Updated: Monday May 4, 2009 MYT 11:32:51 AM
What is the most important lesson from financial crisis?
OMAHA, Nebraska: Billionaires Warren Buffett and Charlie Munger said Sunday the most important lessons of the recent financial turmoil are that companies should borrow less and build a system of severe disincentives for failure.
Berkshire Hathaway Inc.'s top two executives offered that frank assessment of businesses' role in the current recession at a news conference held a day after 35,000 attended the company's annual meeting in Omaha.
The two men also said most of the nation's biggest banks are not too big to fail, but consumers shouldn't be worried about bank failures because of the protections built into the system.
Buffett said having severe disincentives for failure and proper incentives for success is key to ensuring large financial institutions are run well.
He said people didn't become more greedy in the last decade, but the system allowed people to take advantage of it.
"I think the most important lesson is the world needs a whole lot less leverage," said Buffett, who is Berkshire's 78-year-old chief executive and chairman.
In speaking of disincentives, Buffett suggested that if an executive would be shot if the company fails, then the company would definitely borrow more carefully.
Buffett said Fannie Mae and Freddie Mac show that intense regulation can't prevent problems because those mortgage finance firms were some of the most regulated companies before government seized control of them amid mounting mortgage losses.
But Buffett said assigning blame for the economic mess doesn't make a ton of sense because so many people made mistakes.
"I think that virtually everyone associated with the financial world contributed to it," Buffett said.
Munger, Berkshire's 85-year-old vice chairman, said a combination of factors caused the financial mess.
He said the nation tolerated way too much debt, immorality and stupidity, and now it's paying the price.
"We have failed big-time on multiple fronts," Munger said.
He said gross immorality persisted in the consumer credit and derivatives businesses, and many people were taken advantage of.
Then the accounting profession failed to catch problems and tolerated too much foolishness, Munger said.
He said accounting rules that allow companies to report huge profit just before failing doesn't make sense.
"We do not need insane accounting that rewards people that can't handle the temptation," Munger said.
But it still might be hard to get Congress to pass sensible rules for investment banks and derivatives, Munger said, because of the amount of lobbying investment banks have done.
"We're going to have a hell of a time getting this fixed the way it should be fixed," Munger said.
Buffett said he's not sure how the government will handle the results of the stress tests officials are conducting on the 19 largest U.S. banks, but he doesn't think the government should rule out the failure of most of the banks.
"These 19 banks are not too big to fail," Buffett said.
"You can make a deal for any but the top four on the list."
To prove his point Buffett pointed to the examples of Wachovia and Washington Mutual banks, which both failed in the past year and were sold to competitors.
The stress tests are supposed to determine which banks would need more cash if the economy weakens further.
Federal Reserve officials have said the banks will be required to keep extra capital on hand in case losses escalate, which means some banks would be forced to raise money.
Buffett said consumers should not worry about bank failures because the Federal Deposit Insurance Corp. is there to protect them with the resources it collects by charging banks fees, so taxpayers don't pay when the FDIC rescues banks.
"I'm not worried at all about a run on the banks," said Buffett, whose company holds large stakes in Wells Fargo & Co., US Bancorp, M&T Bank, Bank of America and Sun Trusts Banks
Given the age of Buffett and Munger, there is always speculation on who might replace them.
Buffett said Sunday that investors would know if either had health problems.
"If I know of anything serious - or anything that might be interpreted as serious - health problems, Berkshire would disclose it," Buffett said.
"We don't want rumors flying around."
But Munger joked there might be a high threshold for disclosing anything about his health: "In my case, I'm so nearly dead anyway that it's a minor detail."
Both Munger and Buffett said they feel great.
Berkshire's Class A stock lost 32 percent in 2008, and Berkshire's book value - assets minus liabilities - declined 9.6 percent, to $70,530 per share.
That was the biggest drop in book value under Buffett and only the second time its book value has declined.
But Buffett always measure's the company's book value performance in relation to the S&P 500, which fell 37 percent in 2008, so he's not bothered by stock price fluctuations.
"We don't consider it our worst year by miles," Buffett said Sunday.
Berkshire owns more than 60 subsidiaries including insurance, clothing, furniture, and candy companies, restaurants, natural gas and corporate jet firms.
Berkshire also has major investments in such companies as Coca-Cola Co. and Burlington Northern Santa Fe Corp.
On the Net: Berkshire Hathaway Inc.: www.berkshirehathaway.com
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Monday, 4 May 2009
Buffett admits investment mistakes but shareholders keep the faith
Buffett admits investment mistakes but shareholders keep the faith
The legendary stockpicker dubbed the Sage of Omaha still wowing the crowds despite 35% drop in Berkshire Hathaway share price
Andrew Clark in Omaha, Nebraska
guardian.co.uk, Sunday 3 May 2009 19.47
It is usually a festival of financial self-congratulation in the US heartland. But a sombre tone descended on Warren Buffett's annual investor meeting as the legendary stockpicker was obliged to defend the worst year of his career.
Facing a record crowd of 35,000 shareholders in his Berkshire Hathaway business empire, who had come from as far afield as Australia and South Africa, Buffett admitted this weekend that he had failed to "cover himself in glory" since the global financial crisis began.
"It's been an extraordinary year," he said. "I'm not sure you'll see this again in your lifetime."
Held in Buffett's home city of Omaha, the quirky annual gathering of Berkshire's shareholders has become known as Woodstock for capitalists. Investors queued from 4am yesterday to snatch prime seats in the Qwest arena. A light-hearted video depicted the billionaire being demoted to a mattress salesman in one of his Nebraska Furniture Mart stores as punishment for the loss of Berkshire's treasured triple-A credit rating.
For six hours, Buffett, 78, and his lifelong business partner, Charlie Munger, 85, fielded queries chosen by a panel of journalists about their investment approach. "There's always a lot of things wrong with the world," Buffett told investors. "Unfortunately, it's the only world we've got so we have to deal with it."
Losing Berkshire's blue-chip credit rating, Buffett admitted, was "disappointing", causing the firm to "lose some bragging rights around the world" in terms of the rock-solid reliability of the insurance policies it sells. It was part of a string of setbacks for Berkshire, which has seen its shares slump by 35% since the start of 2008.
The book value of the company's assets, which include a stake in Tesco and ownership of Northern Electric, fell by 9.6% in only his second negative year since 1965. Investments ranging from Fruit of the Loom underwear to American Express credit cards and NetJets corporate aircraft caught the thick edge of the recession. First-quarter operating profits fell from $1.9bn (£1.3bn) to $1.7bn.
Shareholders, by and large, are still unstinting in their faith. Charles Hostetler, an insurance agent from Kansas, compared Buffett to a St Louis Cardinals baseball star of the 1960s, Bob Gibson. "You've got a great pitcher like Bob Gibson. He had one bad year in a 20-year career and 18, 19 good years," said Hostetler. "You wouldn't give up on him after one bad year, now would you?"
He added: "It wasn't a good year for Berkshire, but it wasn't a good year for America either."
But Wall Street critics say Buffett's Midas touch has deserted him through a series of unforced errors. A punt on two Irish banks went spectacularly awry as their stocks plunged by 89% and he made a costly investment in the energy firm ConocoPhillips just as the oil price peaked last summer.
Many have queried a decision by Buffett to plunge into derivatives – once scorned by the billionaire as "financial weapons of mass destruction". At the end of 2008, Berkshire had contracts with a notional long-term value of $67bn betting on the long-term performance of stocks and bonds.
Buffett has also found himself on the back foot over Berkshire's 20% stake in the credit-rating agency Moody's.
Quizzed about this, he said: "There was almost total belief throughout the country that house prices not only wouldn't fall significantly but would keep rising. The ratings agencies built that into their models."
The cult-like status of Buffett endures, despite these mishaps. In the Qwest arena's exhibition hall, shareholders snapped up packs of playing cards bearing images of Buffett and a popular T-shirt for children reads: "Warren Buffett is building my future."
Some took a more sceptical view. David Newton, a South African who came from Johannesburg for the meeting, welcomed the tougher examination of Buffett: "Last time I was here was completely a prayer meeting. If somebody had asked Warren if they should fly to the moon and he'd said yes, they'd have gone straight off and done it."
Still sprightly in his seventies and adept at playing the ukulele, Buffett has balked at publicly naming a successor, saying he sees no value in having a "crown prince" lurking around. He has, however, revealed that he has four potential proteges in mind. In a worrying sign, Buffett disclosed that none of these apprentice investment managers had beaten a 37% drop in the S&P 500 index last year. "You would not say they covered themselves with glory," he said. "But I didn't cover myself in glory either, so I'm pretty tolerant of that."
Bad news for papers
A former paperboy, Warren Buffett is a fan of newspapers but he offered a gloomy perspective on prospects for publishers struggling with falling readerships and dwindling advertising. "For most newspapers in the United States, we wouldn't buy them at any price," said Buffett, who has a stake in the Washington Post and owns the Buffalo News in New York.
Buffett said circulations were being eroded at an accelerating pace, hitting commercial revenue: "They were essential to advertisers only as long as they were essential to readers, and that is changing … I don't see anything on the horizon that causes that erosion to end." Although a technophobe, he feels newspapers, with the possibility of "unending losses", offer little attraction for investors.
http://www.guardian.co.uk/business/2009/may/03/warren-buffett-shareholder-meeting
The legendary stockpicker dubbed the Sage of Omaha still wowing the crowds despite 35% drop in Berkshire Hathaway share price
Andrew Clark in Omaha, Nebraska
guardian.co.uk, Sunday 3 May 2009 19.47
It is usually a festival of financial self-congratulation in the US heartland. But a sombre tone descended on Warren Buffett's annual investor meeting as the legendary stockpicker was obliged to defend the worst year of his career.
Facing a record crowd of 35,000 shareholders in his Berkshire Hathaway business empire, who had come from as far afield as Australia and South Africa, Buffett admitted this weekend that he had failed to "cover himself in glory" since the global financial crisis began.
"It's been an extraordinary year," he said. "I'm not sure you'll see this again in your lifetime."
Held in Buffett's home city of Omaha, the quirky annual gathering of Berkshire's shareholders has become known as Woodstock for capitalists. Investors queued from 4am yesterday to snatch prime seats in the Qwest arena. A light-hearted video depicted the billionaire being demoted to a mattress salesman in one of his Nebraska Furniture Mart stores as punishment for the loss of Berkshire's treasured triple-A credit rating.
For six hours, Buffett, 78, and his lifelong business partner, Charlie Munger, 85, fielded queries chosen by a panel of journalists about their investment approach. "There's always a lot of things wrong with the world," Buffett told investors. "Unfortunately, it's the only world we've got so we have to deal with it."
Losing Berkshire's blue-chip credit rating, Buffett admitted, was "disappointing", causing the firm to "lose some bragging rights around the world" in terms of the rock-solid reliability of the insurance policies it sells. It was part of a string of setbacks for Berkshire, which has seen its shares slump by 35% since the start of 2008.
The book value of the company's assets, which include a stake in Tesco and ownership of Northern Electric, fell by 9.6% in only his second negative year since 1965. Investments ranging from Fruit of the Loom underwear to American Express credit cards and NetJets corporate aircraft caught the thick edge of the recession. First-quarter operating profits fell from $1.9bn (£1.3bn) to $1.7bn.
Shareholders, by and large, are still unstinting in their faith. Charles Hostetler, an insurance agent from Kansas, compared Buffett to a St Louis Cardinals baseball star of the 1960s, Bob Gibson. "You've got a great pitcher like Bob Gibson. He had one bad year in a 20-year career and 18, 19 good years," said Hostetler. "You wouldn't give up on him after one bad year, now would you?"
He added: "It wasn't a good year for Berkshire, but it wasn't a good year for America either."
But Wall Street critics say Buffett's Midas touch has deserted him through a series of unforced errors. A punt on two Irish banks went spectacularly awry as their stocks plunged by 89% and he made a costly investment in the energy firm ConocoPhillips just as the oil price peaked last summer.
Many have queried a decision by Buffett to plunge into derivatives – once scorned by the billionaire as "financial weapons of mass destruction". At the end of 2008, Berkshire had contracts with a notional long-term value of $67bn betting on the long-term performance of stocks and bonds.
Buffett has also found himself on the back foot over Berkshire's 20% stake in the credit-rating agency Moody's.
Quizzed about this, he said: "There was almost total belief throughout the country that house prices not only wouldn't fall significantly but would keep rising. The ratings agencies built that into their models."
The cult-like status of Buffett endures, despite these mishaps. In the Qwest arena's exhibition hall, shareholders snapped up packs of playing cards bearing images of Buffett and a popular T-shirt for children reads: "Warren Buffett is building my future."
Some took a more sceptical view. David Newton, a South African who came from Johannesburg for the meeting, welcomed the tougher examination of Buffett: "Last time I was here was completely a prayer meeting. If somebody had asked Warren if they should fly to the moon and he'd said yes, they'd have gone straight off and done it."
Still sprightly in his seventies and adept at playing the ukulele, Buffett has balked at publicly naming a successor, saying he sees no value in having a "crown prince" lurking around. He has, however, revealed that he has four potential proteges in mind. In a worrying sign, Buffett disclosed that none of these apprentice investment managers had beaten a 37% drop in the S&P 500 index last year. "You would not say they covered themselves with glory," he said. "But I didn't cover myself in glory either, so I'm pretty tolerant of that."
Bad news for papers
A former paperboy, Warren Buffett is a fan of newspapers but he offered a gloomy perspective on prospects for publishers struggling with falling readerships and dwindling advertising. "For most newspapers in the United States, we wouldn't buy them at any price," said Buffett, who has a stake in the Washington Post and owns the Buffalo News in New York.
Buffett said circulations were being eroded at an accelerating pace, hitting commercial revenue: "They were essential to advertisers only as long as they were essential to readers, and that is changing … I don't see anything on the horizon that causes that erosion to end." Although a technophobe, he feels newspapers, with the possibility of "unending losses", offer little attraction for investors.
http://www.guardian.co.uk/business/2009/may/03/warren-buffett-shareholder-meeting
FACTBOX: Berkshire Hathaway at a glance
FACTBOX: Berkshire Hathaway at a glance
Sat May 2, 2009 3:30pm EDT
Buffett: Berkshire may lose money on some derivatives
Saturday, 2 May 2009 02:14pm EDT (Reuters) - Berkshire Hathaway Inc, the insurance and investment company run by billionaire Warren Buffett, will hold its annual shareholder meeting on Saturday in Omaha, Nebraska.
The meeting attracted 32,000 people last year. Along with the annual meeting for Wal-Mart Stores Inc, it is perhaps one of the most heavily anticipated shareholder galas.
Buffett, 78, took over Berkshire in 1965 when it was a struggling textile mill. Berkshire now owns close to 80 companies and has a market value of roughly $145 billion.
The following information about Berkshire and its investments is drawn from the company's 2008 annual report and its website:
FINANCIAL INFORMATION:
2008 net income: $4.99 billion
Change from prior year: down 62 pct
2008 net income per share: $3,224
2008 revenue: $107.786 billion
Cash and equivalents at year-end: $25.54 billion
Common stock investments at year-end: $49.07 billion
DERIVATIVES HOLDINGS (dollar amounts in millions):
Notional
Assets Liabilities Value
Equity index put options -- $10,022 $37,134
Credit default
obligations: --
High-yield indexes -- 3,031 7,892
Individual corporate -- 105 3,900
States/municipalities -- 958 18,364
Other 503 528
Counterparty netting and
funds held as collateral (295) (32)
Totals 208 $14,612
SELECTED COMPANIES OWNED:
Benjamin Moore Iscar Metalworking
Borsheim's Fine Jewellery Marmon Holdings
Clayton Homes MidAmerican Energy
Fruit of the Loom National Indemnity
Geico Nebraska Furniture Mart
General Re NetJets
International Dairy Queen See's Candies
MAJOR STOCK INVESTMENTS AS OF DEC. 31, 2008:
Market
Shares Pct Cost Value
Owned * Company Owned (mlns) (mlns)
151,610,700 American Express 13.1 $ 1,287 $ 2,812
200,000,000 Coca-Cola Co 8.6 1,299 9,054
84,896,273 ConocoPhillips 5.7 7,008 4,398
30,009,591 Johnson & Johnson 1.1 1,847 1,795
130,272,500 Kraft Foods Inc 8.9 4,330 3,498
3,947,554 POSCO 5.2 768 1,191
91,941,010 Procter & Gamble 3.1 643 5,684
22,111,966 Sanofi-Aventis 1.7 1,827 1,404
227,307,000 Tesco PLC 2.9 1,326 1,193
75,145,426 US Bancorp 4.3 2,337 1,879
19,944,300 Wal-Mart Stores Inc 0.5 942 1,118
1,727,765 Washington Post 18.4 11 674
304,392,068 Wells Fargo & Co 7.2 6,702 8,973
Others 6,035 4,870
Total Common Stocks $37,135 $49,073
* Also has holdings in Burlington Northern Santa Fe Corp and Moody's Corp carried at "equity value," equal to cost plus retained earnings since purchase, minus taxes that would be paid if the earnings were paid as dividends. Accounting treatment usually required when ownership tops 20 percent.
(Reporting by Jonathan Stempel in Omaha, Nebraska; Editing by Lisa Von Ahn)
http://www.reuters.com/article/newsOne/idUSTRE54127Q20090502?sp=true
Sat May 2, 2009 3:30pm EDT
Buffett: Berkshire may lose money on some derivatives
Saturday, 2 May 2009 02:14pm EDT (Reuters) - Berkshire Hathaway Inc, the insurance and investment company run by billionaire Warren Buffett, will hold its annual shareholder meeting on Saturday in Omaha, Nebraska.
The meeting attracted 32,000 people last year. Along with the annual meeting for Wal-Mart Stores Inc, it is perhaps one of the most heavily anticipated shareholder galas.
Buffett, 78, took over Berkshire in 1965 when it was a struggling textile mill. Berkshire now owns close to 80 companies and has a market value of roughly $145 billion.
The following information about Berkshire and its investments is drawn from the company's 2008 annual report and its website:
FINANCIAL INFORMATION:
2008 net income: $4.99 billion
Change from prior year: down 62 pct
2008 net income per share: $3,224
2008 revenue: $107.786 billion
Cash and equivalents at year-end: $25.54 billion
Common stock investments at year-end: $49.07 billion
DERIVATIVES HOLDINGS (dollar amounts in millions):
Notional
Assets Liabilities Value
Equity index put options -- $10,022 $37,134
Credit default
obligations: --
High-yield indexes -- 3,031 7,892
Individual corporate -- 105 3,900
States/municipalities -- 958 18,364
Other 503 528
Counterparty netting and
funds held as collateral (295) (32)
Totals 208 $14,612
SELECTED COMPANIES OWNED:
Benjamin Moore Iscar Metalworking
Borsheim's Fine Jewellery Marmon Holdings
Clayton Homes MidAmerican Energy
Fruit of the Loom National Indemnity
Geico Nebraska Furniture Mart
General Re NetJets
International Dairy Queen See's Candies
MAJOR STOCK INVESTMENTS AS OF DEC. 31, 2008:
Market
Shares Pct Cost Value
Owned * Company Owned (mlns) (mlns)
151,610,700 American Express 13.1 $ 1,287 $ 2,812
200,000,000 Coca-Cola Co 8.6 1,299 9,054
84,896,273 ConocoPhillips 5.7 7,008 4,398
30,009,591 Johnson & Johnson 1.1 1,847 1,795
130,272,500 Kraft Foods Inc 8.9 4,330 3,498
3,947,554 POSCO 5.2 768 1,191
91,941,010 Procter & Gamble 3.1 643 5,684
22,111,966 Sanofi-Aventis 1.7 1,827 1,404
227,307,000 Tesco PLC 2.9 1,326 1,193
75,145,426 US Bancorp 4.3 2,337 1,879
19,944,300 Wal-Mart Stores Inc 0.5 942 1,118
1,727,765 Washington Post 18.4 11 674
304,392,068 Wells Fargo & Co 7.2 6,702 8,973
Others 6,035 4,870
Total Common Stocks $37,135 $49,073
* Also has holdings in Burlington Northern Santa Fe Corp and Moody's Corp carried at "equity value," equal to cost plus retained earnings since purchase, minus taxes that would be paid if the earnings were paid as dividends. Accounting treatment usually required when ownership tops 20 percent.
(Reporting by Jonathan Stempel in Omaha, Nebraska; Editing by Lisa Von Ahn)
http://www.reuters.com/article/newsOne/idUSTRE54127Q20090502?sp=true
FACTBOX: Berkshire's Buffett on succession, acquisitions
FACTBOX: Berkshire's Buffett on succession, acquisitions
Sat May 2, 2009 3:30pm EDT
(Reuters) - Berkshire Hathaway Inc, the insurance and investment company run by Warren Buffett, has been preparing succession plans for when the 78-year-old billionaire steps down. It also still hunts for acquisitions, preferably large.
In 2008 Berkshire spent $6.1 billion on acquisitions. It spent $4.5 billion for a 60 percent stake in Marmon Holdings Inc, which was owned by the Pritzker family of Chicago and makes such things as railroad tank cars, plumbing pipes, metal fasteners, and wiring and water treatment products used in residential construction. Berkshire later boosted its stake to 63.6 percent.
Berkshire also made a series of large investments in 2008, including $6.5 billion to help fund Mars Inc's purchase of chewing gum company Wm Wrigley Jr Co. It also invested $5 billion in Goldman Sachs Group Inc and $3 billion in General Electric Co.
Berkshire ended 2008 with $25.54 billion in cash. Buffett has repeatedly said he would like to keep $10 billion on hand.
The company is holdings its annual meeting on Saturday in Omaha, Nebraska.
The following information about Buffett's succession plans and Berkshire's acquisition strategy is drawn from the company's 2007 and 2008 annual reports:
BUFFETT ON HIS POTENTIAL SUCCESSORS (FROM 2007 REPORT)
"We have for some time been well prepared for CEO succession because we have three outstanding internal candidates. The board knows exactly whom it would pick if I were to become unavailable, either because of death or diminishing abilities. And that would still leave the board with two backups.
"We have indeed now identified four candidates who could succeed me in managing investments. All manage substantial sums currently, and all have indicated a strong interest in coming to Berkshire if called. The board knows the strengths of the four and would expect to hire one or more if the need arises. The candidates are young to middle-aged, well-to-do to rich, and all wish to work for Berkshire for reasons that go beyond compensation."
ACQUISITION CRITERIA (FROM 2008 REPORT)
"We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
(1) Large purchases (at least $75 million of pretax earnings unless the business will fit into one of our existing units),
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are 'turnaround' situations),
(3) Businesses earning good returns on equity while employing little or no debt,
(4) Management in place (we can't supply it),
(5) Simple businesses (if there's lots of technology, we won't understand it),
(6) An offering price (we don't want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).
"The larger the company, the greater will be our interest: We would like to make an acquisition in the $5-20 billion range... We will not engage in unfriendly takeovers... We prefer to buy for cash, but will consider issuing stock when we receive as much in intrinsic business value as we give."
(Reporting by Jonathan Stempel in Omaha, Nebraska)
http://www.reuters.com/article/topNews/idUSTRE54127T20090502?pageNumber=2&virtualBrandChannel=0&sp=true
Sat May 2, 2009 3:30pm EDT
(Reuters) - Berkshire Hathaway Inc, the insurance and investment company run by Warren Buffett, has been preparing succession plans for when the 78-year-old billionaire steps down. It also still hunts for acquisitions, preferably large.
In 2008 Berkshire spent $6.1 billion on acquisitions. It spent $4.5 billion for a 60 percent stake in Marmon Holdings Inc, which was owned by the Pritzker family of Chicago and makes such things as railroad tank cars, plumbing pipes, metal fasteners, and wiring and water treatment products used in residential construction. Berkshire later boosted its stake to 63.6 percent.
Berkshire also made a series of large investments in 2008, including $6.5 billion to help fund Mars Inc's purchase of chewing gum company Wm Wrigley Jr Co. It also invested $5 billion in Goldman Sachs Group Inc and $3 billion in General Electric Co.
Berkshire ended 2008 with $25.54 billion in cash. Buffett has repeatedly said he would like to keep $10 billion on hand.
The company is holdings its annual meeting on Saturday in Omaha, Nebraska.
The following information about Buffett's succession plans and Berkshire's acquisition strategy is drawn from the company's 2007 and 2008 annual reports:
BUFFETT ON HIS POTENTIAL SUCCESSORS (FROM 2007 REPORT)
"We have for some time been well prepared for CEO succession because we have three outstanding internal candidates. The board knows exactly whom it would pick if I were to become unavailable, either because of death or diminishing abilities. And that would still leave the board with two backups.
"We have indeed now identified four candidates who could succeed me in managing investments. All manage substantial sums currently, and all have indicated a strong interest in coming to Berkshire if called. The board knows the strengths of the four and would expect to hire one or more if the need arises. The candidates are young to middle-aged, well-to-do to rich, and all wish to work for Berkshire for reasons that go beyond compensation."
ACQUISITION CRITERIA (FROM 2008 REPORT)
"We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
(1) Large purchases (at least $75 million of pretax earnings unless the business will fit into one of our existing units),
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are 'turnaround' situations),
(3) Businesses earning good returns on equity while employing little or no debt,
(4) Management in place (we can't supply it),
(5) Simple businesses (if there's lots of technology, we won't understand it),
(6) An offering price (we don't want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).
"The larger the company, the greater will be our interest: We would like to make an acquisition in the $5-20 billion range... We will not engage in unfriendly takeovers... We prefer to buy for cash, but will consider issuing stock when we receive as much in intrinsic business value as we give."
(Reporting by Jonathan Stempel in Omaha, Nebraska)
http://www.reuters.com/article/topNews/idUSTRE54127T20090502?pageNumber=2&virtualBrandChannel=0&sp=true
Buffett offers bleak outlook for U.S. newspapers
Buffett offers bleak outlook for U.S. newspapers
Sun May 3, 2009 12:33am EDT
OMAHA, Nebraska (Reuters) - Warren Buffett is fond of newspapers -- he reads five a day -- but the billionaire investor warned shareholders of his Berkshire Hathaway Inc that the reeling industry may never recover because it lacks a sustainable business model.
At Saturday's annual meeting of Berkshire, which owns the Buffalo News and has a big stake in Washington Post Co, Buffett said that as readership falls, so does the attraction of newspapers for advertisers, and for investors in the companies that publish them.
"For most newspapers in the United States, we would not buy them at any price," Buffett said. "They have the possibility of nearly unending losses. ... I do not see anything on the horizon that sees that erosion coming to an end."
Many U.S. newspapers have lost 20 percent or more of their advertising revenue as changes in technology and reading habits shrink circulation and more readers to get their news online.
Several newspapers in large U.S. cities have closed in recent months, and the future of the money-losing Boston Globe, owned by The New York Times Co, remains up in the air.
"Twenty, thirty years ago, they were a product that had pricing power that was essential," said Buffett. "They have lost that essential nature."
Buffett said Berkshire would hold on to the Buffalo News, a daily newspaper in the New York state city of the same name, if only because Berkshire buys businesses for the long term and does not sell simply because the companies hit a rough patch.
He did not rule out having to squeeze out excess costs, including possible job cuts, or eventually shuttering the paper if it goes too deeply into the red.
"On an economic basis you should sell this business. I said I agree 100 percent but I am not going to do it," he said. "The union has been cooperative in having an economic model that will at least give us a little bit of money."
Charlie Munger, Berkshire's vice chairman, called the decline of the newspaper industry "a national tragedy."
"What replaces it will not be as desirable as what we are losing," he said.
(Reporting by Lilla Zuill and Jonathan Stempel; Editing by Xavier Briand)
http://www.reuters.com/article/businessNews/idUSTRE5420I820090503
Sun May 3, 2009 12:33am EDT
OMAHA, Nebraska (Reuters) - Warren Buffett is fond of newspapers -- he reads five a day -- but the billionaire investor warned shareholders of his Berkshire Hathaway Inc that the reeling industry may never recover because it lacks a sustainable business model.
At Saturday's annual meeting of Berkshire, which owns the Buffalo News and has a big stake in Washington Post Co, Buffett said that as readership falls, so does the attraction of newspapers for advertisers, and for investors in the companies that publish them.
"For most newspapers in the United States, we would not buy them at any price," Buffett said. "They have the possibility of nearly unending losses. ... I do not see anything on the horizon that sees that erosion coming to an end."
Many U.S. newspapers have lost 20 percent or more of their advertising revenue as changes in technology and reading habits shrink circulation and more readers to get their news online.
Several newspapers in large U.S. cities have closed in recent months, and the future of the money-losing Boston Globe, owned by The New York Times Co, remains up in the air.
"Twenty, thirty years ago, they were a product that had pricing power that was essential," said Buffett. "They have lost that essential nature."
Buffett said Berkshire would hold on to the Buffalo News, a daily newspaper in the New York state city of the same name, if only because Berkshire buys businesses for the long term and does not sell simply because the companies hit a rough patch.
He did not rule out having to squeeze out excess costs, including possible job cuts, or eventually shuttering the paper if it goes too deeply into the red.
"On an economic basis you should sell this business. I said I agree 100 percent but I am not going to do it," he said. "The union has been cooperative in having an economic model that will at least give us a little bit of money."
Charlie Munger, Berkshire's vice chairman, called the decline of the newspaper industry "a national tragedy."
"What replaces it will not be as desirable as what we are losing," he said.
(Reporting by Lilla Zuill and Jonathan Stempel; Editing by Xavier Briand)
http://www.reuters.com/article/businessNews/idUSTRE5420I820090503
Sunday, 3 May 2009
Buffett dispenses gloom at Berkshire fest
Buffett dispenses gloom at Berkshire fest
OMAHA, Nebraska (Reuters) - Warren Buffett told a record crowd at a somber annual meeting of his Berkshire Hathaway Inc that first-quarter operating profit fell and the company's book value declined 6 percent, as the recession hurt many of the company's businesses and investments.
Operating profit fell about 12 percent from a year earlier to $1.7 billion, as most of Berkshire's businesses were "basically down," Buffett told an estimated 35,000 people at the meeting in downtown Omaha.
The decline in book value results in part from falling stock prices and higher losses on derivatives contracts, and comes on top of a 9.6 percent decline last year, the biggest drop since Buffett began running the company in 1965.
Buffett acknowledged that Berkshire will probably lose money on derivatives tied to the credit quality of junk bonds, though he still expects to make money on a much larger and longer-term derivatives bet that stock prices will rise.
Berkshire's cash stake fell to about $22.7 billion on March 31 from $25.5 billion at year end, Buffett said. Berkshire expects to report results on May 8.
The outlook punctuated a meeting that had a decidedly more serious and somber tone from years past as many investors expressed worries about the economy, Berkshire's investments, and how long the 78-year-old Buffett plans to stay on the job.
Half the questions were pre-screened by journalists, providing a tougher and more substantive dialogue with Buffett and his 85-year-old vice chairman, Charlie Munger.
Berkshire's stock has fallen 39 percent since December 2007, but Buffett said no stock buybacks are planned because Berkshire's share price is not "demonstrably below" the company's intrinsic value. Profit fell 62 percent last year.
Buffett offered a gloomy forecast for parts of the economy and Berkshire itself, saying some units are laying off workers as managers "look at the reality of the current situation."
He also said massive federal efforts to stimulate activity could pay off, at a possible cost of higher inflation.
"It has been a very extraordinary year," Buffett said. "When the American public pulls back the way they have, the government does need to step in.... It is the right thing to do, but it won't be a free ride."
DERIVATIVES
Buffett said housing prices have yet to stabilize broadly, that retailers may be under pressure for a "considerable period of time," and that he would not buy most U.S. newspaper
companies "at any price."
He also said that in insurance, which comprises about half of Berkshire's operations, the earnings power "was not as good last year as normal" and "won't be as good this year."
Buffett had transformed Berkshire from a failing textile maker into a company with close to 80 businesses that sell such things as Geico car insurance, paint, ice cream and underwear.
Buffett is often considered the world's greatest investor, but recent missteps have prompted speculation the world's second-richest person has lost his touch.
Berkshire still has three internal candidates to replace him as chief executive, including one the board could appoint immediately if the occasion arose.
Buffett said the four candidates to replace him as chief investment officer failed in 2008 to outperform the Standard & Poor's 500, which fell 38 percent that year.
But he said the candidates' performance has been "modestly to significantly better than average" over 10 years, and that he was confident they could repeat that in the next 10 years.
Marc Rabinov, a shareholder from Melbourne, Australia, who said he was attending his 13th meeting, called succession a "big problem." But he added: "They are very good at being able to assess character, and that's the most important thing about who replaces him."
Much of the worry about Berkshire has focused on Buffett's use of derivatives in making long-term bets on the direction of stocks and junk bonds, and which have so far resulted in billions of dollars of paper losses.
While Buffett still expects the contracts tied to equity stock indexes to make money, he said "we have run into far more bankruptcies in the last year than is normal."
He said he now expects the contracts tied to credit defaults, which mature between 2009 and 2013, will show a loss before investment income, and perhaps after as well.
Buffett distinguishes his derivatives from others, given that he collects billions of dollars of premiums upfront to invest and posts little collateral. He called other derivatives "a danger to the system. There is no question about that."
CONFIDENCE IN BANKS
Buffett expressed confidence in Wells Fargo & Co, one of Berkshire's biggest investments, saying it has "by far the best competitive position" of any large U.S. bank.
He noted that Wells Fargo shares fell below $9 earlier this year, and that at that price, "If I had (to) put all of my net worth into stock, that would be the stock." The bank's shares closed Friday at $19.61.
Buffett added that if he wanted to turn Berkshire into a bank holding company, "I would love to buy all of US Bancorp, or I would love to buy all of Wells."
He also defended Berkshire's roughly 20 percent stake in Moody's Corp, and said the credit rating agency "made a huge mistake" but was not alone in failing to foresee the housing and credit crisis. He also said "the rating agency business is probably still a good business."
Buffett also said Berkshire can weather its recent loss of its "triple-A" credit ratings from Moody's and Fitch ratings. "The 'triple-A' is not going to be material to Berkshire," he said, "but it still irritates me."
While declining to name candidates to replace him as chief executive officer and chief investment officer, Buffett said "it would be impossible" to replace Ajit Jain, who runs much of his insurance businesses and whom investors believe is a CEO contender. "We won't find a substitute for him," Buffett said.
Buffett also said that while Berkshire is less nimble than when it was smaller, "our sustainable competitive advantage is we have a culture and business model that people would find very, very difficult to copy."
Munger added that "the stupidity in the management practices of the rest of the corporate world" will likely benefit Berkshire in the future.
(Reporting by Jonathan Stempel and Lilla Zuill, editing by Vicki Allen)
http://www.reuters.com/article/businessNews/idUSN0236003720090503?feedType=RSS&feedName=businessNews&sp=true
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OMAHA, Nebraska (Reuters) - Warren Buffett told a record crowd at a somber annual meeting of his Berkshire Hathaway Inc that first-quarter operating profit fell and the company's book value declined 6 percent, as the recession hurt many of the company's businesses and investments.
Operating profit fell about 12 percent from a year earlier to $1.7 billion, as most of Berkshire's businesses were "basically down," Buffett told an estimated 35,000 people at the meeting in downtown Omaha.
The decline in book value results in part from falling stock prices and higher losses on derivatives contracts, and comes on top of a 9.6 percent decline last year, the biggest drop since Buffett began running the company in 1965.
Buffett acknowledged that Berkshire will probably lose money on derivatives tied to the credit quality of junk bonds, though he still expects to make money on a much larger and longer-term derivatives bet that stock prices will rise.
Berkshire's cash stake fell to about $22.7 billion on March 31 from $25.5 billion at year end, Buffett said. Berkshire expects to report results on May 8.
The outlook punctuated a meeting that had a decidedly more serious and somber tone from years past as many investors expressed worries about the economy, Berkshire's investments, and how long the 78-year-old Buffett plans to stay on the job.
Half the questions were pre-screened by journalists, providing a tougher and more substantive dialogue with Buffett and his 85-year-old vice chairman, Charlie Munger.
Berkshire's stock has fallen 39 percent since December 2007, but Buffett said no stock buybacks are planned because Berkshire's share price is not "demonstrably below" the company's intrinsic value. Profit fell 62 percent last year.
Buffett offered a gloomy forecast for parts of the economy and Berkshire itself, saying some units are laying off workers as managers "look at the reality of the current situation."
He also said massive federal efforts to stimulate activity could pay off, at a possible cost of higher inflation.
"It has been a very extraordinary year," Buffett said. "When the American public pulls back the way they have, the government does need to step in.... It is the right thing to do, but it won't be a free ride."
DERIVATIVES
Buffett said housing prices have yet to stabilize broadly, that retailers may be under pressure for a "considerable period of time," and that he would not buy most U.S. newspaper
companies "at any price."He also said that in insurance, which comprises about half of Berkshire's operations, the earnings power "was not as good last year as normal" and "won't be as good this year."
Buffett had transformed Berkshire from a failing textile maker into a company with close to 80 businesses that sell such things as Geico car insurance, paint, ice cream and underwear.
Buffett is often considered the world's greatest investor, but recent missteps have prompted speculation the world's second-richest person has lost his touch.
Berkshire still has three internal candidates to replace him as chief executive, including one the board could appoint immediately if the occasion arose.
Buffett said the four candidates to replace him as chief investment officer failed in 2008 to outperform the Standard & Poor's 500, which fell 38 percent that year.
But he said the candidates' performance has been "modestly to significantly better than average" over 10 years, and that he was confident they could repeat that in the next 10 years.
Marc Rabinov, a shareholder from Melbourne, Australia, who said he was attending his 13th meeting, called succession a "big problem." But he added: "They are very good at being able to assess character, and that's the most important thing about who replaces him."
Much of the worry about Berkshire has focused on Buffett's use of derivatives in making long-term bets on the direction of stocks and junk bonds, and which have so far resulted in billions of dollars of paper losses.
While Buffett still expects the contracts tied to equity stock indexes to make money, he said "we have run into far more bankruptcies in the last year than is normal."
He said he now expects the contracts tied to credit defaults, which mature between 2009 and 2013, will show a loss before investment income, and perhaps after as well.
Buffett distinguishes his derivatives from others, given that he collects billions of dollars of premiums upfront to invest and posts little collateral. He called other derivatives "a danger to the system. There is no question about that."
CONFIDENCE IN BANKS
Buffett expressed confidence in Wells Fargo & Co, one of Berkshire's biggest investments, saying it has "by far the best competitive position" of any large U.S. bank.
He noted that Wells Fargo shares fell below $9 earlier this year, and that at that price, "If I had (to) put all of my net worth into stock, that would be the stock." The bank's shares closed Friday at $19.61.
Buffett added that if he wanted to turn Berkshire into a bank holding company, "I would love to buy all of US Bancorp, or I would love to buy all of Wells."
He also defended Berkshire's roughly 20 percent stake in Moody's Corp, and said the credit rating agency "made a huge mistake" but was not alone in failing to foresee the housing and credit crisis. He also said "the rating agency business is probably still a good business."
Buffett also said Berkshire can weather its recent loss of its "triple-A" credit ratings from Moody's and Fitch ratings. "The 'triple-A' is not going to be material to Berkshire," he said, "but it still irritates me."
While declining to name candidates to replace him as chief executive officer and chief investment officer, Buffett said "it would be impossible" to replace Ajit Jain, who runs much of his insurance businesses and whom investors believe is a CEO contender. "We won't find a substitute for him," Buffett said.
Buffett also said that while Berkshire is less nimble than when it was smaller, "our sustainable competitive advantage is we have a culture and business model that people would find very, very difficult to copy."
Munger added that "the stupidity in the management practices of the rest of the corporate world" will likely benefit Berkshire in the future.
(Reporting by Jonathan Stempel and Lilla Zuill, editing by Vicki Allen)
http://www.reuters.com/article/businessNews/idUSN0236003720090503?feedType=RSS&feedName=businessNews&sp=true
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Understanding the business model: Hard-Asset-Based Businesses
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
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
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
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