UMW (29.5.2012)

Announcement		Financial		Earning	Dividend	NTA (RM)	ttm-EPS	Quarter
Date		Quarter		Per Share (Cent)	(Cent)		(Cent)	Number
29/05/2012		31/03/2012		18.83	0	3.82	49	1
24/02/2012		31/12/2011		4.4	7.5	3.65	43.24	4
24/11/2011		30/09/2011		14.51	13.5	3.69	40.46	3
19/08/2011		30/06/2011		11.26	10	3.662	39.12	2
25/05/2011		31/03/2011		13.07	0	3.635	46.6	1
24/02/2011		31/12/2010		1.62	6.5	3.485	45.34	4
22/11/2010		30/09/2010		13.17	13.5	3.594	52.76	3
20/08/2010		30/06/2010		18.74	10	3.622	51.04	2
20/05/2010		31/03/2010		11.81	0	3.515		1
23/02/2010		31/12/2009		9.04	9	3.369		4
20/11/2009		30/09/2009		11.45	5	3.325		3

ttm-EPS  49 sen

LFY Dividend 31 sen

Price  RM 7.85

PE 16x

DY 3.95%

Stock Investing is not Rocket Science!

The test of real expertise is wealth protection in bad times and solid growth in good times. So that, over a longer horizon covering boom and bust, you get attractive growth, say 20% CAGR. Of course there are a few rare, real experts (but you won’t see them on TV every day, predicting the market) who have consistently been doing this. Each Stock Shastra is the distilled wisdom of such rare, real experts. The real Gurus! And from them, here is Stock Shastra #1: Stock Investing is not Rocket Science! Now, how do you feel when you say this Shastra?

• Benjamin Graham, one of the Gurus of stock investing, did not have a background of finance when he started investing. However, he learnt stock investing, eventually pioneering the concept of value investing; his philosophy was simple: Buy great businesses at extremely cheap prices.
• Warren Buffett, one of the greatest stock investors of all time, started investing when he was 12, without any formal finance education. He regarded Benjamin Graham as his Guru and today is amongst the richest people in the world.
• The common thread binding these great investors is the same. They weren’t experts when they started. But they learnt to do it on their own by following a simple and sound framework of investing and sticking to it with discipline.
• It involved buying into a great business with the mindset of an owner. Finding such a business might require some search and analysis, but is something you can certainly manage.
• Most importantly, sooner or later, the market gives you many opportunities to buy such wonderful businesses at throw-away prices; or sell your holdings at unbelievably high prices. The proof: Look at the 52-week Highs and lows of any of the Sensex stocks.

Once we change our mindset and decide to invest in stocks on our own, the next step is to find a wonderful business worth owning. The next Stock Shastra will tell you how to start doing this.

http://stockshastra.moneyworks4me.com/stock-shastra-1/

Different styles of framing choices causes different preferred outcomes.

Loss Aversion, Risk, & Framing

The next stop in the framing inquiry involves the unique relationship of risk taking to positive and negative framing. Since losses loom larger than gains, it appears that humans follow conservative strategies when presented with a positively-framed dilemma, and risky strategies when presented with negatively-framed ones. To illustrate, consider Kahneman & Tversky's 1984 study where they asked a representative sample of physicians the following question. Read and answer it before you continue.

Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows: If program A is adopted, 200 people will be saved. If program B is adopted, there is a one-third probability that 600 people will be saved and a two-thirds probability that no people will be saved. Which of the two programs would you favor? 

Be sure to answer this question before you proceed.

Have you answered? OK.

Notice that the preceding dilemma is positively framed. It views the dilemma in terms of "lives saved." When the question was framed in this manner, 72% of physicians chose A, the safe-and-sure strategy, but only 28% chose program B, the risky strategy. An equivalent set of physicians considered the same dilemma, but with the question framed negatively:

Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows: If program C is adopted, 400 people will die. If program D is adopted, there is a one-third probability that nobody will die and a two-thirds probability that 600 people will die. Which of the two programs would you favor? 

You can see that the two questions examine an identical dilemma. Two hundred of 600 people saved is the same as 400 of 600 lost. However, when the question was framed negatively, and physicians were concentrating on losses rather than gains, they voted in a dramatically different fashion. When framed negatively, 22% of the physicians voted for the conservative strategy and 72% of them opted for the risky strategy!

As you can see, framing the choice positively vs. negatively caused an almost perfect reversal in the choices of highly-trained experts making a decision in their field of expertise--saving (or is that 'not losing'?) lives! Clearly, framing can powerfully influence the way a problem is perceived, which in turn can lead to the favoring of radically different solutions.

Let's consider the same "negative frame => risky behavior" phenomenon from a somewhat less theoretical and more practical perspective. Imagine that you are a medical practitioner, and you have just seen your third case of advanced breast cancer in a single week. "Why," you wonder to yourself, "aren't these women performing breast self-exams (BSEs) and finding these lumps before they become full-fledged, life-endangering metastatic cancers?" Your clinic hands a brochure on BSE to every woman that enters the door, BSE is regularly described in newspapers and on TV; information on this topic isn't exactly scarce! Why do your patients choose to die rather than comply? you wonder.

But consider the act of a BSE. Logically, it's safe--but psychologically, it's a risky procedure. If you perform BSE, you may feel a lump. So performing BSE is a risky behavior, because by looking, you may find something you don't want to find. Not performing a BSE is a logical health risk behavior, but is safer psychologically. By not looking, you won't find anything that may cause you to worry.

Researchers Meyerowitz and Chaiken explored this very question in a 1987 research project. They distributed one of two brochures on BSE to equivalent patients in equivalent clinics. The brochures were identical in terms of content, but one stressed the gains associated with performing a BSE, and the other focused on the losses associated with inaction. You can guess the result, can't you? The negatively-framed brochure lead to higher positive BSE-related attitudes and behaviors. Actually, the true strength of the negative frame emerged four months after patients received the brochures. Those who received negatively-framed brochures showed significantly greater intentions to perform BSE at the later date.

Why is it that negative information causes increased persuasion in these types of situations? Psychologists have long known of the existence of the "positivity bias," which states that humans overwhelmingly expect good things (as opposed to neutral or bad things) to occur. If perceivers construct a world in which primarily positive elements are expected, then negative information becomes perceptually salient as a jolting disconfirmation of those expectations (Kanouse & Hanson, 1972). We also know that people stop to examine disconfirmations to a much higher degree than confirmations. Negative information is often highly informative and thus may be assigned extra weight in the decision-making process (Fiske, 1980; Smith & Petty, 1996). Let me ask you: if you learned that your friend's auto mechanic performed an excellent valve job but botched his automatic transmission repair, would you take your car to that mechanic? No, because negative information overwhelms positive information. You expect a mechanic to be effective, period.

---

This topic is considered in further detail for the benefit of my students, who must enter the URLs found on the syllabus to access the following pages (if you're not a student of mine, please don't ask! The answer will be "Sorry."):

• Positive & Negative Frames (They're both effective in the appropriate circumstances, but you need to know which is best to use when.)
• Why Experts Fail to Predict (One reason experts make stupid mistakes.)
• Framing by Position (The real reason for the cheap and expensive models in the product lineup.)
• Framing by Contrast (How contrast is used to make you do things you wouldn't otherwise do.)
• Framing by Attribution (One of the most seductive persuasion tactics around because it makes people feel good!)

Ref:

http://www.workingpsychology.com/lossaver.html

http://www.workingpsychology.com/mediafr.html
Media framing (How the media frames the news and shapes public opinion.)

Should investors switch from bonds to shares?

Savers have preferred bonds to shares for the past seven months. But those saving for long-term goals such as retirement should remember that equities, unlike bonds, can offer a growing income.

http://www.telegraph.co.uk/finance/personalfinance/investing/9290399/Should-investors-switch-from-bonds-to-shares.html

SITUATIONS MATTER by Sam Sommers

BETTER BY MISTAKE: The Unexpected Benefits of Being Wrong

How Mating and Self-Protection Motives Alter Loss Aversion

Loss Aversion: The Shortsightedness of “Playing Not to Lose”

We experience the pain of a loss much more acutely than we experience the pleasure of a gain. One result is that we overreact to price increases.

Asymmetrical reaction to price fluctuations

Imagine you’re at the supermarket, about to buy your favorite brand of peanut butter. If you see that the price has dropped, you’re mildly pleased. But if you see the price has increased by the same amount, you get that awful sinking feeling. Disappointed, you put it back on the shelf and go without.

But it’s not just the potential loss of money that we overreact to. It can be the loss of time, prestige… or a game of football.

The best explanation of loss aversion I’ve ever read appears the book, Sway: The Irresistible Pull of Irrational Behavior. Authors Ori and Rom Brafman give some great examples of how loss aversion can lead us to make the most irrational, self-defeating decisions. Below are two real-world examples from Sway:

1.  A pilot’s obsession with getting back on schedule

In the 1970’s, Captain Jacob van Zanten was KLM’s most esteemed pilot. He was their chief flight instructor and even appeared in KLM advertising.

On a flight to the Canary Islands in March of 1977, van Zanten’s 747 was diverted to a smaller, nearby airport. After several frustrating delays, van Zanten — driven by an obsession to get back on schedule — started to take off in thick fog without full takeoff clearance. What he didn’t know was that a fully loaded Pan Am 747 was sitting on the runway, directly in his path.

The KLM jumbo smashed into the Pam Am plane. Everyone on board the KLM flight was killed, as were most of those on the Pan Am flight. There were 584 fatalities – the worst air disaster ever. And it was caused mainly by the KLM pilot’s obsession with living up to KLM’s claim of being “the people who made punctuality possible”. In other words, avoiding a loss.

2.  Playing not to lose

When Steve Spurrier took over as coach for the University of Florida Gators in 1990, he spotted a weakness in his opponents’ strategy. The other teams in his conference all played very conservative, defensive games. In other words, they were playing not to lose.

Spurrier exploited his opponents’ obsession over avoiding losses. He had his team take some chances, pass more often, play more aggressively, and try to score. The strategy was a huge success and it illustrates the opportunities that exist when we recognize irrational behavior for what it is.

You’d think the opposing coaches, seeing what was happening, would have changed strategy and played more aggressively. But they simply couldn’t. They had become so committed to the goal of avoiding a loss that for years they continued their losing strategy.

http://www.cardinalpath.com/loss-aversion-the-shortsightedness-of-%E2%80%9Cplaying-not-to-lose%E2%80%9D/

Loss Aversion

"losses loom larger than corresponding gains"

"In prospect theory, loss aversion refers to the tendency for people to strongly prefer avoiding losses than acquiring gains. Some studies suggest that losses are as much as twice as psychologically powerful as gains. Loss aversion was first convincingly demonstrated by Amos Tversky and Daniel Kahneman."

"The principle of loss aversion was first introduced by Kahneman and Tversky (1979)"

Tversky and Kahneman (1991) "The central assumption of the theory is that losses and disadvantages have greater impact on preferences than gains and advantages."

"Numerous studies have shown that people feel losses more deeply than gains of the same value (Kahneman and Tversky 1979, Tversky and Kahneman 1991)."
Goldberg and von Nitzsch (1999) pages 97-98

"Both the status quo bias and the endowment effect are part of a more general issue known as loss aversion." (Montier 2007, p. 32)

Loss aversion - Wikipedia

The Psychology Of Loss Aversion (And How It Applies To Venture Capital)

Rob Go|August 17, 2010

• 

I’ve been reading the book “The Black Swan” recently on the recommendation of my two partners.  I had heard about the book for years, but it never made it off my “to-read” list until now.

One of the concepts that the book discusses is the way we think of risk differently when we are generating profits vs. when we are minimizing losses.  The simple illustration goes something like this:

If someone gave you the offer of $100, no strings attached, vs. flipping a coin for the chance of winning $200, what would you choose?  Although both options are mathematically equivalent, most folks would choose the $100.

On the flip side, if things were reversed, and you could either lose $100 for sure, or have a 50% chance of losing $200 or nothing, what would you choose?  Most people in this situation tend to prefer the possibility of losing nothing, even though there is the 50% chance of a larger loss.  

This illustrates a simple point that we tend to be irrationally risk tolerant in protecting capital.  Social scientists call this loss aversion.

This has major implications for the venture business in the realm of follow-on investment decisions.  It’s a part of the business that doesn’t get much attention, but consider this:  I think it’s safe to say that well over 50% of a typical venture firm’s capital actually comes in after the initial investment round of financing for a company.  So even if a fund is supposed to be “early stage” focused, the reality is that the bulk of their capital is going into the follow-on investments in the B, C, D and later rounds. 

I didn’t realize this before I went into VC, but most VC firms are lifecycle investors, meaning that they have large reserves and expect to participate in most of the follow on rounds for companies that are doing reasonably well.  One would think that the follow-on investing decision for VC’s would be an easy one.  After all, no one has more information on a company than the existing investors and board directors.  Therefore, they should be very well equipped in figuring out which companies deserve follow-on capital, and which ones don’t.  Even though the follow-on capital is usually at a higher cost base than the earlier investments, this should be concentrated in the “best” companies, and should perform very well from a risk adjusted basis (even before considering the protection from being higher up in the preference stack).

Case closed right? Wrong.  There are a lot of reasons why follow-on financings might happen when they shouldn’t, causing VC’s  to “pour in good money after bad”.   

• Loss Aversion.  As discussed above, the uber-reason this happens is that one is irrationally risk tolerant when trying to preserve capital.  Or put another way, once you have a vested interest (time or money) into a company, you are willing to take irrational risks to protect your investment.   

• Delayed Gratification.  No investor wants to see a “zero” on their track record, and no investor wants to report “zeros” to LP’s.  This is true even though a small -100% return today might be much much better than a big -80% return in 5 years.  The pressure of needing to raise a future fund, looking good in front of your partners, trying to get promoted, trying to look like a clever guy in the twitterverse, etc leads to unnecessary risk-taking in follow-on financing decisions.  Even though almost every firm says they evaluate follow-on rounds like “new deals”,  I think this is actually far from reality.

• The Signaling Death Spiral.  Let’s take the hypothetical case of a company raising a series B that is doing ok, but not great.  The existing investors will often say they will support the company but have an outside lead price the round.  The new investor will ask the existing investors if they are “in” for their pro rata as a signal that it’s worth investing.  If an outside lead is willing to price and lead a round, it’s very very hard for the existing investor to say “you know what, I don’t believe in this.  I’m going to pass on this investment and risk that the whole deal blows up” (note that this is different than the follow-on dynamics of VC led seeds, where the investor will have a much smaller % of capital at risk and knows that they are buying 5 options to make 1 true investment.)  So in this scenario, a follow-on round gets done, and both parties are heavily influenced by the fact that the other is investing.  Puzzling no?

• Confirmation Bias.  This is the tendency for people to favor information that confirms their preconceptions regardless of whether that information is true or complete.  When layered in with Loss Aversion, it creates a deadly combination.  Because an investor is averse to losses, he/she is biased against any data that suggests that the initial investment decision was a mistake and will gravitate towards information that supports a follow-on investment.  

• The Bridge to Nowhere.  Even if a company is really struggling, the following logic is very appealing: wouldn’t you be willing to spend $2M to save the last $8M?  Because investors usually buy preferred stock, they get paid first and so they only need the company to sell for the value of the preferred stock to get their money back.  As a result, you often see struggling companies raise inside rounds under this logic (often crushing the employee’s equity in the process).  But many times, this round of “bridge” financing ends up being a bridge to nowhere.

So, follow-on investing ends up being a much more complicated endeavor than it would first appear.  Clearly, there are some firms out there that have a great deal of discipline about follow-on financing and have been very successful.  But I think that this is a very very easy way to falter as an investor because it’s so natural to fall prey to these pitfalls.  As some super-angel funds increase in size, it will be interesting to see how they deal with these hurdles as well.  It’s easy to say that one will “pile in on their winners”, but the ability to do so will cut both ways.

Read more: http://articles.businessinsider.com/2010-08-17/strategy/30074026_1_venture-capital-investors-loss-aversion#ixzz1vzJKzpZV

10 Common Mistakes People Make When Investing

Almost everyone makes investment mistakes. Yet, these mistakes may benefit us in the future, as we utilize our knowledge to make better and more informed business and investing decisions even if they cost us money the first time around. Like the advice from our parents, we must often experience it ourselves before we truly learn from them. However, if we know about our tendencies before we make them, it is much easier to recognize the problem and learn from it. Here are 10 common mistakes that people make when it comes to investing.

1. Blinded by Reward
Being blinded by the possible rewards of an investment can lead us astray when it comes to the associated risk of that same investment. Hearing others speak of amazing dividends, huge returns, and immense profit taking can leave us chomping at the bit to jump into an investment without considering the risks involved. You must often step back for a moment and consider just why the payoffs are so high for a particular investment, and then decide whether the risks of such payoffs are worth what might only be a fleeting reward.

2. Impatience
Impatience has been the killer of many wise investments. Not waiting out a downturn in the economy or assuming a stock has seen its prime and selling it too soon, even though it’s a well-known and stable investment, could leave you with regrets.

As an example, one investor (he shall remain nameless for the purposes of this article) was once invested in Hilton Hotel Corporation stock. This same investor had bought his shares at $10. When the stock reached $14 and stabilized for several months, the investor lost faith even though he knew the stock was a rock solid investment. He didn’t need the money, but became inpatient and dumped the stock, took his profits and several years later Hilton was bought out, their stock selling for over $40 a share. Impatience got the better of him and he lost out big time.

3. Missed the Train
Missing the train when it comes to a hot investment can leave you frustrated and angry that you didn’t get on board with everyone else. Rather than chalking it up to a learning experience and looking for a new investment, you may decide to chase the train and jump on just as everyone aboard is jumping off. This can leave you holding the bag while others are taking their profits.

4. Bubble Bursting
A bursting investment bubble can leave a lot of people losing a lot of money. Not seeing the fall of a particular investment or investment area in time can leave you in a precarious position. During the last decade, areas such as real estate and technology have shown us just how dangerous bursting bubbles can be. When people start saying an investment is fail-safe or bound to make you money, it’s a good idea to start questioning the soundness of such advice. Remember the old adage, “If it sounds too good to be true, it probably is.”

5. Influence of the Masses
It can be easy to get caught up in the excitement of an investment. When everyone around you is telling you how great a particular investment is and how much money they are making off of it, it can be difficult to ignore the opportunity. However, as with bursting bubbles, that same herd of charging cattle that leads you to water can lead you off the side of a cliff when it comes to your investment decision. Listening to the masses rather than your own good sense (i.e. housing bubble, tech bubble) could be an investing mistake you’ll kick yourself over down the road.

6. Taking Investing Personally
Sure, it might seem like big business is out to get you and the oil companies raise gas prices every time you head to the pump to fill up your car, but taking investing personally can be a big mistake. Making investment decisions based upon personal preferences or because you’re angry about losses may only leave you angrier because you didn’t base your decision on factual information and sound investing practices.

7. Uncomfortable Investments
Some people find that they are unable to stop thinking about their investments because they are worried about losing money. Even though their investment decisions may be good ones, they are unable to stop fixating on the investments and lose sleep over the fact that their money is at risk. Sometimes investments just aren’t worth the fear that comes with them and for some people certain risk-involved investments may be considered a mistake due to the loss of peace of mind they are suffering.

8. Heightened Expectations
Heightened expectations of investment returns can result in poor decisions. Often influenced by Wall Street analysts or our financial advisors, many are no longer satisfied with four or five percent returns on their investments. Heightened expectations due to constantly being led to believe returns of eight, nine, or ten percent are a regular occurrence can lead to skewed decision-making regarding where and how money is invested.

9. Low Capital Investments
Sometimes it’s not that we don’t make the correct decisions, but when we do, we don’t put enough money into the pot to make the decision worthwhile. Purchasing 10 shares worth of stock when the stock price is $10 a share, even if the investment takes off, might not make a significant difference in your overall portfolio.

10. Investing Before Debt is Reduced or Eliminated
Sometimes we make the mistake of putting the cart before the horse in our investing. By making investments, even if they result in higher returns, before reducing or eliminating debt, means taking a much higher risk than necessary. Even if a particular investment returns 10% annually, if you are paying credit card interest on a similar amount at 20%, your investment choice might not be a wise one.

This post was written by Tom Becker who writes for Money Choices where he reviews high interest savings accounts and other investment vehicles.

http://moneyning.com/investing/10-common-mistakes-people-make-when-investing/?utm_medium=feed

Facebook lessons: What not to do when planning an IPO

Facebook lessons: What not to do when planning an IPO

Written by Reuters Friday, 25 May 2012

NEW YORK (May 25): It's been less than a week since Facebook went public, and while the initial public offering (IPO) made CEO Mark Zuckerberg and many others very wealthy, the botched way in which the offering was done has sparked investigations, lawsuits and regulatory threats. It has also sparked a lot of anger toward the social media company, lead underwriter Morgan Stanley and the Nasdaq stock market. 

Here is a list of eight things that went wrong with the Facebook IPO — a "what not to do list" for the next big TECHNOLOGY [] company considering a public listing, compiled from interviews with investors, traders, analysts, attorneys and regulators.

1. Charge too much. Facebook raised the price of its shares above a reasonable valuation given its earnings and revenue. The US$38 (RM120) price tag was 100 times historical earnings. By comparison, Apple Inc trades at 14 times historical earnings, while Google Inc is at 19 times. Facebook set the higher price despite a slowdown in recent months in its online advertising business and its concerns about the growing use of mobile devices, an area in which its advertising revenue is still weak.

2. Sell too much stock. Facebook floated 421 million shares worth around US$16 billion at the offering price — the biggest ever US technology company IPO. As soon there were some wrinkles, supply overwhelmed demand. Many bankers were especially concerned that Facebook demanded that a larger than usual block — about 25% — be set aside for ordinary investors, who typically are more willing to flip their purchase in the hope of a quick profit. "The underwriters misjudged the amount of buy and hold demand relative to the amount of speculative demand," said Jay Ritter, a finance professor at the University of Florida, in Gainesville, Florida, who plans to hold on to the 400 shares he bought in the IPO.

3. Fall for the hype. Facebook, Morgan Stanley and others believed the hype — some of it self-generated — that the company's shares would pop 30% to 50% on the first day of trading, and miscalculated the demand. The event was "a perfect storm", according to J Robert Brown Jr, a law professor at the University of Denver Sturm College of Law in Denver, Colorado. Facebook increased the number of shares at the last minute while bad news was coming out. Then delays in the start of trading on Nasdaq and later disruptions in matching buy and sell orders "gave some shareholders time to reconsider and cancel their orders", Brown said in an email. "All of this resulted in less demand and a dropping share price."

4. Selective Disclosure. Even if Morgan Stanley and other underwriters didn't do anything illegal, they weren't upfront about what they knew about the company and whom they told. Morgan Stanley and at least three of the other underwriters lowered their forecasts for Facebook's second-quarter and full-year revenues — but the bad news reached only a small group of big clients. Smaller investors had no idea until the figures were revealed by Reuters several days after trading had begun. The company and Facebook have denied any wrongdoing, but regulators and lawmakers in Washington have opened inquiries and reviews, and some shareholders have sued Facebook and Morgan Stanley. "The main underwriters in the middle of the road show reduced their estimates and didn't tell everyone," said Samuel Rudman, a partner at Robbins Geller Rudman & Dowd, which brought the lawsuit on Wednesday. "I don't think any investor in Facebook wouldn't have wanted to know that information."

5. Have a distracted CEO. Some investors are asking whether Zuckerberg was on top of the whole process enough, given the many thousands of investors who were about to buy a slice of his company. He appeared in New York City at the company's investor road show in his trademark hoodie, failed to appear at some other road show events, and declined to hold a ceremony at Nasdaq's main New York City site in Times Square for the listing debut. He was also busy planning his nuptials — his wedding to long-time girlfriend Priscilla Chan occurred one day after the IPO.

6. Don't plan for the worst-case. Nasdaq CEO Robert Greifeld partied last Friday with Zuckerberg while the bell was rung at Facebook's Silicon Valley headquarters to kick off trading — but at just that time, a major crisis was brewing back east at Nasdaq's sites. Technical glitches delayed Facebook's debut by 30 minutes, and many buy and sell orders for hours afterwards. Nasdaq said on Wednesday that it made the wrong fix for a technical glitch, worsening the initial problem. The exchange now faces big claims for compensation from traders. "If we had known that our solution was inadequate, we would have fixed the solution with the right solution before moving forward," said Eric Noll, Nasdaq's head of transaction services. The US Securities and Exchange Commission (SEC) is now reviewing the matter, and at least one lawsuit has been filed accusing Nasdaq of negligence.

7. Avoid the Google road. Facebook sold its shares through a traditional Wall Street IPO — which is a more subjective process because it's managed by the investment bankers. By contrast, when Google went public in 2004, it issued stock through a more transparent — and democratic — process known as a modified Dutch auction. Underwriters gathered bids from investors regardless of their connections or size of their portfolios.

8. Alienate your customers. For a company that transformed the meaning of the words "like" and "friend," the events of the last week weren't so friendly. The biggest US automaker, General Motors Co, said only days before the IPO that it would stop buying ads on Facebook. The decision followed Facebook's failure to convince GM about the benefits of Facebook in a meeting in recent weeks, people familiar with the meeting said. Then the IPO problems managed to upset thousands of investors who are also Facebook customers. In a sign of the image problems it has created, the headline on one New York Post column on Thursday was: "Warm, Fuzzy Vultures", and a cartoon in the same newspaper depicted a distraught bull slumped over a computer featuring a Facebook page thinking the worst — "unfriend, unfriend, unfriend, unfriend, unfriend". — Reuters

Facebook flop hurts small investors’ trust in stocks

May 26, 2012

Pedestrians walk near the Nasdaq Marketsite at the start of the listing for Facebook in New York May 18, 2012. — Reuters pic

NEW YORK, May 26 — Just when brokers thought Mom-and-Pop investors were getting excited about the stock market, along came Facebook.

The 17 per cent plunge in Facebook’s shares since its ballyhooed debut last Friday, coupled with Nasdaq’s mishandling of opening day trading, is spooking the very investors who had seemed the most intrigued by the offering, said Wall Street executives.

“The Facebook IPO is another in a series of data points that feed concerns that the financial markets are not a safe place to be for individual investors,” said John Taft, chief executive of Royal Bank of Canada’s US wealth management division, one of 33 underwriters of the offering.

Brokerage firms have been fighting to restore investor confidence in the markets since the financial crisis of 2008, but trading volume has remained stubbornly weak. Market-shattering events such as the Flash Crash of 2010, the Bernard Madoff scam, last summer’s downgrade of US government debt and the European sovereign debt crisis have been pushing investors out of equities into cash or bonds that yield near-zero returns.

Anticipation of the Facebook IPO had created a stir of public interest in the offering and in stocks in general. Now, its failure is expected to drive more retail investors away from stocks and further depress trading volume, which lowers revenue at brokerage firms.

Investors poured US$33.5 billion (RM100 billion) of net new money into US stock mutual funds in the first quarter, according to Thomson Reuters Lipper. In the last three weeks, however, they pulled out US$16.3 billion.

“The Facebook flop didn’t help,” said Jeff Tjornehoj, Lipper’s head of Americas research.

“The perception was that something good was going on,” said Anthony DeChellis, chief executive of private banking Americas at Credit Suisse, which also had a small portion of the Facebook underwriting. “It could have gotten people interested in the next IPO, but the conversation now is, ‘You owe me because of Facebook.’”

The Facebook IPO had plenty of problems. The company increased the size and price of the issue just before the debut, and it later emerged that numerous analysts had cut their growth forecasts for the company — without telling retail investors.

One result was that despite pre-IPO chatter about a scarcity of shares, too many retail investors got a piece of the Facebook action, brokers said. Trading in the IPO last Friday made up 40 per cent of daily volume at discount brokerages, up from two per cent to five per cent historically for IPOs, according to analysts at Sandler O’Neill & Partners. So-called retail investors lost an estimated US$630 million in the first four days of trading.

New headlines showing that even Wall Street insiders got pummelled by the Facebook debut have stoked further doubts among small investors. At least four of the trading firms chosen by Nasdaq to make markets in Facebook lost a total of more than US$100 million because of systems issues in the electronic marketplace, according to one of the firms.

“It’s disheartening and very scary,” said Victoria Phibbs, a day trader from Jacksonville, Florida, who canceled an order for 400 Facebook shares through her Charles Schwab Corp brokerage account as she watched the price plummet on its opening day of trading. She learned in the evening that her order was nevertheless filled, leading to a US$1,000 loss as she sold the shares. Schwab, she said, reimbursed her commission costs.

“It’s not like when our parents used to trade,” she said, recalling a time when investors could be confident enough in the markets to buy and hold stocks for the long term. “I feel like you can’t win as an individual investor.”

Spokespersons at Nasdaq did not respond to calls for comment. A Schwab spokesman said the company has resolved most of its clients’ Facebook-related issues.

Brian Cabral, a United Airlines pilot from Topsfield, Massachusetts, ordered 100 Facebook shares through a discount broker last Friday during a layover on a flight from Tokyo to Washington, then quickly cancelled the order.

He received a “cancel pending” notice within minutes. But more than six hours elapsed before he received word that the cancellation went through, a notification he said typically takes five to 10 minutes.

“I think these types of shenanigans will dissuade people from investing in the stock market,” said the 50-year-old pilot. “You’re not going to see my generation really coming back to this market.”

RBC’s Taft said the Facebook systems glitches are particularly harmful to restoring confidence. “You can imagine the feedback we’re getting from brokers and clients,” he said. “You should be able to trust that your buy and sell orders are being filled in a timely manner.”

The securities industry is concerned that the extended drought in stock investing will continue to erode its bottom line. Trading commissions at retail brokerage firms dipped nine per cent in this year’s first quarter from a year earlier while cash balances and investments in low-yielding bonds are at unusually high levels. “Credits” reflecting cash at securities firms have grown 32 per cent in the 24 months ended February 28, according to regulatory reports.

Balances in margin accounts — a profitable lending product for brokers and an indication of investors’ risk appetites — are 10 per cent below last April, according to analysts at Goldman Sachs.

The hit to brokerage firms’ bottom lines from reduced trading has been cushioned by the growth of fee-based advisory accounts and the recovery of the broad market from the depths of the financial crisis, but brokerage executives said distrust of the markets and trading remains a problem.

“Investors are still spooked,” said Taft, a former chairman of the Securities Industry and Financial Markets Association, the US brokerage industry’s principal trade group.

That Facebook blew up after weeks of anticipatory headlines is proving to be an object lesson to retail investors.

“There is an incredible amount of empirical evidence that retail investors should not be buying IPOs,” said Henry Hu, a securities and finance professor at the University of Texas Law School. “Insiders always know more and the pricing is incredibly subtle.”

The apparent mispricing of Facebook shares by underwriters and the deal’s large float give the impression that Wall Street enjoys “squeezing every dime out of investors’ pockets,” likely hurts Facebook’s ability to sell future offerings and exposes the company and its underwriters to litigation, he said.

IPOs are subject to Section 11 of the Securities Act of 1933, which sets higher standards of due diligence than other antifraud provisions of the securities law. “Section 11 is promised land for plaintiffs’ attorneys,” said Hu, who was the first head of the Securities and Exchange Commission’s division of risk, strategy and financial innovation.

SEC Chairman Mary Schapiro told reporters Tuesday that there is still “a lot of reason to have confidence in our markets and in the integrity of how they operate,” but one of her predecessors was less cheery.

“It’s an event with long-lasting negative implications for an industry that can ill afford this kind of blemish,” former SEC Chairman Arthur Levitt said in an interview. — Reuters

What are the objectives of all this?

The power of conviction

Buffett wrote to his investors and explained that stock pickers ''have to work extremely hard to find just a few attractive investment situations'', and because such opportunities are rare, why just nibble at them?

Buffett was no nibbler; he put 40 per cent of his partnership's assets into Amex because there was ''an extremely high probability that our facts and reasoning are correct, with a very low probability that anything could drastically change the underlying value of the investment''. His attitude paid off - within a year the stock price rose more than 40 per cent and compounded at high rates thereafter.

So-called efficient markets suffer from regular outbreaks of inefficiency. Over the past two years, News Corp, Cochlear, QBE Insurance and Cabcharge have all offered attractive investment opportunities due to temporary factors. Buffett's three simple rules show us how to take advantage of them.

Nathan Bell is the research director at Intelligent Investor, intelligent investor.com.au. This article contains general investment advice only (under AFSL 282288).

Read more: http://www.smh.com.au/money/investing/stay-cool-learn-from-the-master-20120518-1yvjs.html#ixzz1vpsGG5dl