Banks, investment banks and financial companies rely on borrowing large amounts of money that they hope to loan out at higher interest rates to businesses and consumers.
A company like Freddie Mac, which deals in residential mortgages, carries $175 billion in short-term debt and $185 billion in long-term debt. If your business is borrowing money at 6% and loaning it out at 7%, there is no way your return on total capital ROTC is going to even approach 12%.
In these instances, Warren Buffett likes to look at what the bank or finance company earned in relation to the total assets under its control. The rule here is, the higher the better. Anything over 1% is good and anything over 1.5% is fantastic.
Learning Point
With banks, investment banks, and financial companies, look for a consistent return on assets ROA in excess of 1% and a consistent return on shareholders' equity ROE in excess of 12%.
Also Read:
Return on Total Capital (ROTC)
The Right Rate of Return on Total Capital (ROTC)
ROA of Banks, Investment Banks and Financial Companies
Using ROTC Where the Entire Net Worth of the Company has been taken out
ROTC, ROA, ROE and Buffett's Durable Competitive Advantage
Wednesday 3 June 2009
The Right Rate of Return on Total Capital (ROTC)
Problem with ROE
The problem with looking at high rates of return on shareholders' equity is that some businesses have purposely shrunk their equity base with large dividend payments or share repurchase programs. They do this because increasing the return on shareholders' equity makes the company's stock more enticing to investors. Thus, you will find companies in a price-competitive business, like General Motors, reporting high rates of return on shareholders' equity. To solve this problem, Warren Buffett looks at the return on total capital (ROTC) to help him screen out these types of companies.
ROTC
ROTC is defined as the net earnings of the business divided by the total capital in the business. (Total capital = Equity + Long-Term Debts + Short-Term Debts).
Warren Buffett is looking for a consistently high rate of ROTC, AND, a consistently high rate of ROE.
General Motors' return on equity for the 10-year period (1992 to 2001) was an average annual rate of 27.2%, which is very respectable but suspect because of the 0% return in 1992. Its total return on capital (ROTC) for the 10-year period shows a different story. Its 9.5% average is not enticing. Compare this to H&R Block, which logged in an average annual rate of ROE of 21.5% and an average annual total return on capital (ROTC) of 20.7%.
Take Home Message
The problem with looking at high rates of return on shareholders' equity is that some businesses have purposely shrunk their equity base with large dividend payments or share repurchase programs. They do this because increasing the return on shareholders' equity makes the company's stock more enticing to investors. Thus, you will find companies in a price-competitive business, like General Motors, reporting high rates of return on shareholders' equity. To solve this problem, Warren Buffett looks at the return on total capital (ROTC) to help him screen out these types of companies.
ROTC
ROTC is defined as the net earnings of the business divided by the total capital in the business. (Total capital = Equity + Long-Term Debts + Short-Term Debts).
Warren Buffett is looking for a consistently high rate of ROTC, AND, a consistently high rate of ROE.
General Motors' return on equity for the 10-year period (1992 to 2001) was an average annual rate of 27.2%, which is very respectable but suspect because of the 0% return in 1992. Its total return on capital (ROTC) for the 10-year period shows a different story. Its 9.5% average is not enticing. Compare this to H&R Block, which logged in an average annual rate of ROE of 21.5% and an average annual total return on capital (ROTC) of 20.7%.
Take Home Message
- Companies with a durable competitive advantage will consistently earn both a high rate of ROE and a high rate of return on toal capital (ROTC). Again, the key word is CONSISTENT.
- Companies in a price-competitive business, will typically earn a low rate of ROTC.
- Warren Buffett looks for a consistent ROTC of 12% or better.
Also Read:
Return on Total Capital (ROTC)
The Right Rate of Return on Total Capital (ROTC)
ROA of Banks, Investment Banks and Financial Companies
Using ROTC Where the Entire Net Worth of the Company has been taken out
ROTC, ROA, ROE and Buffett's Durable Competitive Advantage
Return on Total Capital (ROTC)
Return on Total Capital (ROTC)
Total Capital = Long-Term Debt + Short-Term Debt + Equity
Return on Total Capital = Net Earnings / Total Capital
The calculation of ROTC is illustrated here: http://files.shareholder.com/downloads/SYY/654431717x0x226567/EC4E58FF-E488-4CBB-A19B-570745E81387/Non-GAAP%20ROTC%20calculation.pdf
It is important to note the numerator and the denominator used in calculating ROTC by various other groups.
Total Capital = Long-Term Debt + Short-Term Debt + Equity
Return on Total Capital = Net Earnings / Total Capital
The calculation of ROTC is illustrated here: http://files.shareholder.com/downloads/SYY/654431717x0x226567/EC4E58FF-E488-4CBB-A19B-570745E81387/Non-GAAP%20ROTC%20calculation.pdf
It is important to note the numerator and the denominator used in calculating ROTC by various other groups.
- Value Line defines the return on total capital as "annual net profit plus 1/2 of annual long-term interest divided by the total of shareholders’s equity and long term debt." Shareholders’s equity is the net worth of the company.
- Some defines total capital as equity plus long-term debt.
Also Read:
Return on Total Capital (ROTC)
The Right Rate of Return on Total Capital (ROTC)
ROA of Banks, Investment Banks and Financial Companies
Using ROTC Where the Entire Net Worth of the Company has been taken out
ROTC, ROA, ROE and Buffett's Durable Competitive Advantage
Return of capital
Return of capital
A distribution of cash resulting from depreciation tax savings, the sale of a capital asset or securities, or any other transaction unrelated to retained earnings.
A distribution of cash resulting from depreciation tax savings, the sale of a capital asset or securities, or any other transaction unrelated to retained earnings.
Return on Total Assets
Return on Total Assets
Abbreviated as ROTA, refers to a measure of how effectively a firm uses its assets.
Calculated by (income before interest and tax) / (fixed assets + current assets).
Abbreviated as ROTA, refers to a measure of how effectively a firm uses its assets.
Calculated by (income before interest and tax) / (fixed assets + current assets).
Return on Assets
Return on Assets
Abbreviated as ROA, refers to a measure of a firm's profitability, equal to a fiscal year's earnings divided by its total assets, expressed as a percentage.
Abbreviated as ROA, refers to a measure of a firm's profitability, equal to a fiscal year's earnings divided by its total assets, expressed as a percentage.
Return on Investment
Return on Investment
Abbreviated as ROI, refers to a measure of a corporation's profitability, equal to a fiscal year's income divided by common stock and preferred stock equity plus long-term debt.
ROI measures how effectively the firm uses its capital to generate profit; the higher the ROI, the better.
Abbreviated as ROI, refers to a measure of a corporation's profitability, equal to a fiscal year's income divided by common stock and preferred stock equity plus long-term debt.
ROI measures how effectively the firm uses its capital to generate profit; the higher the ROI, the better.
Return on Equity
Return on Equity
Abbreviated as ROE, refers to a measure of how well a firm used reinvested earnings to generate additional earnings, equal to a fiscal year's after-tax income (after preferred stock dividends but before common stock dividends) divided by book value, expressed as a percentage.
It is used as a general indication of the firm's efficiency; in other words, how much profit it is able to generate given the resources provided by its stockholders. investors generally look for firms with returns on equity that are high and growing.
Abbreviated as ROE, refers to a measure of how well a firm used reinvested earnings to generate additional earnings, equal to a fiscal year's after-tax income (after preferred stock dividends but before common stock dividends) divided by book value, expressed as a percentage.
It is used as a general indication of the firm's efficiency; in other words, how much profit it is able to generate given the resources provided by its stockholders. investors generally look for firms with returns on equity that are high and growing.
Return on Invested Capital
Return on Invested Capital
ROIC is a calculation used to assess the profitability of a firm by determining how well capital is being allocated into its operations.
By comparing a firm's Return on Investment Capital with its Cost on Capital (WACC), it can be deduced whether or not capital is being used effectively.
The calculation for ROIC is as follows:
Return On Investment Capital - ROIC = (Net Income - Dividends) /(Total Invested Capital)
(typically expressed as a percentage)
A downside of the ROIC calculation is that it does not explain where returns from capital are generated from (i.e. whether they came from one source or from continuing operations). This can lead to misguiding figures that do not accurately explain the overall profitability of a firm.
ROIC is a calculation used to assess the profitability of a firm by determining how well capital is being allocated into its operations.
By comparing a firm's Return on Investment Capital with its Cost on Capital (WACC), it can be deduced whether or not capital is being used effectively.
The calculation for ROIC is as follows:
Return On Investment Capital - ROIC = (Net Income - Dividends) /(Total Invested Capital)
(typically expressed as a percentage)
A downside of the ROIC calculation is that it does not explain where returns from capital are generated from (i.e. whether they came from one source or from continuing operations). This can lead to misguiding figures that do not accurately explain the overall profitability of a firm.
Return on Capital Employed
Return on Capital Employed
Abbreviated as ROCE. A measure of the returns that a firm is realizing from its capital.
Calculated as profit before interest and tax divided by the difference between total assets and current liabilities.
The resulting ratio represents the efficiency with which capital is being utilized to generate revenue.
Abbreviated as ROCE. A measure of the returns that a firm is realizing from its capital.
Calculated as profit before interest and tax divided by the difference between total assets and current liabilities.
The resulting ratio represents the efficiency with which capital is being utilized to generate revenue.
Return on Capital
Return on Capital
Abbreviated as ROC, refers to a measure of how effectively a firm uses the money (borrowed or owned) invested in its operations.
Return on Invested Capital is equal to the following:
= net operating income after taxes / [total assets minus cash and investments (except in strategic alliances) minus non-interest-bearing liabilities].
Abbreviated as ROC, refers to a measure of how effectively a firm uses the money (borrowed or owned) invested in its operations.
Return on Invested Capital is equal to the following:
= net operating income after taxes / [total assets minus cash and investments (except in strategic alliances) minus non-interest-bearing liabilities].
- If the Return on Invested Capital of a firm exceeds its WACC, then the firm created value.
- If the Return on Invested Capital is less than the WACC, then the firm destroyed value.
Where Warren Buffett Discovers Companies with Hidden Wealth
Warren Buffett has discovered 4 basic types of businesses with durable competitive advantages:
1. Businesses that fulfill a repetitive consumer need with products that wear out fast or are used up quickly, that have brand-name appeal, and that merchants have to carry or use to stay in business. This is a huge world that includes every thing from cookies to panty hose.
2. Advertising businesses, which provide a service that manufacturers must continuously use to persuade the public to buy their products. This is a necessary and profitable segment of the business world. Whether you are selling brand-name products or basic services, you need to advertise. It's a fact of life.
3. Businesses that provide repetitive consumer services that people and businesses are consistently in need of. this is the world of tax preparers, cleaning services, security services, and pest control.
4. Low-cost producers and sellers of common products that most people have to buy at some time in their life. This encompasses many different kinds of businesses from jewelry to furniture to carpets to insurance.
1. Businesses that fulfill a repetitive consumer need with products that wear out fast or are used up quickly, that have brand-name appeal, and that merchants have to carry or use to stay in business. This is a huge world that includes every thing from cookies to panty hose.
2. Advertising businesses, which provide a service that manufacturers must continuously use to persuade the public to buy their products. This is a necessary and profitable segment of the business world. Whether you are selling brand-name products or basic services, you need to advertise. It's a fact of life.
3. Businesses that provide repetitive consumer services that people and businesses are consistently in need of. this is the world of tax preparers, cleaning services, security services, and pest control.
4. Low-cost producers and sellers of common products that most people have to buy at some time in their life. This encompasses many different kinds of businesses from jewelry to furniture to carpets to insurance.
PETRONAS Dagangan Berhad
Business Summary
PETRONAS Dagangan Berhad engages in the marketing of petroleum products and operation of service stations. The company markets a range of petroleum products, including motor gasoline, aviation fuel, kerosene, diesel, fuel oil, bunker fuel, lubricants, liquefied petroleum gas (LPG), and asphalt to motorists, households, airlines, shipping lines, transporters, plantations, processing and manufacturing plants, power stations, and commercial enterprises in Malaysia. It markets its products directly to customers, as well as through its network of service stations, LPG dealers, and industrial dealers. The company was incorporated in 1982 and is based in Kuala Lumpur, Malaysia. PETRONAS Dagangan Berhad is a subsidiary of Petroliam Nasional Berhad.
PETRONAS Dagangan Berhad engages in the marketing of petroleum products and operation of service stations. The company markets a range of petroleum products, including motor gasoline, aviation fuel, kerosene, diesel, fuel oil, bunker fuel, lubricants, liquefied petroleum gas (LPG), and asphalt to motorists, households, airlines, shipping lines, transporters, plantations, processing and manufacturing plants, power stations, and commercial enterprises in Malaysia. It markets its products directly to customers, as well as through its network of service stations, LPG dealers, and industrial dealers. The company was incorporated in 1982 and is based in Kuala Lumpur, Malaysia. PETRONAS Dagangan Berhad is a subsidiary of Petroliam Nasional Berhad.
Exchange
Bursa Malaysia
Company Name
Petronas Dagangan
Stock Code
5681
Sectors
Paid Up Capital *
MYR 993.45
Par Value
- (as at 2008-03-31)
Market Cap *
MYR 7,848.29 (based on value of 7.9000 per share)
Bursa Malaysia
Company Name
Petronas Dagangan
Stock Code
5681
Sectors
Paid Up Capital *
MYR 993.45
Par Value
- (as at 2008-03-31)
Market Cap *
MYR 7,848.29 (based on value of 7.9000 per share)
Performance (as at 2008-03-31) *
Total Assets:
MYR 8,609.61
Intangible Assets:
MYR 23.40
Revenue:
MYR 22,301.58
Earnings Before Interest and Taxes:
MYR 908.16
EPS (Basic) Inc. Extraordinary Items:
MYR 0.67
PE Inc. Extraordinary Items:
11.86
EPS (Basic) Exc. Extraordinary Items:
MYR 0.67
PE Exc. Extraordinary Items:
11.86
Net Income:
MYR 661.67
Dividends - Common/Ordinary:
MYR 332.91
Dividends - Total:
MYR 332.91
Goodwill:
MYR 23.40
Minority Interest:
MYR 46.73
Reserves:
-
Return On Assets:
7.69%
Return On Equity:
16.89%
Shareholder's Equity:
MYR 3,917.42
Total Assets:
MYR 8,609.61
Intangible Assets:
MYR 23.40
Revenue:
MYR 22,301.58
Earnings Before Interest and Taxes:
MYR 908.16
EPS (Basic) Inc. Extraordinary Items:
MYR 0.67
PE Inc. Extraordinary Items:
11.86
EPS (Basic) Exc. Extraordinary Items:
MYR 0.67
PE Exc. Extraordinary Items:
11.86
Net Income:
MYR 661.67
Dividends - Common/Ordinary:
MYR 332.91
Dividends - Total:
MYR 332.91
Goodwill:
MYR 23.40
Minority Interest:
MYR 46.73
Reserves:
-
Return On Assets:
7.69%
Return On Equity:
16.89%
Shareholder's Equity:
MYR 3,917.42
---
Historical 5 Yr PE 11.3 to 15.8
Historical 10 Yr PE 9.8 to 14.0
Present PE based on 7.90 = 11.9
Earnings Yield = 8.4%
DY = 4.24% (MYR 332.91/MYR 7,848.29 )
ROTC = 16.89%
Between the end of 1998 and the end of 2007:
- total earnings were $3.129 a share,
- total dividends were $1.09 a share and
- retained earnings were $2.039 per share ($3.129 - $1.09 = $2.039) to add to its equity base.
- the company's per share earnings increased from $0.216 a share to $0.645, the difference was $0.426 a share.
- return on retained capital/earnings RORC was 0.426/203.9 = 21%
---
I like this company. It is a company that I can relate to. Petronas service stations are sprouting all over the place. It has a virtual monopoly supplying energy to certain niche sectors. Its revenue has been good and profitable. It generates a lot of free cash flow. It has been reinvesting into its business regularly, and the return on the equity is a 16.89% which is one of the my investing criteria. Its ROTC is 16.89%, as this company has no borrowings. Its earnings yield is at least 2x that of the risk free FD interest rate. Its dividend has been increasing over the years and I do not anticipate any decrease in future dividend despite the poor economic environment. In fact, it is predicted that the future earnings should continue to show an uptrend, and growth is encouraging with new Petronas stations opening up in new locations funded by self generated profit. The company is debt free.
At 7.90, its PE of 11.86 is at the lower end of its historical 5 year and 10 year PEs. There is safety of capital with a reasonable potential for moderate return (low risk with moderate return) for those with a longer term investing horizon. Just loudly sharing my view, you will need to make your own investing decision based on your personal assessment.
Opportunities in Calamities
Bad-news situations come in 5 basic flavors:
The perfect buying situations is created when a stock market correction or panic is coupled with an industry recession or an individual business calamity or structural changes or a war.
- Stock market correction or panic
- Industry recession
- Individual business calamity
- Structural changes
- War
The perfect buying situations is created when a stock market correction or panic is coupled with an industry recession or an individual business calamity or structural changes or a war.
Company Recovery after a correction, panic or bubble-bursting situation.
1. Companies with durable competitive advantage
a) Correction or panic during a bull market: Any company with a durable competitive advantage will eventually recover after a market correction or panic during a bull market.
b) Bubble-bursting situation: But beware: In a bubble-bursting situation,during which stock prices trade in excess of 40 times earnings and then fall to single-digit PEs, it may take years for them to fully recover. After the crash of 1973-74, it took Capital Cities and Philip Morris until 1977 to match their 1972 bull market highs. It took Coca-Cola until 1985 to match its 1972 bull market high of $25 a share. On the other hand, if you bought during the crash, as Warren Buffett did, it didn't take you long to make a fortune.
2. Companies of the price-competitive type
Be warned: Companies of the price-competitive type may never again see their bull market highs, which means that investors can suffer real and permanent losses of capital if they buy them during a bubble.
Take Home Lessons
The bull/bear market cycle offers many buying opportunities for the selective contrarian investor.
The most important aspect of these buying opportunities is that they offer the investor the chance to buy into durable-competitive-advantage companies that have nothing wrong with them other than sinking stock prices.
The herd mentality of the shortsighted stock market creates buying opportunities for both you and Warren.
After the bubble bursts
After the bubble bursts, a couple of things can happen.
The first is that the country will slip into a recession. You will see reports of layoffs and falling corporate profits. The Fed will actively drop interest rates, which will, in a year or so, respark the economy. The immediate impact of lower interest rates will be an increase in car and house sales. Seeing this, investors will anticipate the revival of the economy and jump back into the market. This time, though, they will be investing in the big names -like GE and Hewlett-Packard - that have earnings. They won't chase after the once-hot bubble stocks. Those stocks are dead until they begin earning money.
If the Fed's dropping of interest rates doesn't revive the economy, the country will slip into a depression and stock prices will really go to hell. It happened in the early 1920s, and the ensuing crash made 1929 pale in comparison. If that happens, you are in a major recession/depression and the stock market will be giving companies away. Value investors, including Warren, dream of such an opportunity, while the rest of the world dreads it. That's because Warren is a selective contrarian investor with a ton of cash and a long-term perspective.
However, Warren Buffett does not buy or sell baseed on what he thinks the market will do. He is price-motivated. This means that he will only invest when the price of the company makes business sense.
The first is that the country will slip into a recession. You will see reports of layoffs and falling corporate profits. The Fed will actively drop interest rates, which will, in a year or so, respark the economy. The immediate impact of lower interest rates will be an increase in car and house sales. Seeing this, investors will anticipate the revival of the economy and jump back into the market. This time, though, they will be investing in the big names -like GE and Hewlett-Packard - that have earnings. They won't chase after the once-hot bubble stocks. Those stocks are dead until they begin earning money.
If the Fed's dropping of interest rates doesn't revive the economy, the country will slip into a depression and stock prices will really go to hell. It happened in the early 1920s, and the ensuing crash made 1929 pale in comparison. If that happens, you are in a major recession/depression and the stock market will be giving companies away. Value investors, including Warren, dream of such an opportunity, while the rest of the world dreads it. That's because Warren is a selective contrarian investor with a ton of cash and a long-term perspective.
However, Warren Buffett does not buy or sell baseed on what he thinks the market will do. He is price-motivated. This means that he will only invest when the price of the company makes business sense.
Tuesday 2 June 2009
Why the Efficient Market Theory is Both Right and Wrong
Why the Efficient Market Theory is Both Right and Wrong
Once upon a time a couple of enterprising university professors got together and proclaimed that the stock market was efficient, meaning that on any given day a stock was accurately priced given the information available to the public. They also concluded that because of this efficiency, it would be impossible to develop an investment strategy that could do better than the market did as a whole. Because of the market's efficiency, they concluded, the most profitable approach to investing would be through index funds that go up and down with the rest of the market. (This type of fund buys a basket of stocks, without regard to price, representing the stock market as a whole.)
Warren Buffett recognizes that because 95% of all investors are hell-bent on trying to beat each other out of the quick buck, the stock market is very efficient. He sees that it is impossible to beat these people at their short-term game. He also realizes that the shortsighted investment mind-set that dominates the stock market is completely devoid of any true long-term investment strategy. You only have to look to the options market to see hard evidence of this.
Once upon a time a couple of enterprising university professors got together and proclaimed that the stock market was efficient, meaning that on any given day a stock was accurately priced given the information available to the public. They also concluded that because of this efficiency, it would be impossible to develop an investment strategy that could do better than the market did as a whole. Because of the market's efficiency, they concluded, the most profitable approach to investing would be through index funds that go up and down with the rest of the market. (This type of fund buys a basket of stocks, without regard to price, representing the stock market as a whole.)
Warren Buffett recognizes that because 95% of all investors are hell-bent on trying to beat each other out of the quick buck, the stock market is very efficient. He sees that it is impossible to beat these people at their short-term game. He also realizes that the shortsighted investment mind-set that dominates the stock market is completely devoid of any true long-term investment strategy. You only have to look to the options market to see hard evidence of this.
- Short-term options trading, up to 6 months out, is a fully developed market with multiple exchanges, writing tens of thousands of option contracts, on hundreds of different companies, each and every day the stock market is open.
- The so-called long-term options market, up to 2 years out, is tiny and deals in fewer than fifty stocks. From Warren's investment perspective, 2 years out is still short-term.
- No exchange has an active options market writing contracts 5 to 10 years out. It simply doesn't exist.
Warren's great discovery is that, from a short-term perspective, the stock market is very efficient, but from a long-term perspective, it is grossly inefficient. He had only to develop an investment strategy to exploit the shortsighted market's inefficient long-term pricing mistakes. To this end, he developed selective contrarian investing.
Are you Mr. Market or Mr. Buffett?
Benjamin Graham's teaching on the shortsightedness of the stock market
There are certainly many opinions in the blogs. Those who visit these for "tips" maybe disappointed.
Investing should be a lonely journey, through hard work guided by your own philosophy and strategy.
Nevertheless, some of the blogs information can be useful too. One can also learn and benefit from the emotions and thought processes driving these bloggers.
You should be aware of the "noises" which are temporarily good or bad news that many bloggers get excited with. For the long term investors, the news that matters are quite different yet again.
Perhaps, this point can be better illustrated by the parable of Mr. Market made famous by Benjamin Graham.
"When Benjamin Graham was teaching Warren Buffett about the shortsightedness of the stock market, he asked Warren to imagine that he owned and operated a wonderful and stable little business with an equal partner by the name of Mr. Market.
Mr. Market had an interesting personality trait that some days allowed him to see only the wonderful things about the business. This, of course, made him wildly enthusiastic about the world and the business's prospects. On other days, he couldn't see past the negative aspects of the business, which, of course, made him overly pessimistic about the world and the immediate future of the business.
Mr. Market also had another quirk. Every morning he tried to sell you his interest in the business. On days he was wildly enthusiastic about the immediate future of the business, he asked for a high selling price. On doom-and-gloom days, when he was overly pessimistic about the immediate future of the business, he quoted you a low selling price hoping that you would be foolish enough to take the troubled company off his hands.
One other thing. Mr. Market doesn't mind if you don't pay any attention to him. He shows up to work every day - rain, sleet, or snow - ready and willing to sell you his half of the business, the price depending entirely on his mood. You are free to ignore him or take him on his offer. Regardless of what you do, he will be back tomorrow with a new quote.
If you think that the long-term prospects for the business are good and would like to own the entire busines, when do you take Mr. Market up on his offer? When he is wildly enthusiastic and quoting you a really high price? Or when he feels pessimistic and quotes you a very low price? Obviously you buy when Mr. Market is feeling pessimistic about the immediate future of the business, because that's when you would get the best price.
Graham added one more twist. He taught Warren that Mr. Market was there to benefit him, not to guide him. You should be interested only in the price that Mr. Market is quoting you, not in his thoughts on what the business is worth. In fact, listening to his erratic thinking could be financially disastrous to you. Either you will become overly enthusiastic about the business and pay too much for it, or you become overly pessimistic and miss taking advantage of Mr. Market's insanely low selling price.
Warren says that, to this day, he still likes to imagine himself being in business with Mr. Market. To his delight he has found that Mr. Market still has his eye on the short term and is still manic-depressive about what businesses are worth."
Key point: In an investment world dictated by shortsighted investment goals, where the human emotions of optimism and pessimism control investors' buy and sell decisions, it is short-sighted pessismism that creates Warren's buying opportunity.
Are you Mr. Market or Mr. Buffett?
There are certainly many opinions in the blogs. Those who visit these for "tips" maybe disappointed.
Investing should be a lonely journey, through hard work guided by your own philosophy and strategy.
Nevertheless, some of the blogs information can be useful too. One can also learn and benefit from the emotions and thought processes driving these bloggers.
You should be aware of the "noises" which are temporarily good or bad news that many bloggers get excited with. For the long term investors, the news that matters are quite different yet again.
Perhaps, this point can be better illustrated by the parable of Mr. Market made famous by Benjamin Graham.
"When Benjamin Graham was teaching Warren Buffett about the shortsightedness of the stock market, he asked Warren to imagine that he owned and operated a wonderful and stable little business with an equal partner by the name of Mr. Market.
Mr. Market had an interesting personality trait that some days allowed him to see only the wonderful things about the business. This, of course, made him wildly enthusiastic about the world and the business's prospects. On other days, he couldn't see past the negative aspects of the business, which, of course, made him overly pessimistic about the world and the immediate future of the business.
Mr. Market also had another quirk. Every morning he tried to sell you his interest in the business. On days he was wildly enthusiastic about the immediate future of the business, he asked for a high selling price. On doom-and-gloom days, when he was overly pessimistic about the immediate future of the business, he quoted you a low selling price hoping that you would be foolish enough to take the troubled company off his hands.
One other thing. Mr. Market doesn't mind if you don't pay any attention to him. He shows up to work every day - rain, sleet, or snow - ready and willing to sell you his half of the business, the price depending entirely on his mood. You are free to ignore him or take him on his offer. Regardless of what you do, he will be back tomorrow with a new quote.
If you think that the long-term prospects for the business are good and would like to own the entire busines, when do you take Mr. Market up on his offer? When he is wildly enthusiastic and quoting you a really high price? Or when he feels pessimistic and quotes you a very low price? Obviously you buy when Mr. Market is feeling pessimistic about the immediate future of the business, because that's when you would get the best price.
Graham added one more twist. He taught Warren that Mr. Market was there to benefit him, not to guide him. You should be interested only in the price that Mr. Market is quoting you, not in his thoughts on what the business is worth. In fact, listening to his erratic thinking could be financially disastrous to you. Either you will become overly enthusiastic about the business and pay too much for it, or you become overly pessimistic and miss taking advantage of Mr. Market's insanely low selling price.
Warren says that, to this day, he still likes to imagine himself being in business with Mr. Market. To his delight he has found that Mr. Market still has his eye on the short term and is still manic-depressive about what businesses are worth."
Key point: In an investment world dictated by shortsighted investment goals, where the human emotions of optimism and pessimism control investors' buy and sell decisions, it is short-sighted pessismism that creates Warren's buying opportunity.
Are you Mr. Market or Mr. Buffett?
Geithner insists Chinese dollar assets are safe
Geithner insists Chinese dollar assets are safe
US Treasury Secretary Tim Geithner was laughed at by an audience of Chinese students after insisting that China's US assets are safe.
By Edmund Conway
Last Updated: 8:03PM BST 01 Jun 2009
In his first official visit to China since becoming Treasury Secretary, Mr Geithner told politicians and academics in Beijing that he still supports a strong US dollar, and insisted that the trillions of dollars of Chinese investments would not be unduly damaged by the economic crisis. Speaking at Peking University, Mr Geithner said: "Chinese assets are very safe."
The comment provoked loud laughter from the audience of students. There are growing fears over the size and sustainability of the US budget deficit, which is set to rise to almost 13pc of GDP this year as the world's biggest economy fights off recession. The US is reliant on China to buy many of the government bonds it is planning to issue but Beijing's policymakers have expressed concern about the strength of the dollar and the value of their investments.
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http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5423650/Geithner-insists-Chinese-dollar-assets-are-safe.html
US Treasury Secretary Tim Geithner was laughed at by an audience of Chinese students after insisting that China's US assets are safe.
By Edmund Conway
Last Updated: 8:03PM BST 01 Jun 2009
In his first official visit to China since becoming Treasury Secretary, Mr Geithner told politicians and academics in Beijing that he still supports a strong US dollar, and insisted that the trillions of dollars of Chinese investments would not be unduly damaged by the economic crisis. Speaking at Peking University, Mr Geithner said: "Chinese assets are very safe."
The comment provoked loud laughter from the audience of students. There are growing fears over the size and sustainability of the US budget deficit, which is set to rise to almost 13pc of GDP this year as the world's biggest economy fights off recession. The US is reliant on China to buy many of the government bonds it is planning to issue but Beijing's policymakers have expressed concern about the strength of the dollar and the value of their investments.
Related Articles
US calls for China to have greater say in world economic affairs
We all want to get back to business but we need an election first
The trillion dollar question
Deficit will be tamed ? Geithner
Tim Geithner will put away the verbal grenades in China
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5423650/Geithner-insists-Chinese-dollar-assets-are-safe.html
Wall Street shrugs off GM bankruptcy as world markets rally
Wall Street shrugs off GM bankruptcy as world markets rally
Wall Street shrugged off General Motor's long-expected bankruptcy filing as world share markets started June with a gain, lifted by manufacturing surveys suggesting a more upbeat picture of the global economy.
By Telegraph Staff
Last Updated: 10:19PM BST 01 Jun 2009
The Dow Jones closed up 221 points, or 2.6pc, at 8721 in New York. Other major indexes also advanced with the FTSE 100 closing up 2pc at 4506, Germany's DAX rising 4pc to 5142 and France's CAC gaining 3.1pc to 3379.
Earlier in Asia, Japan's Nikkei 225 stock average, which has surged 37pc since early March, closed up 155.25 points, or 1.6 pec, at 9,677.75, while Hong Kong's Hang Seng index shot up 4pc to 18,888.59.
US purchasing managers index — a broad gauge of business activity — from the Institute for Supply Management rose to a better-than-expected 42.8 in May from April's 40.1. It echoed two surveys in China which showed manufacturing expanding in May and one in the UK which indicated that the rate of decline in British economy was slowing.
The Dow Jones said it would drop GM as a component after the automaker filed for bankruptcy, as well as Citigroup, in which the government now owns a significant stake. GM and Citi will be replaced with Travelers and Cisco Systems next week.
Tim Hughes, head of sales trading at IG Index in London, said: "One of the main drivers today has been the ongoing increase in commodity prices, helping to register some impressive gains for mining stocks."
Xstrata and Vedanta were both up more than 9pc in London.
Mr Hughes said the action in commodity markets continues to suggest that the end is in sight for the global slowdown, with gold at its highest for more than three months and oil back to where it was in early November.
"Stock investors seem happy to keep pushing the price of the mining shares higher – this is a sector that has outperformed the wider market for much of this year and at the moment it seems to have plenty of positive momentum behind it."
Investors have been worried of late that the rally in world markets since early March had run out of steam.
Brent crude settled at nearly $68 a barrel and the pound rose more than 3 cents against the dollar to a seven-month high of $1.6428.
http://www.telegraph.co.uk/finance/financetopics/recession/5423078/Wall-Street-shrugs-off-GM-bankruptcy-as-world-markets-rally.html
Wall Street shrugged off General Motor's long-expected bankruptcy filing as world share markets started June with a gain, lifted by manufacturing surveys suggesting a more upbeat picture of the global economy.
By Telegraph Staff
Last Updated: 10:19PM BST 01 Jun 2009
The Dow Jones closed up 221 points, or 2.6pc, at 8721 in New York. Other major indexes also advanced with the FTSE 100 closing up 2pc at 4506, Germany's DAX rising 4pc to 5142 and France's CAC gaining 3.1pc to 3379.
Earlier in Asia, Japan's Nikkei 225 stock average, which has surged 37pc since early March, closed up 155.25 points, or 1.6 pec, at 9,677.75, while Hong Kong's Hang Seng index shot up 4pc to 18,888.59.
US purchasing managers index — a broad gauge of business activity — from the Institute for Supply Management rose to a better-than-expected 42.8 in May from April's 40.1. It echoed two surveys in China which showed manufacturing expanding in May and one in the UK which indicated that the rate of decline in British economy was slowing.
The Dow Jones said it would drop GM as a component after the automaker filed for bankruptcy, as well as Citigroup, in which the government now owns a significant stake. GM and Citi will be replaced with Travelers and Cisco Systems next week.
Tim Hughes, head of sales trading at IG Index in London, said: "One of the main drivers today has been the ongoing increase in commodity prices, helping to register some impressive gains for mining stocks."
Xstrata and Vedanta were both up more than 9pc in London.
Mr Hughes said the action in commodity markets continues to suggest that the end is in sight for the global slowdown, with gold at its highest for more than three months and oil back to where it was in early November.
"Stock investors seem happy to keep pushing the price of the mining shares higher – this is a sector that has outperformed the wider market for much of this year and at the moment it seems to have plenty of positive momentum behind it."
Investors have been worried of late that the rally in world markets since early March had run out of steam.
Brent crude settled at nearly $68 a barrel and the pound rose more than 3 cents against the dollar to a seven-month high of $1.6428.
http://www.telegraph.co.uk/finance/financetopics/recession/5423078/Wall-Street-shrugs-off-GM-bankruptcy-as-world-markets-rally.html
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