How to invest in a bear market

How to invest in a bear market
The FTSE All Share Index lost 29pc in 12 months and there is more pain in store.

By David Stevenson, manager of the Ignis Cartesian UK Opportunities Fund
Published: 10:32PM BST 15 Jun 2009

UK equity investors have had a torrid time of it in the last year. The FTSE All Share Index lost 29pc in the 12 months to the end of March and there is more pain in store. Recent stock market rallies should be taken for what they were, short-term technical bounces rather than the market bottoming on improved fundamentals.

That said, for investors who are able to stomach the volatility and take a longer term view, there are positives. The UK stock market is at one of its lowest points in the last ten years.


In the coming 12 to 18 months, it is likely to fall further taking valuations to levels of 'cheapness' that only present themselves once or twice in a lifetime. Making the most of these opportunities, however, requires a suitable investment approach and there are key considerations for investors in a bear market.

Companies are under considerable pressure and investors need to look in detail at what they are potentially buying into.

This requires careful balance sheet analysis as heavily indebted businesses may not survive the coming years. This may seem extreme but is a reality of economic cyclicality. Companies with low or sustainable levels of borrowing, and which therefore have a degree of control over their future, are relatively attractive, especially when combined with a secure dividend yield.

Earnings provide a barometer of corporate health and are under pressure across the market. Investors can, however, mitigate that risk by targeting certain types of companies.

Defendable earnings are important and are typically generated by companies with big franchises, large market shares and leverage over competitors or suppliers, allowing them to eke out more market share or a better margin. Thinking big is generally a sensible approach.

Big brands have a footprint that will allow them to survive through a difficult environment. Companies like Vodafone, Centrica and Unilever are all likely to outperform, operating in areas where spending remains necessary. Food retailers and pharmaceutical companies are also attractive.

Investors should also focus on sectors that offer predictable growth, rather than those dependent on support from the economic cycle.

Secular trends currently include the long-term growth of outsourcing, both in the public and private sector, and the maintenance and operation of critical infrastructure, such as utility and telecommunication networks and transport links. Both of these should offer resilience in a downturn and will benefit if the government's stimulus plans come to fruition.

It pays for investors to be sceptical in all market conditions but particularly during a downturn. It is important to think independently and not be fooled by consensus views.

Fundamental analysis of balance sheets and earnings will give a clearer picture of companies' future prospects. This then allows a portfolio to be built 'bottom-up' without necessitating a 'top-down' view on overarching macroeconomic, consensus or benchmark themes.

For investors seeking exposure to the market via mutual funds it is important to analyse the investment approach of fund managers. There is a temptation for managers to alter their process when short-term performance numbers disappoint, as can happen in volatile markets.

This, however, tends to be detrimental. Proper analysis of a manager's track record is therefore important, paying particular attention to longevity, consistency of approach and performance during previous downturns.

Certain managers are suited to a rising market, others, typically those able to best identify potential balance sheet holes and signs of earnings weakness, fare better when business models come under increased pressure, as is currently the case.

Another point to consider is the level and type of trading in a fund. Fund managers are generally not good short-term traders. Investment views need to be made on at least a one year basis, and a bear market does not change that.

A sharp pickup in turnover within a portfolio may indicate panic trades or a fundamental shift in strategy. In a bear market the number of attractive stock ideas tends to fall.

This may justify holding a more concentrated portfolio, and then adding new positions when opportunities arise. The important point is to make sure a fund manager is not holding low conviction stocks for the sake of diversification.

Finally, it will pay to be patient. The UK stock market will recover, but not overnight. At the moment market conditions remain challenging and it would be foolish to invest expecting the market to bounce back straightaway.

Equities tend to move before economic data picks up but with the current levels of volatility it is prudent to wait for clear signs that leading indicators are improving and government stimulus packages have laid solid foundations for growth.

This is likely to be some way off but by reinforcing a portfolio based on the points above, and taking advantage of increasingly attractive valuations, long-term investment opportunities in the UK can be exploited.

http://www.telegraph.co.uk/finance/personalfinance/investing/5545094/How-to-invest-in-a-bear-market.html

'Money in the bank? You're better off having it under the pillow and hoping for the tooth fairy'

Michel Roux: 'Money in the bank? You're better off having it under the pillow and hoping for the tooth fairy'
Fame & fortune: Michel Roux Jr, 49, is chef patron at the internationally famous Le Gavroche, the restaurant his father Albert and uncle Michel made the first British eatery ever to win three Michelin stars. Michel Jr lives with his wife Giselle, 52, and daughter Emily in Clapham.

By Mark Anstead
Published: 3:05PM BST 17 Jun 2009

Michel Roux: 'Banking has become terribly impersonal' Photo: ROGER TAYLOR
How did your childhood experience influence your attitude to money?
We didn't have much money – my father and mother had only just arrived on these shores from France. He became private chef to the Queen Mother's horse trainers and we lived in Kent, near Pembury.

We were surrounded by opulence, but we led a simple country life in a small pink cottage. As a child it seemed large but I have since been back to see it and it was only tiny. We grew our own vegetables and reared rabbits and pigeons, which my father slaughtered to eat.


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Cornwall: Take the plunge into toddler nirvanaAre you cautious with money or liberal?
I am very cautious – throughout my childhood I was taught not to squander anything. To this day I like to recycle and use every last morsel in the kitchen, putting everything to use. For example, I never throw away potato peelings – you can fry them up and they make good French fries for staff lunch. And orange peelings can be made into petit fours – simply cook the peel in sugar.

There are some chefs who are brilliant at cooking, but when it comes to controlling their costs they are absolutely useless. That's why we've been seeing a lot of good chefs closing their doors because they cannot make ends meet.

Part of making ends meet is avoiding waste – I buy top quality meat on the bone so I can cut it myself instead of using a butcher because I believe I can get more from it myself. I use lamb trimmings for individual shepherd's pies, for example, and the bones to make my own stock or soup. Nothing should go in the bin.

Now that you are better off, are you happier?
I don't think so because I have some fantastically fond memories of my childhood sitting in the countryside with Mum and Dad. As soon as we moved to London my father worked every hour under the sun at Le Gavroche and I hardly ever saw him, so I realised then that being better off has its downsides.

Are you good with money or irresponsible?
I save religiously into a pension pot and I have money put aside for a rainy day. Is that being good?

How much have you been contributing to your pension?
I've been putting away more than 10pc of what I earn for the last 25 years and I tell all my staff to do the same. Many of them say they are too young to worry about it, but I tell them they are never too young. It doesn't matter what people say about how badly pension funds have performed – a stock market crash is only bad news if you need to take your money out now. They won't need it for another 30 years and it will be worth a lot more then.

But aren't you disappointed at the poor performance of your own pension funds?
Yes I'm disappointed, but I've got quite a few more years of my working life left for it all to turn around. I'm more disappointed that the Government has been tinkering with tax relief on pensions – they should keep the incentives for people to put money away because for too long we have been acting as if tomorrow will never come, and that's part of the reason for our crisis.

How do you prefer to pay for things – by cash, card or cheque?
Credit card, which I prefer to debit card because then I can earn points and air miles. I'm with NatWest Private Banking and am fairly happy with them, but not with their MasterCard division.

I went over my limit two years ago by £1.20 when purchasing three business class tickets to fly to South Africa. Bear in mind I been with NatWest since I was 16 and I have never been over my £15,000 limit before, but they sent me a very nasty letter saying I would be charged £20.

I phoned and told them I wanted the fee waived and that they should increase my limit because my wife had a higher ceiling and she isn't even working. I wanted an apology for the letter, but I didn't get one – I just got a very curt phone call saying they would waive the £20 but wouldn't increase my limit.

This is an example of how banking has become terribly impersonal. I switched to a Visa with another bank, who happily gave me a higher limit, but I kept my card open with NatWest waiting for an apology. You'd think they'd care that they have now lost between £4,000 and £5,000 spending each month from me.

How do you tip? Are you an easy tipper or do they have to work hard with you?
I always tip and I tip generously if I feel people have done a good job. I believe in tipping wholeheartedly. We pay our staff the going rate and our service charge is a voluntary extra.

Staff don't have to pay on tips, but the Government is trying to close this loophole by saying a discretionary service charge cannot go towards the minimum wage. The only winner out of changing the law will be the Government – the restaurateur will have to pay National Insurance and so will the employee.

Ultimately the customer will be footing the bill and everyone loses except the Inland Revenue.

Does talking about money embarrass you?
I feel I deserve my salary so I am happy to talk about what I earn with friends if they ask me. I don't want to say how much exactly in this interview, but I'll admit I will be affected by the new rate of income tax when it comes in in October.

How do you separate responsibility for finance with Giselle?
We have one joint account and separate bank accounts as well. There's no particular reason – it's just how it happened. I pay for the holidays and other big stuff and Giselle looks after all the shopping. She runs a very tight ship and never squanders money – she's not afraid to shop in cheaper outlets and gets great pleasure in finding bargains.

What has been your best buy?
My house in France. It's a beautiful five-bedroom old stone house that cost me €700,000 four years ago when the euro was at 1.55. When the euro reached parity I realised I'd made a massive saving.

Worst buy?
A white leather jacket I bought in the Asprey in Bond Street a few years ago for £500. It had a lovely purple lining and fitted me particularly well, but I've never had occasion to wear it.

What's been your greatest extravagance?
I have just bought a 1959 bottle of Chateau d'Yquem for £800. It's my birthday present for next year. I also tend to buy business class on long-haul flights, but I'm happy to fly Ryanair and easyJet as well for short trips.

How much did your home cost when you bought it?
I bought my three-bedroom flat in Clapham in 1989 for £120,000. I think the value must be not far off six times that now.

Have you ever invested in shares?
I have a little portfolio of shares and unit trusts and Isas. It's a managed fund – I sat down with my advisers to work out if I was a cautious or risky investor and now they make their own decisions from there.

Do you use high-interest savings accounts?
What's the point of having money in the bank? You're better off having it under the pillow and hoping for the tooth fairy. I took money out when the bank crisis started and used it to pay off some of my mortgage. I still have some money in deposit accounts because there is nowhere else to put it, but I am now almost completely mortgage free. I had a fairly good mortgage deal anyway – I was paying 4.25pc – but now I'm saving having to pay that, which is a lot better than getting just 1pc.

Do you bank online?
No I don't. I can just about switch computers on – my wife handles our emails.

How are you coping with the recession in your restaurant?
It is obviously having an effect. People are spending a bit less money, but we are doing very well. When times are hard I think people want brands they can rely upon and I believe that Le Gavroche falls into that category.

Join Michel Roux and other top chefs at the Taste Festival in Regents Park June 18-21, www.tastefestivals.com/london





http://www.telegraph.co.uk/finance/personalfinance/fameandfortune/5559650/Michel-Roux-Money-in-the-bank-Youre-better-off-having-it-under-the-pillow-and-hoping-for-the-tooth-fairy.html

How the rich are different – and becoming more so

Comment: How the rich are different – and becoming more so


It falls to Nick Carraway in F Scott Fitzgerald's novel The Great Gatsby to observe: "The rich are different from you and me." To which the sensible reply must surely be: "Yes, they have more money."

By Ian Cowie
Published: 11:55AM BST 02 Jul 2009

Another, more topical, difference is that there are far fewer of them than there were a year ago. Given the scale of the credit crisis, perhaps that is one of the less surprising conclusions of the 2009 World Wealth Report issued last week by Merrill Lynch and Capgemini.

But what caught my eye was the marked change in the geographical location of these lucky plutocrats. Far fewer of them are British. For the first time, the number of millionaires in China has overtaken those in Britain.

Merrill Lynch Global Wealth Management, an arm of America's biggest stockbroker, and Capgemini, the global consulting services firm, disdain to use such a vulgar word as "rich". Instead, they prefer to count "high net worth individuals", by which they mean people with more than $1m (£615,000) of "investable assets" – that is, excluding the value of their home.

Whatever you call them, there were 491,000 of these millionaires in Britain the last time Merrill counted them but only 362,000 this year. China also felt the credit crunch – but less so – with its headcount of millionaires falling from 413,000 to 364,000.

It would be wrong to make too much of such a marginal difference, although it does dislodge Britain from its long established place as the fourth richest country in the world on the Merrill Lynch measure. America, Japan and Germany still account for 54pc of all millionaires but how long will it be before China overtakes those in third and second positions?

This largely overlooked report may remind unit and investment trust investors who are keen to gain exposure to economies that are growing rather than shrinking that the sun sets in the west but rises in the east.



http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/5682336/Comment-How-the-rich-are-different---and-becoming-more-so.html

Long-term interest rates on course to double

US lurching towards 'debt explosion' with long-term interest rates on course to double

The US economy is lurching towards crisis with long-term interest rates on course to double, crippling the country’s ability to pay its debts and potentially plunging it into another recession, according to a study by the US’s own central bank

By Philip Aldrick, Banking Editor
Published: 5:44AM BST 06 Jul 2009

Comments 270 Comment on this article

Next Tim Geithner, the US Treasury Secretary, has faced searching question about the growing US Budget deficit
Alan Greenspan, the former chairman of the Federal Reserve, is blamed by many for keeping interest rates too low for too long
Wen Jiabao, the Chinese premier, has expressed his concern over the scale of the US deficit
The deficit is just one of the financial headaches confronting US President Obama, pictured here at the G20 Summit
The US budget deficit is expected to reach about 12pc of the country's gross domestic product this year
George Soros, the billionaire investor, has been among those to express concern about the size of the US deficit and those of other economies
Federal Reserve chairman Ben Bernanke, pictured here with Tim Geither, has acknowledged that the mountain of US debt needs to be reined in
Politicians around the world have said that the bigger deficits are a necessary consequence of keeping a global depression at bay
Bank of England Governor Mervyn King, pictured on the right, has given explicit warnings to Alistair Darling, the Chancellor, to cut the deficit
UK Prime Minister Gordon Brown is arguing that more Government spending will prop up the economy and help cut the deficit


In a 2003 paper, Thomas Laubach, the US Federal Reserve’s senior economist, calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt. Applying his assumptions to the recent spike in the US fiscal deficit and national debt, long-term interests rates will double from their current 3.5pc.

The impact would be devastating by making it punitively expensive to finance national borrowings and leading to what Tim Congdon, founder of Lombard Street Research, called a “debt explosion”. Mr Laubach’s study has implications for the UK, too, as public debt is soaring. A US crisis would have implications for the rest of the world, in any case.

Using historical examples for his paper, New Evidence on the Interest Rate Effects of Budget Deficits and Debt, Mr Laubach came to the conclusion that “a percentage point increase in the projected deficit-to-GDP ratio raises the 10-year bond rate expected to prevail five years into the future by 20 to 40 basis points, a typical estimate is about 25 basis points”.

The US deficit has blown out from 3pc to 13.5pc in the past year but long-term rates are largely unchanged. Assuming Mr Laubach’s “typical estimate”, long-term rates have to climb 2.5 percentage points.

He added: “Similarly, a percentage point increase in the projected debt-to-GDP ratio raises future interest rates by about 4 to 5 basis points.” Economists are predicting a wide range of ratios but Mr Congdon said it was “not unreasonable” to assume debt doubling to 140pc. At that level, Mr Laubach’s calculations would see long-term rates rise by 3.5 percentage points.

The study is damning because Mr Laubach was the Fed’s economist at the time, going on to become its senior economist between 2005 and 2008, when he stepped down. As a result, the doubling in rates is the US central bank’s own prediction.

Mr Congdon said the study illustrated the “horrifying” consequences for leading western economies of bailing out their banks and attempting to stimulate markets by cutting taxes and boosting public spending. He said the markets had failed to digest fully the scale of fiscal largesse and said “current gilt yields [public debt] are extraordinary low given the size of deficits”.

Should the cost of raising or refinancing public debt in the markets double, “the debt could just explode”, he said, adding that it would come to a head in “five to 10 years”.



http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5754447/US-lurching-towards-debt-explosion-with-long-term-interest-rates-on-course-to-double.html

Time for Buffett to answer some tough questions

Time for Buffett to answer some tough questions
Berkshire Hathaway shareholders are heading for the "Woodstock for capitalists" – the company's annual gathering in Omaha. Warren Buffett, the Berkshire boss, has changed the format to encourage more questions about the business. Investors should take him up on that.

By Richard Beales
Published: 6:20PM BST 01 May 2009

The legendary investor is 78 and his long-time sidekick, Charlie Munger, is 85. With his track record and public profile, Buffett is the epitome of the corporate "key man", as Fitch Ratings pointed out in knocking Berkshire's triple-A rating down a notch in March. He has, he says, chosen his successors. While their identities are undisclosed, it's a safe bet they know what they are doing. But the culture that brings 30,000-odd shareholders to Omaha every year will unavoidably change.

Another important Buffett decision of late has been to expose Berkshire to big derivatives bets – $67bn of potential exposure at the end of 2008. This is in spite of once calling such instruments "financial weapons of mass destruction".

Buffett recognises the apparent double standard, and brings to derivatives much of the common sense he applies to other investments. The contracts he has written, so far, are relatively straightforward and he has limited expected losses to an amount Berkshire could easily handle.

Berkshire shares have lost a third of their value in the past year. It is suddenly looking like what it is – a largely unhedged equity investment vehicle with a focus on the financial sector.

Its giant insurance businesses don't look so special at the moment. Large stakes in American Express, Wells Fargo and rating agency Moody's underline the finance focus. Along with the succession question, that may help to explain why Berkshire's shares appear to be trading at a discount to the market value of its holdings.

But another development should generate optimism among the Berkshire faithful: opportunities to invest on the cheap ought now to be plentiful. Buffett picked up some good deals last year, Berkshire still has strong credit and plenty of cash – and the Sage is still around.

After years in which few bargains were available and Berkshire's size made meaningful deals hard to come by, he has the chance to redeem himself.




http://www.telegraph.co.uk/finance/breakingviewscom/5258851/Time-for-Buffett-to-answer-some-tough-questions.html

How to invest like Warren Buffett

How to invest like Warren Buffett
The author's book on Warren Buffett, "The Midas Touch", summarises the favourite investing principles of the "Sage of Omaha".

By John Train
Published: 11:26AM BST 01 Jul 2009

Comments 12 Comment on this article

Fanatical: offered a glass of good wine at a dinner, Warren Buffett said: 'Just hand me the money' Photo: AFP/GETTY

My book on Warren Buffett, "The Midas Touch", has just been published in Britain. It contains most of his favourite investing principles. Although time has passed since its original appearance, his ideas today are much the same.

Here is a handful of the central ones. They aren't easy: this is a competitive game.

1. The key to investing is found in this rule: buy a share as though you were buying the whole company.

To do that, you have to know what the enterprise is worth. Therefore, the investor should live in the world of companies, never of mathematical formulae.

In the latest annual meeting of Berkshire Hathaway, Buffett's company, his partner Charles Munger put it this way: "The worst decisions are often made with the most formal projections. They look so professional that you begin to believe the numbers are reality.

"You are taken in by the false precision. Business schools teach this stuff because they have to teach something."

2. A recent heresy is that market volatility equals risk. Quite the contrary!

For a serious investor, volatility creates opportunity. To use my own language, investment opportunity consists of the difference between reality and perception. High volatility increases that difference, and thus increases opportunity for the knowledgeable investor.

Mr Buffett says sardonically that he favours the dotty "efficient market theory" because it creates more opportunities for him.

3. As to growth versus value, Mr Buffett observes that "value" should include projected growth, notably "growth at a reasonable price" or Garp.

He looks for companies with a business "moat" around them that should have steady, reasonably predictable growth.

Perhaps a better phraseology for the growth versus value dichotomy might be "high growth" versus "bargain hunting". The analytical techniques, and investor temperaments, in the two approaches are quite different. One calls for a futurologist, the other for an accountant.

That said, for a taxpaying investor long-term growth is more convenient and more tax-efficient than seeking one bargain after another.

4. High technology, most emerging markets, leveraged buyouts, real estate and other hard to appraise exotica might as well not exist for Mr Buffett.

He follows the safest approach: stick to what you know best. However, many approaches are valid. Your advantage will be the extent to which your knowledge of a valid situation exceeds the market's.

It makes little difference how broad your knowledge is. One correct investment decision is as valuable as another. Mr Buffett says that one should only seek a handful of really big ideas in one's investing career. The key is to be right when you do decide, not to flutter about spreading yourself thin.

5. Investing in bad industries, or turnarounds, usually doesn't work.

A skilled surgeon can excise a tumour but to revive a moribund patient requires a magician. The princess hopes that when she kisses the toad a beautiful prince will spring up. In fact, alas, she will probably end up awash in toads.

6. Businesses that generate cash that they can reinvest at high rates of return over long periods are particularly attractive holdings.

Low-margin businesses that periodically call for more cash from their investors, which they can only invest at a modest rate of return, are a dismal affair. Differently put, if all else is the same, feel free to marry an heiress rather than a pauper.

7. Don't sell a great stock just because it has doubled.

It could be better value afterwards than it was before. The greatest stocks may go up 20 or even 100 times in a generation or two.

Peter Lynch, who built up Fidelity's Magellan fund, points out that the deluded policy of "rebalancing" more or less automatically because a stock has risen is a lot like pulling out the flowers in the garden and watering the weeds. Don't do it!

8. A grave corporate folly is offering your own underpriced stock for the fully valued stock of an acquisition candidate.

In that scenario, instead of paying 50p for £1 of value, you are paying £1 for 50p of value. Lunacy! Still, such situations are often generated by the megalomania of chief executives.

9. Avoid long-term bonds.

"We are bound to have inflation, given current policies. There are a lot of incentives for politicians in all countries to inflate their currencies," Mr Buffett says.

10. To do superlatively well, an investor, like a company manager, must be a fanatic.

By relentless concentration, Mr Buffett has moved billions of dollars from other people's pockets into his own. Alas, he doesn't enjoy what money can buy. He's a miser.

Once, offered a glass of good wine at a dinner, he said: "Just hand me the money." So, it may be helpful in business terms to be that focused, but not necessarily in human terms.

Still, to preserve capital, which is difficult, one should understand the principles, and Mr Buffett's are all good ones.

"The Midas Touch" by John Train is published by Harriman House. Mr Train founded Train Smith Investment Counsel and he has written hundreds of columns for the Wall Street Journal, the New York Times and Forbes magazine. Apart from "The Midas Touch", his best-selling books include "The Craft of Investing", "The Money Masters" and "The New Money Masters".

http://www.telegraph.co.uk/finance/personalfinance/investing/5708407/How-to-invest-like-Warren-Buffett.html

"Even Buffett Isn't Perfect"

Sunday, July 20, 2008
Book Review-"Even Buffett Isn't Perfect"

I am a complete sucker for investment books. My wife accuses me of owning several thousand books that have essentially the same title, usually some variant of Value Investing, valuation, or intrinsic value, or securities analysis. Of course, I have every Buffett or Munger book known to man as well as everything about or by Benjamin Graham. By the way, speaking of Graham, my good friend Geoff Gannon is putting together a series which will review Securities Analysis chapter by chapter. For those who are serious value investing students, I suspect that you will enjoy Geoff's always thorough and thoughtful posts.

Vahan Janjigian, a fellow CFA, is executive director of Forbes Investment Advisory Institute and publishes a number of newsletters with Forbes. He also has a blog and serves on the investment committee of a large RIA.

Dr. Janjigian's book gingerly attempts to criticize some of Buffett's mistaken investments and controversial points of view. I think the book is more successful with the latter than the former.

Janjigian admires Buffett's discipline and capital allocation methodologies. He admires Buffett's ability to manage executive talent. His last sentence in the book summarizes his viewpoint,"Based on the evidence, it is certainly fair to conclude that WB is one of the greatest investors-if not the greatest investor-of all time."

So where are Buffett's mistakes? Janjigian criticizes Buffett's views on taxation, especially those on estate taxes. I agree with Janjigian that there is an irony if not an artificiality or phoniness about urging the continuity of high estate taxes and concomitantly avoiding the situation through setting up trusts and foundations Evidence of avoiding income taxes is evident throughout Berkshire's life...the company and Buffett have always used the IRS Tax Code to their advantage. There is clearly nothing wrong with that but similarly. it is somewhat disingenuous to urge higher taxes after a career of avoiding them.

Like any investor, Buffett has made some mistakes. This is not a game of perfect, but rather one where investors should attempt to understand the downside risks in making an investment. The outcomes can be highly uncertain...the future always is hazy and usually, initial assumptions are plain wrong, either on the optimistic or the pessimistic side of expectations.

Janjigian addresses the Buffett diversification versus concentration question. "Buffett believes that if you can't invest enough money to have some say in how the company's capital is to be deployed, you are better off diversifying your portfolio." This is simply not true. Most Buffetteers and wannabes certainly attempt to focus their portfolios. WB does not say not to diversify...in fact, for the average investor who is not inclined to do sufficient due diligence, diversification is a salvation. For many professional portfolios, the great bulk of the portfolio is indexed. But in cases where one has specialized knowledge or skills, satellite investments outside the cord index are made and should add performance. Diversification is a protection against ignorance. If one is able to do due diligence, and select successful businesses at reasonable valuations, diversification will not serve you other than to reduce volatility and an unfortunate corollary, reduce returns.

VJ does a decent job in discussing attributes of diversification in a non-mathematical approach to statistical correlation. This is one of the strongest elements in this book.

Much of the rest of the book is in my view, completely obvious. "Buffett buys stocks cheap, not cheap stocks." "Successful investors must be able to distinguish between great companies and great stocks." VJ has an amazing grasp of the obvious and adds little insight into valuation of growth stocks. There are far better sources than this book for this element.

VJ addresses the fact that value works over the long run but growth or rather momentum can work over the short run. Buffett never trashes growth but views it as a partner in helping undervalued stocks recover when growth becomes temporarily disrupted. Other than Buffett's famous comments about lemmings, he has never discussed momentum investing per se, at least to my knowledge.

VJ makes some dangerous statements about PIPE stocks indicating that WB has been successful in buying special issue "Private Investment in Public Equity" holdings such as Salomon Brothers or US Air. True, these had special terms that a large buyer can extract but it is misleading to believe that what some brokers present as PIPEs will offer the average investor better returns. Most PIPE offerings are made in very small cap, highly risky businesses. VJ does suggest that the best access to such investments is through a hedge fund or through Berkie itself.

VJ makes the point that "Unless you have access to Buffett-like resources, it is better to think of yourself as a stock buyer than a business buyer." The argument that managements will rarely listen to outside advice is humbling for both institutional and retail investors. However, retail investors and small institutional investors can be very successful in motivating and organizing larger investors to add pressure to a board. The principle of thinking long term as an owner of a business rather than a punter of stocks is an important part of any real value investor's credo. I have known many managers who "played" stocks rather than owned businesses and who were looking for trends rather than valuation rationales for stocks. They are assuredly not value managers. I have had investee company managements who have indicated that I should just sell the stock if I didn't like what they are doing. Again, these are managements who just don't get "it." If the business has a strong moat that is not being defended, get rid of the management but hang onto the business. VJ's advice is ill-conceived at best in this topic.

Swinging for the fat pitch is WB's approach. WB does not suffer from analysis paralysis and VJ believes that some of WB's recent deals have had inadequate due diligence. Sometimes the obvious should not take very long!

WB readily admits to being "dead wrong." Salomon was a mistake that took an extraordinary amount of work to escape. Gen Re was much worse with poor judgment on WB's part re underwriting discipline and the derivatives book of GenRe securities. NetJets capital intensity does not seem to fit the usual Buffett textbook. Pier One had no moat. Mistkaes all. VJ actually misses the most egregious errors that I recall, namely Dexter Shoe which gave away 1.6% of BRK or about $3.5 Billion in value for what is now a tiny fragment of H.H. Brown Shoe Group, another BRK sub. Dexter, Buffett calls his worst mistake. VJ doesn't even address this. There have been others. WB was the largest investor in Handy and Harman, the silver processor and refiner. Unfortunately, it was also an auto parts supplier and metal bender. Buffett's endless fascination with silver attracted him to H&H. H&H ultimately merged into WHX, which went chapter 11 in 2003. Berky had escaped H&H many years before this ignominious end.

VJ dislikes WB's views about corporate governance. It is incorrect to say that Buffett opposes employee stock options. It was the accounting for them that he faulted as well as the low hurdles that most company's managements clear to get them. In many cases, the only requirement for managements to achieve is respiration, and there are even cases where compensation continues into the after-life! There is nothing misleading about WB issuing options in subsidiary companies with clear performance mandates versus his public statements about employee stock options issuance.

The composition of WB's board has been controversial in the past. No it certainly was not independent historically with Warren and Charlie, Susan and Howard Buffett; Malcolm Chace, Walter Scott were old business cronies; Ron Olson was a partner in Munger's old firm. But VJ missed the most obvious point, Buffett for most of the time that he was involved in BRK owned over half the stock. It was absolutely iron clad clear that management's interests were aligned with shareholders. Unlike most public corporations, management owned most of the stock. The role of the board is not to protect minority shareholder interests but rather to ensure that shareholders' interests are protected. This point is missed by VJ.

Bottom-line, if you are looking for advice to imitate WB's investment style, this is not the best source. If you are looking for a comprehensive list of WB's mistakes in judgment, this is incomplete. If you are looking for views on taxation contra to those of WB, read Steve Forbes rather than VJ's book.

The key takeaways after each chapter provide an excellent summary of each chapter. The final chapter, "Conclusion" successfully highlights the important points.

Dr. Janjigian has attempted to provide an antidote to the usual glorious heaping of praise that most Buffett books (and CNBC coverage) provide. The reality is that nobody walks on water (or parts the sea depending on your point of view.) Even great investors frankly screw up royally. But the incidence in the case of Buffett is remarkably low, the damage is a scratch or fender bender rather than a complete wreck. Should all of us be so fortunate, or disciplined!!

posted by Rick @ 6:52 PM 3 comments



http://valuediscipline.blogspot.com/2008/07/book-review-buffett-isn-perfect.html

The 15 Most Important Investing Blogs For New Investors or Traders

Saturday, January 05, 2008

The 15 Most Important Investing Blogs For New Investors or Traders

As I mentioned in my last post I had a good year and have done well in my first two years investing. While it may be luck I would like to think that at least part of my success the past two yeas is due to skill. Not my own of course but rather the skills I have appropriated from reading various blogs.

In what has become a semi-annual feature I like to recognize the blogs that I feel have contributed most to my education as an investor and trader. At the end of my first year I posted on the top five blogs I read my first year investing. I followed up with an another top five blogs for the first half of 2007.

To recap the first ten are:

1. Gannon On Investing
One of the few bloggers I would actually pay to read.

2. Nodoodahs Investing
Smartest blogger I read.

3. Capital Markets & Social Equity
Best all around site to learn about every aspect of investing.

4. Trader Mike
Short term, long term, chart analysis, book reviews, educational links, reviews of trading tools; you name it Mike seems to provide it.

5. Howard Lindzon: Trends - Find Them, Ride Them, and Get Off
Part Groucho Marx and J.P. Morgan, Howard Lindzon does a great job of discussing, with humor, the underlying businesses represented by stocks.

6. Traderfeed
Read this site and you just may unleash the inner power of your mind to increase market performance while at the same time controlling the destructive mental tendencies we all have that decrease investing performance.

7. Daily Options Report
Great resource for an investor or trader looking to utilize options as a means to enhance market performance.

8. Maoxian
Think of him as the Bo Jackson of blogging. Can do it all and do it well. Insightful market commentary on all time frames and every style of investing and trading.

9. Cheap Stocks
Perhaps the best blog to read on applying the teachings of Benjamin Graham.

10. Abnormal Returns
Provides a comprehensive review, with links, to some of the best investment and economic related posts on the Internet.


Adding to the above ten are the following five blogs that I have found worthwhile reading during the second half of 2007:

11. Chris Perruna's Successful Education Through Investing
Great site that mixes different styles of investing and trading. One of the best things about this blog is that the blog does a good job of explaining why and how to have buy and sell discipline in selecting stocks.

12. Fat Pitch Financials
Great resource for the new value investor looking to learn more about value investing and how it is practiced.

13. Covered Call Writer Blog
The blog is a trading journal of an individual who has a system for writing covered calls. The blog details that system as well as the trades made using the aforementioned system. Good starting point for those interested in options.

14. Reflections on Value Investing
Best site that provides links to the best articles, blog posts, and resources for the value investor.

15. Rising Dividend Investing
Solid site that provides worthwhile market insight from a professional money management firm.


While I read a lot of great blogs, the above fifteen are those that I feel have done the most to advance my understanding of investing and trading.


Posted by Steven at 1/05/2008 01:25:00 PM


http://valueblogreview.blogspot.com/2008/01/15-most-important-investing-blogs-for.html

Dividends Are Still the Linchpin

Thursday, May 14, 2009
Dividends Are Still the Linchpin

With all of the dividend cuts of the last 18 months, many pundits are sounding the death knell for the dividend. There are lots of reasons they give:

1. Companies can't afford them anymore
2. They complicate capital adequacy and flexibility
3. The capital they represent is too hard to raise
4. Obama tax hike will make them less attractive to investors

The arguments that dividends are a relic of the past or a fatality of the credit crunch are silly. The recession we are crawling through will not last forever, and when it ends, companies will once again reinstate most of the dividend cuts as soon as they are able.

The reason is simple: almost all of the companies that have cut their dividends by any significant amount have faced a hornet's nest of angry shareholders. In addition, it is hard to find a company whose price is higher after a dividend cut. Indeed, in most cases, if a company has cut its dividend, it has been hammered.

According to Bloomberg data, dividends are very much alive. Bloomberg shows that of the 500 stocks in the S&P Index, 362 currently pay a dividend. During the past twelve months,

• 94 companies reduced their dividends,
• 115 paid the same amount as last year, and
• 130 raised their dividends.

Thus, in a year when the headlines have been full of dividend cuts, there were actually more dividend hikes than cuts.

The median dividend hike for the 130 companies that raised their dividends during the year was about 6%. Importantly, the median total return of these companies outperformed the S&P Index by nearly 8%.

There are still many great companies that are quietly raising their dividends and in doing so, reconfirming their commitment to give back to their "owners" a fair cut of the profits.

As I have said before, the root of the word dividend is dividere, which means to cut or divide. Dividends are not a bonus or a gift; dividends are the shareholders' cut of the profits. Corporate managers who ignore this may find themselves looking for a new job.

The linchpin that best ties the interests of corporate America together with its shareholders is a consistent and intelligent dividend policy. Most shareholders understand that recessions mean lower earnings and dividends. But, in my judgement, the pundits are wrong if they assume that shareholders will be less interested in dividends after the recession than they were before. I think it will be just the opposite.

More on this topic (What's this?)
The Top 40 Dividend Stocks for 2009 book review (Dividend Growth Investor, 5/15/09)
Dividend Portfolios – concentrate or diversify? (Dividend Growth Investor, 6/17/09)
The Latest In Dividend Research (Disciplined Approach to Investing, 5/24/09)


http://risingdividendinvesting.blogspot.com/2009/05/dividends-are-still-linchpin.html

Ten Principles of Dividend Growth Investing

Thursday, July 02, 2009
Ten Principles of Dividend Growth Investing

Many people forward on to me articles on dividend investing. These articles cover the waterfront from writers opposed to dividends completely to those who believe companies should pay a stated amount of their earnings in dividends. I find that I agree with very few of the articles I see. In most cases, I find it is not a theoretical objection but a practical objection: I have tried it their way and found it didn't work for me.

Elsewhere in earlier blogs I explained how I first learned of the merits of dividend investing in the 1980s and how those early ideas have evolved over time. The following is a short list of the principles of dividend investing as practiced by Donaldson Capital Management.

1. Consistent Dividend Growth is the most important element of dividend investing.

2. Beware of high dividend yields where dividend payouts are in excess of :

• 60% for industrial companies,
• 70% for utilities, and
• 90% for REITs.

3. Beware of any company that pays out more in dividends than their free cash flows.

4. Look for companies where there is at least a 70% correlation between price growth and dividend growth over the long run.

5. Companies with consistent dividend growth permit valuation using regression models. These regression models can offer an investor an educated guess at the expected total return of a stock over a future period of time.

6. It is remarkable that many so-called cyclical companies with volatile earnings will have a much lower price volatility if they employ a normalized dividend approach, instead of a lumpy approach.

7. We are always on the prowl for dividend-paying companies that the market has rewarded with a high correlation between their dividend growth and their price growth and who have temporarily fallen out of favor.

8. For almost all companies, even the most highly predictable companies in our universe, changes in interest rates will affect relative valuation.

9. Consistent dividend growing stocks seldom get highly over or undervalued. They get overvalued when the band is playing, the birds are singing, and stocks are flying high. They get undervalued when the media is shouting duck and cover.

10. Watch carefully at dividend actions in good times and in bad. In good times, dividend growth should be less than earnings growth. In bad times dividend growth should be higher than earnings growth.

We are now enduring a time when the media is doing what they do best: broadcasting duck and cover stories. Save a copy of the most pessimistic article on the economy and stocks you can find. Set a note on your calendar to look at it in three years.

In three years, as the birds sing softly in the background, re-read today's duck and cover article. As you hear the band warming up in the background and the media are cautiously suggesting that things are looking up call me. Surprise me and ask me the following question: How much is Procter and Gamble overvalued?

We own Procter and Gamble.



More on this topic
(What's this?)
The Sweet Spot of Dividend Investing (Dividend Growth Investor, 5/26/09)
The Top 40 Dividend Stocks for 2009 book review (Dividend Growth Investor, 5/15/09)
6 Steps for High Yield Dividends (Investment U, 7/7/09)
Read more on Growth Investing, Dividend Investing, Dividends at Wikinvest

http://risingdividendinvesting.blogspot.com/

Year-to-date performance of major world indices (1H09)

Top 30 KLCI performing stocks (1H09)

Opportunity Cost and Opportunity Lost

A value investor's mind operates in a continuous buzz, deciding whether an investment is achieving its best possible returns or whether it should be replaced.

Value investors like cheap stocks, but if the stocks get cheap on an investor's watch, the investor should consider a serious reappraisal of a company's prospects.

Value investors continuously check for dead branches and aren't afraid to get out the pruning shears. Value investors know the cost of dead wood.

Likewise, the frugal citizens, value investors avoid squandering money that could be put to better use and always think of the best use for their capital. For Warren Buffett, a penny found on a sidewalk is "the start of the next billion."

Has Mr. ttb bought his Lampo-genie?

I am pretty sure that I spelt the name of this car incorrectly. Anyway, you can see where this discussion is heading.

You are a successful value investor achieving consistent 12%, 15% or greater returns, and you have the discipline and fortitude to hang on to investments. Now even successful value investors can have fun, right? They can splurge on a new car, a vacation, a really nice outdoor barbecue. But savvy value investors also know how much this costs in the long run.

Suppose that you're a modestly successful 12% value investor. You spend $1,000 on that new barbecue today. You can see that you could have had $3,106 in 10 years, $9,646 in 20 years, $29,960 in 30 years, and $93,051 in 40 years instead. Spend $30,000 on a new car today, and forgo $289,380 20 years from now, $898,800 in 30 years, and $2.8 million in 40 years, at 12%! And if you're a better investor (an investor normally capable of 12% returns or better), the "losses" grow faster! So, the better an investor you are, the more the "good things" in life may cost. Ironic, right?

It's always right and safer to be frugal.

Pruning the Dead Branches

It isn't hard to show what happens when you hang on to losers, or even the inferior "winners."

Click here:

Compared to market returns, an investor underperforming the market by 2% (or achieving an 8% return) falls:

• 17% behind a market performer after 10 years,
• 31% behind over 20 years, and
• 42% behind over 30 years.

An investor underperforming by 6% loses:

• 43% to the market-performing investor over 10 years,
• 67% over 20 years, and,
• 81% over 30 years.

That's quite a price to pay for underperformance.

Now, if your investments are producing negative returns, the results can be quite ugly indeed.

There's a lesson in these numbers: Don't hang on to chronic losers! Not only do you lose, but you also lose the out on opportunities to gain. If it's broke, fix it!

Opportunity Lost

The mathematical power of compounding makes a small increase in investing return, or i, very compelling. To increase the chances of achieving a higher i, buy cheap. Buy expensive, and you'll be lucky to match market returns.

Investors should know how beating the market with even slightly higher rates of return is a shorter path to wealth.

This is especially true if the investments are left on the table to perform, and perform consistently, over time.

What about investments achieving less than market average return?

What happens when you cling to these investments?

Are they like a bad marriage, not only producing inferior returns but also consuming valuable time that you could put to work elsewhere?

From an investment perspective, the answer is yes.

Quick Rules for Recognizing Value and Un-Value

This summarizes how to use PE and its "family of measures to recognize value and un-value in stocks and stock prices.

Many of these can be found in common stock screeners, so it's possible to use these factors not only for final valuation but also for stock selection.


Value

First, find sound and improving business fundamentals - improving ROE drivers and intangibles. Then:

Earnings yield > bond yield (now or soon, some compensation for equity risk)

PEG 2 or less (growth at a reasonable price)

Stock price growth potential exceeds hurdle rate (e.g. 15%, 10 years, probably better than most other investments)

P/S less than 3 and profit margin greater than 10% (good profitability at reasonable price)

P/B less than 5 and ROE greater than 15% (good overall returns at reasonable price)

Shares of companies that fit the preceding factors (the more factors, the better) are more likely to be a good value for the price.

Un-value

Earnings yield < bond yield with low growth prospects

PEG greater than 3 with low margins

Stock price growth falls short of hurdle rate (e.g., 15%)

P/S greater than 3 with low margins

P/B greater than 5 with low ROE

STOCK HaiO C0DE 7668

8.7.2009
STOCK HaiO C0DE 7668
Price $ 4.66 Curr. PE (ttm-Eps) 7.48 Curr. DY 9.01%

Rec. qRev 132845 q-q % chg 30% y-y% chq -1%
Rec. qPbt 22957 q-q % chg 24% y-y% chq 20%
Rec. qEps 17.80 q-q % chg 22% y-y% chq -29%
ttm-Eps 62.30 q-q % chg -11% y-y% chq -5%

Using VERY CONSERVATIVE ESTIMATES:
EPS GR 5% Avg.H PE 7.48 Avg. L PE 5.00
Current price is at Middle 1/3 of valuation zone.
RISK: Upside 47% Downside 53%
One Year Appreciation Potential 6% Avg. yield 12%
Avg. Total Annual Potential Return over next 5 years 17%
CPE/SPE 1.20 P/NTA 2.34 Sig. PE 6.2 Sig. Pr 3.86

Birds and Bees

Today is the 8th July 2009. My free counter, started on 23rd June 2009, reads 6208.

Comment on meritocracy and bumiputra quota system

Wednesday July 8, 2009
Comment on meritocracy and bumiputra quota system
Plain Speaking - A column by Yap Leng Kuen



MERITOCRACY, it appears, is going to be the name of the game from now onwards.

Only time will tell if we have firmly put the ancient practices of the quota systems behind us.

For the time being, words to that effect have been sounded and decisions put in place to reinforce the bold ideas for change.

Announcements have been made progressively, starting from April 22 when the 30% bumiputra equity quota was scrapped on 27 service sub-sectors and subsequently on initial public offerings (June 30).

The participation of bumiputras in the newly set-up private equity fund, Ekuiti Nasional Bhd (Ekuinas), is also to be premised on merit.

In his speech at Invest Malaysia 2009, Prime Minister Datuk Seri Najib Razak hoped that through investment funds such as Ekuinas, “the ambitions of the best and brightest amongst bumiputras can be supported and nurtured.’’

Scholarships based on merit is another hot issue. Following Najib’s announcement that starting next year, a new class of scholarships would be based on merit and not racial background, letters to the editor have indicated strong hopes of a better system for the future generations.

Countries that are run on merit-based systems and policies have made rapid strides in terms of competitiveness, attracting the best talents and moving up the value chain.

For Malaysia to hit that high note, it has to scale up the ladder much faster and look into an overall incentive scheme that is robust and, at the same time, practical.

Its leaders should never be bogged down by politics but march ahead resolutely, in full conviction that this is the best path to the future. They must not flip flop but adhere to their medium or long-term plan. In other words, they must really prove that all these announcements are not “gimmicks” to pull in the sentiment.

That does not mean that they operate within their own space but they must have a communication strategy to engage the masses, especially those who are likely to oppose. It should be explained to them what sort of “goodies’’ and help they can still obtain from the Government within a timeframe that is based on reducing amounts.

With higher awareness and exposure to global systems of governance, all Malaysians are becoming increasingly independent and proud to be able to stand on their feet.

Talking to high achievers within the bumiputra community, one gets a sense that they truly want to be associated with merit and individual capability.

Sensing that new wave, Najib has rightly pointed out in the same speech: “The world is changing quickly and we must be ready to change with it or risk being left behind ... It is not a time for sentiment or half measures but to renew our courage and pragmatism to take the necessary bold measures.’’

In our quest to achieve higher standards, there is actually no other way forward but through meritocracy. Rhetorics and politics aside, let’s make the switch and quantum leap as fast as we can to make up for lost time.


Senior business editor Yap Leng Kuen believes Malaysians are a resilient lot and can still fight for a better future. In the aftermath of the global financial crisis, many countries are still struggling to find a new footing and this can be an opportune moment for Malaysia to rise and shine.

http://biz.thestar.com.my/news/story.asp?file=/2009/7/8/business/4275563&sec=business