What factors can investors use to choose individual stocks with superior returns?
Earnings
Dividends
Cash flows
Book values
Capitalization
Past performance
These, among others, have been suggested as important criteria to find stocks that will bear the market.
Security analysis cannot presume to lay down general rules as to the "proper value" of any given common stock.... The prices of common stocks are not carefully thought out computations, but the resultants of a welter of human reactions.
Benjamin Graham and David Dodd
Friday, 12 June 2009
Thursday, 11 June 2009
Stock Prices and Future Stock Returns
The PE ratio can be a very misleading indicator of future stock returns in the short run, in the long run, the PE ratio is a very useful predictor.
Current yield of a bond = interest received / price paid
(Current yield of a bond is a good measure of future return if the bond is not selling at a large premium or discount to its maturity value.)
Earnings yield of a stock = EPS / price
Since the underlying assets of a firm are real, earnings yield is a REAL, or inflation-adjusted return. Over time, inflation will raise the cash flows from the underlying assets, and the assets themselves will appreciate in value.
This contrasts with the NOMINAL return earned from fixed-income assets (like bonds), where all the coupons and the final payment are fixed in money terms and do not rise with inflation.
The long-run data bear out the contention that the earnings yield is a good long-run estimate of real stock returns. The average PE ratio of the market over the past 130 years has been 14.45, so the average earnings yield on stocks has been 1/14.45, or 6.8%. This earning yield exactly matches the 6.8% real return on equities from 1871.
There are limitations to using the PE ratio to predict future short-term stock returns.
Current yield of a bond = interest received / price paid
(Current yield of a bond is a good measure of future return if the bond is not selling at a large premium or discount to its maturity value.)
Earnings yield of a stock = EPS / price
Since the underlying assets of a firm are real, earnings yield is a REAL, or inflation-adjusted return. Over time, inflation will raise the cash flows from the underlying assets, and the assets themselves will appreciate in value.
This contrasts with the NOMINAL return earned from fixed-income assets (like bonds), where all the coupons and the final payment are fixed in money terms and do not rise with inflation.
The long-run data bear out the contention that the earnings yield is a good long-run estimate of real stock returns. The average PE ratio of the market over the past 130 years has been 14.45, so the average earnings yield on stocks has been 1/14.45, or 6.8%. This earning yield exactly matches the 6.8% real return on equities from 1871.
There are limitations to using the PE ratio to predict future short-term stock returns.
- For example, future returns will be higher than predicted by the earnings yield if the economy is emerging from a recession.
- And in the short run, there are many other sources of market movement, such as changes in interest rates or the risk premium demanded by stockholders.
Stocks for the long run - buy the dips
Most investors claim to retain their faith in stocks as the best long-term investments. Experience showed that market sell-offs were indeed ideal times for investors to commit more to the market. The mantra of the common investor in the 1990s was "Buy the dips."
Despite the steadfast faith in the market, the bear market of 2000 - 2001 has raised doubts in many minds about the desirability of holding the overwhelming proportion of a portfolio in stocks.
Despite the steadfast faith in the market, the bear market of 2000 - 2001 has raised doubts in many minds about the desirability of holding the overwhelming proportion of a portfolio in stocks.
- Has the continued popularity of the stock market planted seeds of its own destruction?
- Have investors sent equity prices so high that they cannot in the future possibly match their superior historical returns?
An important lesson from the October 1987 crash
A comparison of the DJIA from 1922 - 1929 and 1980 - 1987 showed an uncanny similarity between these two bull markets. On October 19, 1987, we witnesse d the greatest 1-day drop in the stock market history, exceeding the great crash of October 29, 1929. In fact, the market in 1987 continued to trade like 1929 for the remainder of the year. Many forecasters, citing the similarities between the two periods, were certain that disaster loomed and advised their clients to sell everything.
However, the similarity between 1929 and 1987 ended at year's end. The stock market recovered from its October 1987 crash and by August of 1989, hit new high ground. In contrast, 2 years after the October 1929 crash, the Dow, in the throes of the greatest bear market in U.S. history, had lost more than two-thirds of its value and was about to lose two-thirds more.
What was different? Why did the eerie similarities between these two events finally diverge so dramatically?
The simple answer is that in 1987 the central bank had the power to control the ultimate source of liquidity in the economy - the supply of money - and, in contrast to 1929, did not hesitate to use it. Heeding the painful lessons of the early 1930s, the Federal Reserve temporarily flooded the economy with money and pledged to stand by all bank deposits to ensure that all aspects of the financial system would function properly.
The public was reassured. There were no runs on banks, no contraction of the money supply, and no deflation in commodity and asset values. Indeed, the economy itself moved upwards despite the market collapse. The October 1987 stock market crash taught investors an important lesson - that a crisis can be an opportunity for profit, not a time to panic.
However, the similarity between 1929 and 1987 ended at year's end. The stock market recovered from its October 1987 crash and by August of 1989, hit new high ground. In contrast, 2 years after the October 1929 crash, the Dow, in the throes of the greatest bear market in U.S. history, had lost more than two-thirds of its value and was about to lose two-thirds more.
What was different? Why did the eerie similarities between these two events finally diverge so dramatically?
The simple answer is that in 1987 the central bank had the power to control the ultimate source of liquidity in the economy - the supply of money - and, in contrast to 1929, did not hesitate to use it. Heeding the painful lessons of the early 1930s, the Federal Reserve temporarily flooded the economy with money and pledged to stand by all bank deposits to ensure that all aspects of the financial system would function properly.
The public was reassured. There were no runs on banks, no contraction of the money supply, and no deflation in commodity and asset values. Indeed, the economy itself moved upwards despite the market collapse. The October 1987 stock market crash taught investors an important lesson - that a crisis can be an opportunity for profit, not a time to panic.
Volatility is the friend of the value investor
Although most investors express a strong distaste for market fluctuations, volatility must be accepted to reap the superior returns offered by stocks. Risk and volatility are the essense of above-average returns: Investors cannot make any more than the risk-free rate of return unless there is some possibility that they can make less.
While the volatility of the stock market deters many investors, it fascinates others. The ability to monitor a position on a minute-by-minute basis fulfills the need of many people to know quickly whether their judgement, which affects not only money but also ego, has been validated. For many people, the stock market is truly the world's greatest gambling casino.
Yet this ability to know exactly how much one is worth at any given moment also can provoke anxiety. Many investors do not like the instantaneous verdict of the financial market. Some retreat into investments such as real estate, for which daily quotations are not available. They believe that not knowing the current price makes an investment somehow less risky.!
As Keynes stated over 50 years ago about the investing attitudes of the endowment committee at Cambridge University:
"Some Bursars will buy without a tremor unquoted and unmarketable investment in real estate which, if they had a selling quotation for immediate cash available at each audit, would turn their hair gray. The fact that you do not know how much its ready money quotation fluctuates does not, as is commonly supposed, make an investment a safe one."
While the volatility of the stock market deters many investors, it fascinates others. The ability to monitor a position on a minute-by-minute basis fulfills the need of many people to know quickly whether their judgement, which affects not only money but also ego, has been validated. For many people, the stock market is truly the world's greatest gambling casino.
Yet this ability to know exactly how much one is worth at any given moment also can provoke anxiety. Many investors do not like the instantaneous verdict of the financial market. Some retreat into investments such as real estate, for which daily quotations are not available. They believe that not knowing the current price makes an investment somehow less risky.!
As Keynes stated over 50 years ago about the investing attitudes of the endowment committee at Cambridge University:
"Some Bursars will buy without a tremor unquoted and unmarketable investment in real estate which, if they had a selling quotation for immediate cash available at each audit, would turn their hair gray. The fact that you do not know how much its ready money quotation fluctuates does not, as is commonly supposed, make an investment a safe one."
How high is high and how low is low.
Buying when the VIX is high and selling when it is low have proved profitable in recent years. However, so has buying during market spills and selling during market peaks.
The real question is how high is high and how low is low.
For instance, an investor may have been tempted to buy into the market on Friday, October 16, 1987, when the VIX reached 40. Yet such a purchase would have proved disastrous given the record 1-day collapse that followed on Monday.
The real question is how high is high and how low is low.
For instance, an investor may have been tempted to buy into the market on Friday, October 16, 1987, when the VIX reached 40. Yet such a purchase would have proved disastrous given the record 1-day collapse that followed on Monday.
VIX: Volatility Index
In 1993, the Chicago Board Options Exchange (CBOE) introduced a volatility index, called VIX, based on actual index option prices and calculated this index back to the mid-1980s.
In the short run, there is a strong negative correlation between the VIX and the LEVEL of the market. When the market is falling, the VIX rises because investors are willing to pay more for downside protection. When the market is rising, the VIX typically goes down because investors become less willing to insure their portfolios against a loss.
When anxiety in the market is high, the VIX is high, and when complacency rules, the VIX is low. The peaks in the VIX corresponded to periods of extreme uncertainty and sharply lower stock prices.
In the early and middle 1990s, the VIX sank to between 10 and 20. With the onset of the Asian crises in 1997, however, the VIX moved up to a range of 20 to 30. Spikes between 50 and 60 in the VIX occurred on 3 occasions:
In the short run, there is a strong negative correlation between the VIX and the LEVEL of the market. When the market is falling, the VIX rises because investors are willing to pay more for downside protection. When the market is rising, the VIX typically goes down because investors become less willing to insure their portfolios against a loss.
When anxiety in the market is high, the VIX is high, and when complacency rules, the VIX is low. The peaks in the VIX corresponded to periods of extreme uncertainty and sharply lower stock prices.
In the early and middle 1990s, the VIX sank to between 10 and 20. With the onset of the Asian crises in 1997, however, the VIX moved up to a range of 20 to 30. Spikes between 50 and 60 in the VIX occurred on 3 occasions:
- when the Dow fell 550 points during the attack on the Hong Kong dollar in October 1987,
- in August 1998 when Long Term Capital Management needed to be bailed out, and,
- in the week following the terrorist attacks of September 11, 2001.
All these spikes in the VIX were excellent buying opportunities for investors. Peaks in the VIX also correspond to periods of extreme pessimism on the part of the investors. On the other hand, low levels of the VIX often reflect too much investor complacency.
What to expect from a unit trust fund's annual report
Annual reports: Read before you weep
Published: 2009/06/10
There is no short cut when you're dealing with investments, even if it is one of the less complicated and taxing reports, says Securities Industry Development Corp
AFTER last week's article, some of you may have already started going through unit trust fund's annual reports for your future funds.
If you somehow stopped at the pages filled with a plethora of numbers, waiting for this installment to be released, so as to get a rough idea about what those numbers represent, do not fret! Read on and we will tell you what the following pages of your annual reports are all about.
Financial Statements
Never ignore the financial statements part! For those of you who are interested in drilling down further into the financial details, what you need to scrutinise are the financial statements that have been elaborately presented before you.
Your financial statements comprise:
* Income Statement
* Balance Sheet
* Statement of Changes in Net Asset Value (NAV)
* Cash Flow Statement
What do all these mean?
* Income Statement
The income statement will provide details on the investment activities, relative to the previous financial year's activities.
This statement will provide you with a way to differentiate the net income/loss contributed by realised gain/loss versus unrealised gain/loss, which is the result of portfolio revaluation.
For example, a fund's net income is reported as RM1 million, but the realised investment loss is RM2 million, offset by an unrealised gain of RM3 million. Here, you can tell that the RM1 million net income reported does not truly reflect the actual performance of the company. It's simply a matter of accounting practice that the amount is recorded as such.
As an investor, you need to be mindful of the unrealised items, such as unrealised gain or loss on foreign exchange, which may appear in the Income Statement.
* Balance Sheet
There are a few critical pieces of financial information that you can learn from this statement:
(i) whether the fund's total asset is appreciating or depreciating as compared to the previous period.
(ii) whether the units in circulation are increasing or decreasing - a significant decrease in units in circulation shows that the cancellation of units is much greater than creation of units for sale, which also implies that the fund is losing popularity among its existing customers.
* Statement of Changes in NAV
This statement will provide the details on the changes in the NAV during the period and differentiate between the changes contributed by investment activities and transactions with unit holders.
You should be able to see the net impact of undistributed income due to investment activities versus movement due to unit creation or redemption.
From here, it will tell whether the increase or decrease in the fund's value is due to investment effort or expansion/shrinkage in the funds.
For example, if a net decrease of RM5 million in NAV is attributed to RM1 million net increase in undistributed income and RM6 million in amount paid on cancellation of units under the movement due to unit redemption, you may want to be more cautious and investigate further on the reasons behind the redemption from the unit holders.
* Cash Flow Statement
This statement tells you where cash flow for the year is being generated and spent, whether the sources of cash flows are from operating or investment activities and financing activities.
Notes to Financial Statements
Notes can be rather mind-boggling but they function as a supplement to the financial statements and help make sense of the numbers presented.
* Management Expense Ratio
As managing a fund requires a whole team of professionals, the cost incurred to run a fund is part of the cost of investing in unit trust for an investor.
The cost inherent in operating a fund includes management fees, trustee fee, audit fee, administrative expenses (printing of annual reports, distribution warrants, and postage) and other service charges incurred in the management of the fund.
Management Expense ratio is the ratio of the total of all the fees incurred for the period deducted from the fund and all the expenses recovered from and/or charged to the fund, expressed as a percentage of the average value of the fund. It can be summarised as follows:
The MER ratio should be fairly consistent over the years. If you see a significant difference from the previous year, you will need to find out the reason for the change. This is a useful ratio to compare the fund you have invested in or intend to invest with other similar funds in your fund selection process.
The higher the MER ratio, the more expenses are required to manage the fund. Therefore, when you draw up comparisons between funds within a similar range, the ones having similar performance but with lower MER will be more beneficial to you as an investor, because less money is being spent by the managers and more is available for distribution.
* Portfolio Turnover Ratio
Portfolio Turnover ratio measures the average acquisitions and disposals of securities of a fund. The calculation is as follows:
The PTR usually comes after the section on MER in an annual report's notes to financial statement. PTR indicates the rate of trading activity in a fund's portfolio of investments. If the PTR is high, it means that the fund manager is constantly changing the companies or financial instruments in the portfolio. As each and every transaction involves cost, high turnover indicates that the transaction cost incurred is high and it will in turn eat into the profit earned, which will eventually not work out to the benefit of the investors.
You should also look for any other extraordinary items stated in the notes to financial statements, especially events that can materially affect the portfolio's performance or investors' interests, such as change of fund managers and investment committee members, compliance issues, change of investment objectives or policies and major change of shareholders.
Now that you know what to expect from a unit trust fund's annual report, it is high time you get started with the actual reading! There is no short cut when you're dealing with investments, even if it is one of the less complicated and taxing reports. You need to know what you are parting your money for and to whom you will be giving it in order to manage it, so "Read Before You Weep!"
Securities Industry Development Corp (SIDC), the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission, Malaysia. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/sidc17/Article/
Published: 2009/06/10
There is no short cut when you're dealing with investments, even if it is one of the less complicated and taxing reports, says Securities Industry Development Corp
AFTER last week's article, some of you may have already started going through unit trust fund's annual reports for your future funds.
If you somehow stopped at the pages filled with a plethora of numbers, waiting for this installment to be released, so as to get a rough idea about what those numbers represent, do not fret! Read on and we will tell you what the following pages of your annual reports are all about.
Financial Statements
Never ignore the financial statements part! For those of you who are interested in drilling down further into the financial details, what you need to scrutinise are the financial statements that have been elaborately presented before you.
Your financial statements comprise:
* Income Statement
* Balance Sheet
* Statement of Changes in Net Asset Value (NAV)
* Cash Flow Statement
What do all these mean?
* Income Statement
The income statement will provide details on the investment activities, relative to the previous financial year's activities.
This statement will provide you with a way to differentiate the net income/loss contributed by realised gain/loss versus unrealised gain/loss, which is the result of portfolio revaluation.
For example, a fund's net income is reported as RM1 million, but the realised investment loss is RM2 million, offset by an unrealised gain of RM3 million. Here, you can tell that the RM1 million net income reported does not truly reflect the actual performance of the company. It's simply a matter of accounting practice that the amount is recorded as such.
As an investor, you need to be mindful of the unrealised items, such as unrealised gain or loss on foreign exchange, which may appear in the Income Statement.
* Balance Sheet
There are a few critical pieces of financial information that you can learn from this statement:
(i) whether the fund's total asset is appreciating or depreciating as compared to the previous period.
(ii) whether the units in circulation are increasing or decreasing - a significant decrease in units in circulation shows that the cancellation of units is much greater than creation of units for sale, which also implies that the fund is losing popularity among its existing customers.
* Statement of Changes in NAV
This statement will provide the details on the changes in the NAV during the period and differentiate between the changes contributed by investment activities and transactions with unit holders.
You should be able to see the net impact of undistributed income due to investment activities versus movement due to unit creation or redemption.
From here, it will tell whether the increase or decrease in the fund's value is due to investment effort or expansion/shrinkage in the funds.
For example, if a net decrease of RM5 million in NAV is attributed to RM1 million net increase in undistributed income and RM6 million in amount paid on cancellation of units under the movement due to unit redemption, you may want to be more cautious and investigate further on the reasons behind the redemption from the unit holders.
* Cash Flow Statement
This statement tells you where cash flow for the year is being generated and spent, whether the sources of cash flows are from operating or investment activities and financing activities.
Notes to Financial Statements
Notes can be rather mind-boggling but they function as a supplement to the financial statements and help make sense of the numbers presented.
* Management Expense Ratio
As managing a fund requires a whole team of professionals, the cost incurred to run a fund is part of the cost of investing in unit trust for an investor.
The cost inherent in operating a fund includes management fees, trustee fee, audit fee, administrative expenses (printing of annual reports, distribution warrants, and postage) and other service charges incurred in the management of the fund.
Management Expense ratio is the ratio of the total of all the fees incurred for the period deducted from the fund and all the expenses recovered from and/or charged to the fund, expressed as a percentage of the average value of the fund. It can be summarised as follows:
The MER ratio should be fairly consistent over the years. If you see a significant difference from the previous year, you will need to find out the reason for the change. This is a useful ratio to compare the fund you have invested in or intend to invest with other similar funds in your fund selection process.
The higher the MER ratio, the more expenses are required to manage the fund. Therefore, when you draw up comparisons between funds within a similar range, the ones having similar performance but with lower MER will be more beneficial to you as an investor, because less money is being spent by the managers and more is available for distribution.
* Portfolio Turnover Ratio
Portfolio Turnover ratio measures the average acquisitions and disposals of securities of a fund. The calculation is as follows:
The PTR usually comes after the section on MER in an annual report's notes to financial statement. PTR indicates the rate of trading activity in a fund's portfolio of investments. If the PTR is high, it means that the fund manager is constantly changing the companies or financial instruments in the portfolio. As each and every transaction involves cost, high turnover indicates that the transaction cost incurred is high and it will in turn eat into the profit earned, which will eventually not work out to the benefit of the investors.
You should also look for any other extraordinary items stated in the notes to financial statements, especially events that can materially affect the portfolio's performance or investors' interests, such as change of fund managers and investment committee members, compliance issues, change of investment objectives or policies and major change of shareholders.
Now that you know what to expect from a unit trust fund's annual report, it is high time you get started with the actual reading! There is no short cut when you're dealing with investments, even if it is one of the less complicated and taxing reports. You need to know what you are parting your money for and to whom you will be giving it in order to manage it, so "Read Before You Weep!"
Securities Industry Development Corp (SIDC), the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission, Malaysia. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/sidc17/Article/
Bubbles: Does history guide us?
A historical perspective is an excellent place for everyone to start. It is not the only tool, but it is a beginning. History is some help if one stands back and looks at things from the standpoint of fundamentals. But if we have misinformation, or are misled by fraud or lies, then history can be outweighed and we need to add other tools to the historical perspective.
Bubbles have appeared for millennia, actually.
1. A lot of speculation occurred in the Roman economy, which included money lending and some other aspects of capitalism.
2. One of the most famous manias and bubbles of all time was the tulip mania in Holland in the early 1630s. People believed that ordinary tulip bulbs, which collectors prized, had greter and greater value;. A virus randomly made bulbs of one strain change and become more valuable, introducing an unknown into the game with a gambling or speculative element. Bulbs went up in price as people simply bid them up, and one bulb could be a lot more valuable than an expensive town house. Naturally, there came a point when the market got a bit soft, and rumors went around that there were no more buyers, and so the market crashed.
Call this crazy, if you will, but it is a great lesson in how the combination of human emotions and misinformation can mislead and fool even sophisticated people, and create powerful forces.
3. There were manias surrounding the building of railroads and canals in both England and the United States, since amazing leaps in productivity and economic advantages flowed from these developments. The reality was there and lasted for a long time - twenty years in England actually - but people just got too emotional, and their emotions led them to believe that this economic expansion would last forever. Crashes were always the way these mania-driven phenomena ended. In the United Kingdom, the famous railway mania led to the British financial crisis of 1847. October 17, 1897, was know in London as the week of terror.
Interestingly, the canals and railroads in England created a genuine and huge economic expansion, which in turn created a great deal of wealth before the situation slipped into mania territory. Thus when stocks started to come down in price, the crowd, many of whom were very sophisticated, truly believed it was only a temporary pullback in an expansion that would go on indefinitely. Most of those who got rich on the reality of the expansion were so caught up in the mania that they could not distinguish reality from wishful thinking, so they eventually lost all or most of their wealth.
Bubbles have appeared for millennia, actually.
1. A lot of speculation occurred in the Roman economy, which included money lending and some other aspects of capitalism.
2. One of the most famous manias and bubbles of all time was the tulip mania in Holland in the early 1630s. People believed that ordinary tulip bulbs, which collectors prized, had greter and greater value;. A virus randomly made bulbs of one strain change and become more valuable, introducing an unknown into the game with a gambling or speculative element. Bulbs went up in price as people simply bid them up, and one bulb could be a lot more valuable than an expensive town house. Naturally, there came a point when the market got a bit soft, and rumors went around that there were no more buyers, and so the market crashed.
Call this crazy, if you will, but it is a great lesson in how the combination of human emotions and misinformation can mislead and fool even sophisticated people, and create powerful forces.
3. There were manias surrounding the building of railroads and canals in both England and the United States, since amazing leaps in productivity and economic advantages flowed from these developments. The reality was there and lasted for a long time - twenty years in England actually - but people just got too emotional, and their emotions led them to believe that this economic expansion would last forever. Crashes were always the way these mania-driven phenomena ended. In the United Kingdom, the famous railway mania led to the British financial crisis of 1847. October 17, 1897, was know in London as the week of terror.
Interestingly, the canals and railroads in England created a genuine and huge economic expansion, which in turn created a great deal of wealth before the situation slipped into mania territory. Thus when stocks started to come down in price, the crowd, many of whom were very sophisticated, truly believed it was only a temporary pullback in an expansion that would go on indefinitely. Most of those who got rich on the reality of the expansion were so caught up in the mania that they could not distinguish reality from wishful thinking, so they eventually lost all or most of their wealth.
Bubble lessons never go out of style
Bubble lessons never go out of style, and not only are going to help you with big bubbles, or individual stock bubbles, but will focus you on which information is real and what is perception in almost all of your investing. Learn the lessons well.
With bubbles, there is an element of mystery. To cope with that, start with the first step, knowledge, and combine that with your disiciplined buy and sell strategies, since in a bubble it is likely that the beliefs of the crowd cannot be supported by real knowledge.
A considerable number of people (but not all) in the investment community regarded a wide range of technology, communications, and internet stocks as having almost unlimited demand for their products and unlimited potential - all of which assumptions proved to be incorrect. Yet the entire crowd thought in this way about many Internet companies because of incorrect and incomplete information. Emotions temporarily filled that void. A disciplined buy and sell strategy helps you control your emotion.
The other big factor in irrational behaviour comes when the crowd is deliberately fooled, so some bubbles are either accompanied by or built upon fraud or swindles. In the 2000 Internet bubble, the atmosphere of greed it created did bring out the worst in a number of executives who engaged in what proved to be criminal behaviour, either outright stealing from their companies (as executives of Tyco International and Adelphia Communications did), or engaging in accounting and financial fraud (which is what Bernie Ebbers, WorldCom's chairman was convicted of in March 2005.)
There were 3 bubbles that burst in 2000, and they wer all related to one another.
With bubbles, there is an element of mystery. To cope with that, start with the first step, knowledge, and combine that with your disiciplined buy and sell strategies, since in a bubble it is likely that the beliefs of the crowd cannot be supported by real knowledge.
A considerable number of people (but not all) in the investment community regarded a wide range of technology, communications, and internet stocks as having almost unlimited demand for their products and unlimited potential - all of which assumptions proved to be incorrect. Yet the entire crowd thought in this way about many Internet companies because of incorrect and incomplete information. Emotions temporarily filled that void. A disciplined buy and sell strategy helps you control your emotion.
The other big factor in irrational behaviour comes when the crowd is deliberately fooled, so some bubbles are either accompanied by or built upon fraud or swindles. In the 2000 Internet bubble, the atmosphere of greed it created did bring out the worst in a number of executives who engaged in what proved to be criminal behaviour, either outright stealing from their companies (as executives of Tyco International and Adelphia Communications did), or engaging in accounting and financial fraud (which is what Bernie Ebbers, WorldCom's chairman was convicted of in March 2005.)
There were 3 bubbles that burst in 2000, and they wer all related to one another.
- The first was the most obvious: the stock market bubble, which had component bubbles in Internet, telecommunications, and various technology stocks. The excitement over those took almost all other stocks into overvaluation.
- The second was the bubble in capital spending by corporations in the great telecommunications build-out that was going to accommodate all the new traffic, create broadband access for most businesses and consumers, and handle all the new uses of the Internet. The same beliefs that caused stocks to soar were also driving this corporate capital spending, since the new information about the potential of all sorts of technologies appeared to offer great opportunities. Ultimately, the Internet has proved to be a transforming force (just as, say, the railroads, were in the nineteenth century in Europe) and is changing business and life for many people. Thus, not everything that created the mania was false, and this fact just compounded the confusion.
- The third bubble was the overall U.S. economy, which reached peak growth rates that wer more than twice the long-term average real growth. The other two bubbles caused that to happen, so when stocks came down, lower stock values and fear caused consumers and corporations to spend less. The biggest effect on the economy was the loss of the part of corporate spending that had been directed into telecommunications, since that was an incredibly large part of the overall picture.
Bubbles have one thing in common; they are going to burst
On March 6, 2000, Larry Summers and Alan Greenspan and many of the senior executives actually waxed poetic about the productivity gains, the technologies, the confluence of our capital markets and great new technological advances, and the fact that it meant great things for our future.
Four days after that March 6, 2000 gathering, on March 10, the bubble burst and the game was over. All had changed.
It all seemed very real at the time, and the senior people in government were getting their information from the sources that had proved the most valuable and trustworthy in the past for all of us: real economic data generated by consumers and corporations, as well as the very best information that the executives running those corporations could give them. We all had seen the same things, and we all had believed.
"Trying to understand is like straining through muddy water. Be still and allow the mud to settle." Lao-Tzu
---
The lessons from this bubble are important for 3 reasons.
Bubbles, like those from bubble gum or soap, come in all different sizes, but they all have one thing in common with each other, including the gum and the soap bubbles; they are going to burst. They are unsustainable because they are not built on enough real substance to support themselves. Thus, many bubbles develop from a mania. A mania is simply something that is more emotional than tangible or rational, so it can be thought of as irrationality.
The irrationality that leads to the inflating in price beyond what complete knowledge and good analysis would suggest can be the result of one thing or of two or more things in combination.
Four days after that March 6, 2000 gathering, on March 10, the bubble burst and the game was over. All had changed.
It all seemed very real at the time, and the senior people in government were getting their information from the sources that had proved the most valuable and trustworthy in the past for all of us: real economic data generated by consumers and corporations, as well as the very best information that the executives running those corporations could give them. We all had seen the same things, and we all had believed.
"Trying to understand is like straining through muddy water. Be still and allow the mud to settle." Lao-Tzu
---
The lessons from this bubble are important for 3 reasons.
- First, there is the unlikely possibility that we may encounter another stock market bubble in our investing lifetime. One per lifetime seems the 'rule', but we cannot rule out anything completely.
- Second, we do have small bubbles in the market (smaller than in 1929 and 2000) periodically. These include the one caused by a mania in blue chips (called the "Nifty Fifty") from the late 1960s into early 1973, a moderate technology stock bubble in 1983, and the overvaluation in the market before the 1987 stock market "crash."
- Third and most important, bubbles occur in INDIVIDUAL STOCKS fairly frequently.
- in real estate or housing,
- in financial instruments in foreign countries, and
- at times even in the Chinese economy,
Bubbles, like those from bubble gum or soap, come in all different sizes, but they all have one thing in common with each other, including the gum and the soap bubbles; they are going to burst. They are unsustainable because they are not built on enough real substance to support themselves. Thus, many bubbles develop from a mania. A mania is simply something that is more emotional than tangible or rational, so it can be thought of as irrationality.
The irrationality that leads to the inflating in price beyond what complete knowledge and good analysis would suggest can be the result of one thing or of two or more things in combination.
- The irrationality itself is not very easy to see at the beginning, since there would be no bubble if it were apparent.
- The causes start with beliefs that are exciting, but the crowd does not know what it does not know.
- Knowledge is incomplete or just wrong.
Bubble Trouble
Bubbles and bear markets are two separate and distinct things. Investors truly need to understand the differences. You need to understand which strategy to apply when, and not use a hammer when you need a screwdriver. Once you see the straightforward differences, you will know what to do.
One buys in a bear market and sells in a bubble. Those buying in bad markets made a lot of money. This approach avoids the pitfalls of market timing and uses knowledge of what you own or want to own to a maximum advantage.
A bubble results from a mania, meaning that either valuations or fundamentals are highly suspect or totally wrong, since emotions and perceptions have overwhelmed what is "real". It is better to run - meaning sell - if you recognize a bubble.
Some people wonder why the NASDAQ remained 3,000 points below its old year 2000 high for more than 5 years. They wonder why they had trouble making back their money that was lost in the year 2000 bubble. That is because they think of bubbles like bear markets and do not realize the incredible excesses of bubbles that have to be worked off. But the most important difference is the cause.
Bear markets are caused mainly by fundamental problems. The 5 main cause of a bear market are listed (see reference). It runs its course, and so does the poor market. Then things normalize. You buy into a bear market, since you get great prices on stocks; then stocks come back and you make more money.
Bubbles are not caused by fundamental events. It is investors themselves who create them. Investors come to believe some things that are not true or not rational and thus create a mania in a stock, in an industry, or in the overall market. If the mania goes on for a time, a bubble is created, and that builds until its inherent instability leads it to break.
One of the interesting differences between bubbles and bear markets is that in a bear market, there are plenty of bulls and bears. In a bubble, the few bears are drowned out by the loud and almost universal bullishness. This happened with the Internet, because a mania is normally caused by a belief in something that is supposed to be new and amazing, even though this cannot be proved.
It is natural to like momentum and money, but if investors have no disciplines and no sense of bubbles, then they are headed not for the big money, but for quite the opposite.
With bear markets, one wants to use buy and sell disciplines and buy when prices and fundamentals would dictate that.
There are market bubbles once in a great while, perhaps once in a life-time, but individual stock bubbles are more common. All bubbles have some similarities that concern how perceptions, emotions, and a lack of accurate information combine to set an investor trap.
One buys in a bear market and sells in a bubble. Those buying in bad markets made a lot of money. This approach avoids the pitfalls of market timing and uses knowledge of what you own or want to own to a maximum advantage.
A bubble results from a mania, meaning that either valuations or fundamentals are highly suspect or totally wrong, since emotions and perceptions have overwhelmed what is "real". It is better to run - meaning sell - if you recognize a bubble.
Some people wonder why the NASDAQ remained 3,000 points below its old year 2000 high for more than 5 years. They wonder why they had trouble making back their money that was lost in the year 2000 bubble. That is because they think of bubbles like bear markets and do not realize the incredible excesses of bubbles that have to be worked off. But the most important difference is the cause.
Bear markets are caused mainly by fundamental problems. The 5 main cause of a bear market are listed (see reference). It runs its course, and so does the poor market. Then things normalize. You buy into a bear market, since you get great prices on stocks; then stocks come back and you make more money.
Bubbles are not caused by fundamental events. It is investors themselves who create them. Investors come to believe some things that are not true or not rational and thus create a mania in a stock, in an industry, or in the overall market. If the mania goes on for a time, a bubble is created, and that builds until its inherent instability leads it to break.
One of the interesting differences between bubbles and bear markets is that in a bear market, there are plenty of bulls and bears. In a bubble, the few bears are drowned out by the loud and almost universal bullishness. This happened with the Internet, because a mania is normally caused by a belief in something that is supposed to be new and amazing, even though this cannot be proved.
It is natural to like momentum and money, but if investors have no disciplines and no sense of bubbles, then they are headed not for the big money, but for quite the opposite.
With bear markets, one wants to use buy and sell disciplines and buy when prices and fundamentals would dictate that.
There are market bubbles once in a great while, perhaps once in a life-time, but individual stock bubbles are more common. All bubbles have some similarities that concern how perceptions, emotions, and a lack of accurate information combine to set an investor trap.
The five possible factors that cause bear markets
While various people can legitimately pick factors that trigger bear markets, or those stock-market environments that result in declines that are long, very significant, or both, there are five factors which great investors center on. These elements of a bear market can be present individually to create falling prices, or they can appear in combination.
The five possible factors that cause bear markets are:
1. Persistent overvaluation.
2. High or rising interest rates or rising inflation that leads to them.
3. Weakness in company earnings. (By the time people know they are in a recession, normally weak earnings have been evident and if high interest rates cause economic weakness, then those rates have been present for a time.)
4. Oil shocks.
5. Wars (but not always).
The first three are, "the big three"; and those who ignored them suffered much greater losses than those who did not.
In each of the following instances: the terrible 1973-1974 market, the 1983 tech boom and bust, the 1987 stock-market crash and the 2000 Internet and technology bubble burst, there was a general disregard for valuations of individual stocks leading up to the collapses. Each collapse was related to this factor. They did not descend upon the markets out of nowhere.
Markets have a habit of discounting good and bad events in advance. This explains why a company's stock may make a big move before its earnings are made public, or why the market may hit the doldrums for three weeks prior to a rise in interest rates. The reason is anticipation. Savvy investors must take into account that reaction to future events may already be reflected in current prices.
The five possible factors that cause bear markets are:
1. Persistent overvaluation.
2. High or rising interest rates or rising inflation that leads to them.
3. Weakness in company earnings. (By the time people know they are in a recession, normally weak earnings have been evident and if high interest rates cause economic weakness, then those rates have been present for a time.)
4. Oil shocks.
5. Wars (but not always).
The first three are, "the big three"; and those who ignored them suffered much greater losses than those who did not.
In each of the following instances: the terrible 1973-1974 market, the 1983 tech boom and bust, the 1987 stock-market crash and the 2000 Internet and technology bubble burst, there was a general disregard for valuations of individual stocks leading up to the collapses. Each collapse was related to this factor. They did not descend upon the markets out of nowhere.
Markets have a habit of discounting good and bad events in advance. This explains why a company's stock may make a big move before its earnings are made public, or why the market may hit the doldrums for three weeks prior to a rise in interest rates. The reason is anticipation. Savvy investors must take into account that reaction to future events may already be reflected in current prices.
Markets can detach from fundamentals for long periods
Warren Buffett, say that the markets can detach from fundamentals for periods as long as a year or even longer. Therefore market timing is a form of gambling. It is easier to understand a stock you know well, and value that stock with reasonable accuracy, particularly if it is for a time horizon of a couple of years.
These days, minor market-moving news and events are more and more frequent and could have you trading (at a dizzying and counterproductive pace) into and out of some of the companies that you would want for long-term investing and wealth.
There are countless small but violent moves in the markets, let alone the many corrections and periodic bear markets that occur. Using knowledge and disciplines instead of being driven by raw emotion and using a 'timing approach' were the keys to investment success.
Over the years, volatility in market averages and individual stock prices has increased, not decreased, so that there have been many more sharp moves and many more reversals. Many factors are responsible. Some of the reasons are:
Interestingly enough, there are typically more 3 percent and 5 percent daily upward moves in stock market averages during bear markets than in bull markets. The basic nature of market moves, and the psychology that affects those moves, coupled with the complex financial variables, makes the process of trying to determine the short-term direction of markets a very tricky game of chance, and one that can be immensely costly.
These days, minor market-moving news and events are more and more frequent and could have you trading (at a dizzying and counterproductive pace) into and out of some of the companies that you would want for long-term investing and wealth.
There are countless small but violent moves in the markets, let alone the many corrections and periodic bear markets that occur. Using knowledge and disciplines instead of being driven by raw emotion and using a 'timing approach' were the keys to investment success.
Over the years, volatility in market averages and individual stock prices has increased, not decreased, so that there have been many more sharp moves and many more reversals. Many factors are responsible. Some of the reasons are:
- computerised stock trading,
- huge increases in the size of the largest institutional portfolios,
- the proliferation of aggressive hedge funds, and
- the complexity of the task of properly interpreting information that develops at a dizzying pace in our globalised markets.
Interestingly enough, there are typically more 3 percent and 5 percent daily upward moves in stock market averages during bear markets than in bull markets. The basic nature of market moves, and the psychology that affects those moves, coupled with the complex financial variables, makes the process of trying to determine the short-term direction of markets a very tricky game of chance, and one that can be immensely costly.
Predicting short-term market movements (Market Timing) will cost you money or opportunities
Any attempts to try to predict the direction of the stock market are called market timing. Academicians and professionals as a group agree that it cannot be done; in fact, it will cost you money or opportunities.
Fear, greed, and a basic human desire to think we can know or control our future all drive us to try to predict short-term market movements.
If you flip a coin ten times and it comes up heads ten times, that is random luck, not a 'system'. We know that over time it will be 50-50, heads and tails. Many who guess which way the market will move and guess correctly think they have a system and really can do it. Yet if you guess correctly and try to time the market a number of times in succession, it most likely that you will guess wrong at some point and more than wipe out your prior gains and be well behind (see the Long-Term Capital Management story). This is also evident from reading academic studies on the subject and from observing what has happened in the markets over the decades.
Therefore, avoid timing the market. How then to resist the temptations posed by events or rapid market moves?
First, and most important, is to have buy and sell disciplines, and right after that, a proper time horizon. Emotions are an important step, for as soon as you feel the pull of fear in a down market or a down stock, you know that you do not have enough knowledge to know what to do. Knowledge, disciplines, and your buy and sell disciplines can be called upon to resist emotion-driven timing.
Computers and sophisticated software programs for determining weather changes or changes in the direction of the stock market have been developed and refined over the last two decades. But computer software cannot properly account for all of the linked factors that influences weather changes or market changes.
Fear, greed, and a basic human desire to think we can know or control our future all drive us to try to predict short-term market movements.
If you flip a coin ten times and it comes up heads ten times, that is random luck, not a 'system'. We know that over time it will be 50-50, heads and tails. Many who guess which way the market will move and guess correctly think they have a system and really can do it. Yet if you guess correctly and try to time the market a number of times in succession, it most likely that you will guess wrong at some point and more than wipe out your prior gains and be well behind (see the Long-Term Capital Management story). This is also evident from reading academic studies on the subject and from observing what has happened in the markets over the decades.
Therefore, avoid timing the market. How then to resist the temptations posed by events or rapid market moves?
First, and most important, is to have buy and sell disciplines, and right after that, a proper time horizon. Emotions are an important step, for as soon as you feel the pull of fear in a down market or a down stock, you know that you do not have enough knowledge to know what to do. Knowledge, disciplines, and your buy and sell disciplines can be called upon to resist emotion-driven timing.
Computers and sophisticated software programs for determining weather changes or changes in the direction of the stock market have been developed and refined over the last two decades. But computer software cannot properly account for all of the linked factors that influences weather changes or market changes.
Buffett sticks to his investment principles.
Warren Buffett is one of the greatest investor of all time. What lifts him above his peers is a determination to stick to his investment principles. Buffett has steadfastly refused to jump on any bandwagon. Unlike so many other investors who are nursing burnt fingers, Buffett let the dot-com train roll on by. Famously, he refuses to invest in businesses that he doesn't understand - which includes most high-tech companies. Instead Buffett made a fortune for himself and his shareholders by investing in undervalued companies for the long-term. It's Buffett's willingness to buck the trend that makes him worthy of his 'Sage of Omaha" tag.
Wednesday, 10 June 2009
Coastal
Company Basics
Exchange Bursa Malaysia
Company Name Coastal Contracts
Stock Code 5071
Sectors
Paid Up Capital * MYR 70.56
Par Value - (as at 2008-12-31)
Market Cap * MYR 682.30 (based on value of 1.9300 per share)
Recent 52 wk low: Price 0.79 a share (Market cap MYR 279.3m)
Exchange Bursa Malaysia
Company Name Coastal Contracts
Stock Code 5071
Sectors
Paid Up Capital * MYR 70.56
Par Value - (as at 2008-12-31)
Market Cap * MYR 682.30 (based on value of 1.9300 per share)
Recent 52 wk low: Price 0.79 a share (Market cap MYR 279.3m)
Performance (as at 2008-12-31) *
Total Assets: MYR 862.32
Intangible Assets: MYR 5.88
Revenue: MYR 348.06
Earnings Before Interest and Taxes: MYR 98.10
EPS (Basic) Inc. Extraordinary Items: MYR 0.28
PE Inc. Extraordinary Items: 7.02
EPS (Basic) Exc. Extraordinary Items: MYR 0.28
PE Exc. Extraordinary Items: 7.02
Net Income: MYR 96.77
Dividends - Common/Ordinary: MYR 8.47
Dividends - Total: MYR 8.47
Goodwill: MYR 5.88
Minority Interest: -
Reserves: -
Return On Assets: 11.22%
Return On Equity: 31.42%
Shareholder's Equity: MYR 307.97
----
2008...2007...2006
Assets
862.32...546.42...292.72
Liabilities
554.35...331.76...143.22
ROA
11.22%...12.69%...11.69%
ROE
31.42%...32.29%...22.89%
EPS
0.28...0.20...0.10
PE
7.02...9.65...18.85
Net Income Margin (%)
27.80...23.76...21.48
Operating Margin (%)
-
EBITD Margin (%)
30.29...25.51...25.83
Income Statement
Revenue - Total
348.06...291.76...159.29
Gross Profit (Loss)
-
Operating Income After Depreciation
98.10...69.44...35.75
Net Income (Loss) - Consolidated
96.77...69.32...34.22
Total Assets: MYR 862.32
Intangible Assets: MYR 5.88
Revenue: MYR 348.06
Earnings Before Interest and Taxes: MYR 98.10
EPS (Basic) Inc. Extraordinary Items: MYR 0.28
PE Inc. Extraordinary Items: 7.02
EPS (Basic) Exc. Extraordinary Items: MYR 0.28
PE Exc. Extraordinary Items: 7.02
Net Income: MYR 96.77
Dividends - Common/Ordinary: MYR 8.47
Dividends - Total: MYR 8.47
Goodwill: MYR 5.88
Minority Interest: -
Reserves: -
Return On Assets: 11.22%
Return On Equity: 31.42%
Shareholder's Equity: MYR 307.97
----
2008...2007...2006
Assets
862.32...546.42...292.72
Liabilities
554.35...331.76...143.22
ROA
11.22%...12.69%...11.69%
ROE
31.42%...32.29%...22.89%
EPS
0.28...0.20...0.10
PE
7.02...9.65...18.85
Net Income Margin (%)
27.80...23.76...21.48
Operating Margin (%)
-
EBITD Margin (%)
30.29...25.51...25.83
Income Statement
Revenue - Total
348.06...291.76...159.29
Gross Profit (Loss)
-
Operating Income After Depreciation
98.10...69.44...35.75
Net Income (Loss) - Consolidated
96.77...69.32...34.22
----
Recent 52 wk low: Price 0.79 a share (Market cap MYR 279.3m)
You could have bought the whole company for 279.3 million and earned 98.10 million for the year 2008! (PE of 2.82, P/B of 0.9). Yes, there remains the concern over its book orders in 2010 or the short run. However, over the long run, Coastal should do alright when the O&G sector improves. Its business and fundamentals have been good and at that very low price 0f MYR 0.79 a share, was probably a good investment: there is safety of capital with a potential for a positive reasonable return.
What led to the steep drop from MYR 2.38 to MYR 0.79? The severe economic depression, the Lehman crash and the worries over the future earnings of Coastal had led to investors to sell down causing the steep fall in the price of this stock. On the other hand, what led to the recent steep rise in the price of this stock? The answer lies in understanding the fundamentals of the business of this company and the Mr. Market phenomenon espounded by Benjamin Graham.
----
Coastal share price continues to rise. It was sold down hugely during the last few months.
2008 was another record year for Coastal. It has achieved a 5 years compounded annual growth rate above 43%.
What of its prospects for the coming year? Here are some notes from its chairman in its annual report:
"We are determined to remain firm on fostering a strong balance sheet and sound credit rating."
"We will continue to, of which we did, augment our fleet by building and owning more sophisticated marine transportation vessels, including higher end OSV."
"We expect 10-15% reduction in global fuel exploration and production expenditure and hence the concomitant offshore services. In the short run, our performance will be backed by existing book order."
"....global oil moguls continue to move exploration into deeper sea ensured by higher demands for young and sophisticated OSV. Pressure are on ship owners to replace their fleet."
"Longer term, we believe the fundamentals for oil & gas services remain strong and the demand for OSV will gradually return."
"We expect 2009 to be another year of progress for the Group."
... sounds encouraging in this financial turmoil.
Padini
Business Summary
Padini Holdings Berhad, an investment holding company, engages in the distribution and retail of fashion wears and accessories in Malaysia and Hong Kong. It offers ladies shoes and accessories, ancillary products, children's garments, maternity wear, and accessories. The company distributes its products through approximately 170 freestanding stores and in-house outlets. It offers its products under the Padini, Padini Authentics, PDI, P&Co, Seed, and Miki brand names. The company was founded in 1971 as Hwayo Garments Manufacturers Company and changed its name to Home Stores Sdn Bhd in 1991. Further, it changed its name to Padini Holdings Sdn Bhd in 1992; and to Padini Holdings Berhad in 1995. The company is based in Shah Alam, Malaysia.
Company Basics
Exchange Bursa Malaysia
Company Name Padini Holdings Bhd
Stock Code 7052
Sectors Consumer Discretionary
Paid Up Capital * MYR 65.59
Par Value - (as at 2008-06-30)
Market Cap * MYR 327.64 (based on value of 2.4900 per share)
Performance (as at 2008-06-30) *
Total Assets: MYR 264.31
Intangible Assets: MYR 0.12
Revenue: MYR 383.31
Earnings Before Interest and Taxes: MYR 58.43
EPS (Basic) Inc. Extraordinary Items: MYR 0.32
PE Inc. Extraordinary Items: 7.85
EPS (Basic) Exc. Extraordinary Items: MYR 0.32
PE Exc. Extraordinary Items: 7.85
Net Income: MYR 41.72
Dividends - Common/Ordinary: -
Dividends - Total: -
Goodwill: -
Minority Interest: -
Reserves: -
Return On Assets: 15.78%
Return On Equity: 24.61%
Shareholder's Equity: MYR 169.48
----
Historical 5 Yr PE 6.2 to 10.5
Historical 10 Yr PE 8.0 to 14.8
Present PE based on 2.49 = 7.85
Earnings Yield = 12.7%
DY = (0.134/2.49)= 5.4%
ROTC
= 41.72/ (OE 206.737 + STL 37.607 + LTL 2.525)
= 16.9%
Between the end of 1999 and the end of 2008:
total earnings were $1.28 a share,
total dividends were $0.463 a share and
retained earnings were $ 0.817 per share to add to its equity base.
the company's per share earnings increased from $0.025 a share to $0.317, the difference was $0.292 a share.
return on retained capital/earnings RORC was 0.292/0.817 = 35.7%
Tuesday, 9 June 2009
How can you turn innovation into profitable growth?
How can you turn innovation into profitable growth?
There are 5 components to innovation:
Before discussing each, there are four factors to note.
1. All the factors are interrelated, although most people don't stop to realize that. You need to know all pieces tie together, because a breakdown in one can affect what happens thereafter. If you can improve the nurturing and launching of ideas, for example, you can improve their flow.
2. This is an observable process. You can observe and diagnose how well your organization deals with each component. You can rank your firm's ability to handle each function on a scale of one to ten. And you will also be able to observe how well your company, or business unit, handles the overall flow within each of these 5 components. The selection process should be transparent. Everyone should know the criteria that will decide whether the concept will be funded.
3. You can't pursue every idea, and not all ideas are created equal. After you have surfaced as many ideas as possible, pick the best ones to fund. Kill off the rest. There are criterias you use to make that decision.
4. Finally, these are 5 distinct steps to getting an idea into the marketplace. Each requires a unique set of skills.
There are 5 components to innovation:
- ideation
- selection
- nurturing,
- launch, and,
- killing failures early.
Before discussing each, there are four factors to note.
1. All the factors are interrelated, although most people don't stop to realize that. You need to know all pieces tie together, because a breakdown in one can affect what happens thereafter. If you can improve the nurturing and launching of ideas, for example, you can improve their flow.
2. This is an observable process. You can observe and diagnose how well your organization deals with each component. You can rank your firm's ability to handle each function on a scale of one to ten. And you will also be able to observe how well your company, or business unit, handles the overall flow within each of these 5 components. The selection process should be transparent. Everyone should know the criteria that will decide whether the concept will be funded.
3. You can't pursue every idea, and not all ideas are created equal. After you have surfaced as many ideas as possible, pick the best ones to fund. Kill off the rest. There are criterias you use to make that decision.
4. Finally, these are 5 distinct steps to getting an idea into the marketplace. Each requires a unique set of skills.
All revenue growth starts with an idea.
All revenue growth starts with an idea. The idea could be for a new product or a new service. Or it can be an addition to a product or a service that already exists. Or it can be an idea that begins as almost idle speculation - "I wonder what would happen if...."
Employees, from the rawest recruits to crusty veterans of the business, have ideas, and many of them have the potential to help the enterprise. The leadership challenge is to have a social process that helps draw them out. After all, those ideas don't do your company any good if people won't voice them.
The social engine can help, of course. The interactions among the various departments - marketing and R&D, for example, or customer services and sales - will spark more ideas worth pursuing.
Your organization doesn't need to wait for the proverbial light-bulb to go on in order to come up with new ideas. Innovation can be operationalized. You can develop a process that you can follow to surface ideas and then, develop as many growth ideas as possible.
Unlike cost-cutting, growing revenues requires innovation. Many people think only geniuses can innovate. And, indeed, genius is always welcom. However, innovation is a social process and everyone can participate. Once the process is firmly integrated into the way the company does business every day, you will find more and more geniuses coming out of the woodwork.
Silicon Valley is filled with geniuses. But if you look at the successful entrepreneurs who work there, you will discover a curious thing. The vast majority of them worked - often for a long time - at established firms before going off on their own. Part of the attraction, of course, in starting their own companies was the freedom and equity ownership that come along as part of the deal. But another reason for leaving had to do with the fact that their old companies just could not accommodate them and what they wanted to do. Had their former employers handled the social innovation process better, a certain percentage of those entrepreneurs would have stayed and probably contributed in a big way to the growth of their former company.
How can you turn innovation into profitable growth?
Employees, from the rawest recruits to crusty veterans of the business, have ideas, and many of them have the potential to help the enterprise. The leadership challenge is to have a social process that helps draw them out. After all, those ideas don't do your company any good if people won't voice them.
The social engine can help, of course. The interactions among the various departments - marketing and R&D, for example, or customer services and sales - will spark more ideas worth pursuing.
Your organization doesn't need to wait for the proverbial light-bulb to go on in order to come up with new ideas. Innovation can be operationalized. You can develop a process that you can follow to surface ideas and then, develop as many growth ideas as possible.
Unlike cost-cutting, growing revenues requires innovation. Many people think only geniuses can innovate. And, indeed, genius is always welcom. However, innovation is a social process and everyone can participate. Once the process is firmly integrated into the way the company does business every day, you will find more and more geniuses coming out of the woodwork.
Silicon Valley is filled with geniuses. But if you look at the successful entrepreneurs who work there, you will discover a curious thing. The vast majority of them worked - often for a long time - at established firms before going off on their own. Part of the attraction, of course, in starting their own companies was the freedom and equity ownership that come along as part of the deal. But another reason for leaving had to do with the fact that their old companies just could not accommodate them and what they wanted to do. Had their former employers handled the social innovation process better, a certain percentage of those entrepreneurs would have stayed and probably contributed in a big way to the growth of their former company.
How can you turn innovation into profitable growth?
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