There's a range of ways to value a business. Valuations based on multiples of future earnings and the capitalisation of future cashflows are the most common. There are a number of common valuation methods:
1. Businesses with a record of sustainable profits are often valued at a multiple of earnings. Profits are adjusted for any unusual, one-off items to arrive at an estimate of 'normalised' earnings. Smaller businesses are usually valued at a lower multiple than similar, larger companies.
2. Mature, cash-generating businesses can be valued in a similar way but based on cashflow. Future cashflows are estimated and discounted - this is known as discounted cashflow. Long-term cashflow is worth less than cashflow due shortly.
3. An asset valuation might be appropriate for stable businesses with significant tangible assets - property or manufacturing businesses, for example. Your starting point is the value of assets stated in the accounts - known as the 'net book value'. These figures are then refined to reflect factors such as changes in the value of assets or bad debts.
4. The cost of creating a business similar to yours can be used as a basis for valuation. Costs could include buying equipment, employing staff, developing products, attracting customers, and so on. It may be possible to estimate this 'entry cost' as a benchmark of your business' value. Of course, if the cost of entry is low there's little likelihood of you achieving a successful sale.
In some industries, there are established criteria for valuing businesses, eg by the number of branches an estate agency has.
A potential buyer may use more than one method to get a range of values for your business. In the end, however, any price will be a matter for negotiation.
Pneumonic: MADE
Multiple of Earnings
Asset Valuation
Discounted Cashflow
Entry Cost
http://www.businesslink.gov.uk/bdotg/action/detail?r.s=sc&r.l1=1073861225&r.lc=en&r.l3=1074410825&r.l2=1074400490&r.i=1074411173&type=RESOURCES&itemId=1074411241&r.t=RESOURCES
Monday 9 November 2009
Investment Club Performance
Investment clubs serve many useful functions.
Ref: Barber, Brad, and Terrance Odean,
"Too many cooks spoil the profits: Investment Club Performance."
Financial Analysts Journal, Jan/Feb 2000, 17-25
Using data from a large discount brokerage firm, Barber and Odean looked at the performance of 166 investment clubs over the period 1991 through 1997. They found that these clubs tended to purchase high-beta, small-cap growth stocks and had an average holding period of about 18 months. They found that 60% of the clubs underperformed the market, by an average of 3.7 percentage points per year.
- They encourage savings.
- They educate their members about financial markets.
- They foster friendhsips and social ties.
Unfortunately, their investments do not beat the market.
"Too many cooks spoil the profits: Investment Club Performance."
Financial Analysts Journal, Jan/Feb 2000, 17-25
Using data from a large discount brokerage firm, Barber and Odean looked at the performance of 166 investment clubs over the period 1991 through 1997. They found that these clubs tended to purchase high-beta, small-cap growth stocks and had an average holding period of about 18 months. They found that 60% of the clubs underperformed the market, by an average of 3.7 percentage points per year.
"What do you think of the market?"
Perhaps the most common investment question is "What do you think of the market?"
Expectations about the future are extremely important in the determination of security prices. Even if you are a firm believer in the efficient market hypothesis, it is difficult to make informed investment decisions with complete disregard for:
The Greenspan Model is a heuristic many people use as one means of estimating the over- or under- valuation of the broad market. The model is simple: just subtract the S&P 500 earnings yield from the current yield on a 10-year Treasury security.
Greenspan market value = 10-year Treasury yield - S&P 500 earnings yield
When the result is positive, the market is overvalued.
When it is negative, the market is undervalued.
According to the Greenspan model, the broad stock market was overvalued for the entire decade of the 1990s. There were buying opportunity in 2003 and 2004, but in the mid-2005 stocks were starting to get pricey again.
As with historical PE ratios or earnings yield figures, the Greenspan model offers some historical indication of the reasonableness of the current level of the market, given estimated earnings and the interest rate environment.
- To an informed group of market analysts, the question invites intellectual discussion and is very difficult to answer succinctly.
- In casual conversation with friends, however, the question can be like an overused pickup line at a cocktail party.
Expectations about the future are extremely important in the determination of security prices. Even if you are a firm believer in the efficient market hypothesis, it is difficult to make informed investment decisions with complete disregard for:
- the current level of the popular indexes or
- the prospects for the economy.
The Greenspan Model is a heuristic many people use as one means of estimating the over- or under- valuation of the broad market. The model is simple: just subtract the S&P 500 earnings yield from the current yield on a 10-year Treasury security.
Greenspan market value = 10-year Treasury yield - S&P 500 earnings yield
When the result is positive, the market is overvalued.
When it is negative, the market is undervalued.
According to the Greenspan model, the broad stock market was overvalued for the entire decade of the 1990s. There were buying opportunity in 2003 and 2004, but in the mid-2005 stocks were starting to get pricey again.
As with historical PE ratios or earnings yield figures, the Greenspan model offers some historical indication of the reasonableness of the current level of the market, given estimated earnings and the interest rate environment.
Latexx keeps up the pace
(Figures in Malaysian Ringgits)
Recent Stock Performance:
1 Week -2.9%
13 Weeks 32.8%
4 Weeks 39.8%
52 Weeks 734.4%
Latexx's price has moved up steadily. The stock was the second highest gainer on Bursa Malaysia between Jan 1 and Oct 30, up 456% from 48 sen.
CIMB forecasts Latexx's net profit to sustain a surge to RM 82 million or earnings per share (EPS) of 42.1 sen next year, up 58% from a forecast net profit %M 51.9 million (EPS of 26.7 sen) this year.
The investment bank has projected a traget price of RM 3.97 before the end of next year. The stock closed at RM 2.44 last Thursday.
The Edge Malaysia November 9th, 2009
The importance of not buying shares near the top of the market peaks
Stock prices can be very volatile.
The price movements even within a year can be considerable (the average is 38 per cent).
The minimum movement within a year is still 19 per cent from the highest to the lowest price which is about 6 times greater than the average dividend yield of 3 per cent.
This means that price changes can very quickly wipe out any return provided by dividend.
This means that the value of one's investment can vary considerably from year to year. One must be able to sustain such losses if one wishes to invest in shares.
Therefore, if we buy our shares when the market is at a reasonable level (that is when the index is around the trend line or below), we can rely on the long term rising trend to obtain our gain from the market.
Unless we buy shares near the top of the peaks, we should be able to profit from buying shares after a few years. It is therefore important to go for the long run.
The price movements even within a year can be considerable (the average is 38 per cent).
The minimum movement within a year is still 19 per cent from the highest to the lowest price which is about 6 times greater than the average dividend yield of 3 per cent.
This means that price changes can very quickly wipe out any return provided by dividend.
This means that the value of one's investment can vary considerably from year to year. One must be able to sustain such losses if one wishes to invest in shares.
Therefore, if we buy our shares when the market is at a reasonable level (that is when the index is around the trend line or below), we can rely on the long term rising trend to obtain our gain from the market.
Unless we buy shares near the top of the peaks, we should be able to profit from buying shares after a few years. It is therefore important to go for the long run.
Sunday 8 November 2009
Good fundamental reasoning is important. Guts too!
Forty-four billion reasons to support the bull market
Warren Buffett has just made his biggest investment ever in buying Burlington Northern Railroad Company in the US.
By Alan Steel
Published: 1:21PM GMT 06 Nov 2009
Alan Steel The two big differences between Warren Buffett and the thousands of pessimists predicting our financial demise is that he puts his hard earned cash on the line, and he is usually right.
Warren Buffett, in buying Burlington Northern Railroad Company in the US has just made his biggest investment ever. All said and done the business came with a $44 billion price tag.
He said he’s betting on an out and out recovery in the US economy and he is focusing, as all good investors should, on the medium to long term.
Meanwhile, pessimists are pulling their money out of equity funds and piling into fixed interest bonds.
So no doubt they will not only be dismayed by Warren Buffett’s move, but also by Cisco CEO’s statement on Thursday which ignited US stockmarkets. He stands alongside his counterparts at Apple, Amazon and Intel by stating “the quarter was very strong and the recovery is gaining momentum”.
Further good news comes from the US Institute for Supply and Management who reckon the US GDP is likely now growing at an annualised rate of 4.5pc. Workers’ productivity also offers a guide.
This week the US Labour Department said output per hour of non farm workers rose at an annual rate of 9.5pc in the quarter, more than four times the average productivity growth rate of the last 25 years. Taking that together with the previous quarter’s 6.9pc, it’s the strongest productivity growth rate over any six month period since 1961.
All of this, plus the continued scepticism among experts and ordinary investors, tells us to expect a continuing worldwide stockmarket recovery.
Alan Steel is chairman of Alan Steel Asset Management
http://www.telegraph.co.uk/finance/personalfinance/investing/6514334/Forty-four-billion-reasons-to-support-the-bull-market.html
Warren Buffett has just made his biggest investment ever in buying Burlington Northern Railroad Company in the US.
By Alan Steel
Published: 1:21PM GMT 06 Nov 2009
Alan Steel The two big differences between Warren Buffett and the thousands of pessimists predicting our financial demise is that he puts his hard earned cash on the line, and he is usually right.
Warren Buffett, in buying Burlington Northern Railroad Company in the US has just made his biggest investment ever. All said and done the business came with a $44 billion price tag.
He said he’s betting on an out and out recovery in the US economy and he is focusing, as all good investors should, on the medium to long term.
Meanwhile, pessimists are pulling their money out of equity funds and piling into fixed interest bonds.
So no doubt they will not only be dismayed by Warren Buffett’s move, but also by Cisco CEO’s statement on Thursday which ignited US stockmarkets. He stands alongside his counterparts at Apple, Amazon and Intel by stating “the quarter was very strong and the recovery is gaining momentum”.
Further good news comes from the US Institute for Supply and Management who reckon the US GDP is likely now growing at an annualised rate of 4.5pc. Workers’ productivity also offers a guide.
This week the US Labour Department said output per hour of non farm workers rose at an annual rate of 9.5pc in the quarter, more than four times the average productivity growth rate of the last 25 years. Taking that together with the previous quarter’s 6.9pc, it’s the strongest productivity growth rate over any six month period since 1961.
All of this, plus the continued scepticism among experts and ordinary investors, tells us to expect a continuing worldwide stockmarket recovery.
Alan Steel is chairman of Alan Steel Asset Management
http://www.telegraph.co.uk/finance/personalfinance/investing/6514334/Forty-four-billion-reasons-to-support-the-bull-market.html
Commercial property values prompt fears of a bubble
Commercial property values prompt fears of a bubble
Concerns that the UK property market is entering a bubble have been exacerbated after new data showed yields have returned to 2006 levels after seeing their biggest monthly decline since 1993 in October.
By Graham Ruddick, City Reporter (Automotive, Healthcare, Property)
Published: 7:56PM GMT 06 Nov 2009
Yields, which measure rental returns against the value of a property and are a useful barometer of risk appetite, fell below 5pc for prime retail properties in October, below 6pc for offices, and 7pc for industrial property, according to BNP Paribas Real Estate. An overall fall of 35 basis points was the biggest since 1993, Cushman & Wakefield said.
There are fears that property values are recovering too quickly because of a lack of supply and strong overseas demand.
Segro, the warehouse owner, on Friday sold its Great Western Industrial Park in Southall, West London for £110.4m to the Universities Superannuation Scheme at a yield of 6.9pc.
Concerns that the UK property market is entering a bubble have been exacerbated after new data showed yields have returned to 2006 levels after seeing their biggest monthly decline since 1993 in October.
By Graham Ruddick, City Reporter (Automotive, Healthcare, Property)
Published: 7:56PM GMT 06 Nov 2009
Yields, which measure rental returns against the value of a property and are a useful barometer of risk appetite, fell below 5pc for prime retail properties in October, below 6pc for offices, and 7pc for industrial property, according to BNP Paribas Real Estate. An overall fall of 35 basis points was the biggest since 1993, Cushman & Wakefield said.
There are fears that property values are recovering too quickly because of a lack of supply and strong overseas demand.
Segro, the warehouse owner, on Friday sold its Great Western Industrial Park in Southall, West London for £110.4m to the Universities Superannuation Scheme at a yield of 6.9pc.
Price is not the issue here
Lachlan Murdoch outmuscles Russell Crowe: Master and Commander star fails to land £12m Sydney house
Lachlan Murdoch, the eldest son of Rupert Murdoch, chairman and chief executive of News Corporation, has paid a record A$23m (£12.7m) for a home in Sydney, Australia, after seeing off a host of stars in an auction.
By Graham Ruddick, City Reporter
Published: 8:50PM GMT 06 Nov 2009
The property is the French government?s former consulate in Sydney?s exclusive eastern suburbs Mr Murdoch beat nine other bidders to secure the property, named 'Le Manoir’, including actor Russell Crowe and actress Nicole Kidman.
The property is the French government’s former consulate in Sydney’s exclusive eastern suburbs. It is a six-bedroom residence with panoramic views of the Pacific Ocean as well as a tennis court, swimming pool, five bathrooms, two studies, a guest powder room and a three-car garage.
The French government paid just A£26,000 for the property in 1956.
Bidding for the property, which lasted 10 minutes, opened at A$18m and bidders were asked to pay a refundable deposit of A$50,000 before the auction began.
The acquisition is thought to be the most expensive home purchase in Australia this year. Mr Murdoch and his wife, a television presenter and former model, are expecting their third child. He leads investment group Illyria Pty.
When should a stock be sold?
In a portfolio of good quality stocks bought at fair or bargain price, there are usually few reasons for selling. However, the businesses of these companies need to be tracked regularly and their quarterly results announcements followed.
When should a stock be sold?
Firstly, if the fundamentals of the stock are deteriorating, the stock should be sold urgently.
Another good reason would be when the stock is overpriced.
Another good reason would be when the stock is overpriced.
- Be alert when the PE of the stock has risen by more than 50% above its usual average PE.
- Reappraise the fundamentals and valuations of this stock, in particular, its future earnings growth potential.
- the present high PE cannot be justified or
- if the present high PE has run ahead of the fundamentals of the stock.
Berkshire Hathaway's 3Q net income triples to US$3.24b
Berkshire Hathaway's 3Q net income triples to US$3.24b
Tags: Berkshire Hathaway | Warren Buffett
Written by Reuters
Saturday, 07 November 2009 08:14
NEW YORK: Warren Buffett's Berkshire Hathaway Inc on Friday, Nov 6 said quarterly earnings tripled, as rising stock markets boosted its investment holdings and a quiet hurricane season contributed to higher insurance profit, according to Reuters.
Results were announced three days after Buffett revealed the biggest acquisition in his 44 years running Berkshire, a US$26 billion takeover of Burlington Northern Santa Fe Corp. Berkshire had already owned 23 percent of the nation's second-largest railroad operator.
Third-quarter net income for Omaha, Nebraska-based Berkshire rose to US$3.24 billion, or US$2,087 per Class A share, from US$1.06 billion, or US$682, a year earlier.
Excluding investments, operating profit fell less than 1 percent to US$2.06 billion, or US$1,325 per share, from US$2.07 billion, or US$1,335. On that basis, analysts expected profit of US$1,308.25 per share, according to Thomson Reuters I/B/E/S.
Revenue rose 7 percent to US$29.9 billion, though Berkshire said the effects of a global recession hurt results for several manufacturing, apparel and retailing units, as some customers "dramatically" reduced spending.
"These operating subsidiaries are so sensitive to the economic climate," said Bill Bergman, an analyst at MorningstarInc in Chicago. "It will be worth watching."
Berkshire's growing diversification has made it more of a bellwether for the U.S. economy. Its roughly 80 operating units sell such things as Geico car insurance, Dairy Queen ice cream, Benjamin Moore paint and Fruit of the Loom underwear.
Insurance underwriting profit more than quadrupled to $363 million, helped mainly by reinsurance operations and despite a decline at Geico, while insurance investment income rose 21 percent to US$976 million. Results benefited from the quietest Atlantic hurricane season in more than a decade. Only a single named storm, Claudette, made U.S. landfall.
Operating profit in noninsurance businesses, in contrast, fell 28 percent to US$774 million.
Berkshire also benefited as rising stock markets boosted the value of investments in companies such as Coca-Cola Co, Goldman Sachs Group Inc, Procter & Gamble Co and Wells Fargo & Co.
Results included US$1.18 billion of investment and derivatives gains, mainly from derivatives contracts tied to junk bond credit quality and to a lesser extent to performance of four stock indexes in the United States, Europe and Japan.
Berkshire's book value ended September at US$126.07 billion, or US$81,247 per share, up 10 percent from three months earlier and 15 percent from year end.
Buffett often touts book value, which reflects assets minus liabilities, as a good gauge of Berkshire's health.
Steven Check, who oversees Check Capital Management in Costa Mesa, California, noted that book value is 4 percent higher than at the start of 2008, despite a 27 percent drop in the Standard & Poor's 500. "Buffett has made back everything he lost in 2008, and then some," he said. - Reuters
Tags: Berkshire Hathaway | Warren Buffett
Written by Reuters
Saturday, 07 November 2009 08:14
NEW YORK: Warren Buffett's Berkshire Hathaway Inc on Friday, Nov 6 said quarterly earnings tripled, as rising stock markets boosted its investment holdings and a quiet hurricane season contributed to higher insurance profit, according to Reuters.
Results were announced three days after Buffett revealed the biggest acquisition in his 44 years running Berkshire, a US$26 billion takeover of Burlington Northern Santa Fe Corp. Berkshire had already owned 23 percent of the nation's second-largest railroad operator.
Third-quarter net income for Omaha, Nebraska-based Berkshire rose to US$3.24 billion, or US$2,087 per Class A share, from US$1.06 billion, or US$682, a year earlier.
Excluding investments, operating profit fell less than 1 percent to US$2.06 billion, or US$1,325 per share, from US$2.07 billion, or US$1,335. On that basis, analysts expected profit of US$1,308.25 per share, according to Thomson Reuters I/B/E/S.
Revenue rose 7 percent to US$29.9 billion, though Berkshire said the effects of a global recession hurt results for several manufacturing, apparel and retailing units, as some customers "dramatically" reduced spending.
"These operating subsidiaries are so sensitive to the economic climate," said Bill Bergman, an analyst at MorningstarInc in Chicago. "It will be worth watching."
Berkshire's growing diversification has made it more of a bellwether for the U.S. economy. Its roughly 80 operating units sell such things as Geico car insurance, Dairy Queen ice cream, Benjamin Moore paint and Fruit of the Loom underwear.
Insurance underwriting profit more than quadrupled to $363 million, helped mainly by reinsurance operations and despite a decline at Geico, while insurance investment income rose 21 percent to US$976 million. Results benefited from the quietest Atlantic hurricane season in more than a decade. Only a single named storm, Claudette, made U.S. landfall.
Operating profit in noninsurance businesses, in contrast, fell 28 percent to US$774 million.
Berkshire also benefited as rising stock markets boosted the value of investments in companies such as Coca-Cola Co, Goldman Sachs Group Inc, Procter & Gamble Co and Wells Fargo & Co.
Results included US$1.18 billion of investment and derivatives gains, mainly from derivatives contracts tied to junk bond credit quality and to a lesser extent to performance of four stock indexes in the United States, Europe and Japan.
Berkshire's book value ended September at US$126.07 billion, or US$81,247 per share, up 10 percent from three months earlier and 15 percent from year end.
Buffett often touts book value, which reflects assets minus liabilities, as a good gauge of Berkshire's health.
Steven Check, who oversees Check Capital Management in Costa Mesa, California, noted that book value is 4 percent higher than at the start of 2008, despite a 27 percent drop in the Standard & Poor's 500. "Buffett has made back everything he lost in 2008, and then some," he said. - Reuters
Mohd Nadzmi launches takeover of Transocean
Flash Mohd Nadzmi launches takeover of Transocean
Written by Joseph Chin
Friday, 06 November 2009 17:56
KUALA LUMPUR: TRANSOCEAN HOLDINGS BHD [] chairman and managing director Datuk Mohd Nadzmi Mohd Salleh has launched a takeover of the loss-making logistics company by offering RM1 per share.
The takeover of Transocean will be undertaken by Kumulan Kenderaan Malaysia Bhd (KKMB), which is controlled by Nadzmi.
Transocean share price surged 21 sen to 86.5 sen on Friday, Nov 6 before it was suspended at 3.41pm. Trading in Transocean will resume on Monday, Nov 9 at 9am.
KKMB said it had proposed to acquire 100% stake in Lengkap Suci Sdn Bhd, which owns 11.6 million shares of Transocean or 28.29%, for a cash consideration of RM2. The shares in Lengkap Suci are to be acquired from Zaharah Ibrahim and Reena Nizma Zuhdi.
Upon completion of the proposed sales and purchase agreement (SPA), KKMB and parties acting in concert would see their collective shareholding increase to more than 33%.
"Accordingly, upon the SPA becoming unconditional and in compliance with the Malaysian Code on Take-overs and Mergers, 1998, KKMB has further informed the company that KKMB intends to make a take-over offer to acquire all the remaining Transocean shares not already held by KKMB and the parties acting in concert at a cash consideration of RM1 per share," it said.
Mohd Nadzmi indirectly controls 100% or 45 million shares of KKMB while the direct stake in KMMB is held by Nadicorp Holdings Sdn Bhd.
He was appointed chairman and managing director of Transocean on Oct 1. He is also chairman of PROTON HOLDINGS BHD [].
Transocean posted net loss of RM1.19 million on the back of RM10.43 million in revenue in 4Q ended May 31.
For the financial year ended May 31, its net loss was RM2.53 million on the turnover of RM45.18 million. Its net asset per share was 64 sen. It had borrowings of RM18.16 million
http://www.theedgemalaysia.com/business-news/153165-flash-mohd-nadzmi-launches-takeover-of-transocean.html
Written by Joseph Chin
Friday, 06 November 2009 17:56
KUALA LUMPUR: TRANSOCEAN HOLDINGS BHD [] chairman and managing director Datuk Mohd Nadzmi Mohd Salleh has launched a takeover of the loss-making logistics company by offering RM1 per share.
The takeover of Transocean will be undertaken by Kumulan Kenderaan Malaysia Bhd (KKMB), which is controlled by Nadzmi.
Transocean share price surged 21 sen to 86.5 sen on Friday, Nov 6 before it was suspended at 3.41pm. Trading in Transocean will resume on Monday, Nov 9 at 9am.
KKMB said it had proposed to acquire 100% stake in Lengkap Suci Sdn Bhd, which owns 11.6 million shares of Transocean or 28.29%, for a cash consideration of RM2. The shares in Lengkap Suci are to be acquired from Zaharah Ibrahim and Reena Nizma Zuhdi.
Upon completion of the proposed sales and purchase agreement (SPA), KKMB and parties acting in concert would see their collective shareholding increase to more than 33%.
"Accordingly, upon the SPA becoming unconditional and in compliance with the Malaysian Code on Take-overs and Mergers, 1998, KKMB has further informed the company that KKMB intends to make a take-over offer to acquire all the remaining Transocean shares not already held by KKMB and the parties acting in concert at a cash consideration of RM1 per share," it said.
Mohd Nadzmi indirectly controls 100% or 45 million shares of KKMB while the direct stake in KMMB is held by Nadicorp Holdings Sdn Bhd.
He was appointed chairman and managing director of Transocean on Oct 1. He is also chairman of PROTON HOLDINGS BHD [].
Transocean posted net loss of RM1.19 million on the back of RM10.43 million in revenue in 4Q ended May 31.
For the financial year ended May 31, its net loss was RM2.53 million on the turnover of RM45.18 million. Its net asset per share was 64 sen. It had borrowings of RM18.16 million
http://www.theedgemalaysia.com/business-news/153165-flash-mohd-nadzmi-launches-takeover-of-transocean.html
HELP — grossly undervalued and expanding aggressively
HELP — grossly undervalued and expanding aggressively
Tags: HELP International Corp | InsiderAsia
Written by InsiderAsia
Thursday, 05 November 2009 19:58
LAST week, we took a look at HELP International Corp's (RM1.50) recent third-quarter FY October 2009 (3Q09) results, which saw growth momentum accelerating further. Today, we take a look at the education company's expansion plans and underlying asset valuations.
HELP has consistently delivered double-digit earnings growth over the last few years, even during the recession. Indeed, its earnings have grown over 20% per year since 2006, and remain on track this year.
For FY October 2009, we expect net profit to rise 21.1% to RM14.3 million, or 16.1 sen per share. At RM1.50, the stock is trading at only 9.3 times FY09 earnings, and 8.5 times FY2010.
These valuations are very attractive for a company with strong and yet defensive, recession-proof earnings — and a solid brand name. Its underlying price-to-earnings (P/E) is much lower if we subtract the sizeable cash reserves, although much will be invested in the new campus.
HELP has a very strong balance sheet. Net cash stood at RM72.4 million in July 2009, as compared with a market capitalisation of RM133.2 million. This translates into a significant 82 sen per share — or 55% of the current share price of RM1.50.
Strong, understated balance sheet
HELP's present net trading asset (NTA) of RM1.02 per share is also severely understated.
The company's main property asset is Wisma HELP, an 11-storey building in the prime Damansara Heights suburb of Kuala Lumpur. The 29-year old building has 269,086 sq ft of built-up space on 43,292 sq ft of freehold land. This property is carried in its books at only RM32 million — or just RM119 psf for the built-up space.
Although the building is relatively old at 29 years, the valuation is far too low compared with current market prices of RM520-750 psf in the wider Damansara Heights, Bangsar and Mont'Kiara areas, as well as current replacement costs.
As a comparison, an even older nearby building, the 37-year old Wisma Damansara was sold last year by HELP's parent, Selangor PROPERTIES [], to a joint venture between Selangor Properties and E&O Property Devt for RM371 psf (the venture was later unwound due to the financial crisis).
If we place a conservative value of RM350 psf for Wisma HELP, we would arrive at a value of RM94.2 million for the building. Thus, the value of the building and cash alone would total RM168.8 million — or RM1.90 per share, or 27% above the current share price.
This implies — at the current share price — investors are getting HELP's other assets, including the underlying business, valuable franchises and strong branding built up for over 20 years, for effectively free.
Solid branding
HELP's strong branding has helped to expand its student population base, extend its presence overseas and increase the appeal of its own home-grown degrees awarded under the "HELP University College" banner.
From just 8,600 students in October 2007, HELP now has about 11,500 students, including 1,500 from HELP-ICT. This excludes over 1,000 students studying for HELP accredited courses overseas in Vietnam, Indonesia and China through franchising arrangements.
The company has been growing its student base through acquisitions and new branch campuses, organic growth and overseas tie-ups that are now featuring more strongly.
Fraser KL campus to open in early 2010
In November 2007, HELP acquired the loss-making HELP-ICT (the former Sepang Institute of TECHNOLOGY []), giving it various new courses and a student base of about 1,500 students.
We understand the institute will be relocated to the new Fraser Business Park campus in downtown Kuala Lumpur, in line with branding the new campus as a hub for vocational courses. This will also increase economies of scale at the new city campus.
The campus at Fraser Business Park will open in January 2010. HELP will lease space in the business centre, which can accommodate up to 5,000 students. It will cater largely for post-graduate, technical and vocational courses, including a wide range of new courses such as culinary, hospitality, performing arts, physiotherapy and others.
Subang campus to anchor longer-term growth
Further out, the longer-term expansion plans will centre on the Subang 2 campus in Sungei Buloh. Located on 23.3 acres, the land was acquired for just RM20 psf, or RM20.3 million, which is being finalised. The entire campus is expected to cost around RM100 million, including land cost. HELP hopes to start building next year.
The first phase, with 300,000 sq ft of built-up space will cost RM50 million, excluding land cost. This can be easily funded through annual cash flows, although it will take advantage of the current low interest rate regime. The full-fledged campus will support its application for full university status.
HELP's home-grown degrees, granted under the HELP University College brandname are also gaining popularity — not just locally but abroad as well. The company was awarded "University College" status in 2004, enabling it to design and award its own degrees. The shift towards more home-grown degrees has helped improve overall margins.
Overseas ventures faring well
HELP's overseas ventures in Vietnam, Indonesia, China and Saudi Arabia are also taking off well. Its ability to penetrate the international market is a strong testimony to its brand.
The overseas ventures involve a "franchise" or "twinning" like arrangements with low risks and entry costs, but high international visibility and earnings potential. HELP provides software, syllabus, training, technical and academic support, without heavy investment in buildings or physical assets.
There are currently over 1,000 students studying overseas for HELP's degrees, most of them in Vietnam and some in Indonesia and China. It is also exploring opportunities in other parts of Indochina.
The Vietnam venture is the largest and involves twinning programmes with Vietnam National University in Hanoi. Under these arrangements, students will transfer to Malaysia after a year or two in Vietnam to obtain HELP or other accredited degrees.
Similar "twinning" arrangements are being done with several Indonesian and Chinese colleges, but on a smaller scale. We understand the company has also been invited to explore similar ventures in other parts of Indochina.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
http://www.theedgemalaysia.com/business-news/153072-help-grossly-undervalued-and-expanding-aggressively.html
Tags: HELP International Corp | InsiderAsia
Written by InsiderAsia
Thursday, 05 November 2009 19:58
LAST week, we took a look at HELP International Corp's (RM1.50) recent third-quarter FY October 2009 (3Q09) results, which saw growth momentum accelerating further. Today, we take a look at the education company's expansion plans and underlying asset valuations.
HELP has consistently delivered double-digit earnings growth over the last few years, even during the recession. Indeed, its earnings have grown over 20% per year since 2006, and remain on track this year.
For FY October 2009, we expect net profit to rise 21.1% to RM14.3 million, or 16.1 sen per share. At RM1.50, the stock is trading at only 9.3 times FY09 earnings, and 8.5 times FY2010.
These valuations are very attractive for a company with strong and yet defensive, recession-proof earnings — and a solid brand name. Its underlying price-to-earnings (P/E) is much lower if we subtract the sizeable cash reserves, although much will be invested in the new campus.
HELP has a very strong balance sheet. Net cash stood at RM72.4 million in July 2009, as compared with a market capitalisation of RM133.2 million. This translates into a significant 82 sen per share — or 55% of the current share price of RM1.50.
Strong, understated balance sheet
HELP's present net trading asset (NTA) of RM1.02 per share is also severely understated.
The company's main property asset is Wisma HELP, an 11-storey building in the prime Damansara Heights suburb of Kuala Lumpur. The 29-year old building has 269,086 sq ft of built-up space on 43,292 sq ft of freehold land. This property is carried in its books at only RM32 million — or just RM119 psf for the built-up space.
Although the building is relatively old at 29 years, the valuation is far too low compared with current market prices of RM520-750 psf in the wider Damansara Heights, Bangsar and Mont'Kiara areas, as well as current replacement costs.
As a comparison, an even older nearby building, the 37-year old Wisma Damansara was sold last year by HELP's parent, Selangor PROPERTIES [], to a joint venture between Selangor Properties and E&O Property Devt for RM371 psf (the venture was later unwound due to the financial crisis).
If we place a conservative value of RM350 psf for Wisma HELP, we would arrive at a value of RM94.2 million for the building. Thus, the value of the building and cash alone would total RM168.8 million — or RM1.90 per share, or 27% above the current share price.
This implies — at the current share price — investors are getting HELP's other assets, including the underlying business, valuable franchises and strong branding built up for over 20 years, for effectively free.
Solid branding
HELP's strong branding has helped to expand its student population base, extend its presence overseas and increase the appeal of its own home-grown degrees awarded under the "HELP University College" banner.
From just 8,600 students in October 2007, HELP now has about 11,500 students, including 1,500 from HELP-ICT. This excludes over 1,000 students studying for HELP accredited courses overseas in Vietnam, Indonesia and China through franchising arrangements.
The company has been growing its student base through acquisitions and new branch campuses, organic growth and overseas tie-ups that are now featuring more strongly.
Fraser KL campus to open in early 2010
In November 2007, HELP acquired the loss-making HELP-ICT (the former Sepang Institute of TECHNOLOGY []), giving it various new courses and a student base of about 1,500 students.
We understand the institute will be relocated to the new Fraser Business Park campus in downtown Kuala Lumpur, in line with branding the new campus as a hub for vocational courses. This will also increase economies of scale at the new city campus.
The campus at Fraser Business Park will open in January 2010. HELP will lease space in the business centre, which can accommodate up to 5,000 students. It will cater largely for post-graduate, technical and vocational courses, including a wide range of new courses such as culinary, hospitality, performing arts, physiotherapy and others.
Subang campus to anchor longer-term growth
Further out, the longer-term expansion plans will centre on the Subang 2 campus in Sungei Buloh. Located on 23.3 acres, the land was acquired for just RM20 psf, or RM20.3 million, which is being finalised. The entire campus is expected to cost around RM100 million, including land cost. HELP hopes to start building next year.
The first phase, with 300,000 sq ft of built-up space will cost RM50 million, excluding land cost. This can be easily funded through annual cash flows, although it will take advantage of the current low interest rate regime. The full-fledged campus will support its application for full university status.
HELP's home-grown degrees, granted under the HELP University College brandname are also gaining popularity — not just locally but abroad as well. The company was awarded "University College" status in 2004, enabling it to design and award its own degrees. The shift towards more home-grown degrees has helped improve overall margins.
Overseas ventures faring well
HELP's overseas ventures in Vietnam, Indonesia, China and Saudi Arabia are also taking off well. Its ability to penetrate the international market is a strong testimony to its brand.
The overseas ventures involve a "franchise" or "twinning" like arrangements with low risks and entry costs, but high international visibility and earnings potential. HELP provides software, syllabus, training, technical and academic support, without heavy investment in buildings or physical assets.
There are currently over 1,000 students studying overseas for HELP's degrees, most of them in Vietnam and some in Indonesia and China. It is also exploring opportunities in other parts of Indochina.
The Vietnam venture is the largest and involves twinning programmes with Vietnam National University in Hanoi. Under these arrangements, students will transfer to Malaysia after a year or two in Vietnam to obtain HELP or other accredited degrees.
Similar "twinning" arrangements are being done with several Indonesian and Chinese colleges, but on a smaller scale. We understand the company has also been invited to explore similar ventures in other parts of Indochina.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
http://www.theedgemalaysia.com/business-news/153072-help-grossly-undervalued-and-expanding-aggressively.html
Caveat Emptor — Be a wary investor
Caveat Emptor — Be a wary investor
Tags: Asian Financial Crisis | Bubble | Caveat emptor | Emotional value | Ethical practices | Excessive greed | Intrinsic values | Investors | Mushida Muhammad | Second judgement | stock market | Subprime crisis | Tech Bubble | Warren Buffett | Winning qualities
Written by Mushida Muhammad
Monday, 02 November 2009 10:53
In the high stake game of making money in the stock market, getting emotional is not an option. It is true that investors should focus on fundamentals, be patient and exercise good judgment; but alas, they are only human.
In the exuberance of a bull run or the trepidation of a bear, often times there exist tendencies to inflate or deflate stocks above or below their intrinsic values disproportionately before investors realise that their optimism or pessimism was not entirely justified.
The danger lies when emotions overcome rational judgment, giving way to greed and fear. Excessive greed leads to a superfluous rise in share prices, creating a bubble which eventually sows the seeds for future panic.
Time and again, history has shown that panic often leads to a crash. In the past 10 years, greed and fear had culminated in three major financial crises; the Asian Financial Crisis, the Tech Bubble and — most recently — the Subprime Crisis.
In all cases, markets were experiencing unprecedented outperformance prior to the crash. Driven by greed, many believed that they could ride the high waves without repercussions. What lesson can be learned from this?
For one, investors tend to have a short term memory, often falling prey to the “herd mentality”. The temptation of making a killing often prompts them to take extremely high risks and disregard fundamentals for fear of missing the boat if they did.
Going back to basics. Regardless whether the objective is for the long- or short-term, investment practices should be based on fundamentals and good business judgment. Warren Buffett’s foundation has always been centralised on the principle of fundamental business analysis — a good investor should identify good businesses, purchase them at fair prices and hold them for the long term.
Success lies not in price behaviour but rather on an investor’s ability to apply sound judgment and make the distinction between market price and intrinsic value.
At a time when markets are insecure and unstable, information is key. Investors must understand the company’s business.
Thus, the onus lies with the investor to be discerning. Information is best found in financial statements, as they provide an up-to-date snapshot view of the company’s financial health and growth potential.
Some industries are inherently better for investment than others due to their intrinsic qualities. Health-care, consumer, plantation are a few sectors that generally provide better investment opportunities due to the inelasticity in demand.
Striking a balance between risk and reward is crucial, for the amount of risk taken ought to be proportionate with the anticipated reward. Assuming too much risk for too little reward gives way to bad investment.
More importantly, investors must have a stop-loss strategy to prevent escalating losses. Many a time investors make the mistake of holding on to losing stocks in the hope that it will turn around — but in reality, these stocks seldom do.
For those with a long term investment horizon, high and stable dividend income may be an important factor, as are return on equity, business sustainability, cash flow management. Corporate governance and management best practice are critical factors.
If a company reports annual growth and profits that seems “too good to be true”, it most probably is too good to be true.
Finding good stocks to invest in is difficult enough; therefore, investors should hold on to them for the long haul. Companies with a competitive edge have the tendency to increase in value over time. Eventually, the market would acknowledge the underlying value and push the price upwards.
So, when is the best time to sell? The answer is often as difficult as deciding when to buy. Depending on investor’s risk tolerance, if the stock proves to be too volatile for the nerves, it is best to sell and replace with another that lets you sleep at night.
Furthermore, social, environmental and ethical practices of many companies are now becoming a concern and investors may dispose of those that are in conflict with their social, religious or moral beliefs.
At times, the decision to sell is due to the company itself. A change in the company’s fundamentals or business plan may warrant a re-assessment on whether it is able to continue to meet the investor’s investment requirements.
There is no doubt that the stock market offers the best opportunity for higher returns in the long run. The risk is that it could dramatically erode investor’s net worth in the short-term should the down market last longer than expected. Nonetheless, it offers great opportunities.
Investors ought to rely on their judgment and not be influenced by the market. Knowing the company, finding its winning qualities and knowing when the right time to sell should aid the investor in obtaining success.
Attaching emotional value, however, is not. So be a wise investor; do not get sentimental. Have an investment objective and take the time to study before putting in your hard-earned money. Caveat emptor; be a wary investor.
Mushida Muhammad is the senior portfolio manager of the equity department, Kumpulan Wang Persaraan (Diperbadankan) (KWAP).
This article appeared in The Edge Financial Daily, November 2, 2009.
Tags: Asian Financial Crisis | Bubble | Caveat emptor | Emotional value | Ethical practices | Excessive greed | Intrinsic values | Investors | Mushida Muhammad | Second judgement | stock market | Subprime crisis | Tech Bubble | Warren Buffett | Winning qualities
Written by Mushida Muhammad
Monday, 02 November 2009 10:53
In the high stake game of making money in the stock market, getting emotional is not an option. It is true that investors should focus on fundamentals, be patient and exercise good judgment; but alas, they are only human.
In the exuberance of a bull run or the trepidation of a bear, often times there exist tendencies to inflate or deflate stocks above or below their intrinsic values disproportionately before investors realise that their optimism or pessimism was not entirely justified.
The danger lies when emotions overcome rational judgment, giving way to greed and fear. Excessive greed leads to a superfluous rise in share prices, creating a bubble which eventually sows the seeds for future panic.
Time and again, history has shown that panic often leads to a crash. In the past 10 years, greed and fear had culminated in three major financial crises; the Asian Financial Crisis, the Tech Bubble and — most recently — the Subprime Crisis.
In all cases, markets were experiencing unprecedented outperformance prior to the crash. Driven by greed, many believed that they could ride the high waves without repercussions. What lesson can be learned from this?
For one, investors tend to have a short term memory, often falling prey to the “herd mentality”. The temptation of making a killing often prompts them to take extremely high risks and disregard fundamentals for fear of missing the boat if they did.
Going back to basics. Regardless whether the objective is for the long- or short-term, investment practices should be based on fundamentals and good business judgment. Warren Buffett’s foundation has always been centralised on the principle of fundamental business analysis — a good investor should identify good businesses, purchase them at fair prices and hold them for the long term.
Success lies not in price behaviour but rather on an investor’s ability to apply sound judgment and make the distinction between market price and intrinsic value.
At a time when markets are insecure and unstable, information is key. Investors must understand the company’s business.
Thus, the onus lies with the investor to be discerning. Information is best found in financial statements, as they provide an up-to-date snapshot view of the company’s financial health and growth potential.
Some industries are inherently better for investment than others due to their intrinsic qualities. Health-care, consumer, plantation are a few sectors that generally provide better investment opportunities due to the inelasticity in demand.
Striking a balance between risk and reward is crucial, for the amount of risk taken ought to be proportionate with the anticipated reward. Assuming too much risk for too little reward gives way to bad investment.
More importantly, investors must have a stop-loss strategy to prevent escalating losses. Many a time investors make the mistake of holding on to losing stocks in the hope that it will turn around — but in reality, these stocks seldom do.
For those with a long term investment horizon, high and stable dividend income may be an important factor, as are return on equity, business sustainability, cash flow management. Corporate governance and management best practice are critical factors.
If a company reports annual growth and profits that seems “too good to be true”, it most probably is too good to be true.
Finding good stocks to invest in is difficult enough; therefore, investors should hold on to them for the long haul. Companies with a competitive edge have the tendency to increase in value over time. Eventually, the market would acknowledge the underlying value and push the price upwards.
So, when is the best time to sell? The answer is often as difficult as deciding when to buy. Depending on investor’s risk tolerance, if the stock proves to be too volatile for the nerves, it is best to sell and replace with another that lets you sleep at night.
Furthermore, social, environmental and ethical practices of many companies are now becoming a concern and investors may dispose of those that are in conflict with their social, religious or moral beliefs.
At times, the decision to sell is due to the company itself. A change in the company’s fundamentals or business plan may warrant a re-assessment on whether it is able to continue to meet the investor’s investment requirements.
There is no doubt that the stock market offers the best opportunity for higher returns in the long run. The risk is that it could dramatically erode investor’s net worth in the short-term should the down market last longer than expected. Nonetheless, it offers great opportunities.
Investors ought to rely on their judgment and not be influenced by the market. Knowing the company, finding its winning qualities and knowing when the right time to sell should aid the investor in obtaining success.
Attaching emotional value, however, is not. So be a wise investor; do not get sentimental. Have an investment objective and take the time to study before putting in your hard-earned money. Caveat emptor; be a wary investor.
Mushida Muhammad is the senior portfolio manager of the equity department, Kumpulan Wang Persaraan (Diperbadankan) (KWAP).
This article appeared in The Edge Financial Daily, November 2, 2009.
Friday 6 November 2009
The truth behind impressive headlines and write-ups
The crowds think in images and are impressed by images rather than the facts and figures behind the images. Very often, the images which so impress them are of their own creation. Since a crowd is impressed by images, it can become prey to figures which have very little relation to the fact.
Many corporate movers and doers are aware of this fact. They feed the investors with a steady diet of figures calculated to impress. The most impressive of a possible range of figures is always the published one.
Thus, instead of providing the average per year profit figure, the ten year or even twenty year cumulated profit figure is the one given prominence.
In order to be even more impressive, the gross sales figures for the next ten or twenty years is usually given the banner headline treatment rather than the average annual sales figure.
The typical small investor, who usually finds it difficult to discern the truth behind the impressive headlines and write-ups, is naturally impressed by big numbers: The bigger the number, the more impressed is he.
For example:
Company X would announce that such and such a project would generate $X billion of sales (over the next 20 years in minute print). Company Y, not to be outdone, would announce that its new project would cost $Y billion and would bring in $Z billion of sales over the next fifty years.
The small, non-analytic and emotionally charged investors are so impressed by these billion dollar figures that they can lose total touch with reality.
A very good example of how raw figures can so impress investors such that they lose touch with reality is the case of Antah in connection with the announcement of the Antah-Biwater joint venture.
In 1985, it was announced that Antah-Biwater had won a M$1.4 billion contract to provide water supply to dozens of villages. On the strength of that particular announcement, the price of Antah’s shares rose from M$1.20 to over M$9.00 within a short space of time. To put this price rise into the proper perspective, this price rise had meant that Antah’s total market value had increased from M$60 million to M$460 million. This means that the market had expected Antah to reap a total benefit of M$400 million purely as a result of this project. The ridiculouseness of this particular episode of speculation can only be seen if we analyse the figures carefully.
First, although the whole project is valued at M$1.4 billion, Antah’s share of the project is only 51 per cent. Even if Antah-Biwater were to make 100 percent profit from this project, its total share of the after tax profit would only be M$393 million. This figure is smaller than the increase in market value of Antah as a result of the announcement.
Of course the profit from a civil engineering project can never be 100 per cent. It is more likely to be 10-20 percent and occasionally, even a loss can be sustained. Let us be generous and assume that Antah-Biwater is likely to make a 10 per cent after tax profit (ie 18 per cent pretax profit) from this contract. This means that the total benefit which Antah will reap from this contract would be around M$71 million, which is a mere 18 per cent of the increase in market value. Besides, the life of the whole project is extended over five years and the benefit of the project will accrue only gradually.
Not unexpectedly, Antah’s price fell to below $2.00 again within a year.
How ridiculously over optimistic can the market get! How did those investors who chased its share to over $9.00 feel? Do they blame their bad luck or do they blame themselves for their own lack of judgement?
Ref: Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean
Also read:
http://myinvestingnotes.blogspot.com/2009/11/lityan-selling-to-suckers.html
Many corporate movers and doers are aware of this fact. They feed the investors with a steady diet of figures calculated to impress. The most impressive of a possible range of figures is always the published one.
Thus, instead of providing the average per year profit figure, the ten year or even twenty year cumulated profit figure is the one given prominence.
In order to be even more impressive, the gross sales figures for the next ten or twenty years is usually given the banner headline treatment rather than the average annual sales figure.
The typical small investor, who usually finds it difficult to discern the truth behind the impressive headlines and write-ups, is naturally impressed by big numbers: The bigger the number, the more impressed is he.
For example:
Company X would announce that such and such a project would generate $X billion of sales (over the next 20 years in minute print). Company Y, not to be outdone, would announce that its new project would cost $Y billion and would bring in $Z billion of sales over the next fifty years.
The small, non-analytic and emotionally charged investors are so impressed by these billion dollar figures that they can lose total touch with reality.
A very good example of how raw figures can so impress investors such that they lose touch with reality is the case of Antah in connection with the announcement of the Antah-Biwater joint venture.
In 1985, it was announced that Antah-Biwater had won a M$1.4 billion contract to provide water supply to dozens of villages. On the strength of that particular announcement, the price of Antah’s shares rose from M$1.20 to over M$9.00 within a short space of time. To put this price rise into the proper perspective, this price rise had meant that Antah’s total market value had increased from M$60 million to M$460 million. This means that the market had expected Antah to reap a total benefit of M$400 million purely as a result of this project. The ridiculouseness of this particular episode of speculation can only be seen if we analyse the figures carefully.
First, although the whole project is valued at M$1.4 billion, Antah’s share of the project is only 51 per cent. Even if Antah-Biwater were to make 100 percent profit from this project, its total share of the after tax profit would only be M$393 million. This figure is smaller than the increase in market value of Antah as a result of the announcement.
Of course the profit from a civil engineering project can never be 100 per cent. It is more likely to be 10-20 percent and occasionally, even a loss can be sustained. Let us be generous and assume that Antah-Biwater is likely to make a 10 per cent after tax profit (ie 18 per cent pretax profit) from this contract. This means that the total benefit which Antah will reap from this contract would be around M$71 million, which is a mere 18 per cent of the increase in market value. Besides, the life of the whole project is extended over five years and the benefit of the project will accrue only gradually.
Not unexpectedly, Antah’s price fell to below $2.00 again within a year.
How ridiculously over optimistic can the market get! How did those investors who chased its share to over $9.00 feel? Do they blame their bad luck or do they blame themselves for their own lack of judgement?
Ref: Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean
Also read:
http://myinvestingnotes.blogspot.com/2009/11/lityan-selling-to-suckers.html
Understanding China: Property Market and Stock Market
Understanding China
China has expanded its economy for the last 20 years. Its growth over the last 10 years was even more impressive than the first 10 years.
Its present stock market is trading at a PE of 50. This is not sustainable.
Why is the PE so high?
Being a relatively new stock market, the 'investors' are not savvy and the price fluctuations are expected to be larger than a mature market.
Another reason is the absence of other assets for the growing affluent Chinese to invest in. Besides keeping money in the bank, most Chinese invest into the property sectors and the stock markets. The high prices in these markets are reflecting the disparity in the excess demand over supply.
Properties in China's biggest cities, Shanghai and Peking have doubled in price over the last 5 years. This rise appears unabated. Some properties have risen another 2% to 10% over the last few months. Rental yields can support about 50% of the mortgage repayments in most cases. The gains in investing into these properties are purely capital gains from property price appreciations.
In Peking, it is not uncommon to find a 3 bedroom flat in a condominium centrally located priced at 5 million yuan. The average per capital income of the local Peking resident is around 2,000 yuan per month. How can such prices be supported? Are these properties affordable? Is there a disconnect between the prices of properties and the affordability of the people who are going to buy and live in them? Giving the present limited supply relative to demand, the price can continue to be supported. This can be explained by the unequal distribution of wealth among the population. There is a small group enjoying a large percentage of the wealth and this group will continue to invest into the property and the stock market in China. There is still some time to go to equilibrium.
There are many businesses in China with huge business opportunities tapping the capital market. The A shares cannot be traded by foreigners. To participate in the Chinese companies one would need to buy the H shares of these Chinese companies listed in the Hong Kong Stock Exchange (HangSeng).
China has expanded its economy for the last 20 years. Its growth over the last 10 years was even more impressive than the first 10 years.
Its present stock market is trading at a PE of 50. This is not sustainable.
Why is the PE so high?
Being a relatively new stock market, the 'investors' are not savvy and the price fluctuations are expected to be larger than a mature market.
Another reason is the absence of other assets for the growing affluent Chinese to invest in. Besides keeping money in the bank, most Chinese invest into the property sectors and the stock markets. The high prices in these markets are reflecting the disparity in the excess demand over supply.
Properties in China's biggest cities, Shanghai and Peking have doubled in price over the last 5 years. This rise appears unabated. Some properties have risen another 2% to 10% over the last few months. Rental yields can support about 50% of the mortgage repayments in most cases. The gains in investing into these properties are purely capital gains from property price appreciations.
In Peking, it is not uncommon to find a 3 bedroom flat in a condominium centrally located priced at 5 million yuan. The average per capital income of the local Peking resident is around 2,000 yuan per month. How can such prices be supported? Are these properties affordable? Is there a disconnect between the prices of properties and the affordability of the people who are going to buy and live in them? Giving the present limited supply relative to demand, the price can continue to be supported. This can be explained by the unequal distribution of wealth among the population. There is a small group enjoying a large percentage of the wealth and this group will continue to invest into the property and the stock market in China. There is still some time to go to equilibrium.
There are many businesses in China with huge business opportunities tapping the capital market. The A shares cannot be traded by foreigners. To participate in the Chinese companies one would need to buy the H shares of these Chinese companies listed in the Hong Kong Stock Exchange (HangSeng).
Lityan: Selling to Suckers
Friday November 6, 2009
Lityan MD sells stake and pockets RM3.9mil
PETALING JAYA: Lityan Holdings Bhd group managing director and chief executive officer Nor Badli Mohd Alias has disposed of his entire stake in the company, a filing on Wednesday with Bursa Malaysia showed.
The stake, comprising 1.25 million shares or 1.98% of the issued shares, was disposed of at RM3.13 per share at a total value of RM3.91mil on Tuesday.
Nor Badli had purchased the shares en bloc on Oct 27 at RM1 per share, a separate filing on Oct 30 showed.
According to a source familiar with the restructuring of Lityan, the stake acquired and then sold by Nor Badli was part of the company’s restructuring scheme.
“As part of the resolutions passed by the shareholders for the restructuring programme, the group managing director and the executive director were both allowed to acquire up to a maximum 1.25 million shares and 750,000 shares respectively in support of the placement exercise,” he told StarBiz.
He added that as part of the restructuring plan, 17.2 million shares were issued to creditors, of which 16.8 million were successfully placed out and issued on Oct 27 at a reference price of RM1 per share.
The stock had traded at 1.6 sen in June 2006 before it was suspended.
Lityan’s share price has been surging since it emerged from Practice Note 17 status and relisted on Oct 30.
The stock closed yesterday at RM2.65.
Sources said interest in the company was largely due to it being in a partnership with Huawei Technologies Co Ltd, and that the partnership had successfully bid for one component of Telekom Malaysia Bhd’s RM11.3bil high-speed broadband project.
Lityan was queried by Bursa, which issued an unusual market activity advisory on the counter on Tuesday, following which the shares tumbled 9.25% to RM2.45 on that day.
Trading in the company’s shares was halted less than half an hour before the market closed on the same day.
-----
Thursday November 5, 2009
Investors continue buying into Lityan
By FINTAN NG
PETALING JAYA: Investor interest in Lityan Holdings Bhd, which recently emerged from Practice Note 17 status as a listed subsidiary of Lembaga Tabung Haji (LTH), has been intense on speculation of the company’s earnings potential resulting from a tie-up with Huawei Technologies Co Ltd as well as other Middle East project tenders.
Lityan group managing director and chief executive officer Nor Badli Mohd Alias said the share price volatility was likely due to the relatively lower public shareholding spread of the company with LTH having a 56% stake in the company.
“There’s a lot of interest in the company but people are not selling. Coupled with the low public shareholding spread, there’s bound to be a rise in the share price,” he told StarBiz.
On Tuesday, Lityan’s share price volatility earned the company an unusual market activity query from Bursa Malaysia.
The stock tumbled 9.3% to RM2.45 on the same day before trading in its shares was halted less than 30 minutes before the market closed.
Last Friday, the company’s shares surged 25.17% to close at RM1.74 from an opening price of RM1.39. From Oct 30 to Nov 4, the average trading volume was 13.68 million shares or 21.67% of the total share capital of 63.1 million shares.
Nor Badli had said last Friday that the company was in a tie-up with Huawei for Telekom Malaysia Bhd’s (TM) high-speed broadband (HSBB) project as well as tendering for projects in the Middle East.
Although TM group chief executive officer Datuk Zam Isa did not identify Huawei as one of the partners in the project in an earlier report, industry sources said the Shenzhen-based company was one of the technology partners in the RM11.3bil HSBB project.
Nor Badli said the company was in a tie-up with Huawei to tender for three packages in the HSBB project but declined to reveal details except that the company’s share of the packages would be based on its scope of works.
According to AmResearch Sdn Bhd, Lityan’s work in the project would involve fibre-to-the-home implementation and Internet protocol television infrastructure.
So far, only the package involving the roll-out of fibre optics for the last-mile to targeted high-density areas of Kuala Lumpur and Selangor has been announced.
“We don’t know when the results of the tender for the other packages will be announced. It’s been delayed six months,” Nor Badli said, adding that the tenders in the Middle East were done in conjunction with LTH.
“This will involve projects with a minimum total value of US$1bil,” he said.
Lityan MD sells stake and pockets RM3.9mil
PETALING JAYA: Lityan Holdings Bhd group managing director and chief executive officer Nor Badli Mohd Alias has disposed of his entire stake in the company, a filing on Wednesday with Bursa Malaysia showed.
The stake, comprising 1.25 million shares or 1.98% of the issued shares, was disposed of at RM3.13 per share at a total value of RM3.91mil on Tuesday.
Nor Badli had purchased the shares en bloc on Oct 27 at RM1 per share, a separate filing on Oct 30 showed.
According to a source familiar with the restructuring of Lityan, the stake acquired and then sold by Nor Badli was part of the company’s restructuring scheme.
“As part of the resolutions passed by the shareholders for the restructuring programme, the group managing director and the executive director were both allowed to acquire up to a maximum 1.25 million shares and 750,000 shares respectively in support of the placement exercise,” he told StarBiz.
He added that as part of the restructuring plan, 17.2 million shares were issued to creditors, of which 16.8 million were successfully placed out and issued on Oct 27 at a reference price of RM1 per share.
The stock had traded at 1.6 sen in June 2006 before it was suspended.
Lityan’s share price has been surging since it emerged from Practice Note 17 status and relisted on Oct 30.
The stock closed yesterday at RM2.65.
Sources said interest in the company was largely due to it being in a partnership with Huawei Technologies Co Ltd, and that the partnership had successfully bid for one component of Telekom Malaysia Bhd’s RM11.3bil high-speed broadband project.
Lityan was queried by Bursa, which issued an unusual market activity advisory on the counter on Tuesday, following which the shares tumbled 9.25% to RM2.45 on that day.
Trading in the company’s shares was halted less than half an hour before the market closed on the same day.
-----
Thursday November 5, 2009
Investors continue buying into Lityan
By FINTAN NG
PETALING JAYA: Investor interest in Lityan Holdings Bhd, which recently emerged from Practice Note 17 status as a listed subsidiary of Lembaga Tabung Haji (LTH), has been intense on speculation of the company’s earnings potential resulting from a tie-up with Huawei Technologies Co Ltd as well as other Middle East project tenders.
Lityan group managing director and chief executive officer Nor Badli Mohd Alias said the share price volatility was likely due to the relatively lower public shareholding spread of the company with LTH having a 56% stake in the company.
“There’s a lot of interest in the company but people are not selling. Coupled with the low public shareholding spread, there’s bound to be a rise in the share price,” he told StarBiz.
On Tuesday, Lityan’s share price volatility earned the company an unusual market activity query from Bursa Malaysia.
The stock tumbled 9.3% to RM2.45 on the same day before trading in its shares was halted less than 30 minutes before the market closed.
Last Friday, the company’s shares surged 25.17% to close at RM1.74 from an opening price of RM1.39. From Oct 30 to Nov 4, the average trading volume was 13.68 million shares or 21.67% of the total share capital of 63.1 million shares.
Nor Badli had said last Friday that the company was in a tie-up with Huawei for Telekom Malaysia Bhd’s (TM) high-speed broadband (HSBB) project as well as tendering for projects in the Middle East.
Although TM group chief executive officer Datuk Zam Isa did not identify Huawei as one of the partners in the project in an earlier report, industry sources said the Shenzhen-based company was one of the technology partners in the RM11.3bil HSBB project.
Nor Badli said the company was in a tie-up with Huawei to tender for three packages in the HSBB project but declined to reveal details except that the company’s share of the packages would be based on its scope of works.
According to AmResearch Sdn Bhd, Lityan’s work in the project would involve fibre-to-the-home implementation and Internet protocol television infrastructure.
So far, only the package involving the roll-out of fibre optics for the last-mile to targeted high-density areas of Kuala Lumpur and Selangor has been announced.
“We don’t know when the results of the tender for the other packages will be announced. It’s been delayed six months,” Nor Badli said, adding that the tenders in the Middle East were done in conjunction with LTH.
“This will involve projects with a minimum total value of US$1bil,” he said.
Analysts bullish on Malaysian banking sector
Analysts bullish on banking sector
By Goh Thean Eu
Published: 2009/11/06
Analysts believe the war to attract more customers to take up loans by lowering interest rates has come to an end, if not near to an end, as lenders are beginning to raise interest rates.
ANALYSTS and fund managers are generally bullish on the banking sector next year, as economic recovery, higher interest rates and lower non-performing loans (NPL) are expected to lift banks earnings.
"This year, people were worried about how the economy would shape up, and on the banking sector, people were concerned about banks' NPL. A lot of these concerns were addressed and we are now more optimistic about next year.
"We believe asset quality would not deteriorate significantly next year and we are also expecting the central bank to increase the OPR some time next year, which would offer a good earning driver and higher margin for the banks and we believe earnings and margins to be better next year," said a TA Securities analyst.
For more than a year, banks were in a fierce competition to attract more customers to take up loans by lowering interest rates. Analysts believe the war has come to an end, if not near to an end, as lenders are beginning to raise interest rates.
"Moving forward, the competition landscape would not be as bad as we expected earlier, thanks to the revision of interest rates. It will certainly help increase the net interest margins of banks.
"As long as the economic recovery story remains intact, we expect banks provision will eventually come down and we expect most local banks to post a double-digit growth on revenue and earnings next year," said an analyst from a local research house.
Aberdeen Asset Management managing director Gerald Ambrose thinks likewise.
"Companies must meet a set of criteria before we invest in them. From our company visits so far, I must say, a lot of companies that met our criteria are banks," he said.
He said companies that meet the criteria are companies that are well-managed, has a long-term business plan, good corporate governance, transparent and willing to return excess cash to minority shareholders as dividend, among others.
Although the Kuala Lumpur Financial Index rose by more than 55 per cent this year alone, compared with the 42 per cent year-to-date increase of the benchmark FTSE Bursa Malaysia KLCI, analysts still believe that it's not too late to invest in banks.
"We are maintaining our overweight call on the sector on the grounds that NPLs are likely to be benign while the downtrend in provisions and strong capitalisation positions will provide future earnings and capital management upside surprises, which may not have been fully reflected in banks' valuation," said OSK Research Sdn Bhd analyst Keith Wee in a report.
OSK placed a "buy" call on CIMB and EON Capital, while TA Securities has a "buy" on Public Bank and Hong Leong Bank.
Thursday 5 November 2009
****Be a Better Investor
Be a Better Investor
Sponsored by
by Bob Frick
Thursday, October 8, 2009
Outsmart your emotions, cut your fees, keep it simple -- and reap higher returns.
Damn, it happened again. Ten years after the internet bubble ballooned, then burst, we're left to pick up our shattered portfolios from another cycle of hope, anxiety and regret. To make matters worse, our own actions added insult to the injury inflicted by the catastrophic bear market that ended last March.
By buying high and selling low, mutual fund investors, for instance, lost $42 billion more than they should have during the 12-month period that ended last May, estimates The Hulbert Financial Digest. (In a similar vein, columnist Russel Kinnel tells us that the typical investor earns far less than funds' reported returns.)
How could this have happened? The simple answer is that emotion, not logic, usually rules our investing habits. In many ways we're predisposed not just to buy high and sell low, but to cling to losing investments we should sell, ignore threats to our wealth and follow the investing herd off a cliff again and again.
These tendencies are now well documented in the burgeoning fields of investor psychology and behavioral finance. Scholars in both disciplines are arriving at a new understanding of how humans make decisions. For instance, in the bestseller Nudge: Improving Decisions About Health, Wealth and Happiness, authors Richard Thaler and Cass Sunstein say long-held assumptions that people "think like Albert Einstein, store as much memory as IBM's Big Blue and exercise the willpower of Mahatma Gandhi" are falling by the wayside. To help people, including investors, make better choices, we have to understand and embrace our emotions and predilections, say the authors, and figure out how to avoid becoming our own worst enemy.
Teachable Moments
But just recognizing our mental kinks won't help us undo them, experts say. "I don't believe it's possible to change behavior that's really hard-wired into our biology," says Andrew Lo, director of the Massachusetts Institute of Technology Laboratory for Financial Engineering. But "Homo sapiens can do what we've always done: adapt. We don't have wings, but we can fly. So we develop tools to protect ourselves from these emotional shortcomings."
The silver lining to the recent bear market is that painful experiences remain in our memories for a long time and provide lessons for the future. So let's review the past few years through the eyes of experts in investor psychology and behavioral finance, studying events not as a financial roller coaster, but rather as an emotional one.
Humans are wired to organize facts around stories. The Internet bubble was fueled by a fable that the Web would lead to an unending explosion of commerce. The explosion in real estate speculation that began in the early 2000s was firmly built on the same kind of fiction. Stories of people getting rich as property prices rose year after year "replicated and spread like thought viruses," says Robert Shiller, the Yale economist who warned of the Internet and real estate bubbles in different editions of his book Irrational Exuberance. Such tales instill confidence in people and inspire them to move fast to get rich themselves.
These stories proliferate even when they fly in the face of facts. That's because we tend to look only for facts that support our story, something called confirmation bias. So, for instance, real estate prices in Las Vegas and Phoenix rose at double-digit rates, as if land in those Sun Belt cities was a scarce commodity. The desire to cash in on the property boom ignored "obvious facts," says Thaler, such as a virtually "infinite supply of land" that facilitated an abundant supply of homes.
So think back to 2006. Real estate is on fire, the stock market is doing pretty well, and both investments look like sure bets. That's about the time the dangerous psychological juju started kicking in. Greg Davies, head of behavioral finance for Barclays Wealth, the London-based financial-services giant, says investors fell victim to the recency effect and began to lose their sense of caution because they'd known nothing but gains for several years.
As a result of the recency effect, says Davies, "what's most recent in our minds stands out." For instance, "if investments have been going up for a while, I start seeing them as less risky. I start thinking, Well, my budget for risky investments isn't full -- I can put more in there."
Buying Stimuli
As investors pile in and the markets continue to rise, herd behavior and regret drive our actions. One consequence of herd behavior is that it makes us think something is safe because it seems safe if everyone is doing it. And regret causes those who can't stand being left out to jump in.
Then, as our portfolios swell, we start to feel a collective buzz courtesy of dopamine, a feel-good chemical that the brain produces at the mere thought of making money (or driving a sports car or having sex). The more dopamine produced, the more decision-making is kicked to the primitive, emotional parts of our brain, making it harder for us to think logically. As the reward system gets excited, the fear centers in the brain are deactivated, says Richard Peterson, a psychiatrist who runs a hedge fund that aims to make money by taking advantage of investors' overreactions. "We're no longer able to observe the threats," says Peterson. "We observe only what we want to."
Now recall the mood in September 2008. The real estate sector is crumbling, and the stock market has been slipping for nearly a year. Uncle Sam has taken over Fannie Mae and Freddie Mac, and Bear Stearns and Lehman Brothers have failed. Investors, who couldn't wait to check their account balances when the market was rising, monitor them much less frequently now. They are suffering from the ostrich effect, a term coined by George Loewenstein, a professor of economics and psychology at Carnegie Mellon University.
Many investors who know intellectually that they're overloaded in stocks can't pull back, even if they're suffering steep losses. The reason is something called the disposition effect. On some level we feel that if we don't actually sell a stock that's underwater, we're not actually realizing the loss and the pain that goes with it.
Then, from mid September to mid October, the sum of our suppressed financial fears came to fruition. Stocks tumbled 30%. Do you remember that as an especially painful period? If you do, you're not imagining that pain. When we lose money, our brain reacts in the same way that it processes physical pain. Losing money hurts.
For many people, plunging portfolio values became too much to bear, and they just wanted the pain to end. So they sold. According to the Investment Company Institute, the greatest net monthly outflow from stock funds in the past two years -- $25 billion -- came in February 2009. The timing couldn't have been much worse for those who sold then. As it turned out, stocks bottomed on March 9 and surged about 50% over the ensuing six months.
As stocks have recovered, our emotions have begun to heal. Lo, the MIT professor, thinks most investors have already dealt with three of the five stages of grief-the denial, anger and bargaining phases-and are now working through the last two: depression and acceptance.
Now is a perfect time, while the trauma is still fresh in our minds, to figure out how to prevent similar mistakes in the future. Unfortunately, says Peterson, the psychiatrist and hedge-fund manager, the bear market was so painful that many investors don't want to think about it. As a result, he says, "five years from now they'll make the same mistakes."
So, if you recognize yourself in some of the actions (or lack thereof) we've just described, now's the time to take steps to make sure you don't suffer the same mental miscues in the future. You may not be able to change your behavior in trying times, but you can change your investing strategy to neutralize negative impulses.
One bold idea: If you handle your own investments and you find that emotions are tripping you up, hire an adviser. A good adviser should help you avoid those impulses-which typically stem from short-term fluctuations in the value of your investments-and keep you focused on meeting long-term goals. The extra cost could be worth the money.
You can also use a psychological quirk, called mental accounting, to your advantage. Mental accounting holds that even though a dollar is a dollar, we often mentally separate our wealth into different accounts. Consider opening a separate account to house your "safe" money-cash-type investments and other low-risk stuff that should hold up even during a stock-market crash. The size of your safe account depends on your risk tolerance and other factors. But while the pain of the bear market is fresh in your mind, determine how much of a cushion you need so that another 40% drop in the rest of your investments won't lead to poorly conceived actions that are driven by panic.
You may also want to tone down the risk in your other accounts as an antidote for increasing volatility in all sorts of markets. A more stable portfolio will leave you calmer and better able to make decisions based on logic rather than emotion.
Beware of merely mixing stocks and bonds, which Lo says creates "diversification deficit disorder." You need other assets, such as real estate, commodities and other alternative investments.
One of the best vaccines against emotional decision-making is the tried-and-true technique of dollar-cost averaging. By investing a fixed amount of money on a regular basis-the practice of just about anyone who participates in a 401(k) or similar retirement plan-you're conceding that you can't time the market. You avoid the temptation to buy high, or to pull out precipitously if the market sours. Plus, you'll continue to invest when markets decline, so -- voilà -- you're buying low. Who knew that controlling emotions could be so easy?
http://finance.yahoo.com/focus-retirement/article/107912/be-a-better-investor.html;_ylt=ApAH9skfEtqpCrB.0qa.Qc2VBa1_;_ylu=X3oDMTFiZGM1OXZpBHBvcwMxNARzZWMDZmlkZWxpdHlBcmNoaXZlBHNsawN3aGljaGluc3RpbmM-?mod=fidelity-buildingwealth
Summary:
Rather than being emotional, investing should be rational.
Learn from the recent severe bear market. Analyse your emotions, actions and adapt strategies to optimise your investing. Here are 3 strategies:
Sponsored by
by Bob Frick
Thursday, October 8, 2009
Outsmart your emotions, cut your fees, keep it simple -- and reap higher returns.
Damn, it happened again. Ten years after the internet bubble ballooned, then burst, we're left to pick up our shattered portfolios from another cycle of hope, anxiety and regret. To make matters worse, our own actions added insult to the injury inflicted by the catastrophic bear market that ended last March.
By buying high and selling low, mutual fund investors, for instance, lost $42 billion more than they should have during the 12-month period that ended last May, estimates The Hulbert Financial Digest. (In a similar vein, columnist Russel Kinnel tells us that the typical investor earns far less than funds' reported returns.)
How could this have happened? The simple answer is that emotion, not logic, usually rules our investing habits. In many ways we're predisposed not just to buy high and sell low, but to cling to losing investments we should sell, ignore threats to our wealth and follow the investing herd off a cliff again and again.
These tendencies are now well documented in the burgeoning fields of investor psychology and behavioral finance. Scholars in both disciplines are arriving at a new understanding of how humans make decisions. For instance, in the bestseller Nudge: Improving Decisions About Health, Wealth and Happiness, authors Richard Thaler and Cass Sunstein say long-held assumptions that people "think like Albert Einstein, store as much memory as IBM's Big Blue and exercise the willpower of Mahatma Gandhi" are falling by the wayside. To help people, including investors, make better choices, we have to understand and embrace our emotions and predilections, say the authors, and figure out how to avoid becoming our own worst enemy.
Teachable Moments
But just recognizing our mental kinks won't help us undo them, experts say. "I don't believe it's possible to change behavior that's really hard-wired into our biology," says Andrew Lo, director of the Massachusetts Institute of Technology Laboratory for Financial Engineering. But "Homo sapiens can do what we've always done: adapt. We don't have wings, but we can fly. So we develop tools to protect ourselves from these emotional shortcomings."
The silver lining to the recent bear market is that painful experiences remain in our memories for a long time and provide lessons for the future. So let's review the past few years through the eyes of experts in investor psychology and behavioral finance, studying events not as a financial roller coaster, but rather as an emotional one.
Humans are wired to organize facts around stories. The Internet bubble was fueled by a fable that the Web would lead to an unending explosion of commerce. The explosion in real estate speculation that began in the early 2000s was firmly built on the same kind of fiction. Stories of people getting rich as property prices rose year after year "replicated and spread like thought viruses," says Robert Shiller, the Yale economist who warned of the Internet and real estate bubbles in different editions of his book Irrational Exuberance. Such tales instill confidence in people and inspire them to move fast to get rich themselves.
These stories proliferate even when they fly in the face of facts. That's because we tend to look only for facts that support our story, something called confirmation bias. So, for instance, real estate prices in Las Vegas and Phoenix rose at double-digit rates, as if land in those Sun Belt cities was a scarce commodity. The desire to cash in on the property boom ignored "obvious facts," says Thaler, such as a virtually "infinite supply of land" that facilitated an abundant supply of homes.
So think back to 2006. Real estate is on fire, the stock market is doing pretty well, and both investments look like sure bets. That's about the time the dangerous psychological juju started kicking in. Greg Davies, head of behavioral finance for Barclays Wealth, the London-based financial-services giant, says investors fell victim to the recency effect and began to lose their sense of caution because they'd known nothing but gains for several years.
As a result of the recency effect, says Davies, "what's most recent in our minds stands out." For instance, "if investments have been going up for a while, I start seeing them as less risky. I start thinking, Well, my budget for risky investments isn't full -- I can put more in there."
Buying Stimuli
As investors pile in and the markets continue to rise, herd behavior and regret drive our actions. One consequence of herd behavior is that it makes us think something is safe because it seems safe if everyone is doing it. And regret causes those who can't stand being left out to jump in.
Then, as our portfolios swell, we start to feel a collective buzz courtesy of dopamine, a feel-good chemical that the brain produces at the mere thought of making money (or driving a sports car or having sex). The more dopamine produced, the more decision-making is kicked to the primitive, emotional parts of our brain, making it harder for us to think logically. As the reward system gets excited, the fear centers in the brain are deactivated, says Richard Peterson, a psychiatrist who runs a hedge fund that aims to make money by taking advantage of investors' overreactions. "We're no longer able to observe the threats," says Peterson. "We observe only what we want to."
Now recall the mood in September 2008. The real estate sector is crumbling, and the stock market has been slipping for nearly a year. Uncle Sam has taken over Fannie Mae and Freddie Mac, and Bear Stearns and Lehman Brothers have failed. Investors, who couldn't wait to check their account balances when the market was rising, monitor them much less frequently now. They are suffering from the ostrich effect, a term coined by George Loewenstein, a professor of economics and psychology at Carnegie Mellon University.
Many investors who know intellectually that they're overloaded in stocks can't pull back, even if they're suffering steep losses. The reason is something called the disposition effect. On some level we feel that if we don't actually sell a stock that's underwater, we're not actually realizing the loss and the pain that goes with it.
Then, from mid September to mid October, the sum of our suppressed financial fears came to fruition. Stocks tumbled 30%. Do you remember that as an especially painful period? If you do, you're not imagining that pain. When we lose money, our brain reacts in the same way that it processes physical pain. Losing money hurts.
For many people, plunging portfolio values became too much to bear, and they just wanted the pain to end. So they sold. According to the Investment Company Institute, the greatest net monthly outflow from stock funds in the past two years -- $25 billion -- came in February 2009. The timing couldn't have been much worse for those who sold then. As it turned out, stocks bottomed on March 9 and surged about 50% over the ensuing six months.
As stocks have recovered, our emotions have begun to heal. Lo, the MIT professor, thinks most investors have already dealt with three of the five stages of grief-the denial, anger and bargaining phases-and are now working through the last two: depression and acceptance.
Now is a perfect time, while the trauma is still fresh in our minds, to figure out how to prevent similar mistakes in the future. Unfortunately, says Peterson, the psychiatrist and hedge-fund manager, the bear market was so painful that many investors don't want to think about it. As a result, he says, "five years from now they'll make the same mistakes."
So, if you recognize yourself in some of the actions (or lack thereof) we've just described, now's the time to take steps to make sure you don't suffer the same mental miscues in the future. You may not be able to change your behavior in trying times, but you can change your investing strategy to neutralize negative impulses.
One bold idea: If you handle your own investments and you find that emotions are tripping you up, hire an adviser. A good adviser should help you avoid those impulses-which typically stem from short-term fluctuations in the value of your investments-and keep you focused on meeting long-term goals. The extra cost could be worth the money.
You can also use a psychological quirk, called mental accounting, to your advantage. Mental accounting holds that even though a dollar is a dollar, we often mentally separate our wealth into different accounts. Consider opening a separate account to house your "safe" money-cash-type investments and other low-risk stuff that should hold up even during a stock-market crash. The size of your safe account depends on your risk tolerance and other factors. But while the pain of the bear market is fresh in your mind, determine how much of a cushion you need so that another 40% drop in the rest of your investments won't lead to poorly conceived actions that are driven by panic.
You may also want to tone down the risk in your other accounts as an antidote for increasing volatility in all sorts of markets. A more stable portfolio will leave you calmer and better able to make decisions based on logic rather than emotion.
Beware of merely mixing stocks and bonds, which Lo says creates "diversification deficit disorder." You need other assets, such as real estate, commodities and other alternative investments.
One of the best vaccines against emotional decision-making is the tried-and-true technique of dollar-cost averaging. By investing a fixed amount of money on a regular basis-the practice of just about anyone who participates in a 401(k) or similar retirement plan-you're conceding that you can't time the market. You avoid the temptation to buy high, or to pull out precipitously if the market sours. Plus, you'll continue to invest when markets decline, so -- voilà -- you're buying low. Who knew that controlling emotions could be so easy?
http://finance.yahoo.com/focus-retirement/article/107912/be-a-better-investor.html;_ylt=ApAH9skfEtqpCrB.0qa.Qc2VBa1_;_ylu=X3oDMTFiZGM1OXZpBHBvcwMxNARzZWMDZmlkZWxpdHlBcmNoaXZlBHNsawN3aGljaGluc3RpbmM-?mod=fidelity-buildingwealth
Summary:
Rather than being emotional, investing should be rational.
Learn from the recent severe bear market. Analyse your emotions, actions and adapt strategies to optimise your investing. Here are 3 strategies:
- By using mental accounting, create a portfolio for those good quality stocks you wish or will hold long term. This prevents you from reacting emotionally in the face of a falling market.
- Build a portfolio of stocks with lower price volatilities. This ensure that you will be subjected less to the folly of the market price fluctuations which can be huge at times.
- By using dollar cost averaging, you can have the 'gut' to invest into the market when the prices are obviously low in a falling market. Similarly, do not be carried away during the height of a bull market. This can be prevented to certain extent by dollar cost averaging strategy, though the smarter investors will probably allocate more to cash during this period.
This recession is the longest we’ve had post World War II.
CNN Money just released an interesting slideshow about the state of the economy as of late. If you’re wondering about when (or whether) this economy will be *truly* turning around and whether your vague unsettling feelings about it have any basis, then these hard numbers should help give you perspective. If you’re going to get anything from this post, maybe it’s this: that this recession is the longest, most grating one we’ve had post World War II.
http://money.cnn.com/2009/10/29/news/economy/gdp/index.htm
Subscribe to:
Posts (Atom)