12 warning signs of unreliable forecasts from Tarbell and Trugman

Written by David on October 5, 2010


“It’s good to be talking about business forecasts with a lot of CICBV members in the room,” began Gary Trugman at his keynote session on working with financial projections in Miami at the ASA/CICBV Annual Business Valuation Conference. “You’re all already familiar with hockey sticks.”

Trugman and his co-presenter Jeff Tarbell note that USPAP doesn’t address forecasts directly in Sections 9 or 10. SSVS-1 refers to projections in sections on collecting data, and in DCF analyses. But, there’s nothing about the degree to which appraisers need to audit forecasts—which is part of the reason that a standard limiting condition in many valuation reports is something like the language below.

We do not provide assurance on the achievability of the results forecasted by [ABC Company] because events and circumstances frequently do not occur as expected; differences between actual and expected results may be material; and achievement of the forecasted results is dependent on actions, plans, and assumptions of management.

Correctly or incorrectly, some appraisers may try to account for forecasts they don’t trust via the company-specific risk factor. “The courts are catching up with anything that looks like this practice,” Tarbell said.

How good are forecasts? First, “30-40% of the companies we work with don’t have a meaningful forecast,” said Trugman. “But, even when you can obtain one, you often face unreliable assumptions, and they may be unwilling to make changes you suggest.” So, when do you just do your own forecast?

Particularly with public companies “you’re going to have a hard time justifying numbers you made up as opposed to numbers management made up,” says Tarbell. “You could be asking management to revise numbers that may have already been presented to analysts or others. You’re opening a lot of doors no one wants to open.” But, if you do your own, the best hope is “to get management to sign off on what you’ve done. Maybe they don’t have a balance sheet forecast so we fill in the blanks, send it to management, and ask them to agree to it with all the disclaimers that you can’t predict the future.”

Trugman and Tarbell feel that if you can’t obtain a forecast, or adjust a weak forecast, or create your own, your option is to reject the income approach. And, they warn all appraisers to recognize two rules about nearly all forecasts:

1. Management tends to over-estimate projected cash flows:

– The distribution of future cash flows is not likely symmetric.

– Downside often exceeds upside due to capacity constraints, market size, competition, etc.

2. The appropriate projected cash flow for discounting is the statistically expected value, meaning a probability-weighted expectation of future results.

– This is not the particular outcome with the highest probability of occurrence.

Pratt and Grabowski’s Cost of Capital 4th Edition is due out very soon. Tarbell reports that these two points are freshly emphasized in the update. And, Tarbell and Trugman recognize that there are a dozen Indications of possible unreliability:

1. Forecast results are notably different than past results.—“It’s OK to be wrong in a forecast; all the public companies are. But by looking at past forecasts you can see patterns of unreliability,” says Trugman.
2. Forecast was prepared by a party with an interest in the valuation outcome.
3. Resulting value is not consistent with the values from other methods used.
4. Forecast was prepared by CEO/CFO without input from business unit heads. “If the CEO hasn’t spoken to sales and marketing, you may see very different results,” says Tarbell.
5. Forecast is inconsistent with analyst expectations for public comps. “Are growth rates and margins consistent with what analysts are projecting for public companies in your industry,” asks Tarbell. “There better be a good explanation if a forecast is different that other companies who are all competing for the same market share.”
6. Forecast income statement without balance sheet and statement of cash flows. “It may not be very safe when you’re missing such critical inputs to the DCF method such as working capital, CAPEX/depreciation, or financing needs,” warns Trugman. He sees many clients who project faster than historical growth, but in fact when balance sheet forecasts are prepared, it turns out that you outstrip cash resources very quickly and there’s no way to support this growth. “The company may have exceeded its borrowing capacity early in the projection cycle,” Trugman explains in the most typical case.
7. Forecast assumes capital spending at levels that are not financeable. “We often see a forecast that assumes a doubling of some factor in the middle of the cycle,” says Tarbell. This is a clear warning sign. “A leveraged analysis may be more appropriate where the subject company has significant capital needs over the course of the forecast,” Trugman agrees.
8. Forecast ends on the peak or trough of a business cycle. “What do we do with forecasts now, for instance,” asks Trugman. “The answer is we’re looking at longer business cycles, even beyond the standard five year projections. How did the business do during the last downturn?”
9. Forecast not accompanied by a detailed schedule of assumptions. Tarbell says “even if there aren’t detailed notes, can management explain the significant assumptions and particularly any of those that are inconsistent with the past. I don’t like those.”

10. Forecast not achievable without additional financing or acquisition.

11. Forecast hinges on one or two extraordinary assumptions. “If good results are tied to the outcome of one key assumption, you’ll need to examine that assumption very carefully, and be very suspicious of the projections,” Trugman warned.

12. Too much of the indicated value is coming from the terminal value.

Trugman and Tarbell’s indicators of forecast reliability appear in the table below

Determining Forecast Reliability

• Revenues

– Are growth rates consistent with history?

– What are new revenue streams based on?

– What is the timing of new revenue streams?

– Are changes in revenues consistent with industry information?

• Expenses

– Forecast should be based on normalized operations

– Fixed vs. variable cost analysis

– What do variable costs vary against? Revenues? Payroll? Square footage?

– Is this consistent with history?

– What is basis for research and development costs?

http://www.bvwirenews.com/2010/10/05/12-warning-signs-of-unreliable-forecasts-from-tarbell-and-trugman/

Market PE of KLCI 5.10.2010

Market PE of KLCI  5.10.2010

https://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdHJMTjI0N1NhSG16dVhBMDZCYTQ3eVE&hl=en&output=html

5.10.2010

KLCI 1462.27

Market PE of KLSE =  17.48

Market DY = 2.52%



Compare this with:

Market PE of KLSE 10.2.2010

http://spreadsheets.google.com/pub?key=tqTRwLLBhkoRtg4BhuybqMA&output=html

Tesco sees no repeat of UK recession as profits rise to £1.6bn

Supermarket giant Tesco has been boosted by a recovery in global markets as it announced an 12pc increase in first-half pre-tax profit to £1.6bn.

 

By Izabella Scott
Published: 10:34AM BST 05 Oct 2010

The result came as growth in global markets, particularly Asia, offset "modest" UK sales growth in the 26 weeks to August 28, the company said on Tuesday 

Terry Leahy, chief executive went on to suggest that developed markets like the UK could be stabilised in the wake of Asian growth, avoiding a fall back into recession.

 

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• Tesco boss warns on increase in joblessness

"My starting point is the global economy, which is in a pretty robust recovery," he said. "If you look at the customer psychology and the pulling power of the developing markets, I think they will pull Europe and the United States into a stable and established recovery."

Robust global recovery was contrasted with slow, albeit steady, UK recovery. The company said UK like-for-like sales excluding petrol rose 1.3pc in the second quarter, compared with 1.1pc in the first quarter – but, adjusting for VAT sales, the figure was just 0.3pc higher over the half-year.

Finance director Lawrie McIlwee described the UK economy as "pretty stagnant", although there were "signs of a recovery".

"Modest" UK sales growth in the first half were a result of higher fuel costs as customers spent more at the pump instead of in store and due to low food inflation. However, Mr Leahy said the retailer – which plans to create 9,000 jobs in the UK this year – was experiencing "the tailwinds of recovery".

Tesco, the world's third-biggest retailer behind France's Carrefour and US leader Wal-Mart, said group sales rose 7pc, excluding VAT sales tax, to £29.8bn, just below analysts average forecast of £30bn. 

The company expects its loss-making US supermarket business, Fresh & Easy, to break even by the end of 2012/13 financial year.

Mr McIIwee stated Tesco Bank, with revenues of £474m in the first half, and Tesco Insurance, were significant part of the group business. Mr McIlwee said Tesco hoped to offer mortgages next year, with a current account to follow, following regulatory approvals from the Financial Services Authority (FSA).

The results arrive in an important week for gauging the mood of the British consumer, with updates from rival Sainsbury's and high street retailer Marks & Spencer later this week.

http://www.telegraph.co.uk/finance/newsbysector/epic/tsco/8043148/Tesco-sees-no-repeat-of-UK-recession-as-profits-rise-to-1.6bn.html

Rio kills off BHP deal

Michael West

October 6, 2010

THE biggest merger in Australian history is dead, with the board of Rio Tinto preparing to walk away from a $120 billion iron ore deal to join forces with rival mining company BHP Billiton in the Pilbara desert in Western Australia.
The aborted merger deal - which follows an unsuccessful $180 billion takeover bid for Rio by BHP two years ago - was expected to meet opposition from European and Chinese regulators concerned about the impact of the miners' stranglehold on global iron ore prices.
But the major reasons for Rio's decision appear to be its improving financial fortunes, pressure from shareholders and the conclusion that the deal favoured BHP.
Sources close to the Rio board confirmed Rio was preparing to tell BHP of its decision yesterday. Rio chairman Jan du Plessis had informed fellow directors on Monday night that he did not think BHP would object to Rio calling an end to the deal.
''They can't object to that,'' Mr du Plessis said. ''That's kind of us stating our investment preference. They will no doubt have their own measurements and I think that's fine.''
Although the market had speculated about the failure of the Pilbara deal since BusinessDay first foreshadowed its collapse in August, there had been no acknowledgement from either party that the merger was in trouble.
Now Rio, having canvassed the opinion of its major investors, is looking to save face.
''I think with regard to the JV and why it didn't succeed … we should simply work on the basis that both parties worked well and in good faith to make this thing work and both parties agreed, simultaneously, it wasn't possible.
''In short, I think we have a positive message we should spread … I would caution against trying to be too critical as far as BHP is concerned, or kind of denigrating them in any way. I'm not sure that gets us anywhere,'' Mr du Plessis told his fellow directors.
BusinessDay understands other directors agreed with the positive public strategy. One, Sir Rod Eddington, responded to Mr du Plessis, saying, ''In fact the opposite Jan. I think it blows up in our face''.
Besides needing the approval of regulators, the deal required approval from both BHP and Rio shareholders. And it was this which finally prompted the Rio board to move. Rio - whose iron ore production is roughly twice the size of BHP - stood to gain a $5.8 billion ''equalisation payment'' from BHP. This was no longer viewed as adequate.

When the deal was cut in 2009, Rio was heavily in debt and had fallen afoul of its Chinese customers thanks to its infamous fall-out with Chinalco.

Since then, Rio has cut its debt by almost 40 per cent, its share price is strong and it has struck a $12 billion iron ore deal in West Africa with Chinalco.

Investing Articles

http://money.ninemsn.com.au/shares-and-funds/shares-articles/

Australian Market - Sector Analysis

Australian Market - Sector Analysis

		EPS Growth (%)			Price/Earnings (x)			Dividend Yield (%)
		Curr	F/cast  Yr 1	F/cast  Yr 2	Curr	F/cast  Yr 1	F/cast  Yr 2	Curr	F/cast  Yr 1	F/cast  Yr 2
Total Market		7.64	35.06	9.10	16.35	12.14	10.85	4.24	4.36	4.73
Energy		-27.78	36.80	8.31	34.93	24.00	20.14	2.48	2.64	2.74
Materials		22.77	60.71	3.31	13.89	8.47	7.59	2.02	2.26	2.40
Industrials		5.59	33.02	15.02	15.72	16.29	13.99	4.13	4.49	4.85
Consumer Discretionary		103.18	39.58	11.22	19.04	18.95	17.00	4.14	4.40	4.36
Consumer Staples		-11.97	22.42	12.42	23.44	16.36	14.58	4.05	4.53	5.02
Health Care		0.26	14.29	9.11	23.47	17.25	15.38	2.78	2.93	3.11
Financials		-5.80	23.53	9.36	15.14	12.40	11.10	5.87	5.53	5.94
Information Technology		9.99	26.46	10.29	18.41	16.89	13.84	3.12	3.31	3.29
Telecommunication Services		-2.03	-8.18	14.48	10.50	9.65	9.15	8.54	9.76	10.07
Utilities		-4.99	16.04	9.84	-50.84	16.45	14.93	6.86	6.52	6.76

http://money.ninemsn.com.au/shares-and-funds/sector-analysis.aspx

A punt on the money

By Paul Clitheroe,
Money Magazine, September 2007

Six of the best
1. Invest in something you understand
In both life and investing, the simple things are often the best. Most successful companies have a fundamentally simple product.

It's not terribly hard to get a good grasp of how a business like, say, Woolworths works. I think a pretty good test of whether an investment is complicated and, more to the point, if you understand it, is how well you can explain it to someone else. As the famous investor Warren Buffett has said, "If you don't understand it, don't buy it."

2. Consider mainstream assets first
Most mainstream investments fall into one of three categories: cash (which includes fixed-interest securities), property and shares.

These three investment classes are generally a more proven way of generating wealth. Broadly speaking, they can be classified as income investments (cash and interest-bearing securities) and growth investments (property and shares).

Managed investment funds, strictly speaking, are not a separate asset class. They pool their unit holders' funds and invest the money in other underlying assets, such as cash, property or shares. We'll look at these two main types: "income" assets and "growth" assets.

Income assets
Income assets, also known as "conservative" assets, are generally lower in risk. They include term deposits, cash management trusts and other interest-bearing securities and they usually pay investors a specified income on a regular basis.

However, there are downsides. In keeping with the classic investment principle that risk equals return, the lower-risk nature of most income assets means their average returns are normally lower than the average returns from higher-risk growth assets, such as shares and property.

Another important characteristic of income assets is the way they are taxed. To put it simply, your income asset's earnings are taxed fully at your marginal rate (the highest rate of tax you pay). Growth assets — shares and property — attract some tax relief.

Finally there are the matters of capital growth and inflation. Assuming you hold your income assets until maturity, they offer no capital growth and are also subject to erosion by inflation. Despite these negatives, income assets offer security and regular income and therefore have a place in most investment portfolios.

Some income assets, most notably debentures used to finance property developments, are very high-risk, despite presenting themselves as low-risk. There have been serious company failures in this area with investors losing a lot of money, such as the collapse of Fincorp in 2007, Westpoint in 2006 and, in 1990, Estate Mortgage and the Pyramid Building Society.

Growth assets
Growth assets include property, shares, both international and Australian, and units in managed funds that invest in these assets.

These investments offer ongoing income in the form of rent, dividends and distributions, but they also offer capital growth and some tax breaks. It's important to remember that these investments carry more risk.

The capital growth is by no means guaranteed and while there will be periods when the market goes gangbusters (a "bull'" market), there will also be periods when the market dips (a "bear" market).

You need to be able to withstand a fall in the value of your investment.

Shares and property can also be good sources of ongoing income and, unlike income assets, the return on growth assets can be more tax-effective.

Dividends offer franking credits to offset the income tax you pay and property can give you depreciation and other allowances that can be claimed as a tax deduction. An important point to bear in mind about growth assets is that their stated returns usually include both capital growth and ongoing income, but the capital growth is only accessible if you sell the asset.

Property
Aim for the best-located real estate your money can buy. I reckon it's important to pick a property and a location that will appeal to the ageing baby boomers who make up an increasing proportion of our population.

As the population ages, the baby boomers (people born between 1945 and the mid-1960s) will increasingly move from their homes in the suburbs to smaller dwellings, such as townhouses, closer to the city or to coastal retirement enclaves.

Generally, the dwellings will need to be low-maintenance with little or no garden, made of good-quality materials, well positioned and close to all amenities. Something that fits those parameters is more likely to show stronger price and rental growth than other types of properties.

Shares
In addition to monitoring a share's performance on the Australian Stock Exchange (ASX), things you should look for in a publicly listed company include:

* whether or not the underlying business is a good one;
* whether the management team is experienced, with a good track record;
* whether the product has good growth potential.

A company's annual report provides a lot of information but can be a bit overwhelming — sometimes running to a few hundred pages. This is when the advice of a competent financial planner can be useful. Alternatively, the ASX runs courses designed to give investors a better understanding of shares (13 12 79 or www.asx.com.au).

3. Risk equals return
Taking excessive risk in looking for a big return is the number-one reason investors lose their money. They get too greedy — and investment salespeople know this. Now, I'm not saying risk is to be avoided. If you take no risk, you get no return. Everything has some risk, but you must be aware of risk. The real trick is to consider how much risk you can manage and to invest accordingly.

A young person just entering the workforce, for example, may be prepared to invest heavily in an international managed share fund. Sure, this is risky and international markets have copped a hiding over the past few years. However, with a 20-year view, this strategy could give our young investor the highest return over the decades.

At my age (51 as I write this seventh edition), I would not invest all my money in international share markets because of the high risk. However, I have been more than willing to invest some of my super money in this area — because I won't be touching it for a few years yet. Having paid off my mortgage, my main plan at this stage is to build up my super and a portfolio of other investments, such as Australian shares and some investment property. As I age, my attitude to risk will change. I'll be more concerned with protecting my wealth, not growing it, so I will gradually switch to lower-risk investments such as cash, fixed interest and blue-chip shares.

4. Invest on merit
It could be a free music CD if you buy units in a particular managed fund, a bonus deposit for opening a new savings account, even a year's worth of home insurance for taking out a new home loan. These offers may be all above board, but in some cases they may encourage investors to choose a long-term investment vehicle based on a short-term gain. It pays to stay focused on the fundamentals.

When it comes to investing, don't be baffled by big talk, broad statements or bad gimmicks. Focus on the important stuff — what the company aims to achieve, what it invests in, who runs it, what the fees are and what its long-term performance has been.

5. Diversify
In broad terms, I recommend you have a plan to create three pools of wealth — your home, your superannuation and other investments. This strategy gives you exposure to property (your home), shares and fixed interest (through your super) and other investments you buy yourself. It also gives you diversification from a taxation and legislative perspective.

Super is a highly regulated area and the main reason I would not rely solely on super is another type of risk — the risk of the legislation changing, (and it has changed a great deal). How you diversify depends upon your age, income, family and so on. For example, with a share portfolio, you should diversify by choosing different sectors within the market. You might invest in the following areas:

* Banking and finance
* Building and construction
* Media
* Health
* Resources

Inside, say, the banking and finance sector, you might further diversify by choosing several shares such as Westpac, National Australia Bank and a smaller bank, such as St George.

6. Don't try to 'time' the market
Good market timing is all about buying at the bottom and selling at the top and being a "market timer" means trying to do just that. But no market timer I know consistently gets their timing right year after year, as no one has yet worked out how to read the future.

I'm not saying you shouldn't use research to guide you to better investment areas. But when it comes down to it, determining how much risk you can live with and then buying investments that suit your risk profile and monitoring these is a better strategy than regularly switching from one investment area to another.

For the complete story see Money Magazine's September 2007 issue.

http://money.ninemsn.com.au/article.aspx?id=294907

Key points
"If you don't understand it, don't buy it."
Income assets, also known as "conservative" assets, are generally lower in risk
Dividends offer franking credits to offset the income tax you pay

Share floats: sink or swim

By Chris Walker,
Money Magazine, November 2007

Share floats, or initial public offerings (IPOs), offer investors a chance to get in on the ground floor of a newly listed company, potentially enjoying early gains if the stock performs well. But without the benefit of a history for the share price showing what the market thinks of the stock, investors need to make their own assessment as to whether a share's initial subscription price is under- or overvalued. And it's not always an easy task when the prospectus is designed to sell the company to investors.

The term "share float" refers to the first time a company is listed on the Australian Stock Exchange (ASX). Listing is a big step for any company, bringing an important injection of capital or providing existing owners with the opportunity to sell out.

The company prospectus will state an initial subscription price per share; in other words the cost of buying into the stock.

In some cases, investors can make an instant "stag" profit if the share price skyrockets once the shares start trading on the open market. This was certainly the case when fund manager Platinum Asset Management listed in May this year. Its shares closed at $8.80 on the first day of trading, well up on its subscription price of $5. All subscribers made a massive profit; by mid-October Platinum was trading around $6.20.

But profiting from floats is certainly not guaranteed. Home lender RAMS is a case in point. It had an issue price of $2.50 and a first day closing price of $2.49 in July. By mid-August, as the US sub-prime loans debacle blew up, its share price had plummeted under $1 and then there was another steep fall at the beginning of October; mid-October it was trading around 30c.

The current resource boom is dominating new floats and a swag of resource companies are going public. With plenty of blue-sky optimism, it's important for investors to do some mining of their own to assess each share's merits. Henry Jennings, senior broker with Cube Financial, says: "There are some key aspects investors need to consider with share floats. Firstly, look at what the business does. If you don't understand the business or how the company works, don't go there.

"You also need to ask why the company is being floated," he says. "It may be that the company is in need of new money, or it could be that the directors want to get out. A useful indicator here is how long the directors' shares will be held in escrow for [in other words, how long before the directors can cash in their chips]. If it looks like the directors are keen to make an early exit, the warning bells should start ringing."

It is also worth looking to see who is backing the float financially. "If the float is being underwritten by a large broking group it is usually a better-quality listing than if it's backed by a small broker," Jennings says.

The volume of capital being raised is also noteworthy. If the capital raising is small relative to the nature of the company's operations, it's a reasonable bet it won't be too long before it goes back to the market asking for more cash.

All this information should be available from the company's prospectus, but here as well investors need to exercise caution. "Be wary of being swayed by persuasive pictures and images presented in a prospectus," Jennings says. "Often photographs are included in a prospectus that imply or suggest the company has certain contracts or business connections, when in fact nothing of the sort exists."

Not surprisingly, companies see the timing of their float as critical. A buoyant market can sweep a share value upwards with the overall market mood. But as Jennings points out: "It's impossible to know what sort of market conditions will prevail when a company eventually floats. The good ones will perform well, but a lot of recent floats are struggling because of the present market conditions." A list of upcoming floats is available on the ASX website at www.asx.com.au — click on "prices, research and announcements".

http://money.ninemsn.com.au/article.aspx?id=319389

Key points
Initial public offerings (IPOs), offer investors a chance to get in on the ground floor
The current resource boom is dominating new floats
A buoyant market can sweep a share value upwards

Sharemarket basics: An index can be your key pointer

By Chris Walker,
Money Magazine, February 2010

Want to see at a glance how the sharemarket or market sector is performing? No problem – there’s bound to be a share index to help you.

Tune into any shares report on radio or TV, pick up the newspaper’s financial pages or check out the markets online, and you’ll come across a constant – sharemarket indices.

These provide a simple and revealing indication of how the markets are travelling. Arguably the most quoted Australian sharemarket index is the All Ordinaries, often referred to simply as the “All Ords”.

The UK equivalent is London’s FTSE 100 (often called the “Footsie”), in New York it’s the Dow Jones Index, in Tokyo it’s the Nikkei and in Hong Kong, the Hang Seng.

When a sharemarket index is newly created, its starting day is given a base value. Ongoing changes in the market’s performance are then measured in relation to that opening value.

For example, if the index rose from a starting value of 1000 to 1058, the overall value of the parcel of shares included in this index would have risen by 5.8%.

The S&P/ASX All Ordinaries Index was established in 1980 with a base value of 500. In mid-February, 2010 the index was around 4900, an almost tenfold increase in the share price of the companies.

Since April 2000, the All Ords has tracked the value of approximately 500 of Australia’s largest listed companies by market capitalisation, which effectively accounts for more than 95% of the value of all shares listed on the ASX.

Market capitalisation is calculated by multiplying the number of shares on issue by the share price. For example, the largest company on the ASX, BHP Billiton, has a market capitalisation of around $220 billion and accounts for about 14% of the value of the entire market. The 10 largest companies listed on the ASX account for some 45% of the total market’s capitalisation (as at January 12).

Ten years ago ratings agency Standard & Poor’s launched a number of other key Australian indices, with a narrower focus than the All Ords.

These range from the S&P/ASX 20 index, tracking the market’s 20 largest listed companies, to the S&P/ASX 300, the largest 300 companies.

Probably the most significant and oft quoted is the S&P/ASX 200, made up of the 200 largest companies on the ASX and representing about 78% of the market’s capitalisation. But the old All Ords refuses to lie down and continues to grab most of the attention, certainly from the media.

Most indices are price-only indices, meaning they only measure growth in share prices. For a more complete picture it’s worth looking at the various “accumulation” indices, which include dividends paid by the companies in the index.

The S&P/ASX 300 Accumulation Index, for example, is basically the same as the S&P/ASX 300 Index, except that it assumes all dividends are reinvested in the companies issuing them.

Many managed funds actively manage their investment portfolio and attempt to better a particular index they nominate as their benchmark.

Other managed funds, notably “index” funds, try to replicate the returns of a benchmark index, such as the S&P/ASX 200, by holding shares in the same companies.

Index funds tend to live up to their stated investment return goals, namely to match a specific index’s performance, more reliably than actively managed share funds.

In addition to broader market indices there are market sector indices such as the S&P/ASX 300 Metals and Mining Index, or the S&P/ASX 200 Financial Index which contains companies from the top 200 list (by market size) involved in activities such as banking and insurance.

Indices give you an instant guide to whether a market is rising or falling, be it on a daily, weekly, monthly or annual basis.

Their value to investors is they allow you, quite simply and almost at a glance, to benchmark the performance of your shares against the performance of the overall market or the relevant market sector.

This is vital information in determining which shares to buy, hold or sell, and how to best manage the overall weighting of the share component of your portfolio. Share investing would be more difficult without them! For more information on indices, visit the ASX’s website www.asx.com.au.

http://money.ninemsn.com.au/article.aspx?id=1007144

New look at listed property trusts (REITS)

By Pam Walkley,
Money Magazine, September 2007

Listed property trusts (LPTs) form Australians' third most popular asset class — not surprising given they have on average provided a spectacular 17 percent total return each year for the past 10 years. But now the sector is suffering in the wake of the shake-out from sub-prime loan crisis and rising interest rates. This year returns have gone backwards. In June alone the sector was down 5.1 percent.

Investors are asking if this is the end of the dream run for LPTs. Going back to basics, these vehicles were originally established as income producers, buying large commercial real estate assets, collecting the rent from tenants in these buildings and passing it on to investors in a tax-effective way.

But the sector has changed dramatically over the past few years, with many LPTs taking on added risk through property development and funds management. These vehicles are called "stapled" trusts. Average gearing (borrowing to invest) levels have also increased in LPTs, and many now also have exposure to international real estate as well as local.

Indeed, the sector is now very diverse, and different LPTs produce vastly different returns, as is highlighted by research produced by Adviser Edge showing first-quarter total returns for 2007.

Becton Stapled (BEC), which invests in retirement assets, had the highest at 37.17 percent, and Centroret Staple (CER), investing in retail assets, the lowest at -15.54 percent.

Despite all these changes, the sector still derives 86 percent of its income from property rental, with around 64 percent from domestic property, says a report from Standard & Poor's.

So is it time to sell or are there good buying opportunities? Some, such as financial planning firm Bridges, say investors should take their profits and pull out of the sector.

Others, such as leading economist Frank Gelber from economic forecaster BIS Shrapnel, argue LPTs are just going through a flat patch and will surge again, because property markets will be strong over the next few years.

Most analysts expect the sector to continue to produce sound income returns. After all, the fundamentals are still strong, given a surging economy and high employment which means growing demand for commercial space. But the sector is predicted to produce much more modest total returns this year, likely to be around nine percent.

"The sector has maintained strong financial profiles and continues to build on established track records for managing risk and growth," says a July report from Moody's Investor Services, which has a stable outlook for the sector.

"If you are a long-term investor who has chosen to invest in LPTs, a fall in their price should not really be an overwhelming concern," says Ian Irvine, ASX head of customer and business development equity markets.

"After all, commercial property rents have not fallen and vacancies have not risen and the underlying income streams remain."

Irvine says many people still buy LPTs for long-term income. "Capital gains are fine, but are only realised when you sell." Now that yields are up and prices down, this will make them a more attractive buy for some investors, Irvine says.

But, as with any investment, you need to carefully examine the entity you are planning to invest in. Look at things such as:

* Where it owns its assets.
* If it's stapled, and if so, what to?
* What sector? Is it a diversified vehicle?
* Whether it borrows locally or overseas.

Australia was the first country to securitise commercial property in a big way through listed vehicles. Now REITs (real estate investment trusts), as LPTs are called overseas, are expanding into many countries including the UK and Asia.

http://money.ninemsn.com.au/article.aspx?id=296449

Key points
LPTs form Australians' third most popular asset class
The sector still derives 86 percent of its income from property rental

How to firm up your investing knowlege

By Chris Walker,
Money Magazine, April 2010

Most of us could do with some help and education to increase our chances of succeeding at share investing. No matter how much we know, or think we know, about shares, there’s always more we can learn.

Arguably the most logical place to go to learn more about Australian share investing is the Australian Securities Exchange (ASX) itself.

Certainly the ASX has a keen self-interest in getting more people enthused and involved in share investment.

It generates its revenue from trading, but it would be churlish not to give it full credit for the wide range of educational share courses and programs it offers, most of them free.

To start, visit the ASX website.

Here you will find a wide array of educational resources including free online investment courses in shares, warrants and instalments, options, ASX-listed CFDs (contracts for difference) and futures.

To give you an idea of what’s offered, the ASX’s online warrants and instalments education is divided into eight interactive courses, titled:

# The mechanics of the warrants market
# Introduction to instalments
# How to buy and sell instalments
# Instalment pricing
# Instalment strategies
# Instalment strategies for self-managed super funds
# Self-funding instalments
# Rolling instalments

Each course is delivered via a downloadable PDF document, with the time required to complete all eight of them estimated at 115 minutes.

ASX share courses available for free download include:

# Why and how to invest
# How to buy and sell shares
# Trading simulation
# Sharemarket investment strategies
# Fundamental analysis
# Technical analysis

Each of the share courses is estimated to take 10 to 15 minutes to complete.

Other educational materials available on the site include free downloadable booklets, audio-visual presentations on topics such as dividends, understanding annual reports and listed managed investments. There are also podcasts, ASX sharemarket games and a simulator for trading ASX-listed CFDs.

About the only things that aren’t free on the ASX educational website are the ASX Way share books available at around $30 to $40, and the lunchtime Investor Hour seminars held regularly in state capitals that cost the princely fee of $5.

Online brokers also offer help with getting started in trading through information, seminars and ways of practising trading before you have to commit your cash. For example, online CFD and forex broker GFT has a free practice CFD trading account.

If you want more in-depth sharemarket education, you are going to have to devote more time and no doubt have to pay.

A number of organisations offer share education courses, locatable on the internet, and these need to be looked at closely before you hand over your course fees. This is to ensure that you’re getting good value and impartial information, and are not being roped into using a trading system promoted by the course provider.

Melbourne-based investment company Wealth Within offers two ASIC-accredited shares education courses for serious share investors. Its diploma of share trading and investment can be done full time, or part time. Delivered online, encompassing web seminars, completing a workbook and exams, this course costs $5950.

A shorter version, likely to take three to six months to complete, costs $3950. Both courses count towards continuing professional development as specified by the federal government. Perth-based Pro Trader offers share investor courses including one-day training workshops for $695 or evening workshops for $55 a person. Dates and details are on its website.

http://money.ninemsn.com.au/article.aspx?id=1043338

Share Screener

http://money.ninemsn.com.au/shares-and-funds/share-finder.aspx

Top Value
This gives us the first cut of candidates for our Aspect portfolio. It shows all companies with a Value Rank of 1 or 2. We exclude the highest risk companies by specifying only companies with a Risk Rank of 4 or better.

Turnaround Stocks
This gives us the first cut of candidates for our Aspect portfolio. It shows all companies with a Value Rank of 1 or 2. We exclude the highest risk companies by specifying only companies with a Risk Rank of 4 or better. A number of our highly ranked value stocks are companies that have had poor returns but have strong growth forecasts. This query returns all companies with a Value Rank of 1 or 2, with negative total returns in the last year and with a two year forecast growth above 20%.

Large Cap Comparison
Want to see how the big boys stack up on Value? This query ranks all companies with a market capitalisation greater than $1 Billion and displays their current Value rank.

Aspect Ranks for all companies
This query will list all companies in our database with each of our four ranks displayed against each stock.

Growth at a Reasonable Price
If the thought of investing in turnarounds makes you a bit queasy this query, which focuses on stocks with a strong growth track record, might be for you. These are top value stocks with EPS growth over the last five years above 15% and forecast growth above 20%.

Low PE Bottom trawlers
Run this screen to see all stocks with a PE less than 10 and a PEG less than 1. These stocks are cheap! Mind you it might be for a good reason so make sure you investigate our profiles first.

Forecast Finder
Want to know the consensus forecast for a company? Run this query to see all companies, their current Earnings per share, and the forecast for the next two years.

The Bank Analyser
Run this query to see all banks with a number of key measures against each one, including five year return, dividend yield, net interest margin, cost to income ratio and our own Value rank.

Top Income and Growth
If you are an income investor then try out this query. This lists all stocks ranked 1 in income. We still want good value, however so we exclude stocks with a Value Rank of 4 or 5.

What's your naked position?

By Allison Tait
March, 2007

Money talks, so they say, but how much finance-speak sounds like double Dutch to you? Here, we define 20 common terms you'll hear in relation to money.

Actuary: think uber-accountant. An actuary makes calculations and valuations in relation to insurance funds, super funds and other investments, using mathematical, statistical, economic and financial analysis. The emphasis is on the long-term stuff in financial contracts, such as how much risk is involved.

Asset: things you own that have value. This could be cash, property, equipment …

All Ordinaries Index: they talk about it every day on the news, but do you actually know what it is? Basically, it's the overall measure of the daily performance of the Australian share market based on the weighted share prices of around 500 of the nation's biggest companies.

Bear market: it sounds cute, but it's actually not great — it's a share market in which prices are going down.

Blue chip: the basis of a great, long-term share portfolio. Blue chip is a term for the shares of leading companies, where management is excellent and the foundations are strong.

Bond: effectively a loan to a company. Corporations and governments issue bonds as debt security, in return for cash from lenders and investors. A bond holder lends money to the issuer for a set term, in return for interest.

Bull market: nothing to do with running with bulls in Spain … rather, it's a share market in which prices are on the rise.

Capital growth: the difference between what you paid for an investment (such as a house) and what you can sell it for, if it's increased in value.

Cash management trust: this may be for you if you're interested in investing but don't have a lot of cash. By pooling the funds of many investors, the trust can buy large volumes of short-dated securities, decreasing transaction costs and resulting in higher returns to trust members. A flexible investment option.

Deductible: a beautiful word come tax time. Refers to expenses that can be offset against taxable income — contributions to superannuation funds, for example.

Depreciation: it sounds like a negative, but can have a positive effect on your tax liabilities. Depreciation recognises that assets tend to lose value as they age, so the cost of the asset is written down over the life of that asset. Considered a non-cash business expense, it can generally be offset against taxable income.

Dividend: the amount a shareholder receives out of a company's after-tax earnings. You can either take the money and run or reinvest your dividends back into the company in the form of more shares.

Equity: there's been a lot of talk about this in recent years as people realise how much money they have tied up in their homes. Basically, it's the value an owner has in an asset (in this case, a house) over and above the debt against it. Take the amount your house is worth, subtract the amount you still owe the bank and what's left over is the equity.

Gearing: a measure of just how in debt you are. How much you've borrowed compared with the assets you hold.

Hedge fund: sounds green and clean, doesn't it? It's actually an investment portfolio, under which the fund manager has the authority to use higher-risk investment techniques, including borrowing funds, to generate higher returns. Not for the faint-hearted.

Market order: "Buy, buy, buy" or "sell, sell, sell". A share will be bought or sold at the most advantageous price available after a market order hits the trading floor.

Property trust: If you're interested in property investment but don't want to put all your eggs in one henhouse, so to speak, this may be for you. It's a collective investment vehicle with ownership of a portfolio of real property, so spreading the ownership. You can buy into a listed property trust (quoted on the stock exchange, prices fluctuate with supply and demand) or an unlisted property trust (arranged directly with the trust's manager, who fixes the prices).

Share (stock): buy a share and you own part of the company — albeit a very small part. A share is essentially a contract between the company of issue and the owner, giving the latter an interest in how the company is managed, the right to share in profits and, if it all goes pear-shaped and the company is dissolved, a claim upon assets remaining once the debts have been paid. Stock is a generic term for shares and, less frequently, bonds.

TFN: otherwise known as tax file number. Every taxpayer in Australia is allocated one by the Australian Tax Office, which then uses it to match income and taxation details.

Yield: how much you make on an investment (the return), usually expressed as a percentage.

*Naked position: oh yes. Make that 21. This is actually not that common in general usage, so we'll leave the definition to the expert: namely, Edna Carew in her book The Language of Money (Allen & Unwin).

"A naked position is also known as a naked option. An option whose writer has not hedged, for example, a writer of call options over shares who has sold the right to buy the underlying shares but who does not own them or the writer of a put option over shares who has sold the right to sell the shares (to the writer); if the holder chooses to exercise the option, the uncovered writer will be obliged to buy the shares at an exercise price which will be a higher-than-market price (otherwise the holder of the option would not exercise). Naked options are high-risk and can involve large losses for the writer."

Hmmm...sounded a lot sexier when you didn't know, right?

http://money.ninemsn.com.au/article.aspx?id=256795

Sharemarket basics: a numbers game

Money Magazine, April 2007

Investing in shares can be something of a numbers game, especially when the financial press is peppered with mention of ratios such as "dividend yield" and "earnings per share". There is no shortage of these statistics and they can be useful as a means of assessing whether a particular share offers good returns or strong growth prospects.

On this basis, ratios are worth adding to your armoury of research, though they are by no means infallible. To begin with, ratios use historical data, which is not necessarily a guide for what will happen in the future. And the source data can be open to accounting manipulation, so any insights that ratios provide should be viewed with caution.

Let's take a look at some of the key share market ratios (though this list is by no means exhaustive).

Dividend yield: Calculated by dividing the most recent dividend by the current share price and multiplying by 100 to achieve a percentage figure. Dividend yield is a measure of the regular income return (rather than capital growth) that a share is paying, which allows a comparison between different shares, and also against other asset classes. However, when the share price changes the dividend yield will also change. Indeed, if the share price crashed, the yield would soar, until the next dividend is declared — if there is one.

Earnings per share (EPS): calculated by dividing the net profit of a company by the total number of shares issued. By looking at a company's EPS history, it is possible to see the growth in earnings from one year to the next; and you can compare earnings to the dividend payouts and the share price each year.

Price earnings (PE) ratio: Calculated by dividing the share price by the earnings per share. This often-quoted ratio is a way of measuring investors' expectations about a company's performance, and it is often used to describe whether an individual company, or even the share market as a whole, is "expensive", in the sense that it is overpriced.

Overall share market conditions will have a bearing on the relative PE ratios of different shares but, as a guide, a company with a PE ratio of about 16 is considered to be a growth-orientated company, meaning there's a good chance its earnings will rise. By contrast, a company with a PE ratio of less than 11 may be regarded as having less rosy prospects for earnings growth.

While the PE ratio can be useful for making comparisons between companies, this ratio generally makes more sense if the companies under review operate within the same industry (as average PEs vary between industries), and face the same overall market conditions.

Dividend cover: Calculated as EPS divided by dividend per share. This ratio shows the proportion by which a company's dividend is covered by its earnings. A figure of less than 1.0, for example, suggests the company is paying out more than it is earning. Investors should look for a figure above 1.0, which suggests the company can comfortably pay its dividends.

Net Tangible Assets (NTA): Calculated as the value of shareholders' funds (as reported in the company's balance sheet) divided by the number of issued shares. Also known as the "asset backing", this ratio can give investors an indication of what each share in a company would be worth if all the assets were liquidated and all debts were paid and the remaining proceeds were distributed to ordinary shareholders on a per share basis.

Investors sometimes use the NTA to assess the desirability of a share. If the NTA is greater than the share price, it may be that the company is undervalued — potentially making it a takeover target. Conversely, if the NTA is below the share price, the market may be overvaluing the company.

For the complete story see Money Magazine's April 2007 issue.

http://money.ninemsn.com.au/article.aspx?id=260404

So, you like Glove Sector - Which Stock will you Pick?

Analysis of the Glove Sector.
https://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdDM1ZFNXQ2ZPRHBYcFJjd1lDNFVYdFE&hl=en&output=html

The top 6 glove companies are priced at RM 8.7 billion in market capitalization.  They generated a total of about RM 766 million in earnings the last 12 months.