Companies in the hard-asset-based subsector depend on big investments in fixed assets to grow their businesses. Airlines, waste haulers (Waste Management, Allied Waste, Republic Services), and expedited delivery companies (FedEx, UPS) all fall into this subsector.
In general, these companies aren't as attractive as technology-based businesses, but investors can still find some wide-moat stocks and good investments in this area.
Industry Structure
Growth for hard-asset-based businesses inevitably requires large incremental outlays for fixed assets. After all, once an airline is flyinng full planes, the only way to get more passengers from point A to point B is to acquire an additional aircraft, which can cost $35 million or more.
Because the incremental fixed investment occurs before asset deployment, companies in this sector generally finance their growth with external funding. Debt can be used to finance almost all of the asset's cost, so lenders generally require the asset to provide collateral against the loan. With this model, high leverage is not necessarily a bad thing, provided that the company can make enough money deploying the asset to cover the cost of debt financing and earn a reasonable return for shareholders.
With this in mind, airlines are generally the least attractive investment of all the companies in this subsector. Airlines must bear enormous fixed costs to maintain their fleets and meet the demands of expensive labour contracts, yet they sell a commodity service that's difficult to differentiate. As a result price competition is intense, profit margins are razor-thin - and often non-existent - and operating leverage is so high that the firms can swing from being wildly profitable to nearly bankrupt in a short time. If you don't think this sounds like a recipe for good long-term investments, you're right - airlines have lost a collective $11 billion (excluding the impact of recent government handouts) between deregulation in 1987 and 2002. Over the same time period, 125 airlines had filed for Chapter 11 bankruptcy protection, and 12 of them filed for Chapter 7 liquidation.
But despite the terrible performance for airlines in general, a few carriers have fared very well. Southwest, for one, has been profitable for 30 consecutive years - an amazing achievement considering the cyclicality of its business and the dismal operating environment for the industry in 2002. Southwest's superior financial performance is largely because of its main strategic advantage: a low cost structure driven by its practice of flying one type of aircraft for all its no frills, point-to-point routes. In an industry with less-than-desirable fundamentals, Southwest has achieved superior financial results by deploying a different and dominant, business strategy.
Other characteristics of hard-asset-based businesses make this segment worth watching. The idea of limited or shrinking assets, for example, can go a long way to provide stability in the competitive landscape for these companies. Because of the NIMBY (not in my back yard) principle, it is very difficult to get approval for new landfill sites. As a result, it is highly unlikely that new competitors will enter the landfill side of the waste management business. That puts a company such as Waste Management, which owns 40 percent of the total U.S. disposal capacity via its 300 landfills, at an advantage.
The majority of hard-asset-based companies fall into the narrow- or no-moat buckets. With few, if any, competitive advantages for many of these companies, investors should look for a pretty steep discount to a fair value estimate before buying shares.
Hallmark of Success for Hard-Asset-Based Businesses
Cost leadership: Because hard-asset-based companies have large fixed costs, those that deliver their products most efficiently have a strong advantage and can achieve superior financial performance, such as Southwest in the airline industry. Firms don't usually advertise their cost structures per se, so to get an idea about how efficiently a company operatees, look at its fixed assets turnover, operating margins, and ROIC - and compare its numbers to industry peers.
Unique assets: When limited assets are required to fulfill the delivery of a particular service, ownership of those assets is key. For example, Waste Management's numerous, well-located landfill assets represent a significant competitive advantage and brrier to entry in the waste management market because it's unlikely that enough new landfill locations will get government approval to diminish its share of this business.
Prudent financing: Remember, having a load of debt is not itself a bad thing. Having a load of debt that cannot be easily financed by the cash flow of the business is a reccipe for disaster. When analyzing companies with high debt, always be sure that the debt can be serviced from free cash flow, even under a downside scenario.
(Some Malaysian companies in this hard-asset-based businesses are Air Asia, MAS, Maybulk and Transmile.)
Ref: The Five Rules for Successful Stock Investing by Pat Dorsey
Sunday 3 May 2009
5 Value Traps to Avoid Right Now
5 Value Traps to Avoid Right Now
By Joe Magyer
April 24, 2009 Comments (14)
History’s greatest investor, Warren Buffett, has two simple rules.
Rule #1: Never lose money.
Rule #2: Never forget rule #1.
A big, sarcastic thank-you, Warren!
By Joe Magyer
April 24, 2009 Comments (14)
History’s greatest investor, Warren Buffett, has two simple rules.
Rule #1: Never lose money.
Rule #2: Never forget rule #1.
A big, sarcastic thank-you, Warren!
Sure, practically everyone has lost money in this market -- including Buffett. But take it easy on the Oracle here, because he’s dead-on. Buffett’s intense focus on not just investing in great opportunities but avoiding terrible ones has been the key to epic success.
Avoiding soul-sucking investments -- what we investing nerds dub “value traps” -- is hardly rocket science. Yet, incredibly, I see investors new and salty alike make the same mistakes over and over again, breaking Buffett’s rules and walking right into what seem like obvious value traps.
Having spent way too much time thinking about it, I’ve concluded that there are five primary categories of these dreaded mistakes. Avoiding these five traps will save you time, money, and more than a little heartache.
1. The quarter-life crisis
These are a real heartbreaker. You find a dominant company whose once sky-high growth has stalled, and its shares along with it. “TechWidget Corp. is trading at only 15 times earnings right now, only half its five-year average!” you say. “Its earnings have doubled over the past five years, but the shares are down over the same time period. Sounds like a steal!”
Snap! You just walked into a value trap.
Investors falsely believe that names like Dell or eBay (Nasdaq: EBAY) will see their relative valuations return to their headier days. They won’t.
Why? Captain Obvious would say that growth has slowed, technology evolved, and competition emerged. But all that misses the real reason. Instead of returning incremental profits to shareholders via dividends, such companies wreck shareholder value by chasing growth through overexpansion and high-profile acquisitions. Oh, and the ill-timed share repurchases that exist primarily to juice per-share earnings and help sop up all that stock option-driven dilution.
Steer clear of flailing tech titans until they’re willing to follow the lead of Microsoft (Nasdaq: MSFT) and Oracle (Nasdaq: ORCL) into dividend-paying adulthood.
2. The soaring cyclical
Here’s the rub about cyclical stocks: Their valuations are counterintuitive. They always look the cheapest when they’ve reached their priciest, and look priciest when they’re reached their cheapest.
Take nearly any oilfield service stock from last summer as an example. Transocean (NYSE: RIG) looked dirt cheap via a crude, PEG-style valuation. But savvy investors know that cyclical companies’ profits mean-revert, which is why cyclical stocks’ P/E multiples stay low during booms and high during busts.
In other words, you should be looking at cyclical stocks as their P/Es expand, not shrink.
3. The small-cap Methuselah
The six-year small-cap bull run that came crashing to a halt last year was a painful reminder of a little-known value trap: the Small-Cap Methuselah.
Century-old small-caps you’d never heard of were wrapping up five-year runs of 20% annualized earnings growth. Analysts went gaga, extrapolating those growth rates forward like the party would never end. Valuations followed suit. Gaga analyst, meet mean-reversion.
You won’t find long-run compounding machines within the small-cap space. Show me a company with a long, proven history of creating serious shareholder value, and I’ll show you a mid- or large-cap stock.
4. The too-high yielder
A company usually has a high yield (think above 7%) for one of three reasons:
- It has limited growth potential, so managers return as much cash as they can to shareholders (think regional telecoms).
- The company is in a clear state of decline and investors expect a dividend cut (think newspapers).
- The company is in a tax-advantaged structure that doesn’t allow it to retain much capital (think REITs, MLPs, or BDCs).
Broadly speaking, a high payout is a good thing. There’s a fine line, though. At Motley Fool Income Investor, we’re looking for that sweet spot where an attractive payout meets rest-easy status.
Take my most recent recommendation, Procter & Gamble (NYSE: PG). The stock’s yield of 3.5% is near a multi-decade high despite the company’s underlying earnings power remaining unchanged, if not improving. That’s low-hanging fruit for the income-loving investor.
5. The unopened book
I can already see the Ben Graham fanatics gearing up to peg me with tomatoes, but hear me out. Book values need to be adjusted -- especially heading into and during recessions.
Acquisition-happy companies inevitably end up slashing the goodwill they’d booked while making bloated acquisitions in the years previous. The book values of asset-centric plays (homebuilders, natural resource producers, etc.) also need a good tweaking to reflect the depressed values of those assets. And financials, well, what can I say? Just ask any Citigroup (NYSE: C) or AIG (NYSE: AIG) investor about the ease of assessing their balance sheets.
Don’t get me wrong: I’m all for buying stocks on the cheap. We do just that at Income Investor. But there’s a catch: We’re only interested in good values if they also happen to be great businesses, companies with years of exceptional performance behind and ahead of them. And, of course, ones that pay us to wait for our thesis to play out.
But I digress.
Wrapping the traps
To recap, you can smooth and improve your returns if you:
- Avoid the stalled-out growth stock undergoing a quarter-life crisis.
- Steer clear of hot small-caps with blah track records.
- Don’t get tripped up by seemingly cheap soaring cyclicals.
- Think twice about the yield that looks too good to be true.
- Don’t lean on inflated or unadjusted book values.
You’ve probably picked up on an underlying theme here: You need unconventionally conventional thinking if you want low-stress success in the stock market.
Looking for great, simple-to-understand businesses at good prices is the easiest way to avoid stepping into a value trap -- and bag great returns besides. That’s what I do alongside advisor James Early over at Income Investor, and more than 85% of our active picks are beating the market.
Senior analyst Joe Magyer owns no companies mentioned in this article, though he’s planning to nab a few. Microsoft, Dell, and eBay are Motley Fool Inside Value recommendations. eBay is also a Stock Advisor recommendation. Procter & Gamble is an Income Investor recommendation. The Motley Fool owns shares of Procter & Gamble. The Motley Fool has a disclosure policy.
Read/Post Comments (14) Recommend This Article (113)
http://www.fool.com/investing/dividends-income/2009/04/24/5-value-traps-to-avoid-right-now.aspx
The expanding P/E in cyclical stocks
The soaring cyclical
Here’s the rub about cyclical stocks: Their valuations are counterintuitive. They always look the cheapest when they’ve reached their priciest, and look priciest when they’re reached their cheapest.
Take nearly any oilfield service stock from last summer as an example. Transocean (NYSE: RIG) looked dirt cheap via a crude, PEG-style valuation. But savvy investors know that cyclical companies’ profits mean-revert, which is why cyclical stocks’ P/E multiples stay low during booms and high during busts.
In other words, you should be looking at cyclical stocks as their P/Es expand, not shrink.
Here’s the rub about cyclical stocks: Their valuations are counterintuitive. They always look the cheapest when they’ve reached their priciest, and look priciest when they’re reached their cheapest.
Take nearly any oilfield service stock from last summer as an example. Transocean (NYSE: RIG) looked dirt cheap via a crude, PEG-style valuation. But savvy investors know that cyclical companies’ profits mean-revert, which is why cyclical stocks’ P/E multiples stay low during booms and high during busts.
In other words, you should be looking at cyclical stocks as their P/Es expand, not shrink.
Sentiment curves
How To Interpret What Your Dealers & Remisers Are Saying
An "expert" used to say " market looks like will go up but fear it will correct".
Ref: http://malaysiafinance.blogspot.com/2009/04/how-to-interpret-what-your-dealers.html
Other sentiment curves
Also click:
Capitulation - the point when everybody gives up.
An "expert" used to say " market looks like will go up but fear it will correct".
Ref: http://malaysiafinance.blogspot.com/2009/04/how-to-interpret-what-your-dealers.html
Other sentiment curves
Also click:
Capitulation - the point when everybody gives up.
The Rule of the Pyramid
This is another simple concept one can incorporate into one's investing knowledge. For long term investors, this incorporates the other investing concept of tactical asset allocation.
The Inverted Pyramid
Playing the "Inverted Pyramid" describes the buying pattern of many players (usually "never-die-before" trader) chasing after a charging bull. An inverted pyramid is narrow at the base and gradually broadens at the top.
In a bull market, after several successful attempts, he became overwhelmed by how easy it was to make a quick buck from the market. He became more convinced and his greed manifested itself as the market trended higher and higher. His bets grew bigger and more aggressive than ever.
Building on such a foundation is senseless and perilous. Needless to say, the small winnings from the early stages are by no means sufficient to cushion even a minor correction of the market, not to mention a major deccline, when one has been exposed to huge quantities of highly-priced stock way in excess of one's risk appetite can bear. It is one of the most grievous and typical mistakes of a loser.
The Rule of the Pyramid
Assume that you are happily reaping profits from an upside rally or a huge bull run, gaining inn confidence and becoming undaunted by a possible correction or reversal in trend (the Bear).
Be always mindful of the Rule of the Pyramid. This is, as the market or stock price goes higher and higher, your bets should become smaller and smaller. In other words, the higher the market goes, the lesser you bet. Never risk more than 50% of your winnings back in the market again.
At the end of the day, after all the tiring mind games, guesswork, risk-taking and heart-stopping moments, don't you think you deserve at least something (be it small or big) as a reward for going through all that angst? Would you prefer to give it all back? Or even pay the market for what you had gone through?
This is a simple piece of common sense that not only prevents you from giving back all your winnings to the market after a rally, but also enables you to preserve your winnings.
The Inverted Pyramid
Playing the "Inverted Pyramid" describes the buying pattern of many players (usually "never-die-before" trader) chasing after a charging bull. An inverted pyramid is narrow at the base and gradually broadens at the top.
In a bull market, after several successful attempts, he became overwhelmed by how easy it was to make a quick buck from the market. He became more convinced and his greed manifested itself as the market trended higher and higher. His bets grew bigger and more aggressive than ever.
Building on such a foundation is senseless and perilous. Needless to say, the small winnings from the early stages are by no means sufficient to cushion even a minor correction of the market, not to mention a major deccline, when one has been exposed to huge quantities of highly-priced stock way in excess of one's risk appetite can bear. It is one of the most grievous and typical mistakes of a loser.
The Rule of the Pyramid
Assume that you are happily reaping profits from an upside rally or a huge bull run, gaining inn confidence and becoming undaunted by a possible correction or reversal in trend (the Bear).
Be always mindful of the Rule of the Pyramid. This is, as the market or stock price goes higher and higher, your bets should become smaller and smaller. In other words, the higher the market goes, the lesser you bet. Never risk more than 50% of your winnings back in the market again.
At the end of the day, after all the tiring mind games, guesswork, risk-taking and heart-stopping moments, don't you think you deserve at least something (be it small or big) as a reward for going through all that angst? Would you prefer to give it all back? Or even pay the market for what you had gone through?
This is a simple piece of common sense that not only prevents you from giving back all your winnings to the market after a rally, but also enables you to preserve your winnings.
Uncle Chua's Portfolio & Dividend Income
Uncle Chua's Portfolio & Dividend Income
This is a true story told by the remisier in his book. The story of Uncle Chua, an elderly man, who was barely literate and knew nothing about market tantrums or even how to use the Teletext facility on his TV set to monitor his portfolio of stocks. He managed to accumulate an incredible wealth in excess of $17,000,000 (Seventeen million dollars) by investing in stocks and shares alone.
Here is Uncle Chua's portfolio & dividend income, reproduced here as accurately as was depicted in the book: http://spreadsheets.google.com/pub?key=r5DhwS2nWTiIAK0pDCIPD-Q
He made it all from the market with an initial capital of a couple of hundred thousand dollars that he saved from many years of running a business in the shipping industry that he started in his late 30s.
Was this a miracle, pure luck, a fairy tale or bullshit? Let's learn a few lessons from this story later.
Reference: Why am I always Lo$ing in the Stock Market? Publisher: Heritt & Company
Also read:
The story of Uncle Chua: How did Uncle Chua accumulate so much wealth in his portfolio?
This is a true story told by the remisier in his book. The story of Uncle Chua, an elderly man, who was barely literate and knew nothing about market tantrums or even how to use the Teletext facility on his TV set to monitor his portfolio of stocks. He managed to accumulate an incredible wealth in excess of $17,000,000 (Seventeen million dollars) by investing in stocks and shares alone.
Here is Uncle Chua's portfolio & dividend income, reproduced here as accurately as was depicted in the book: http://spreadsheets.google.com/pub?key=r5DhwS2nWTiIAK0pDCIPD-Q
He made it all from the market with an initial capital of a couple of hundred thousand dollars that he saved from many years of running a business in the shipping industry that he started in his late 30s.
Was this a miracle, pure luck, a fairy tale or bullshit? Let's learn a few lessons from this story later.
Reference: Why am I always Lo$ing in the Stock Market? Publisher: Heritt & Company
Also read:
The story of Uncle Chua: How did Uncle Chua accumulate so much wealth in his portfolio?
Recovering your market losses?
Saturday May 2, 2009
Recovering your market losses?
MARKETS
By SHERILYN FOONG
THESE challenging times for investors demand a well-thought out, personalised and well-diversified investment strategy. (Always important to have a good investment philosophy and strategy.)
Hard, tough and painful decisions will have to be made, be it in the cruel form of “amputation, that is cutting steep losses on stock duds, or ploughing in more good money (after bad?) via participation in invested companies’ cash calls. (It can be painful to cut the losses, sell the losers. But it is required surgery.)
However; the hardest decision to make is really regarding your personal risk appetite: should you or can you afford to take on more risk so as to (hopefully) recover some of your market losses in your investment portfolio? (Knowing one's ability and willingness to take risk is important. This has to do with the wealth effect, the house money effect, modest diversification and also knowing asset allocation.)
Do or die?
One needs to look at the current global scenario and form some rational conclusions involving an element of personal judgment calls. (The truth is no one knows the future. Just observe the experts giving opinions on CNBC. There are just as many on either sides of the argument. Decision should be a personal one based on ability to take risk. In particular, knowing the consequences of your decision is more important than the probabilities of the outcomes, which arguably is uncertain.)
From there-on, the decision as to whether or not you can or should take on more risk can be a highly daunting task.
But it cannot be helped because the alternative passive option of doing nothing can be even riskier! (Yes, if the consequences of a further fall in your portfolio can force you to do something silly. This assumes that the portfolio was constituted to be a winner. Of course, sell the losers, let the winners run. No easy solution here. There are errors of omission and commission too. But in this very down market, and for those with longer time frame in their investment, the probable upside gain compared to the downside loss is more likely favourable.)
A good starting point can be from taking a good look at all the stimulus packages announced globally and all that has been and still is being done by central banks the world over to stabilise and stimulate the global financial systems and real economies respectively, where the verdict as to its success and effectiveness is still out there. (Ah, looking at the macroeconomics and then adopt a top-down approach to pick stocks. It is just as profitable and safe to start at the micro level and select individual businesses. This is probably easier for the majority of the investors who may not be economists.)
The encouraging news is that some signs of bottoming out are in sight. Sure, one may prefer to opt for more concrete and sustainable evidence of recovery before taking on more risk. (Averaging down is also safe, ignoring some investors who preached this to be unsafe. This strategy is particularly useful for those who can value stocks. Buying a good quality stock at below the "intrinsic value" (that is, a bargain) ensures a margin of safety for possible loss should the decision turns out to be adversely affected by future events. Moreover, buying low ensures a higher return in the future.)
But such a typical “wait and see first” stance is not without its own risk. Because when that happens, when it’s a sure fire conclusion that the said policies have been accurately effective, the ever-efficient and nimble markets would have priced that in rather quickly such that taking risk at those material levels would prove more costly. (Missing the few best days of the market can also reduce one's potential gains significantly. Another is when the market starts to rally, some investors remain frozen outside the market. There is no easy answer for those who attempt to time the market. Staying invested long term based on a good investing philosophy and strategy is safe.)
The market’s ‘Limbo Rock’
What comes to mind here is the investment nugget blink of an eye move of Citigroup stock from a penny stock to multiple top performer before you can say “I’ll take the risk!”.
On this note, I would like to quote my wise friend Kumar who recently told me, ”Keep your money in Bank Simpanan and watch TV!”. Enough said.
The wealth preservation argument prevails here: suppose the markets fall substantially from here, hence doing nothing now and preserving what is left would turn out to be the best strategy. (Now that this chap is out of the market, when would be the right time for him to get back into the market? In the long run, the stocks give a better return compared to savings in the banks. Timing the market works for some "investors"; however, buying and selling stocks based on price is what guides the value investors. Once again, "The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more.* Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement." - Benjamin Graham )
Playing God
However, what if the market has indeed bottomed and is in the long, slow but steady progress of recovery?
True, no one has perfect foresight. But it’s important to have a calculated and informed view on investments as opposed to pure speculation or it is no different from casino play.
It is imperative to form a personal view of the market outlook to form the foundation of your investment decisions.
This personal investment decision-making process also incorporates your personal investment objectives which has to be realistic. High returns come with higher risks. (There are quite a few stocks delivering 7% - 8% annual return with little downside risks that investors can buy for the long term in our local market. The harder task is to seek out higher returns without undue unacceptable risks.)
Going through this personal investment thought process is a practical exercise in figuring out your acceptable risk levels. (Yes, an investor should regularly goes through this exercise with the preexisting portfolio. Tracking one's investment and reassessing the individual stocks for returns versus risks is part and parcel of intelligent investing.)
Bear in mind that extremely high levels of fear in the markets often exaggerates the real market risk. (And this is the best time to invest in the market, when the fear is at its highest. One need to be wired or re-wired to take advantage of this.)
The lessons of diversification
Over the last year of unprecedented crunch, investors have been battered by losses across almost all asset classes and thus, are predictably retreating from further investing in a herd-like manner. (Faced with this uncertainty, how should one react? Those with the right philosophy and strategy well thought out and observed strictly will be better guided. Understanding the consequences of risk is paramount.)
The point that has been missed is really, how much would have been lost if there had been no diversification at all? (Start with the asset allocation that is appropriate based on various personal factors, including your risk tolerance. According to Buffett, after diversifying into 6 stocks, the 7th stock is unlikely to give a higher return though the risk may be lower.)
Despite the unfortunate highly positive correlation among almost all asset classes in the current financial crisis, one should only look at the converse situation to conclude that diversification still has its magic.
>Sherilyn Foong, who is attached to a private equity firm, believes that the only thing constant in the market is its inconstancy. So, she maintains that the markets will surprise, as they always do.
http://biz.thestar.com.my/news/story.asp?file=/2009/5/2/business/3819025&sec=business
Recovering your market losses?
MARKETS
By SHERILYN FOONG
THESE challenging times for investors demand a well-thought out, personalised and well-diversified investment strategy. (Always important to have a good investment philosophy and strategy.)
Hard, tough and painful decisions will have to be made, be it in the cruel form of “amputation, that is cutting steep losses on stock duds, or ploughing in more good money (after bad?) via participation in invested companies’ cash calls. (It can be painful to cut the losses, sell the losers. But it is required surgery.)
However; the hardest decision to make is really regarding your personal risk appetite: should you or can you afford to take on more risk so as to (hopefully) recover some of your market losses in your investment portfolio? (Knowing one's ability and willingness to take risk is important. This has to do with the wealth effect, the house money effect, modest diversification and also knowing asset allocation.)
Do or die?
One needs to look at the current global scenario and form some rational conclusions involving an element of personal judgment calls. (The truth is no one knows the future. Just observe the experts giving opinions on CNBC. There are just as many on either sides of the argument. Decision should be a personal one based on ability to take risk. In particular, knowing the consequences of your decision is more important than the probabilities of the outcomes, which arguably is uncertain.)
From there-on, the decision as to whether or not you can or should take on more risk can be a highly daunting task.
But it cannot be helped because the alternative passive option of doing nothing can be even riskier! (Yes, if the consequences of a further fall in your portfolio can force you to do something silly. This assumes that the portfolio was constituted to be a winner. Of course, sell the losers, let the winners run. No easy solution here. There are errors of omission and commission too. But in this very down market, and for those with longer time frame in their investment, the probable upside gain compared to the downside loss is more likely favourable.)
A good starting point can be from taking a good look at all the stimulus packages announced globally and all that has been and still is being done by central banks the world over to stabilise and stimulate the global financial systems and real economies respectively, where the verdict as to its success and effectiveness is still out there. (Ah, looking at the macroeconomics and then adopt a top-down approach to pick stocks. It is just as profitable and safe to start at the micro level and select individual businesses. This is probably easier for the majority of the investors who may not be economists.)
The encouraging news is that some signs of bottoming out are in sight. Sure, one may prefer to opt for more concrete and sustainable evidence of recovery before taking on more risk. (Averaging down is also safe, ignoring some investors who preached this to be unsafe. This strategy is particularly useful for those who can value stocks. Buying a good quality stock at below the "intrinsic value" (that is, a bargain) ensures a margin of safety for possible loss should the decision turns out to be adversely affected by future events. Moreover, buying low ensures a higher return in the future.)
But such a typical “wait and see first” stance is not without its own risk. Because when that happens, when it’s a sure fire conclusion that the said policies have been accurately effective, the ever-efficient and nimble markets would have priced that in rather quickly such that taking risk at those material levels would prove more costly. (Missing the few best days of the market can also reduce one's potential gains significantly. Another is when the market starts to rally, some investors remain frozen outside the market. There is no easy answer for those who attempt to time the market. Staying invested long term based on a good investing philosophy and strategy is safe.)
The market’s ‘Limbo Rock’
What comes to mind here is the investment nugget blink of an eye move of Citigroup stock from a penny stock to multiple top performer before you can say “I’ll take the risk!”.
On this note, I would like to quote my wise friend Kumar who recently told me, ”Keep your money in Bank Simpanan and watch TV!”. Enough said.
The wealth preservation argument prevails here: suppose the markets fall substantially from here, hence doing nothing now and preserving what is left would turn out to be the best strategy. (Now that this chap is out of the market, when would be the right time for him to get back into the market? In the long run, the stocks give a better return compared to savings in the banks. Timing the market works for some "investors"; however, buying and selling stocks based on price is what guides the value investors. Once again, "The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more.* Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement." - Benjamin Graham )
Playing God
However, what if the market has indeed bottomed and is in the long, slow but steady progress of recovery?
True, no one has perfect foresight. But it’s important to have a calculated and informed view on investments as opposed to pure speculation or it is no different from casino play.
It is imperative to form a personal view of the market outlook to form the foundation of your investment decisions.
This personal investment decision-making process also incorporates your personal investment objectives which has to be realistic. High returns come with higher risks. (There are quite a few stocks delivering 7% - 8% annual return with little downside risks that investors can buy for the long term in our local market. The harder task is to seek out higher returns without undue unacceptable risks.)
Going through this personal investment thought process is a practical exercise in figuring out your acceptable risk levels. (Yes, an investor should regularly goes through this exercise with the preexisting portfolio. Tracking one's investment and reassessing the individual stocks for returns versus risks is part and parcel of intelligent investing.)
Bear in mind that extremely high levels of fear in the markets often exaggerates the real market risk. (And this is the best time to invest in the market, when the fear is at its highest. One need to be wired or re-wired to take advantage of this.)
The lessons of diversification
Over the last year of unprecedented crunch, investors have been battered by losses across almost all asset classes and thus, are predictably retreating from further investing in a herd-like manner. (Faced with this uncertainty, how should one react? Those with the right philosophy and strategy well thought out and observed strictly will be better guided. Understanding the consequences of risk is paramount.)
The point that has been missed is really, how much would have been lost if there had been no diversification at all? (Start with the asset allocation that is appropriate based on various personal factors, including your risk tolerance. According to Buffett, after diversifying into 6 stocks, the 7th stock is unlikely to give a higher return though the risk may be lower.)
Despite the unfortunate highly positive correlation among almost all asset classes in the current financial crisis, one should only look at the converse situation to conclude that diversification still has its magic.
>Sherilyn Foong, who is attached to a private equity firm, believes that the only thing constant in the market is its inconstancy. So, she maintains that the markets will surprise, as they always do.
http://biz.thestar.com.my/news/story.asp?file=/2009/5/2/business/3819025&sec=business
Saturday 2 May 2009
Compounded Effects of Market Underperformance
Compounded Effects of Market Underperformance
Beating the market with even slightly higher rates of return is a shorter path to wealth. This is especially true if the investments are left on the table to perform, and perform consistently, over time.
What about investments achieving less than market average return?
What happens when you cling to these investments?
Are they like a bad marriage, not only producing inferior returns but also consuming valuable time that you could put to work elsewhere?
From an investment perspective, yes.
Click to view:
http://spreadsheets.google.com/pub?key=r59JmWu8jkHxD7HKgWcvKUA
The table illustrates that it isn't hard to show what happens when you hang on to the losers, or even the inferior "winners."
Compared to market returns of 10%, an investor underperforming the market by 2% (or achieving an 8% return) falls 7% behind a market performer after 10 years, 31% behind over 20 years, and 42% behind over 30 years. An investor underperforming by 6%, loses 43 %, 67%, and 81% to the market performing investor over 10, 20, and 30 years respectively.
That's quite a price to pay for underperformance.
Now, if your investments are producing negative returns, the results can be quite ugly indeed.
LESSON in these numbers: Don't hang on to chronic losers! Not only do you lose, but you also lose out on opportunities to gain. If it's broke, fix it!
Beating the market with even slightly higher rates of return is a shorter path to wealth. This is especially true if the investments are left on the table to perform, and perform consistently, over time.
What about investments achieving less than market average return?
What happens when you cling to these investments?
Are they like a bad marriage, not only producing inferior returns but also consuming valuable time that you could put to work elsewhere?
From an investment perspective, yes.
Click to view:
http://spreadsheets.google.com/pub?key=r59JmWu8jkHxD7HKgWcvKUA
The table illustrates that it isn't hard to show what happens when you hang on to the losers, or even the inferior "winners."
Compared to market returns of 10%, an investor underperforming the market by 2% (or achieving an 8% return) falls 7% behind a market performer after 10 years, 31% behind over 20 years, and 42% behind over 30 years. An investor underperforming by 6%, loses 43 %, 67%, and 81% to the market performing investor over 10, 20, and 30 years respectively.
That's quite a price to pay for underperformance.
Now, if your investments are producing negative returns, the results can be quite ugly indeed.
LESSON in these numbers: Don't hang on to chronic losers! Not only do you lose, but you also lose out on opportunities to gain. If it's broke, fix it!
What the Swine Flu Panic Means for Your Portfolio
"Buying low makes it a lot easier to sell high."
What the Swine Flu Panic Means for Your Portfolio
By Seth Jayson April 27, 2009 Comments (24)
It's a delicate subject, and people's lives are at risk, so I'll state right here, up top, that I do not intend to make light of this public health concern. I share the sympathies that we all have for individuals afflicted by the swine flu. (I've experienced a delirium-packed, 10-day version of the usual seasonal flu, and I wouldn't wish this illness on my worst enemy.)
That said, the reactions of the investing community already look ridiculous: "Markets Down on Swine Flu" read the headlines. Other writers will try to convince you to pile into vaccine names like GlaxoSmithKline (NYSE: GSK), or companies like Netflix (Nasdaq: NFLX), for which a simplistic, "stay-at-home" argument can be made. This is simply rank trend speculation in reverse.
How to really profit
If you really want to find opportunities relating to the swine flu story, I suggest you do the opposite of what most people are advocating. For instance, consider inverting one particularly brazen and short-sighted call that was reported by Bloomberg this morning: UBS downgrades Mexican stocks from "top pick" to "underweight" because of the swine flu.
Really? An entire country's strongest businesses will be permanently impaired because of this health crisis? Would you write off entire segments of the U.S. economy if the illness got worse here? Would you sell Procter & Gamble (NYSE: PG)? Ditch Home Depot (NYSE: HD)?
Sure, the Mexican economy is generally more fragile than ours, but most of the big-name firms trading on our exchanges are anything but weak. Beverage and minimart king FEMSA will likely sell fewer soft drinks and beers over the coming weeks. Will Gruma sell fewer tortillas, Industrias Bachoco fewer chicken chunks? Probably.
Will this matter for the long term?
Very unlikely If you are investing in strong names for the long term -- and that's how you should be investing -- these are the times when you should be more interested in buying stocks, not less. Flu epidemics are terrible, but they're also normal. So are economic cycles and (in Mexico) the occasional currency panic.
Buying good companies when the headline news is bad is the hardest thing to do (psychologically), but it's the simplest way to buy low. And buying low makes it a lot easier to sell high.
That's the takeaway from the two wealthiest investors in the world -- Warren Buffett and Carlos Slim, who made their fortunes buying companies with competitive advantages on the cheap, often during times of uncertainty. Despite recessions, oil shocks, currency convulsions, SARS, and bird flu, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), Telmex, and America Movil (NYSE: AMX) have made them very wealthy.
We've recently revamped Motley Fool Hidden Gems, putting real money into small-cap stocks, to enable us to take advantage of exactly this kind of short-term market craziness. At times like this, we're more interested in our favorite Mexican stocks: Grupo Aeroportuario del Sur and Grupo Aeroportuario del Pacifico. As monopoly airport operators with high fixed costs, both would see turbulence due to a temporary dip in air travel (one they're already getting thanks to the economy).
But in the long term, monopolies like these thrive and enrich shareholders. Ditto the major players I mentioned further up. So unless you think Mexico is forever on the wane, it's time to look at buying these stocks, not selling them.
Seth Jayson is co-advisor at Motley Fool Hidden Gems. He owns shares of Grupo Aeroportuario del Sur, FEMSA, and Berkshire Hathaway. Grupo Aeroportuario del Pacifico and Grupo Aeroportuario del Sur are Hidden Gems recommendations. Berkshire Hathaway and Netflix are Motley Fool Stock Advisor selections. Berkshire Hathaway and The Home Depot are Motley Fool Inside Value selections. Procter & Gamble is a Motley Fool Income Investor recommendation. America Movil and FEMSA are Global Gains picks. The Fool owns shares of Procter & Gamble and Berkshire Hathaway. The Fool has a disclosure policy.
http://www.fool.com/investing/small-cap/2009/04/27/what-the-swine-flu-panic-means-for-your-portfolio.aspx
What the Swine Flu Panic Means for Your Portfolio
By Seth Jayson April 27, 2009 Comments (24)
It's a delicate subject, and people's lives are at risk, so I'll state right here, up top, that I do not intend to make light of this public health concern. I share the sympathies that we all have for individuals afflicted by the swine flu. (I've experienced a delirium-packed, 10-day version of the usual seasonal flu, and I wouldn't wish this illness on my worst enemy.)
That said, the reactions of the investing community already look ridiculous: "Markets Down on Swine Flu" read the headlines. Other writers will try to convince you to pile into vaccine names like GlaxoSmithKline (NYSE: GSK), or companies like Netflix (Nasdaq: NFLX), for which a simplistic, "stay-at-home" argument can be made. This is simply rank trend speculation in reverse.
How to really profit
If you really want to find opportunities relating to the swine flu story, I suggest you do the opposite of what most people are advocating. For instance, consider inverting one particularly brazen and short-sighted call that was reported by Bloomberg this morning: UBS downgrades Mexican stocks from "top pick" to "underweight" because of the swine flu.
Really? An entire country's strongest businesses will be permanently impaired because of this health crisis? Would you write off entire segments of the U.S. economy if the illness got worse here? Would you sell Procter & Gamble (NYSE: PG)? Ditch Home Depot (NYSE: HD)?
Sure, the Mexican economy is generally more fragile than ours, but most of the big-name firms trading on our exchanges are anything but weak. Beverage and minimart king FEMSA will likely sell fewer soft drinks and beers over the coming weeks. Will Gruma sell fewer tortillas, Industrias Bachoco fewer chicken chunks? Probably.
Will this matter for the long term?
Very unlikely If you are investing in strong names for the long term -- and that's how you should be investing -- these are the times when you should be more interested in buying stocks, not less. Flu epidemics are terrible, but they're also normal. So are economic cycles and (in Mexico) the occasional currency panic.
Buying good companies when the headline news is bad is the hardest thing to do (psychologically), but it's the simplest way to buy low. And buying low makes it a lot easier to sell high.
That's the takeaway from the two wealthiest investors in the world -- Warren Buffett and Carlos Slim, who made their fortunes buying companies with competitive advantages on the cheap, often during times of uncertainty. Despite recessions, oil shocks, currency convulsions, SARS, and bird flu, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), Telmex, and America Movil (NYSE: AMX) have made them very wealthy.
We've recently revamped Motley Fool Hidden Gems, putting real money into small-cap stocks, to enable us to take advantage of exactly this kind of short-term market craziness. At times like this, we're more interested in our favorite Mexican stocks: Grupo Aeroportuario del Sur and Grupo Aeroportuario del Pacifico. As monopoly airport operators with high fixed costs, both would see turbulence due to a temporary dip in air travel (one they're already getting thanks to the economy).
But in the long term, monopolies like these thrive and enrich shareholders. Ditto the major players I mentioned further up. So unless you think Mexico is forever on the wane, it's time to look at buying these stocks, not selling them.
Seth Jayson is co-advisor at Motley Fool Hidden Gems. He owns shares of Grupo Aeroportuario del Sur, FEMSA, and Berkshire Hathaway. Grupo Aeroportuario del Pacifico and Grupo Aeroportuario del Sur are Hidden Gems recommendations. Berkshire Hathaway and Netflix are Motley Fool Stock Advisor selections. Berkshire Hathaway and The Home Depot are Motley Fool Inside Value selections. Procter & Gamble is a Motley Fool Income Investor recommendation. America Movil and FEMSA are Global Gains picks. The Fool owns shares of Procter & Gamble and Berkshire Hathaway. The Fool has a disclosure policy.
http://www.fool.com/investing/small-cap/2009/04/27/what-the-swine-flu-panic-means-for-your-portfolio.aspx
****Shopping for Value: A Practical Approach
Shopping for Value: A Practical Approach
Trading off between philosophy and practicality
Shopping for Value: A Practical Approach
The Thought Process Is What Counts
Understanding different kinds of value investing situations
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors
Using a condensed appraisal approach and check list
Short Form for Value Appraisal
Managing your value investments once purchased
Keeping track of your investments
Making the "sell decision"
Trading off between philosophy and practicality
Shopping for Value: A Practical Approach
The Thought Process Is What Counts
Understanding different kinds of value investing situations
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors
Using a condensed appraisal approach and check list
Short Form for Value Appraisal
Managing your value investments once purchased
Keeping track of your investments
Making the "sell decision"
Making the "sell decision"
Making the "sell decision"
And now, the hardest part.
"You thought 'marrying' the stock was difficult, full of unknowns and subjective assessments? Try the divorce!"
In investing, selling can be one of the hardest things to do. Investors get emotionally vested in their decisions, and hangin on becomes more a matter of hope - and desire to be right "after all" - than a rational, conscious decision based on a company's merit.
True value investors don't think this way. Value investors watch their businesses perform just as a good manager would, and when they stop performing, they get out. It's really one of the great attributes of stock investing: Investors don't get the headaches that managers and small business owners get. When things turn, or when a better opportunity arises, they can just sell and move on. The upshot: Keep track the company's story, and be ready to reappraise and move on if the new appraisal comes up short.
The "sell decision"
A condensed thought process and framework may help. Most experienced investors know that selling takes more discipline and can be more difficult than buying.
For value investors, the main rule about selling is this: The thought process is similar to the buying decision. A business must be a good business to consider owning it, and the price must reflect, or be lower than, the value of the business.
1. If the price exceeds the value of the business, it's time to sell.
Additionally, value investors should consider selling when:
2. The business changes: Any change in fundamentals or the intangibles that drive them signal at least a re-evaluation, and perhaps a sale, of the business. So a changing marketplace, supply chain, interest rates, cost structure, management team - you name it - can trigger a reassessment and sale.
3. There's something else better to buy: Your company may be good, but perhaps there's a better ne out there. Selling should only be done when there's something else better to buy, even if that "something else" is a fixed income cash deposit or a rental property or even a vacation home. If 5 percent risk-free is better than your investment right now, then that's the "better thing to buy." If there isn't something better to buy, then your investment is probably okay.
4. When you need the money: No additional explanation necessary.
And now, the hardest part.
"You thought 'marrying' the stock was difficult, full of unknowns and subjective assessments? Try the divorce!"
In investing, selling can be one of the hardest things to do. Investors get emotionally vested in their decisions, and hangin on becomes more a matter of hope - and desire to be right "after all" - than a rational, conscious decision based on a company's merit.
True value investors don't think this way. Value investors watch their businesses perform just as a good manager would, and when they stop performing, they get out. It's really one of the great attributes of stock investing: Investors don't get the headaches that managers and small business owners get. When things turn, or when a better opportunity arises, they can just sell and move on. The upshot: Keep track the company's story, and be ready to reappraise and move on if the new appraisal comes up short.
The "sell decision"
A condensed thought process and framework may help. Most experienced investors know that selling takes more discipline and can be more difficult than buying.
For value investors, the main rule about selling is this: The thought process is similar to the buying decision. A business must be a good business to consider owning it, and the price must reflect, or be lower than, the value of the business.
1. If the price exceeds the value of the business, it's time to sell.
Additionally, value investors should consider selling when:
2. The business changes: Any change in fundamentals or the intangibles that drive them signal at least a re-evaluation, and perhaps a sale, of the business. So a changing marketplace, supply chain, interest rates, cost structure, management team - you name it - can trigger a reassessment and sale.
3. There's something else better to buy: Your company may be good, but perhaps there's a better ne out there. Selling should only be done when there's something else better to buy, even if that "something else" is a fixed income cash deposit or a rental property or even a vacation home. If 5 percent risk-free is better than your investment right now, then that's the "better thing to buy." If there isn't something better to buy, then your investment is probably okay.
4. When you need the money: No additional explanation necessary.
Keeping track of your investments
Keeping track of your investments
"The speed of business is higher, and the speed of business change has increased. To hold a stock with a long-term goal of forever is a great idea, but things change so fast it just may not be possible."
Supposedly, a value stock was to be acquired and kept for a long time, even a lifetime. True, but especially in today's world of change, business fortunes can turn on a dime, either as a result of macroeconomic and industry factors, or micro problems that escaped your initial read and surfaced during ownership.
According to a recent study, the average stock fund holds a stock for 1.2 years, down from 3 years in 1976. Some funds "trade" actively, but most don't - they simply react to change in business and business conditions.
The point is that you have to keep up with your investments, even after purchase. If you were fortunate enough to do a good job up front, nighttime sleep should come easy. Stability and consistency are good things to have. But no longer is it possible to buy a company and stuff the stock certificate into your mattress. Even Buffett sells shares, and sells them every year.
The best way to keep track is to use many of the same tools used to make the investment decision in the first place. Watch the financials and intangibles through Yahoo! Finance, quarterly Value Line updates, and of course, the newspaper. Repeating the "short-form" appraisal every now and then doesn't hurt either.
"The speed of business is higher, and the speed of business change has increased. To hold a stock with a long-term goal of forever is a great idea, but things change so fast it just may not be possible."
Supposedly, a value stock was to be acquired and kept for a long time, even a lifetime. True, but especially in today's world of change, business fortunes can turn on a dime, either as a result of macroeconomic and industry factors, or micro problems that escaped your initial read and surfaced during ownership.
According to a recent study, the average stock fund holds a stock for 1.2 years, down from 3 years in 1976. Some funds "trade" actively, but most don't - they simply react to change in business and business conditions.
The point is that you have to keep up with your investments, even after purchase. If you were fortunate enough to do a good job up front, nighttime sleep should come easy. Stability and consistency are good things to have. But no longer is it possible to buy a company and stuff the stock certificate into your mattress. Even Buffett sells shares, and sells them every year.
The best way to keep track is to use many of the same tools used to make the investment decision in the first place. Watch the financials and intangibles through Yahoo! Finance, quarterly Value Line updates, and of course, the newspaper. Repeating the "short-form" appraisal every now and then doesn't hurt either.
Making the Value Judgement in Practice
Making the Value Judgement in Practice
It is important to have a practical, simplified model for picking out value investments.
The goal is to boil the selection process down to something that could be handled in a half an hour or less per company.
One wouldn't commit $10 million in capital to a company based on this analysis, but it provides grounds for making small investments or pursuing further research.
At the end of the drill, you should, as Peter Lynch suggests, be able to tell the story of a stock to family, friends and favourite pets. And most of all, to be able to understand, yourself, why you like or don't like a business as an investment.
It is important to have a practical, simplified model for picking out value investments.
The goal is to boil the selection process down to something that could be handled in a half an hour or less per company.
One wouldn't commit $10 million in capital to a company based on this analysis, but it provides grounds for making small investments or pursuing further research.
At the end of the drill, you should, as Peter Lynch suggests, be able to tell the story of a stock to family, friends and favourite pets. And most of all, to be able to understand, yourself, why you like or don't like a business as an investment.
Short Form for Value Appraisal
Making the Value Judgement in Practice
It is important to have a practical, simplified model for picking out value investments.
The goal is to boil the selection process down to something that could be handled in a half an hour or less per company.
One wouldn't commit $10 million in capital to a company based on this analysis, but it provides grounds for making small investments or pursuing further research.
At the end of the drill, you should, as Peter Lynch suggests, be able to tell the story of a stock to family, friends and favourite pets.
And most of all, to be able to understand, yourself, why you like or don't like a business as an investment.
----------
SHORT FORM FOR VALUE APPRAISAL
COMPANY:
DATE:
SHARE PRICE:
VALUE SITUATIONS:
GARP
ASSET PLAY (P/B)
- UNDERVALUED,
- S.O.P. (SUM OF PARTS)
- SMOKE/MIRROR/MIRAGE
GROWTH KICKERS
TURNAROUND
CYCLICAL
------------------------------------------------------------------------
----------------------------------------GRADE -----TREND
---------------------------------------- "A" - "F" ---- +,0,-
------------------------------------------------------------COMMENTS
------------------------------------------------------------------------
FINANCIALS
OVERALL
ROE steady or rising, and/or > 20%
Gross margin increasing
Operating margins increasing
Net profit margins increasing
Asset and unit productivity improving
Cash generator: net producer of cash or capital
Cash position
Debt profile
Return to shareholders (dividend, net share repurchase)
Consistent performance
Strength compared to competition and industry
Other:
---------------------------------------------------
---------------------------------------------------
INTANGIBLES
OVERALL
Market power - brand, share, customer loyalty
Long term growth vectors
Strong, effective management
Pursuit of shareholder interests
Favorable "SWOT" analysis (attach)
Other:
-------------------------------------------------
-------------------------------------------------
VALUATION
OVERALL
Price vs Intrinsic value
P/E and earnings yield
PEG <2
P/S <3
P/B <5
Other:
--------------------------------------------------
--------------------------------------------------
OVERALL ASSESSMENT
Teaching Your Partner About Household Finances
Teaching Your Partner About Household Finances
by Amy Fontinelle (Contact Author Biography)
Often, only one person in the household is responsible for maintaining the family budget and managing the household's finances - and if you're reading this article, that person is probably you.
But what if you died or became incapacitated and could no longer manage the budget? Or what if you're just tired of managing everything yourself, or you partner wants to become more involved in your household's finances? How do you teach your partner everything you know?
This article will outline the areas you should be sure to cover and the steps you should take to give your partner a clear picture of your household's financial situation and the confidence to take over. (For more information on sharing the household finances, read Why You Shouldn't Let Your Partner Do The Books.)
1. Make a list of everything and where it's located.
While you may be able to finish each other's sentences, don't assume your significant other possesses the intuition to know where you keep sensitive information. You may think your filing system couldn't be any more organized and that your financial records are in a pretty obvious location, but your partner might not. While you probably have printed documents related to some of your financial affairs, there's a good chance some of your information is stored solely in your memory bank, as you probably manage some of your finances online. Without access to your email to receive monthly statement reminders, your partner probably doesn't know how to find all of your online accounts, and may not even know which banks and brokerage companies you use, not to mention all the bills you pay. A list of all of your accounts makes it easy for your partner to see everything that needs to be addressed. (For more, see Say "I Do To Financial Compatibility.)
2. Make sure your partner has access to everything.
Just knowing that these accounts exist won't be enough. If you want your partner to be able to take charge, you'll have to give him or her full access. Get your partner a set of keys to any safety deposit boxes, divulge the code to your safe and point out which tree in the backyard is beside where you buried the money. Make sure your partner is a named account holder or the primary beneficiary on all major accounts, life insurance policies and any property you own. Also, make sure he or she knows how to access any important computer files and online accounts. (Life changes may mean it's time to update you estate plan. For more information read Update Your Beneficiaries.)
If you're worried about writing your sensitive information down because of the possibility that the wrong person might find it, you're not alone. Here are some options for making your information available to the right person while keeping it safe from criminals (or ill-intentioned relatives).
Put your list in a safe deposit box at the bank. Make sure your significant other has a key and is listed with the bank as being allowed to access the box. Obviously, this is best for emergency situations, not daily use.
Make your list electronic and store it as an encrypted, password-protected file. Make sure your partner knows how to locate and access the file and that you have at least one backup copy in a separate location in case the first file is lost or corrupted.
Encrypt your list the old-fashioned way. Create logins and passwords that have meaning only to you and your partner. This way, your written list can consist of prompts or reminders to your logins and passwords instead of the complete codes. If one of your passwords was the name of the restaurant where you went on your first date plus the date you acquired your dog, the password prompt you wrote down could be "marcos07xxxx" or "first date restaurant+dogbday". (Learn more in Keep Your Financial Data Safe Online.)
3. Explain what everything is and why it's important.
People tend to complete tasks more successfully when they understand the purpose of what they are doing. Just telling your partner that "this account is where we put our savings," isn't as good as explaining why you choose to put your savings there ("we get the best interest rate at this bank"). Likewise, saying "we have to pay x dollars a month for y," isn't as helpful as explaining why you make the payment. For example, if your partner doesn't know what long-term care insurance is and why you're paying for a policy on your mother's behalf, he or she might cancel the policy. (For more, see A New Approach To Long-Term Care Insurance.)
4. Maintain a household budget.
Maybe you're not the type who needs to write everything down to successfully manage your money, but a budget is an excellent way to give your partner a big-picture idea of all the money in play - the income, the debts, the recurring expenses, the investments and so on. It can also help your partner pick up where you left off in managing the household's finances if you die or become incapacitated. (Learn more about household budgeting in our related articles: Six Months To A Better Budget and The Beauty Of Budgeting.)
5. Have your partner watch you handle the finances.
Explaining things is helpful, and written instructions/checklists/spreadsheets are even better, but nothing beats sitting down with your partner and talking through actually managing the finances. Let your partner observe the process while you explain it, and then have him or her practice it with your help and guidance.
6. Gradually give your partner some financial responsibility.
If your partner currently doesn't handle the money at all, start off with a small, manageable task - preferably one with low stakes. For example, make your partner responsible for paying one small bill each month - something with a generous grace period on the payment due date, like the electric bill. As he or she become more adept, give additional tasks to manage. Eventually, have your partner handle all the finances for one month (with your supervision, of course). Then, try switching off months, with your partner handling the finances every other month until you both feel completely comfortable.
7. Discuss contingency plans.
Make sure your partner knows what you would do in an emergency or unplanned financial event. Don't just be conceptual - discuss actual, concrete strategies to handle unplanned events. If you received a windfall, which debts would you want to pay off? What are your savings priorities? Is there any charity to which you would donate a significant sum? On the other end of the spectrum, if there was a sudden loss of income, which bills would need to be prioritized, and which expenses could be reduced or dropped altogether? (To learn more about dealing with personal financial changes, read Competing Priorities: Too Many Choices, Too Few Dollars.)
8. Encourage your partner's ongoing education.
Your partner may be loathe to pick up a personal finance book on a Saturday afternoon, but reading the occasional article will get your partner learning about money at a manageable pace.
Conclusion
To teach your partner how to handle the household finances, take the time to provide him or her with a complete picture of your household's financial situation and provide access to all important accounts. Then, gradually teach your partner enough to ease your financial management burden or get by in an emergency. These may not be the most entertaining activities, but they are key to taking the best possible care of one of the most important people in your life. (For more reading on managing your personal finances, check out Run Your Personal Finances Like A Business.)
by Amy Fontinelle, (Contact Author Biography)
Amy Fontinelle is a freelance writer and editor with clients located across the United States and in Canada. She has written over 300 published articles and blog posts for a variety of national and local publications and websites on topics including travel, restaurants, food and drink, fitness, budgeting, credit management, real estate, investing and historic preservation. Her articles have been featured on the homepage of Yahoo! and on Yahoo! Finance, Yahoo! HotJobs, several local news websites and Forbes.com. You can read more of Amy's personal finance articles at Two Pennies Earned, her own personal finance website, and at PF Advice, one of the web's leading personal finance blogs.
http://investopedia.com/articles/pf/09/teaching-partner-household-finances.asp?partner=basics5
by Amy Fontinelle (Contact Author Biography)
Often, only one person in the household is responsible for maintaining the family budget and managing the household's finances - and if you're reading this article, that person is probably you.
But what if you died or became incapacitated and could no longer manage the budget? Or what if you're just tired of managing everything yourself, or you partner wants to become more involved in your household's finances? How do you teach your partner everything you know?
This article will outline the areas you should be sure to cover and the steps you should take to give your partner a clear picture of your household's financial situation and the confidence to take over. (For more information on sharing the household finances, read Why You Shouldn't Let Your Partner Do The Books.)
1. Make a list of everything and where it's located.
While you may be able to finish each other's sentences, don't assume your significant other possesses the intuition to know where you keep sensitive information. You may think your filing system couldn't be any more organized and that your financial records are in a pretty obvious location, but your partner might not. While you probably have printed documents related to some of your financial affairs, there's a good chance some of your information is stored solely in your memory bank, as you probably manage some of your finances online. Without access to your email to receive monthly statement reminders, your partner probably doesn't know how to find all of your online accounts, and may not even know which banks and brokerage companies you use, not to mention all the bills you pay. A list of all of your accounts makes it easy for your partner to see everything that needs to be addressed. (For more, see Say "I Do To Financial Compatibility.)
2. Make sure your partner has access to everything.
Just knowing that these accounts exist won't be enough. If you want your partner to be able to take charge, you'll have to give him or her full access. Get your partner a set of keys to any safety deposit boxes, divulge the code to your safe and point out which tree in the backyard is beside where you buried the money. Make sure your partner is a named account holder or the primary beneficiary on all major accounts, life insurance policies and any property you own. Also, make sure he or she knows how to access any important computer files and online accounts. (Life changes may mean it's time to update you estate plan. For more information read Update Your Beneficiaries.)
If you're worried about writing your sensitive information down because of the possibility that the wrong person might find it, you're not alone. Here are some options for making your information available to the right person while keeping it safe from criminals (or ill-intentioned relatives).
Put your list in a safe deposit box at the bank. Make sure your significant other has a key and is listed with the bank as being allowed to access the box. Obviously, this is best for emergency situations, not daily use.
Make your list electronic and store it as an encrypted, password-protected file. Make sure your partner knows how to locate and access the file and that you have at least one backup copy in a separate location in case the first file is lost or corrupted.
Encrypt your list the old-fashioned way. Create logins and passwords that have meaning only to you and your partner. This way, your written list can consist of prompts or reminders to your logins and passwords instead of the complete codes. If one of your passwords was the name of the restaurant where you went on your first date plus the date you acquired your dog, the password prompt you wrote down could be "marcos07xxxx" or "first date restaurant+dogbday". (Learn more in Keep Your Financial Data Safe Online.)
3. Explain what everything is and why it's important.
People tend to complete tasks more successfully when they understand the purpose of what they are doing. Just telling your partner that "this account is where we put our savings," isn't as good as explaining why you choose to put your savings there ("we get the best interest rate at this bank"). Likewise, saying "we have to pay x dollars a month for y," isn't as helpful as explaining why you make the payment. For example, if your partner doesn't know what long-term care insurance is and why you're paying for a policy on your mother's behalf, he or she might cancel the policy. (For more, see A New Approach To Long-Term Care Insurance.)
4. Maintain a household budget.
Maybe you're not the type who needs to write everything down to successfully manage your money, but a budget is an excellent way to give your partner a big-picture idea of all the money in play - the income, the debts, the recurring expenses, the investments and so on. It can also help your partner pick up where you left off in managing the household's finances if you die or become incapacitated. (Learn more about household budgeting in our related articles: Six Months To A Better Budget and The Beauty Of Budgeting.)
5. Have your partner watch you handle the finances.
Explaining things is helpful, and written instructions/checklists/spreadsheets are even better, but nothing beats sitting down with your partner and talking through actually managing the finances. Let your partner observe the process while you explain it, and then have him or her practice it with your help and guidance.
6. Gradually give your partner some financial responsibility.
If your partner currently doesn't handle the money at all, start off with a small, manageable task - preferably one with low stakes. For example, make your partner responsible for paying one small bill each month - something with a generous grace period on the payment due date, like the electric bill. As he or she become more adept, give additional tasks to manage. Eventually, have your partner handle all the finances for one month (with your supervision, of course). Then, try switching off months, with your partner handling the finances every other month until you both feel completely comfortable.
7. Discuss contingency plans.
Make sure your partner knows what you would do in an emergency or unplanned financial event. Don't just be conceptual - discuss actual, concrete strategies to handle unplanned events. If you received a windfall, which debts would you want to pay off? What are your savings priorities? Is there any charity to which you would donate a significant sum? On the other end of the spectrum, if there was a sudden loss of income, which bills would need to be prioritized, and which expenses could be reduced or dropped altogether? (To learn more about dealing with personal financial changes, read Competing Priorities: Too Many Choices, Too Few Dollars.)
8. Encourage your partner's ongoing education.
Your partner may be loathe to pick up a personal finance book on a Saturday afternoon, but reading the occasional article will get your partner learning about money at a manageable pace.
Conclusion
To teach your partner how to handle the household finances, take the time to provide him or her with a complete picture of your household's financial situation and provide access to all important accounts. Then, gradually teach your partner enough to ease your financial management burden or get by in an emergency. These may not be the most entertaining activities, but they are key to taking the best possible care of one of the most important people in your life. (For more reading on managing your personal finances, check out Run Your Personal Finances Like A Business.)
by Amy Fontinelle, (Contact Author Biography)
Amy Fontinelle is a freelance writer and editor with clients located across the United States and in Canada. She has written over 300 published articles and blog posts for a variety of national and local publications and websites on topics including travel, restaurants, food and drink, fitness, budgeting, credit management, real estate, investing and historic preservation. Her articles have been featured on the homepage of Yahoo! and on Yahoo! Finance, Yahoo! HotJobs, several local news websites and Forbes.com. You can read more of Amy's personal finance articles at Two Pennies Earned, her own personal finance website, and at PF Advice, one of the web's leading personal finance blogs.
http://investopedia.com/articles/pf/09/teaching-partner-household-finances.asp?partner=basics5
Market trend
Statues of the two symbolic beasts of finance (the bull and bear) in front of Frankfurt Stock Exchange.
Market trend
From Wikipedia, the free encyclopedia
A Market trend is the direction in which a financial market is moving. Market trends can be classified as primary trends, secondary trends (short-term), and secular trends (long-term). This principle incorporates the idea that market cycles occur with regularity and persistence. This belief is considered to be generally consistent with the practice of technical analysis and broadly inconsistent with the standard academic view of financial markets, the efficient market hypothesis. [1] Another academic viewpoint is that market prices follow a random walk model and that any apparent past 'trends' are purely an accumulation of random variations and do not serve as a predictor for future performance. Random walk theory suggests that it is therefore not possible to outperform the general market using traditional evaluations of its "fundamentals" or by using technical analysis. [2]
However, the assumption that market prices move in trends is one of the major components of technical analysis,[3] and consideration of market trends is common to most Wall Street investors. Market trends are described as sustained movements in market prices over a period of time. The terms bull market and bear market describe upward and downward movements respectively and can be used to describe either the market as a whole or specific sectors and securities (stocks). The expressions "bullish" and "bearish" can also mean optimistic and pessimistic respectively ("bullish on gold," or "bearish on technology stocks", etc).
Contents[hide]
1 Primary market trends
1.1 Bull market
1.2 Bear market
1.3 Market bottom
2 Secondary market trends
3 Secular market trends
4 Market events
5 Cause of market events
6 Technical analysis
7 Etymology
8 Historic examples
9 See also
10 References
11 External links
1 Primary market trends
1.1 Bull market
1.2 Bear market
1.3 Market bottom
2 Secondary market trends
3 Secular market trends
4 Market events
5 Cause of market events
6 Technical analysis
7 Etymology
8 Historic examples
9 See also
10 References
11 External links
Primary market trends
A primary trend has broad support throughout the entire market or market sector and lasts for a year or more.
Bull market
A bull market tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of future price increases and future capital gains. In describing financial market behavior, the largest group of market participants is often referred to, metaphorically, as a herd. This is especially relevant to participants in bull markets since bulls are herding animals. A bull market is also sometimes described as a bull run. Dow Theory attempts to describe the character of these market movements.
A primary trend has broad support throughout the entire market or market sector and lasts for a year or more.
Bull market
A bull market tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of future price increases and future capital gains. In describing financial market behavior, the largest group of market participants is often referred to, metaphorically, as a herd. This is especially relevant to participants in bull markets since bulls are herding animals. A bull market is also sometimes described as a bull run. Dow Theory attempts to describe the character of these market movements.
India's BSE Index SENSEX was in a bull run for almost five years from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points. Another notable and recent bull market was in the 1990s when the U.S. and many other global financial markets rose rapidly.
Bear market
A bear market is a steady drop in the stock market over a period of time.[4] It is described as being accompanied by widespread pessimism. Investors anticipating further losses are often motivated to sell, with negative sentiment feeding on itself in a vicious circle. The most famous bear market in history followed the Wall Street Crash of 1929 and lasted from 1930 to 1932, marking the start of the Great Depression. A milder, low-level, long-term bear market occurred from about 1973 to 1982, encompassing the stagflation of U.S. economy, the 1970s energy crisis, and the high unemployment of the early 1980s. Due to the current economic conditions (be it the steady decline in value of the market or the high unemployment rate) the United States of America is currently in a bear market. High ranking economic evaluators as well as upper end public officials have coined America's current situation as a "recession."
A bear market is a steady drop in the stock market over a period of time.[4] It is described as being accompanied by widespread pessimism. Investors anticipating further losses are often motivated to sell, with negative sentiment feeding on itself in a vicious circle. The most famous bear market in history followed the Wall Street Crash of 1929 and lasted from 1930 to 1932, marking the start of the Great Depression. A milder, low-level, long-term bear market occurred from about 1973 to 1982, encompassing the stagflation of U.S. economy, the 1970s energy crisis, and the high unemployment of the early 1980s. Due to the current economic conditions (be it the steady decline in value of the market or the high unemployment rate) the United States of America is currently in a bear market. High ranking economic evaluators as well as upper end public officials have coined America's current situation as a "recession."
Prices fluctuate constantly on the open market. To take the example of a bear stock market, it is not a simple decline, but a substantial drop in the prices of the majority of stocks over a defined period of time. According to The Vanguard Group, "While there’s no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period."[5]
Market bottom
A stock market bottom is a trend reversal - the end of a market downturn and the beginning of an upward moving trend. "Bottom" is more than just a recent low in a stock market index, but a reversal of the primary trend. A "bottom" may occur because of the presence of a "cycle," or because of "panic selling" as a reaction to an adverse financial development.
It is very difficult to identify a bottom (referred to by investors as "bottom picking") while it is occurring. The upturn following a decline is often shortlived and prices might resume their decline. This would bring a loss for the investor who purchased stock(s) during a misperceived or "false" market bottom.
Some of the more notable market bottoms, in terms of the closing values of the Dow Jones Industrial Average (DJIA) include:
Black Monday: The DJIA hit a bottom at 1738.74 on 10/19/1987, as a result of the decline from 2722.41 on 8/25/1987 (Chart [6]).
The bursting of the Dot-com bubble: A bottom of 7286.27 was reached on the DJIA on 10/9/2002 as a result of the decline from 11722.98 on 1/14/2000. This included an intermediate bottom of 8235.81 on 9/21/2001 which led to an intermediate top of 10635.25 on 3/19/2002 (Chart [7]).
A decline associated with the Subprime mortgage crisis starting at 14164.41 on 10/9/2007 (DJIA) and caused a short term bottom of 11740.15 on 3/10/2008. After a rallying to a temporary top on 5/2/2008 at 13058.20 the primary trend of the declining, "bear" market, resumed. (Chart [8]).
Baron Rothschild is said to have advised that the best time to buy is when there is "blood in the streets", i.e. when the markets have fallen drastically and investor sentiment is extremely negative[9].
Secondary market trends
Secondary trends are short-term changes in price direction against a primary trend. They usually last between a few weeks and a few months. Whether a trend is a secondary trend, or the beginning of a primary trend, can only be known once it has either ended or has exceeded the extent of a secondary trend.
A decline in prices during a primary trend bull market is called a market correction. A correction is usually a decline of 10% to 20%, but some experts say it can be a third or more.[10] It differs from a bear market mostly in that it has a smaller magnitude and duration.
An increase in prices during a primary trend bear market is called a bear market rally. A bear market rally is sometimes defined as an increase of 10% to 20%. Bear market rallies typically begin suddenly and are often short-lived. Notable bear market rallies occurred in the Dow Jones index after the 1929 stock market crash leading down to the market bottom in 1932, and throughout the late 1960s and early 1970s. The Japanese Nikkei stock average has been typified by a number of bear market rallies since the late 1980s while experiencing an overall long-term downward trend.
Secular market trends
A secular market trend is a long-term trend that usually lasts 5 to 25 years (but whose distribution is more or less bell shaped around 17 years, in the stock market), and consists of sequential primary trends. In a secular bull market the primary bear markets have in the past almost always been shorter and less punishing than the primary bull markets were rewarding. Each bear market has rarely (if ever) wiped out the real (inflation adjusted) gains of the previous bull markets, and the succeeding bull markets have usually made up for the real losses of any previous bear markets. This is one of the reasons why a secular market trend may be said to encompass the primary trends within it. The United States was described as being in a secular bull market from about 1983 to 2000, with brief upsets including the crash of 1987 and the dot-com bust of 2000–2002.
In a secular bear market, the primary bull markets are sometimes shorter than the primary bear markets and rarely compensate for the real losses of the primary bear markets occurring during this extended cycle. For example, in the 1966–82 secular bear market in stocks, there was hardly any nominal loss. But in real terms the loss was devastating. (In the past most housing recessions were of a slow nature, thereby allowing inflation to keep housing prices steady.) Another example of a secular bear market was seen in gold during the period between January 1980 to June 1999. During this period the nominal gold price fell from a high of $850/oz ($30/g) to a low of $253/oz ($9/g),[11] and became part of the Great Commodities Depression. The S&P 500 experienced a secular bull market over a similar time period (~1982–2000).
Market events
Main articles: Stock market crash and Stock market bubble
An exaggerated bear market, that tends to be associated with falling investor confidence and panic selling, can lead to a market crash associated with a recession. By contrast, an exaggerated bull market fueled by overconfidence and / or speculation can lead to a market bubble — characterized by an extreme inflation of the price / earnings P/E ratios of the stocks in that market.
Cause of market events
Market movements may respond to new information becoming available to the market, but may also be influenced by investors' cognitive biases and emotional biases. Expectations play a large part in financial markets. Often there will be significant price reaction to financial data, information or news. Unexpected news or information that is perceived as positive for the economy or for a particular market sector or company will of course increase stock prices, and vice versa. Some behavioral finance studies (Richard Thaler) also point to the impact of the underreaction-adjustment-overreaction process in the formation of market movements and trends.
Technical analysis
Main article: Technical analysis
Many investors and analysts use technical analysis to try to identify whether a market or security is likely to increase or decrease in value. They then generate trading strategies to exploit their conclusions and market insights. Some technical analysts believe that the financial markets are cyclical and move in and out of bull and bear market phases on a regular and consistent basis.
Also read:
Recognizing Value Situations - Smoke and Mirrors
Recognizing Value Situations - Smoke and Mirrors
Some apparent asset plays can be a mirage. Find a company selling at a low price to book (P/B), look at assets, and notice that per-share assets are higher than the share price. Is it a good buy?
Depends on the quality and liquidity of the assets on the books.
Large manufacturers and other capital-intensive companies often have overvalued assets on the books. If the assets are largely based on buildings, equipment, and intangibles, watch out; but if they are cash, securities, marketable natural resourcees, land, and the like, there may be an asset-play opportunity.
If there is a large cash hoard exceeding debt, make sure the company is cash flow positive or nearly so. You don't want this cash to disappear as "cash burn."
Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors
Some apparent asset plays can be a mirage. Find a company selling at a low price to book (P/B), look at assets, and notice that per-share assets are higher than the share price. Is it a good buy?
Depends on the quality and liquidity of the assets on the books.
Large manufacturers and other capital-intensive companies often have overvalued assets on the books. If the assets are largely based on buildings, equipment, and intangibles, watch out; but if they are cash, securities, marketable natural resourcees, land, and the like, there may be an asset-play opportunity.
If there is a large cash hoard exceeding debt, make sure the company is cash flow positive or nearly so. You don't want this cash to disappear as "cash burn."
Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Cyclical Plays
Generally, cyclical companies shouldn't be confused with value investments. Growth, although apparent in the short term, usually isn't sustainable. Investors are getting wiser and aren't as likely to bid up prices in good times, nor bid them way down in bad times, so this form of market timing doesn't work as well.
But occasionally companies caught in the cyclical pool come up with strategies to climb out of it, and move more steadily up and to the right International expansion can reduce cyclical effects.
Manufacturing companies diversify into more recession-proof financial services (which make more money as poor business conditions beget lower interest rates). General Electric has figured this out, and Ford has tried. Other smaller companies may have more effective cycle-beating strategies, because it's hard to keep such big ships as Ford and GE from turning when the wind shifts. If a company seems cheap and has something new in its portfolio to avoid cyclical price and earnings behaviour, it may be worth a look.
Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors
Generally, cyclical companies shouldn't be confused with value investments. Growth, although apparent in the short term, usually isn't sustainable. Investors are getting wiser and aren't as likely to bid up prices in good times, nor bid them way down in bad times, so this form of market timing doesn't work as well.
But occasionally companies caught in the cyclical pool come up with strategies to climb out of it, and move more steadily up and to the right International expansion can reduce cyclical effects.
Manufacturing companies diversify into more recession-proof financial services (which make more money as poor business conditions beget lower interest rates). General Electric has figured this out, and Ford has tried. Other smaller companies may have more effective cycle-beating strategies, because it's hard to keep such big ships as Ford and GE from turning when the wind shifts. If a company seems cheap and has something new in its portfolio to avoid cyclical price and earnings behaviour, it may be worth a look.
Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Turning the Ship Around
Many companies go through restructuring, downsizing, and spinning off businesses deemed not vital to the core business. There is usually a "back-to-basics" and "focus" theme to these events, and they usually occur after extended periods of poor business results.
U.S. automakers (particularly Chrysler) went through this years ago and are obviously doing it again, exemplified by Ford's "Way Forward" campaign. Airlines have done it, albeit with mixed results, and it's likely that the banking and lending industrywill have to do the same.
Do turnarounds works? According to Buffett and many other professionals, generally not.
A few do succeed, and when they do, there's usually a big impact on shareholder value. It happened with Chrysler, and again with Hewlett-Packard (whose problems, notably, were not as severe).
Determining worthy value investments in these situations is difficult. Probably the best approach is to try to place a value on the core remaining business, as many did with HP's core printing business; then try to imagine how other units would fare either in a sale or with a successful turnaround. Again here, the work of professionals shouldn't be ignored.
Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors
Many companies go through restructuring, downsizing, and spinning off businesses deemed not vital to the core business. There is usually a "back-to-basics" and "focus" theme to these events, and they usually occur after extended periods of poor business results.
U.S. automakers (particularly Chrysler) went through this years ago and are obviously doing it again, exemplified by Ford's "Way Forward" campaign. Airlines have done it, albeit with mixed results, and it's likely that the banking and lending industrywill have to do the same.
Do turnarounds works? According to Buffett and many other professionals, generally not.
A few do succeed, and when they do, there's usually a big impact on shareholder value. It happened with Chrysler, and again with Hewlett-Packard (whose problems, notably, were not as severe).
Determining worthy value investments in these situations is difficult. Probably the best approach is to try to place a value on the core remaining business, as many did with HP's core printing business; then try to imagine how other units would fare either in a sale or with a successful turnaround. Again here, the work of professionals shouldn't be ignored.
Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Growth Kickers
From time to time, relatively steady companies come up with small subsidiary businesses, sometimes related and sometimes not, that can perk up business growth.
Telecom companies got into the cell phone business and 3M is sticking with the Post-It boom. Twenty years ago, the growthless Southern Pacific Railroad started using its right-of-way for telecommunications lines in a business that eventually became Sprint.
These kickers can kindle grwoth, rekindle growth, and provide good, saleable assets downstream. They may be like finding chunks of chicken in a bowl of soup - not there in every spoonful and maybe not there at all. But when a big company crows about a small new product or business development in its portfolio within its ranks, keep your eyes open.
Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors
From time to time, relatively steady companies come up with small subsidiary businesses, sometimes related and sometimes not, that can perk up business growth.
Telecom companies got into the cell phone business and 3M is sticking with the Post-It boom. Twenty years ago, the growthless Southern Pacific Railroad started using its right-of-way for telecommunications lines in a business that eventually became Sprint.
These kickers can kindle grwoth, rekindle growth, and provide good, saleable assets downstream. They may be like finding chunks of chicken in a bowl of soup - not there in every spoonful and maybe not there at all. But when a big company crows about a small new product or business development in its portfolio within its ranks, keep your eyes open.
Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors
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