Indonesia: 2010 market outlook: Who will pull the trigger first?

Friday, February 5, 2010 9:32 PM


2010 market outlook: Who will pull the trigger first?

Harry Su , Senior Vice President, Head of Research | Thu, 02/04/2010 12:06 PM | Business

During our recent Indonesia strategy marketing trip we spent two full days in Singapore and another two full days in Hong Kong, meeting with various fund managers. We found that all of those in Singapore were still very much bullish on Indonesia, agreeing with us that the Indonesian market performance would be better in the first half of 2010 than in the second, because the risk of rising inflation and interest rates was expected to be higher in the second half of 2010.

Virtually everyone was overweight in cyclicals, with coal clearly the single-most preferred space. Some fund managers disagreed with us on banks, because of the contagion effect from regional de-rating, expensive valuations and concerns over loan growth — particularly given the reduced in spending on infrastructure in 2010. It is worth noting here that the Public Works Ministry will be spending only Rp 34 trillion in 2010, down 18 percent year on year.

In Hong Kong, fund managers had mixed views on Indonesia. Some were overweight on energy, again as the preferred area of exposure. We found this group of Hong Kong fund managers was in agreement with us to underweight the consumer sector because of rising raw materials prices, particularly sugar (up 123 percent year on year).

Some were neutral, adopting a trading stance because they believed easy money had been made and that markets (i.e. not just those in Indonesia) would be choppy this year because of the current global
market volatility.

Others were underweight or had no exposure in Indonesia. This set of fund managers believed Indonesia would not outperform its strong performance last year. With China tightening and the US dollar gaining strength, prices of commodities would disappoint, which is a negative for Indonesia because one-third of the Jakarta Composite Index (JCI) market capitalization is in commodity-related counters.

Many fund managers told us that regional strategists were all advising that markets around the region would perform better in the first half of 2010 than in the second. When we began our roadshow in Singapore, Bahana was also in this camp, believing that the first half would be a more benign period given that inflation and interest rates were set to remain low during this period.

However, with Singapore fund managers all planning to get out of the Indonesian markets by April-June, the first half of 2010 could turn out to be weaker than the second.

It is worth highlighting that in all meetings we faced more questions about Indonesia’s deteriorating political landscape than we have ever faced before — which is not surprising given the de-rating of the Thai market as a result of the political situation there. It is also worth highlighting that the House of Representatives inquiry committee for Bank Century is expected to provide its preliminary findings on Feb. 4 — but won’t present its final recommendations until March 4.

Theoretically speaking, if the Bank Century case is pursued, Indonesia’s political environment could remain tense until August, when the Constitutional Court is due to hand over the case to the People’s Consultative Assembly (MPR).

Coupled with concerns over China and the US markets, it is possible in our view that profit taking could occur sooner rather than later. In fact, 2010 is shaping up to be a year when big funds will pull the trigger first and exit the market.

The key to the success of stock market portfolios will lie in the timing of exit strategies. On the flip side, once the selling pressure subsides and valuations fall to more reasonable levels, the second half of 2010 could provide more lucrative entry levels for investors.

Happy trading!

http://www.thejakartapost.com/news/2010/02/04/2010-market-outlook-who-will-pull-trigger-first.html

How to properly assess the stock market today

How to properly assess the stock market today

By: Christina Pomoni

The current financial crisis has made investors extremely nervous.

• In majority, they doubt that there are buying opportunities in such downturn, or at least opportunities that will give them a return that can compensate them for the extra risk they undertake under these extremely risky market conditions. 
• On the other hand, equity analysts and stock market theorists consider that this is the perfect timing for entering the stock market and buying good stocks at low prices instead of entering the options markets and buy defensive puts.

1.  One good strategy to assess the potential of stock markets in today’s economy is to evaluate the daily performance of NASDAQ and Dow Jones. The decline of the stock markets is expected given the negative climate of global economy and therefore, the NASDAQ and Dow Jones demonstrate a negative performance, often over a series of trading sessions. However, the index performance alone is not enough to assess the overall performance of the stock market. Investors should also evaluate the performance of the individual stocks. For instance, there are companies that perform really well within the financial crisis such as copper and gold companies that expose positive increases. Therefore, investors can read accurate stock reports on Yahoo Finance or Bloomberg in order to get an idea of the market performance as a whole and be able to evaluate the overall performance of the economy.

2.  Another way to assess market performance is to evaluate the fundamentals of the listed companies. Fundamental analysis examines the economic factors, industrial factors and company variables that define the intrinsic value of an investment. Hence, investors can take into account all these parameters in order to observe how a stock performs in this kind of economy and compare its intrinsic value to its market price. In doing so, investors take well-informed investment decisions. Besides, not all companies under-perform within financial crises. Companies are different, have different products, goals, missions and organizational structures and all these diversities are reflected on their interim financial statements and, of course, on their annual reports. Therefore, by following daily trends, but also by getting to know the company fundamentals, investors acquire a general idea of the market and stick to the hot shots, while avoiding the stocks that decline sharply.

3.  For those investors who are not so much into fundamental analysis, technical analysis may be the answer to their inquiries about the prospect of a stock and the market in general. Technical analysis observes historical data of market performance such as price and volume and identifies new trends in order to estimate the market prospects. In this context, investors can use technical analysis to base their investment decisions on historical market data and psychological factors.

4.  Finally, investors can visit the company website in order to get information on historical data, past performance, market positioning, how well the company does in relation to competition and what are their estimates for the future. Besides, corporate websites are always a good source of information in regards to major organizational or other sort of changes and how smooth they occurred. Stability is extremely important in a company and consequently in an investment decision. Stable companies typically rise upwards. Unstable companies are volatile and fluctuate too much.

http://www.simama.org/article/how-to-properly-assess-the-stock-market-today

Major psychological factors that can make an investment strategy make or break.

Investor behavior is irrational as a result of psychological biases. 

Risk aversion, fear, or over-confidence, are the major psychological factors that can make an investment strategy make or break.

With the help of Behavioral Finance, stock market theorists, finance managers, equity analysts and anyone involved in stock market analysis can identify

• how investors evaluate certain events and 
• react in stock market changes. 

Also, investors can understand and evaluate market changes gaining a broader understanding of the factors that drive their behavior.

Method of fundamental analysis to find out cheap stock, particularly in banking sector.

FINDING OUT CHEAP STOCK

February 5th, 2010 | Author: admin

It is for those who like method of fundamental analysis to find out cheap stock, particularly in banking sector. There are 6 methods that can be used to, those are:

Price to Book Value (P/BV)

It is a method that has common tool used for evaluating bank stock, usually used to see the real value of a bank’s net asset. Investors usually have

• a will to buy stock at P/BV,  ROE 2 times when at least by 15% or
• a will to buy at P/BV, ROE 3 times if at least 20%.

Price to Earning Ratio (PER)

It is commonly understood as price of share compared with net income. This ratio is also often used as P/BV. But, the difference, it is usually used to compare PER of stock with

• PER of industry or
• PER of market.

The weakness of PER calculation is easy distortion by revenue that is unrelated to operation such as foreign exchange earning (or other) that could affect net income position outside the operational performance. PER of banking in 2010 reached 20 times, inline with PER of market in range of 12.5 times.

Price to Pre-Provision Profit (P/PPP)

Ratio of P/PPP is used to measure operational performance of company. Net income volatilities caused by imposition of provisional costs and tax costs can be avoided with this method which is only focus on company’s core business. Still there is criticism of this method, because cost of provision should also essential for the calculated to reflect bank’s management quality. Because of the lower-and-lower P/PPP value of bank’s stock, then it is said that bank’s stock price is considered cheap.

Market Cap to Deposit

This method is used to see how far a representation of bank’s potential growth prospect. The logic which is used in application of this ratio is representing fund that can be used by the bank to be channeled into productive asset, particularly loan channeled into high-impact result. Measurement of this ratio will only be valid if banking sector in good condition and not in financial crisis because of curtain reasons of bank.

Dividend Yield Compared with Risk Free Rate Return

It is valuation method used to accommodate those who argue that buying stock is only worth doing if offered dividend yield could be upper yield offered by risk free rate. The weakness of this method is not count possibility of price increase, especially for countries in category of emerging markets, which have capacity to provide high-enough investment return level from price appreciation only. Therefore, there are investors that more likely tend to get profit from higher price multiplication compared to dividend income.

ROE Compared With Cost of Equity

Rationality that is used in applying this ratio is when ROE of bank under its COE (number of return or minimum required return of investor to invest in a stock), then it is felt better to invest fund in other bank that give more profit. The weakness of this ratio is in risk premium or beta coefficient. Meanwhile, the weakness of ROE is difference of net income quality used to calculate ROE and capital optimizing (equity) owned by bank (whether too little or too much) that can affect the level of bank’s ROE.

(from: inter-sources)
http://techbostonworks.com/?p=407

Donald Yacktman's Investment strategy and methodology. “A low purchase price covers a lot of sins.”

Donald Yacktman's Way (Part II)


Feb. 04, 2010


(GuruFocus, February 4, 2010)

This is the second and the last part of my attempt to analyze Donald Yacktman’s investment strategy and methodology. In this part, I want to deal with questions such as

• how the Yacktmans treats the big picture, 
• how they manage cash level, and 
• how they reach a sell decision, and finally, 
• I will summarize their comments on some individual stocks as examples for the methodology in practice.

If you have not done it, please read Part I before reading any further.

What about the Big Picture?

Consciously or not, investors always form their own opinion towards how the economy and the stock market might do in the near future and position their portfolio accordingly. The press is full of such predictions, and good careers have been made. The dilemma for investors is, in any given market, there are always at least two camps, the bulls and the bears, with seasoned and successful professional managers in each camp.

The Yacktmans are bottom-up guys. When asked, their initial response is that they are not distracted by big picture issues. This dialog is from the recent Q&A with GuruFocus users[2]:

Question 16. Although your focus (both) is stock-picking, do you occasionally get caught up with big pictures issues that distract you from your main goal of picking great stocks? How do you deal with it and why do you think it can happen to investors?

Don: I don’t get distracted by big picture issues but I think many others do. I think most people have trouble buying stocks that are in price decline either because of 

• lack of knowledge, 
• a short time horizon, or
• emotion. 

It is important to be objective.

And the Yacktmans think trying to predict the market is not only useless, it could also be harmful, as illustrated by this dialog in the same Q&A session:

Question 4. At this level of market valuation, how do you think the market will do in the next few years?

Don: We don’t predict the market. Frankly I think that most of the time it is a waste of time. Looking at individual businesses and buying them at good value is a much better use of time. If someone correctly predicted the market 10 years ago, they would have been in cash and not our funds. Who is better off?

• Indeed, knowing what we know now about how the market performed in the last decade, most of us would be better off to put money in cash in the past decade. 

• But knowing what the Yacktmans know about value investing, one is better off investing in stocks.

So the Yacktmans totally ignore the macro factors in their managing money? Wrong! The Value Investor Insight interviewer was rather persistent and direct on this point. Here is a quote from the interview [4]:

Speaking generally, do views on the broader economy make it into your analytical process at all?

SY (Stephen Yacktman): We spend almost 

• no time trying to forecast things like inflation, interest rates and the value of the dollar, but 
• we do try to pay a lot of attention to cycles in how we normalize earnings. 

If margins are at a peak, for example, we don’t necessarily assume they’ll stay there forever. That alone kept us out of a lot of the financials that got hurt the most in the meltdown.
Potential inflation, or the lack thereof, seems to be fairly top-of-mind for investors. What’s your take on that?

DY (Donald Yacktman): Over time, we’re very concerned about the risk of higher inflation, but we expect that the kinds of businesses we own – those that can re-price their products fairly flexibly and that are heavily exposed to currencies other than the U.S. dollar – will navigate an inflationary period fairly well.

So long term inflation finds its way to Expected Rate of Return in the Yactkmans’ world of investing.

Manage Cash Level

Keeping the right level of cash is a key decision for individual investors as well as for fund managers. It is important for individual investor, it is vital for active fund managers. When market crashes, the right thing to do is to buy and take advantage of the lower prices, typically what the fund managers have to deal with is all the redemption requests. It is just an inconvenience in a fund manager’s life that one has to deal with.

Fearing of lagging behind peers and benchmarks, many fund managers tend to be fully invested. In May of 2009, during the MorningStar meeting, Robert Rodriguez was very critical towards this practice in his speech:

Did the industry try and prepare for this tsunami of a credit debacle? I don’t think so. 

• Whether in stocks or in bonds, it seems as though the same old strategies were followed--be fully invested for fear of underperforming and don’t diverge from your benchmark too far and risk index tracking error. 
• The industry drove into this credit debacle at full speed. 
• If active managers maintain this course, I fear the long-term outlook for their funds, as well as their employment, will be at high risk. 
• If they do not reflect upon what they have done wrong in this cycle and attempt to correct their errors, why should their investors expect a different outcome the next time?

Since the beginning of 2007 Robert Rodriguez, Rodriguez kept an unusual amount of cash (as much as 45%) in his FPA Capital portfolio. The Yacktmans, on the other hand,

• had as much as 30% in cash at the market peak of 2007.
• In November 2008, they were “all in”. 
• They even had to swap out some high quality stocks to buy some more cyclical ones. 
• And as of November 30, 2009, they are back to 15% again.[4]

So what drives their cash position up and down?

• Why 15% now? 
• And why as much as 30% at market peak in 2007?
• Is it by design or by luck? 

Careful exam of the Yacktmans's thinking on the matter tells us that the high cash might be a build-in function of their investment methodology. Here we dig into the The Wall Street Transcript Interview[1]:
TWST: What triggers an exit from your portfolio? Do you set sell targets?
…

Donald Yacktman: Think of everything being priced against the long-term Treasury, and we want to see a large spread over what the long-term Treasury yield is.

Stephen Yacktman: But in the present environment the dollar is being deflated and the Treasury rate of return is very low. At some point we say, “Hey, the rate of return of an investment is not acceptable to us.” We walk away. It’s the hardest thing to do because we have to wait for something else to come along. We can’t create something out of nothing.


And in theValue Investor Insight interview [4]:

Are you much less active when markets are calm?

DY: We’re not inactive when markets are relatively calm – there’s always something creating opportunity somewhere – but we do tend to be a lot less active overall. Our turnover has fallen compared to this time last year.

We also don’t let cash burn a hole in our pocket when the number of good opportunities decreases. While we were all in last November, our cash position in the funds today is around 15%.



In another word, the cash level is a result of insisting on

• minimum Forward Rate of Return on the investments and 
• minimum spread between the rate of return and the Treasury yield. 

If the requirements do not meet, the Yacktmans would rather keep the money in cash.
Nowadays, with market recovered more than 60% from the March 2009 low, GuruFocus noticed that

• Robert Rodriguez’s fund is hoarding cash; 
• Bruce Berkowitz has upped his cash level to about 20%, more than historical normal level, which has been about middle teens.; and 
• the Yacktmans had about 15% in cash as of November 30, 2009. 

Since you have made so far in reading my article, I feel obliged to give away this observation. These three managers are not bears or market timers, rather, they are very constructive in managing their money through different market cycles.

When to Sell

Stephen Yacktman answered this one straight-forwardly in The Wall Street Transcript Interview[1]:



TWST: What triggers an exit from your portfolio? Do you set sell targets?

Stephen Yacktman: Many people set a price target by saying, “Okay, I think it is worth $X.” Well, we don’t think that way. We look at what the forward rate of return is, stack it up against other investments and determine which one is the highest and which one is the lowest and what risk we are taking to get that rate of return. We account for things like leverage, cyclicality of earnings, and the quality of the business. An investment that is going to make it into the portfolio with the lowest rate of return would be a company like Coca-Cola that has high predictability and good management. We can just go into autopilot. It becomes our AAA bond.

A sale is triggered by two things.

• If the rate of return is not sufficient or 
• if there is a better opportunity elsewhere with a larger margin of safety to get a similar or higher rate of return, we’ll sell it. 

The overall market dropped and consumer product names held up and the media companies got killed. 

• News Corp. went from the $20s to $5. 
• That drop opened up a huge rate of return gap and encouraged us to sell some of our Pepsi and buy News Corp. 
• We viewed that decision as going from a low teens rate of return to something that was going to make a 20% return. 

There’s no price target ever set, it’s just a function of the environment. 

• What ends up happening, unfortunately, in an environment where everything goes up, is fewer of these returns are satisfactory and we end up more heavily in cash. 
• It’s not that we’re trying to time the market; it’s just there’s nothing to buy.

That is the ideal world, in which every purchase is a win. What about if they made mistake and have to sell at a loss? Here is their perspective according to the GuruFocus Q&A [2]:



Question 14. How hard is it to admit a mistake on an investment thesis and what do you do to not repeat the mistake?

Don: It is important to be objective and not let our ego get in the way. As Will Rogers said, “Good judgment comes from experience and a lot of that comes from bad judgment”.

Brian: I agree. In addition, we can’t let our emotions get in the way. When a mistake has been made, you can’t cross your fingers and hope to recoup your losses. You have to ask yourself, where do I go from here?

• On this day, what are my best options, where are my highest yielding assets? 
• Where would this capital best be allocated now? 
• Once you’ve experienced a permanent loss of capital, there’s only one gear from here and that’s forward. 
• But the key in this business is to avoid the permanent losses. 
• And as my father has often said, “A low purchase price covers a lot of sins.”

Just be careful next time you place a buy order.

Comments on Individual Stocks

As illustrations of how the Yacktmans use the concept of Forward Rate of Return, I include a summary of their comments on some of their top holdings.

Much of this material is from of Value Investor Insight interview found on www.yacktmanfund.com website [4]. You might be better served to read the original document. The document was published on November 30, 2009 and the interview could have happened somewhat before that, so please keep the time elapsed since then when you read it.

1. News Corp. (NWS-A)

· Stock trades half of what it was at the beginning of 2007, yet the business mix and growth prospects are much better than they were back then.

· Company has eight different operating units. The most important business by far is cable network programming. Revenues and earnings in this business have more than doubled over the past five years, driven by increasing subscriber fees from cable and satellite companies, as well as higher rates on the advertising side. Plenty room for growth exists in this line of business.

· Non-U.S. operations is another engine for growth.

· Company is believed to be able to generate more than $1 per share in free cash flow. With the stock price at $11.50 (Now it is $13.67 on Feb. 3, 2009), the free cash flow yield is roughly 8.5%. (Now it is 7.3%).

· On the top of that, the Yacktmans expect a total of 6.5% annual growth on the current free-cash-flow yield.

· So the estimated Forward Rate of Return is in mid-teens per year, double what can be expected from S&P 500 (about 7%, see Part I).

· The age of Rupert Murdoch (78) is not of concern in the time horizon that matters here, especially when one paid no premium for him.

2. Viacom Inc. (VIA-B)

· This is more of a pure-play content company, which owns various cable networks, including Nickelodeon, MTV and Comedy Central, as well as the Paramount movie studio.

· As a content company, Viacom has an upside to demand higher carriage fees from the cable distributor companies over time.

· On the advertising side, Viacom’s advertising should more than bounce back when the economy improves

· Paramount is adding nothing in the valuation model as it is not generating any cash, but as a standalone company, it probably worth $5-7 per Viacom share.

· Cable networks alone will generate $2.50 per share in normalized free cash flow. That’s an 8% cash yield. Even if Viacom grew no faster than the average S&P 500 company – and the Yacktmans think it should do better – that produces an expected return of 12-13% per year.

· Internet delivery of content should not be destructive. As long as you have content, you should be able to sell it for something and make a profit.

3. PepsiCo Inc. (PEP)

· Somewhat distinct from Coca-Cola, Pepsi’s fortunes are much more driven by snack foods.

· The distribution and shelf space of Frito-Lay products create a very high barrier to entry.

· Frito-Lay now accounts for roughly half Pepsi’s overall business.

· The snack-food business is a good one. Buyers are not too price-sensitive, margins are high, and unit-volume growth is pretty strong as busy lifestyles prompt people to eat things on the run.

· The second big driver of the business will be continued global expansion.

· On a forward basis, the Yacktmans are estimating $3.85 per share in normalized earnings. They should keep roughly 85% of that, so free cash flow would be around $3.40. That’s a 5.5% free-cash yield, on top of which they are expecting 3-4% annual volume growth, primarily from increased snack-food sales and overseas expansion. Add in some pricing, largely to keep up with inflation, and the expected annual return is 12-13%, 5% better than S&P 500’s expected rate of return.

4. Comcast Corp. (CMCSK)

· Comcast stock performed poorly in recent history because there was never any cash generated. All the earnings needed to be invested for expansion or equipment upgrades.

· Operationally, Comcast is uniquely positioned because it can offer a full complement of television, Internet, and phone services. They’ve been quite successful in rolling out these bundled services in their territories and skimming off profit from phone companies like AT&T and Verizon.

· What sets Comcast apart as an investment is the fact that a lot of the enormous capital spending necessary to build that network is going away. The company now has a platform to meet customer demands well into the future at modest incremental cost.

· That will have a dramatic impact on free cash flow generation.

· Free cash flow should exceed net income by $1-1.5 billion per year as capital expenditures are much lower than depreciation and amortization. On a normal basis, we estimate free cash flow at more than $1.50 per share, resulting in a 11% cash yield. On top of that one would add inflation plus 2% or so, as they continue to take phone and Internet share. That yields an expected mid-teens return for a company that on a fundamental basis continues to perform extremely well.

· The recently announced proposal to acquire NBC Universal, even assumed overpaid, has limited impact on the company’s value and do not change the view that the stock is undervalued.
Conclusion

Central to the Yacktmans’ investment methodology is the concept of Forward Rate of Return, which is current free cash flow yield plus inflation and plus annual growth in free cash flow. Macro economy and business cycle find their way in the calculation of rate of return;

• when minimum rate of return is hard to get, the Yacktmans build a large cash position;  
• when the rate of return become less attractive comparatively, they sell the individual stock.

Finally, it should be noted that the adjective word for the Forward Rate of Return is “Estimated”. As the examples given above show, the Yacktmans do not calculate the rate to the fifth decimal (not even to the second decimal, for that matter). In investing, they also would rather be approximately right than precisely wrong.

As of now, the compass of Rate of Return points toward high quality companies at attractive valuations, and that is where the Yacktman park their money.

http://www.gurufocus.com/news.php?id=83444

Our Stock-Picking Track Record by Pat Dorsey, Morningstar

By Pat Dorsey, CFA| 1-26-2010 12:20 PM

Our Stock-Picking Track Record
Pat Dorsey takes a look back at the performance of our calls through the downturn and recovery, plus how our star ratings on wide-, narrow-, and no-moat stocks have played out.

Related Links
How Our Stock Calls Have Performed

Pat Dorsey: Hi, I'm Pat Dorsey, director of equity research at Morningstar. At Morningstar's Equity Research Department, we're sometimes accused of taking a bit of an academic focus towards equity research. We spend a lot of time on competitive analysis and cash flow projections, but at the end of the day, the purpose is to pick stocks that go up.

So, the question is, did we do this? How has our performance been in 2009 and over the past few years? We recently published an article looking at our performance in '09 and in the past several years. I wanted to recap some of the highlights for you.

One of the first ways we can look at our performance in general is basically comparing how cheap we thought stocks were in aggregate to how the market has done. On that score, we've done OK.

In '07 and '08, we thought stocks were mildly overvalued. In hindsight, they were more overvalued then we had projected them to be, but at least we weren't pounding the table and saying, "Go out and put all your money into the equity markets."

What we did get right was calling the market as significantly undervalued in late '08 and early '09 when the median price-to-fair value of all the stocks that we cover reached as low as about 0.6, meaning that we thought the median stock in our coverage universe was about 40% undervalued in late '08 and early '09. Of course, that turned out to be a pretty good call.

Close Full Transcript

We can also look at our valuation of popular indexes like the S&P 500 because, since we cover every stock in the S&P 500, we can basically take all of our fair values and roll them up into an aggregate value for the index. Well, before things really rolled over, we had a fair value of the S&P of about 1,500-1,600. That was certainly, in hindsight, too high. (Food for thought:  even the expert got it wrong!)

We quickly adjusted that downward in late '08 to a level of about 1,200-1,250, and I'm very proud of the fact that we actually held our ground. Throughout most of '09, we held our fair value for the S&P at about 1, 200 even as the market was cratering down towards 800, 700 and down to the intra-day number of the beast low on March nine of 666.

We held our ground that whole time that the fair value for the S&P of 1,200. I'm fairly glad that we didn't succumb to the temptation to hide under the covers and not call anything a buy. In fact, we called quite a few things buys at that point in time.

Those are two big ways to look at the overall performance of our stock calls. Another way is basically have our 5-stars, our buy-rated stocks, outperformed our 1-stars, sell-rated stocks? One way we do this is sort of look at it by moat. Look at it by

• wide-moat, 
• narrow-moat and 
• no-moat stocks.

And here again, the story is pretty good. If you look at our wide-moat stocks over pretty much all time periods--trailing three years, five years and last year--our 5-star, buy-rated, wide-moat stocks have beaten our entire coverage universe of wide-moat stocks and, of course have done much better than our 1-star, sell-rated, wide-moat stocks.

Same story on the narrow-moat side. Of course, narrow-moat companies are the kinds of companies that don't have quite as strong an advantage as wide-moat businesses, and they are still good businesses. And those are businesses where, again, our 5-stars have out-performed narrow moats in general, as well as our sell-rated, 1-star, narrow-moat stocks.

Now, on the no-moat side of things, the story's a little bit more mixed, frankly. We cover about 900 no-moat stocks. These are typically sometimes smaller, less well competitively advantaged businesses. Businesses that we think are very prone to the vicissitudes of the economy and don't really have strong economic moats. And our performance here has been a bit more skewed, basically. We have not really done a very good job of sorting out the buy-rated ones from the 1-star, no-moat stocks. I think there's a couple reasons for this.

One is, well, frankly these are harder companies to value at the end of the day. They tend to be more volatile. They tend to be less predictable. They tend to be more easily buffeted by macroeconomic events, so they're just harder to value. They've also more volatile. They tend to be a little bit more levered and smaller, on average. They're just tougher companies to get you arms around. And our 1-star, no-moat stocks actually did incredibly well in 2009.

So, if you had owned this portfolio of beaten-down retailers, auto parts companies and media firms, you would have made a ton of money in 2009. You would have also needed a titanium-lined stomach to have held them from the beginning of the year through the March lows, and I'm not quite sure how many people would have had the fortitude to do this. If you did, more power to you. But I think the perhaps better risk-adjusted way is to think about the 5-star, narrow-moat and wide-moat stocks.

Finally, our strategies have done fairly well over time. These are kind of real money portfolios. Again, you're seeing more conservative strategies, like our Morningstar StockInvestor Tortoise Portfolio, didn't do quite as well in 2009, but it also didn't lose nearly as much money as the market in 2008, where as our more aggressive portfolios, like the Morningstar StockInvestor Hare, did quite well in 2009, as taking risk was rewarded by the market .

And our Wide Moat Focus Index, which basically takes the 20 cheapest of our wide-moat stocks, basically has been knocking the cover off the ball. It was up about 46% in 2009 and is beating the market by about 500 basis points annualized over the past five years. Again, it's a very simple, mechanical strategy. It's simply looking at our wide-moat universe of about 160 companies and looking for the 20 cheapest and then rebalancing quarterly.

I think what that really shows is the value of a disciplined approach and having a watch-list sorting out a group of companies you think that have the economic sticking power to be around for the long haul and waiting and buying them when they're cheap. That's essentially all this strategy does.

So, that's a pretty comprehensive look at our performance in 2009 and over the past several years. Overall, pretty good. We could have done a better job with the no-moat stocks but again, these are just frankly harder companies to get your arms around. They tend to be a little bit riskier and those were some missed opportunities, but overall, I'm pretty pleased with the performance.

I'm Pat Dorsey and thanks for watching.
Video:
http://www.morningstar.com/cover/videocenter.aspx?id=323559

Can you be brave, or Will you cave?

Many people stop investing precisely because the stock market goes down.  

Psychologists have shown that most of us do a very poor job of predicting today how we will feel about an emotionally charged event in the future.

Because so few investors have the guts to cling to stocks in a falling market, Benjamin Graham insists that everyone should keep a minimum of 25% in bonds.  That cushion, he argues, will give you the courage to keep the rest of your money in stocks even when the stocks stink.

One advice given is that you should not place 100% of your security portfolio money in stocks unless you....

1.  have set aside enough cash to support your family for at least one year.

2.  will be investing steadily for at least 20 years to come.

3.  survived the bear market that began in 2007.

4.  did not sell stocks during the bear market that began in 2007.

5.  bought more stocks during the bear market that began in 2007.

6.  have read chapter 8 of Graham's Intelligent Investor (human psychology emphasis).

Pluto as never seen before

 

NASA scientists have taken the most detailed pictures ever of the planet. 

MD proposes to buy KNM business for RM3.6bil

Friday February 5, 2010
MD proposes to buy KNM business for RM3.6bil
By LEE KIAN SEONG


lks@thestar.com.my

PETALING JAYA: KNM Group Bhd’s founder and group managing director Lee Swee Eng has proposed to acquire the entire business and undertakings of KNM in a deal worth RM3.6bil.

In a filing to Bursa Malaysia yesterday, KNM said BlueFire Capital Group Ltd, an entity controlled by Lee, had proposed an equivalent price of 90 sen for each issued ordinary share of KNM.
Lee Swee Eng – the founder and group MD of KNM

The company’s current market capitalisation is about RM3bil as stated by Bloomberg.

According to Bursa, Lee is currently the major shareholder of KNM with 23.74% direct and indirect shareholding in the company as at June 8, 2009.

“The proposal is subject to the satisfactory completion of due diligence, receipt of firm financing commitments, and negotiation and execution of definitive documentation relating to the proposed transaction,” said KNM.

It said BlueFire was acting in collaboration with GS Capital Partners VI Fund L.P and Mettiz Capital Ltd in the acquisition and that its international adviser was Goldman Sachs (Singapore) Pte.

“Pursuant to the above, the board has granted BlueFire a limited exclusivity period up to March 22, 2010 in which to complete due diligence and satisfy the other conditions of the proposal, subject to confidentiality undertakings,” it said.

KNM will also promptly engage its legal and financial advisors to assist KNM and its board in evaluating and negotiating the definitive terms of any transaction.

The funding structure and the reason of acquisition were not stated in the statement to Bursa. Efforts to contact Lee proved fruitless.

Lee was quoted by StarBiz on March last year as saying that a management buyout would be considered for KNM Group but it would be very difficult to raise funds in the current environment.

TA Securities analyst Kaladher Govindan said the offer price was about 13 times the company’s price earnings and it was a fair value for the offer.

“Lee’s intention to acquire the company might be due to the improvement in the oil and gas (O&G) industry and the lower entry price for the acquisition,” he told StarBiz.

For the third quarter ended Sept 30, 2009, KNM registered a net profit of RM31.9mil with revenue of RM458.3mil. Its net profit for the first nine months was RM201.8mil with revenue of RM1.4bil.

KNM’s all-time high was at RM2.44 on Jan 8, 2008. It closed at 75 sen yesterday.

KNM, which was established in 1990, is involved in the manufacture of process equipment and processing units for O&G, petrochemicals, minerals processing, desalination, renewable energy, chemicals, steam generation, power and environment industries.

The group currently operates 19 manufacturing facilities and engineering centres in 12 countries, offering a diversified range of products and services to its clients in more than 60 countries.

Over 90% of its revenues are realised from the export markets and international business.

http://biz.thestar.com.my/news/story.asp?file=/2010/2/5/business/5618633&sec=business

Three life-long valuable lessons from Ben Graham

In his pivotal book, The Intelligent Investor, Ben Graham never promises that he can help the reader / investor to "beat the market", but rather promises to teach three valuable lessons:

1. how to minimize the odds of suffering irreversible losses;
2. how to maximize the odds of achieving sustainable gains; and 
3. how to control self-defeating behaviour that keeps most from reaching their full potential.

Knowing one's risk tolerance is important

The KLCI shot up quickly from around 1250 at the start of the new year 2010 to peak around 1300.  This was a rise of about 4% in less than a month.  Except for those were already invested last year riding the market on the uptrend, those who invested in January would have seen their gains evaporated very quickly at the beginning of February.

Dow Jones dropped 2% yesterday.  The world markets are expected to react similarly today.

Knowing one's risk tolerance is important.

Day traders will be absent today.  Momentum traders who are out of the market will probably stay sideline today.  Those still in the trade will have to make decisions when to terminate their trades based on their own established criterias related to current events.  What of the long term trades (long term buy and hold investors)?  That depends on their risk management and risk tolerance profile.

Links:
What Main Street investors did during and after the recent bear market

The buy-and-hold strategy
http://myinvestingnotes.blogspot.com/2010/02/buy-and-hold-strategy.html

KLSE Market PE is around 20. Where will the KLCI be heading?

KLSE Composite Index
Market Valuation

28.1.10
PE Ratio 20.50
DY 2.53
P/B 2.23
KLCI 1264.51

What Main Street investors did during and after the recent bear market

Main Street investors change their strategies


Glenn Salka of Fair Lawn, N.J., who near the 2009 market bottom said he was putting 100% of his free cash into "safe stuff," is still doing that. Why? "Fear. Risk. Take your pick," he says.

Lok Patel, Dubuque, Iowa: "Too many people invest on emotions rather than just investing in stable companies that consistently post profits and pay dividends."

Wendy Hunt, Cincinnati: "We are taking risks again. We've moved out of the really conservative securities to a large extent and are back with more blue chips than ever."


By Adam Shell, USA TODAY

NEW YORK — Near the stock market low last spring, with his losses nearing $200,000, Martin Blank, 67, a Florida retiree with four decades of investing experience, sold most of his stocks.

He liquidated 75% of his stock funds. He hasn't put that cash back in the market. And doesn't plan to.


That emotion-driven decision, made with his wife, Linda, nixed any chance of profiting from the 63% rally that began shortly after selling out in a state of anxiety.

But Blank has no regrets: "I have no desire to attempt to make back what I lost."

Since stocks stopped plunging in March, professional money managers and traders on Wall Street have piled back into the stock market, benefiting from the sharpest rebound in history. But, like Blank, many Main Street investors have yet to regain their stomach for the risky, uncertain and highly volatile world of stocks — leading Andre Weisbrod, CEO of Staar Financial Advisors, to note in a recent report that many buy-and-hold investors have unwittingly switched to a "buy-and-fold" strategy.

Individual investors who once embraced risk-taking have adopted a more defensive investing posture, preferring capital preservation over appreciation. Many are trimming the percentage of stocks they own and boosting holdings of safer investments, such as certificates of deposit and money market funds.

Harry Nieman, 73, a retiree from Pittsburgh, who lost 25% of his $2 million portfolio in the 2008-09 downdraft, just nibbles on individual stocks now, while stashing most of his cash in CDs and high-yielding online bank accounts. David Moran, 62, kept nearly 100% of his money in stocks during and after the 2000 tech-stock bust but sold a lot of shares before the March 2009 low. "I could never be 100% invested in stocks again," the Wayland, Mass., technical writer says.

Similarly, Glenn Salka, a 57-year-old insurance professional from Fair Lawn, N.J., who near the 2009 market bottom told USA TODAY he was putting 100% of his free cash into "safe stuff," is still employing the same conservative strategy. Asked why, Salka said, "Fear. Risk. Take your pick."

Market turbulence caused by signs that China is clamping down on credit to slow its economy, bank bashing by the White House, concerns over debt problems in some European countries and the recent pullback has investors on edge. A two-day rally this week left stocks down 1.1% in 2010.

Following the money trail highlights the shift toward defense. Since the start of 2008, when the worst financial crisis since the Great Depression began shredding paper wealth into confetti, stock funds have suffered outflows totaling $232 billion, Investment Company Institute statistics show. In contrast, fixed-income bond mutual funds have enjoyed inflows of $431 billion.

The love affair with bonds could end badly, says Brian Belski, chief investment strategist at Oppenheimer. In the 2000s, bonds outperformed stocks by a record 7.7 percentage points, on average, annually. The only other times bonds outpaced stocks for a full decade were the 1930s and 1970s. In both cases, stocks rebounded in the following decades, topping bonds by an average 10 percentage points a year.

"Due to the shock and awe of the past 10 years, most people went to the safest assets they could find," says Belski, who thinks now is a good time to move out of bonds into stocks.

Some analysts insist the growing reliance on lower-risk strategies is more than a temporary reaction to the financial tumult that has shaken investor confidence. They believe it's a lasting, long-term change. They warn that individual investors won't return to their old pattern of funneling the bulk of free cash flow into stocks.

The last time investors were hit by major back-to-back stock bear markets was 1968-70 and 1973-74. Back then, they lowered their stock holdings as a percentage of assets from a peak of 35% to 15%. They did not come back to the market in a big way until the 1982 bull market, Bank of America Merrill Lynch research shows.

Less demand for stocks, analysts say, could steal some of the cash ammunition the stock market needs to move higher.

David Rosenberg, chief investment strategist at Gluskin Sheff, cites an aging population and two severe bear markets in the past decade as reasons individual investors are shifting their money into more stable investments.

"It makes perfect sense," he says. "The median Baby Boomer is 52 and is naturally shifting toward capital preservation."

Adds Bob Cohen, a financial planner at Financial Strategies & Wealth Management, "Investors still want to make money, but they're more aware of risks."

After the bear

Interviews with close to two dozen individual investors offer a more balanced portrait of how they have adapted their investment strategies after the worst meltdown since the 1930s.

Three types of investors have emerged from the bear market rubble.

• The first is the buy-and-folder, or investors who sold near the bottom and have either stayed out of the stock market or gotten back in gingerly. 
• The second is the old-fashioned buy-and-hold investor, those who stayed the course. They rode the market all the way down and still made automatic monthly investments to their 401(k)s, enabling them to participate in the rebound. 
• The third is the so-called double-down investor. These more aggressive types had the courage to buy stocks near the market low. They were rewarded handsomely as stocks shot up off of depressed levels.

Snapshots of each type:

•Buy-and-folders. There are many investors, including those nearing retirement, who just want out of the stock market to reduce anxiety, protect assets they still have and embark on a more risk-averse path. While this group won't necessarily stay out of the market forever, they are unlikely to make huge bets on stocks.

Martin Blank fits the profile. Asked why he won't ever again bet big on stocks, he said, "I have a basic distrust of the system."

Nieman, the 73-year-old Pittsburgh native and ex-banker, admits that he's much more "timid" when it comes to stocks. A big reason relates to his age. "I'm more cautious, more vulnerable," he says. "I am more concerned about preserving my capital. Everyone once believed that investing in stocks can make you a millionaire. But the past few years, we have seen that you can lose everything."

Aging demographics are playing a key role in the shift to more income-oriented portfolios, Citigroup research shows. Citing data from the Census Bureau, Citi notes that only 14% of people 65 or older are willing to take "substantial" or "above-average" risk in an effort to reap bigger investment gains, compared with 33% of people 40 to 64.

•Buy-and-holders. While staying fully invested is painful as losses mount when stocks plunge, it pays off when the inevitable rebound unfolds.

Lok Patel, 67, an engineer at John Deere, didn't sell any stock during the market's 57% plunge. He's glad he didn't. "The market came back," he says. Even though Patel, from Dubuque, Iowa, says he was shaken by the scary market volatility, he stuck to basic investment principles, such as spreading his money around many different types of assets, investing only in good companies and funneling a set amount of money each month into stocks, a strategy called dollar-cost averaging.

"Too many people invest on emotions rather than just investing in stable companies that consistently post profits and pay dividends," Patel says, adding that stocks remain one of the few places investors can get a decent return these days.

Donna Bischoff, 59, a self-described "slow and steady" investor from New Orleans, has regained all but 0.2% of losses she suffered in the downturn — thanks to building a diversified portfolio, avoiding speculative stocks and sticking with her buy-and-hold strategy in bad times.

"I got burned in the '90s owning single stocks, and that taught me a lesson about diversification," Bischoff says, adding that she is gradually reducing her stock exposure to better reflect her lower risk tolerance as she nears 60.

•Double-downers. There is an old saying on Wall Street that the best time to buy stocks is when there's blood in the streets.

That's what Paul Davis, 48, did last spring when the Dow looked like it would tumble to zero.

In April 2009, three months after losing his job — and just a month after the market low when fear and panic remained high — Davis invested 90% of a $100,000 401(k) rollover in stocks. It paid off. The $100,000 is now worth $126,000.

Why did Davis take the risk? He had success in the past buying when fear was palpable.

"Some of the best investments I ever made were made after the 9/11 terror attacks," he said.

Michael Hartnett, chief global equity strategist at BofA Merrill Lynch, backed the strategy in a recent report. "Long-term investors should always buy 'humiliation' and sell 'hubris,' " he wrote. Stocks are now the "humiliated" asset class.

Margaret Schaefer, 70, a retired educator from Dearborn, Mich., did just that. Near the March 2009 low, she bought a basket of the most hated stocks: financials. She also bought General Motors when the automaker's future was in question. She tripled her money on both.

"CDs and money markets were paying under 2%," says Schaefer. "I was willing to take the risk."

And while the nearly 7% tumble off the recent high was a reminder that stocks can still go down in a hurry, an analysis of how stocks perform after a recession suggests that another 20% bear market decline is unlikely. Going back to 1928, the S&P 500 fell 10% or more six to 18 months after a recession in 10 of 13 cases (77% odds). But the index suffered only a 20%-plus drop five times (38%), says Ned Davis Research.

A correction, or a drop of 10%, is what Bart Ruff, 45, of Lederach, Pa., says is his buy signal.

Says Ruff, "I missed the opportunity to buy at the bottom last year, and I don't need to be overly aggressive right now. But I'll start increasing my stock holdings at around a 10% correction." Ruff had 70% of his money in stocks pre-slump, vs. 56% now.

If another brutal bear market can be ruled out, that's good news for Wendy Hunt, a 37-year-old married mom from Cincinnati. Hunt who turned ultra-defensive in March, says she is back in the stock market.

"We are taking risks again," she says. "We've moved out of the really conservative securities to a large extent and are back with more blue chips than ever."

Carmine Grigoli, chief investment strategist at Mizuho Securities USA, says that is a bullish sign. He expects more individual investors to come back to stocks and resume their normal investment patterns once it becomes clear the improvement in the economy and financial markets is here to stay.

"The more distant the memory of the financial crisis, the less frightening it becomes," he says.

http://www.usatoday.com/money/markets/2010-02-03-realinvestors03_CV_N.htm

The buy-and-hold strategy

The buy-and-hold strategy

Jonathan Chevreau, Financial Post Published: Friday, April 17, 2009

Among the many casualties of the great bear market of 2008-09 may be the buy-and-hold strategy or the Warren Buffett approach of buying good businesses and waiting patiently for the market's perception of their value to catch up.

Indeed, when it seemed the market had hit new lows last November, CNBC aired a feature declaring the "death of buy-and-hold," with pundits claiming only suckers hung on through thick and thin. And value-oriented fund company AIC Limited, which still uses the slogan "buy, hold and prosper," has suffered from such derogatory variants as "buy, hold and perspire" or "buy and fold."

But rumours of the death of buy-and-hold may be premature.

The Investment Reporter, a well-regarded newsletter founded in 1941, recently concluded buy-and-hold portfolios do better over the long and short run, citing an academic study (by Lakonishok, Schleifer and Vishny) that looked at returns of actively managed pension funds over six years. It found that, on average, buy-and-hold portfolios beat actively managed portfolios by 0.78% a year, not factoring in taxes, management fees or high cash positions.

A buy-and-hold approach

• minimizes commissions and tax events and, naturally, 
• lowers the chances of mistiming the market. 

It's compatible with passive indexing strategies, but you don't have to be an indexer to benefit from this approach. It can be used equally with quality dividend-paying stocks, ladders of bonds or GICs.
Dan Richards, president of Strategic Imperatives, says investors have swung from buy-and-hold to frequent trading but either extreme is a "prescription for disaster." He says academic research from Terrence Odean and Brad Barber shows frequent trading hurts investment returns. The two American business professors wrote a seminal article in 1999 called Online Investors: Do the slow die first?

Vancouver financial advisor Clay Gillespie believes buy-and-hold works for various forms of managed money, such as mutual funds, wrap accounts and other fee-based investment management solutions, although it may not always work with stocks. "An individual company may go out of business and thus have a return of zero." With a particular stock, it may be necessary to sell when

• there are changes in one's personal situation, retirement, for example, and
• it's advisable to reduce volatility. 
• Portfolio rebalancing may also require some tweaks in the buy-and-hold approach. 

But "style drift" usually tends to produce poor performance over time, he says.
Mutual fund companies encourage buy-and-hold, often levying short-term trading penalties on those who trade in and out too often. Typically, fund unitholders buy high and sell low when they switch too often. "It is this multi-percentage point drag that buy-and-hold investors are trying to avoid," says Norm Rothery, chief investment strategist for Dan Hallett & Associates.

Joe Canavan, chairman of Assante Wealth Management, believes fund investors can successfully build portfolios that include both fund managers who use a buy-and-hold approach as well as managers who use a frequent-trading approach. The danger is in trying to do only one or the other, then changing your horses midstream.

That is more likely to result in being "whipsawed," Mr. Canavan says, incurring losses with one strategy, then abandoning that for the opposite approach just as the tide was about to turn.

In his Canadian Capitalist blog, Ottawa-based Ram Balakrishnan advises to "keep faith in buy-and-hold." He reassures readers it's "hard to maintain equanimity in the face of such a steep decline as right now. But what other strategy is there other than buy-and-hold, where almost everyone can have a good shot at reasonable returns? I don't think there is one."

Unlike most advisors, Robert Cable, Toronto-based head of ScotiaMcLeod's Cable Group, is a strong believer in "seasonal" market timing, also called a "sell in May and go away" strategy. While investors may want to emulate Warren Buffett and buy and hold forever, in practice "nobody does it," he says. He recalls asking 300 advisors at a Florida conference how many of their clients had bought and held the same portfolio a decade or more. The only hand that went up represented a client who was literally in a coma following an accident and whose account could not be traded.

"Anyone who goes into investing with the intent of buying and holding virtually always succumbs to outside pressures to abandon the strategy. My guess is when we have nobody believing in buy-and-hold again, we will again be ready for one big bull market to take off," says Mr. Cable.

Markham-based advisor Robert Smith says buy-and-hold works, but not in isolation. Investors need

• proper asset allocation geared to their risk tolerance, 
• portfolios must be well-diversified and 
• investments can't have been purchased at bubble-like prices. 
• They also need to buy during the tough times to bring down their average costs, he says.

"If the investor follows all these requirements, buy-and-hold will not fail them," Mr. Smith says.

Read more: http://www.financialpost.com/story.html?id=1507182#ixzz0eYEmvC9K
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http://www.financialpost.com/story.html?id=1507182




Comment:  My personal experience of 20 years, buy and hold is safe for selected stocks. 

You need a 100% gain to erase a 50% loss; averaging down will help you recover faster

You need a 100% gain to erase a 50% loss

Averaging down will help you recover faster

Jonathan Chevreau, Financial Post Published: Wednesday, September 16, 2009

After recoveries of 45% or more in major stock markets since the Crash of 2008, investors may well wonder how it is they're still not back to even.

Getty Images 

After recoveries of 45% or more in major stock markets since the Crash of 2008, investors may well wonder how it is they're still not back to even.

After recoveries of 45% or more in major stock markets since the Crash of 2008, investors may well wonder how it is they're still not back to even.

There are two reasons.

• One, broad markets are still below the highs reached before the crash. 
• Two, the arithmetic of loss means a 50% loss followed by a 50% rise does not mean you're back to even.

In the current edition of Graham Value Stocks, Norman Rothery notes the bellwether S&P500 index fell 57.7% peak to trough in the bear market, not counting dividends. It has since surged 53.1% from its lows but it still must rise another 54.4% to regain that former high. Thus, it would have to move 136.4% from the bottom reached after the original 57.7% loss, a result Rothery concedes may shock those unfamiliar with "the tyranny of losses."

The math is more understandable in absolute dollars. If you invest $100 at a top and lose 57.7%, you have just $42.30 at the bottom. But any gains you enjoy subsequently are coming off a lower base. Thus, even a 100% gain of $42.30 brings you only up to $84.60 -- still $15.40 less than the $100 you started with. To get back to $100, you'd need a 136.4% gain.

This is the ruthless arithmetic that has investors 100% in stocks -- or worse, leveraged so they were more than 100% in stocks -- licking their wounds in bear markets. However, B.C.-based financial planner Fred Kirby says ruthless arithmetic can be made to work to investors' benefit if dividends are reinvested during declines. This dramatically cuts the number of years needed to recover from losses.

Opportunistic buying can be combined with rebalancing of portfolios to maintain a normal ratio of stocks to bonds. Thus, after the 1929 crash, investors who reinvested dividends and regularly rebalanced recovered in seven years, compared to 22 years for all-stock investors who did not adopt this dual strategy.

Vancouver-based financial planner and author Diane Mc-Curdy says younger investors who dollar-cost averaged into the market early in 2009 have already done very well. Older investors should be conservative and adhere to the rule of thumb that fixed-income exposure should equal their age: so a 40-year old would be 60% stocks to 40% bonds.

The more you had in equities during the crash and the more those equities were in risky segments of the market, the worse the arithmetic of loss. Here, the accompanying chart adapted from Rothery's newsletter is instructive.

In peak-to-trough terms -- with the trough in March 2009 -- the hardest-hit market was the MSCI Emerging Markets index, which fell 67.4%. By early September, it was still 36.8% below its highs, despite the fact emerging markets bounced back 93.8% from their lows. They still must rise a further 58.1% to get back to their former highs. If you're in an emerging markets mutual fund or exchange-traded fund, you're still under water. Of course, if you were prescient enough to buy more at the bottom, you've almost doubled your money on that portion of your bottom-fishing adventure.

A glance at your portfolio may reveal that if you did do what the fund companies urged and "went global" some years back, you're probably still hurting most in funds that track the MSCI EAFE Index: Europe, Australia and the Far East. While the EAFE index didn't fall quite as hard as emerging markets -- it fell a nasty 63.5% -- at this point it still has "the largest hill to climb," Rothery says. EAFE markets are still 39.1% below their peak and have retraced only 66.9%, leaving almost as much again -- 64.2% -- before unitholders feel whole again.

Even the TSX composite still must rise 39.4% to get back to its former highs: something most people realize intuitively since the TSX passed 15,000 before the crash and is now just above 11,000.

Tomorrow, we'll look at what recourses investors may have to recoup losses.

jchevreau@nationalpost.com

Read more: http://www.financialpost.com/story.html?id=1998122#ixzz0eY9tf2po

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Graham's time-tested strategy for defensive investors beat the market again this year.

8 Graham Stocks for 2010

Graham's time-tested strategy for defensive investors beat the market again this year. But that shouldn't come as a big surprise because it's bested the market, often by a wide margin, in eight of the last nine years.

You can check out the yearly performance of the Graham stocks, the S&P500 (as tracked by the SPY exchange-traded fund), and the percentage point difference between the two in Table 1. If you had bought equal dollar amounts of each year's Graham stocks in your RRSP and then replaced them with the new crop of stocks in each subsequent year, you would have gained 480% (or 22% annually) over the full period. On the other hand, the unfortunate index investor who bought and held the S&P500 ETF (NYSE:SPY) would have lost 11% over the same time. That even includes quarterly dividends reinvested annually. As you might imagine, I've been very pleased with the performance of my take on Graham's defensive strategy.

TABLE 1: PERFORMANCE OF PAST GRAHAM STOCKS
Year	Graham	S&P500	+/-
2000 - 2001	20.4%	-22.2%	42.6
2001 - 2002	28.2%	-15.1%	43.3
2002 - 2003	56.8%	16.5%	40.3
2003 - 2004	32.2%	9.4%	22.8
2004 - 2005	46.6%	12.8%	33.8
2005 - 2006	-3.8%	10.7%	-14.5
2006 - 2007	34.4%	16.1%	18.3
2007 - 2008	-6.5%	-22.1%	15.6
2008 - 2009	2.2%	-6.2%	8.4
Total Gain	479.5%	-10.8%	490.3
Annualized	22.0%	-1.3%	23.3

Graham first described his method for defensive investors in The Intelligent Investor. Graham, the dean of value investing, passed away in 1976 but an updated edition of The Intelligent Investor (ISBN 0060555661), with new commentary from veteran columnist Jason Zweig, was published in 2003. The original text is presented in its entirety and Zweig's commentary is thoughtfully separated into copious footnotes at the end of each chapter. If you don't already have a copy of The Intelligent Investor then this is the version to get. Serious Graham buffs will also want to check out the sixth edition of Securities Analysis (ISBN 0071592539) which includes commentary from some of today's famous value investors. But, clocking in at 700 pages, it's not for dilettantes.

Because Graham's rules for defensive investors are extraordinarily strict, I use a more moderate version. My Graham-inspired rules are shown in Table 2. For example, I require some dividend growth over the last five years whereas Graham demanded a twenty-year record of uninterrupted dividend payments. Similarly, I focus on five years worth of earnings growth instead of ten years largely because the five-year figures are provided by many free internet stock screeners.

TABLE 2: GRAHAM-INSPIRED RULES

1. P/E Ratio less than 15 2. P/Book Ratio less than 1.5 3. Book Value more than 0.01 4. Current Ratio more than 2 5. Annual EPS Growth (5-Yr Avg) more than 3% 6. 5-Year Dividend Growth more than 0% 7. 5-Year P/E Low more than 0.01 8. 1-Year Revenue more than $400 Million

Even with my less-stringent version of Graham's rules, very few U.S. stocks usually pass the test. Indeed, the list peaked at 10 stocks in 2002, bottomed out at 2 stocks in 2003, and contained only 4 candidates last year. This year, the list is back up near its highs and contains 8 stocks. While that's a relatively high number of stocks, the list is tiny compared to the thousands of stocks which trade each day. As a result, even my version of Graham's approach remains quite strict.

The current crop of Graham stocks is shown in Table 3. Before diving in, you should always examine any stock in great detail and remember that ten stocks can not be said to form a well-diversified portfolio. Do your own due diligence and be on the look out for problems that might not be reflected in a company's latest numbers. Study news stories, press releases, and regulatory filings.

If you'd like more information on Graham stocks, I publish the Graham Value Stocks letter which covers several Graham-inspired strategies and highlights value stocks in both the U.S. and Canada. Just send me an email, and I'll be happy to provide an online sample.

Remember that value stocks can be psychologically difficult to hold and some stocks will disappoint. While Graham's Defensive method has avoided running into any serious trouble so far, it can't be expected to outperform all of the time. Indeed, significant periods of underperformance are likely. I'm particularly concerned that you might dive right in based on past performance alone. Don't. Be sure to focus at least as much on what can go wrong as on what might go right.

Table 3: U.S. stocks that pass Graham-inspired rules
Company	Price	P/E	P/B	EPS Growth	Current Ratio	D/E	Revenue ($M)	Dividend Growth
A.D.M. (ADM)	$29.72	11.2	1.41	28.1%	2.2	0.61	69,207	14.9%
Baldor (BEZ)	$28.55	14.9	1.47	32.0%	2.7	1.36	1,767	5.1%
Cash America (CSH)	$31.83	12.7	1.49	29.8%	5.1	0.69	1,052	16.6%
Overseas Shipholding (OSG)	$41.33	5.9	0.59	21.2%	4.1	0.72	1,473	18.2%
Reliance Steel (RS)	$41.97	13.4	1.26	70.0%	3.5	0.52	7,517	27.2%
Skywest (SKYW)	$17.16	11.7	0.73	11.1%	3.0	1.39	3,049	10.2%
Spartan Motors (SPAR)	$5.47	6.1	0.99	57.3%	2.8	0.15	624	2.4%
Tidewater (TDW)	$46.11	6.5	1.05	57.7%	3.1	0.13	1,377	10.8%
Source: msn.com, October 8, 2009

http://www.ndir.com/SI/articles/1109.shtml

Are stocks cheap? What’s next for stocks?

2010 will be better than 2009 – or will it?

The overwhelming consent is certainly that the worst is over. Early in January, optimism had reached levels not seen in years, even decades. How can optimism be measured?

Investors Intelligence tracks the recommendation of different market advisors. In early January, 53.4% of all advisors were bullish. 30.7% of advisors were longer term bullish, but believe a short-term correction is likely. All together, 84.1% of advisors expected higher prices. Even the October 2007 market highs did not elicit such a positive response.


How about retail investors? According to the American Association of Individual Investors (AAII), investors are only keeping 18% of their money in cash. This is the lowest level since April 2000.

It is important to connect the dots when talking about investor sentiment. The last extreme reading of market advisors occurred on October 15th, 2007, within less than a week of the all-time market top. Thereafter, the broad stock market fell (NYSEArca: VTI) 55%. Real Estate (NYSEArca: IYR) and financials led the charge lower.

The last time investors felt comfortable enough to keep only 18% of their money in safe cash was in the very early stages of the tech-crash. Within a year, the Technology Select Sector SPDRs (NYSEArca: XLK) and Nasdaq (Nasdaq: QQQQ) had lost more than half of their money.

No doubt, the optimism surrounding this year's earnings announcement (at least initially) was decisively bearish to the astute investor. In the past, when earnings season was greeted by extreme optimism, the S&P 500 was 2 - 3 times more likely to go down than up. The maximum performance to the downside trumped the upside by more than 2x.

Optimism means lower prices

On January 15, 2010, two trading days before the closing highs were reached, the ETF Profit Strategy Newsletter made the bold statement: “Bullish sentiment has reached a level where it is suffocating nearly all bearish currents and undertones. The natural reaction would be, and has been by most, to conform to the trend, join the crowded trade and turn bullish. Historically, such extreme optimism leads to market declines. Even though the up-trend has lasted longer than expected, we believe that every day that brings higher prices presents a better opportunity for the bears”

Slowly but surely, euphoria is starting to be replaced by skepticism. If major corporations make little or no profit, how do you put a price tag on their stock? Where is their fair value?

Are stocks cheap?

The Standard and Poor's P/E ratio for the S&P 500, based on actually reported earnings, is 84.30. This means it would take any S&P constituent an average of 84.3 years to repay the money it borrowed from investors. This does not include interest. How willing would you be to offer a business loan payable over 84.3 years at no interest?

Of course, the P/E ratio falls if you compare the current price with expected earnings. But as we've learned above, Wall Street has a tendency to go with the flow when it comes to earnings. The flow right now is not up.

In March, when things looked bad, Wall Street expected things to get worse. A few weeks ago, when things looked good (after a 70% rally), Wall Street expected things to get better. With earnings disappointing, but still expected to rise another 23%, analysts might once again be forced to revise their forecast – after the fact.

What’s next for stocks?

Different valuation metrics are the markets built in temperature gauge. When things heat up, the market is forced to cool down - this means lower prices.

Historically, the market is 'healthy' with a P/E ratio around 15. Based on actual earnings (P/E of 84.3) the market is overvalued by more than five times. Using a more 'conservative' methodology, the S&P 500 (NYSEArca: SPY) on a normalized Shiller P/E basis, is overvalued by close to 30%.

P/E ratios are not the only valuation metric, however. Dividend yields and the Dow measured in real money - gold (NYSEArca: GLD) are others.

All major market bottoms over the past 100 years had one thing in common; 

• LOW P/E ratios and 
• HIGH dividend yields.

What we are witnessing right now, is exactly the opposite. That's not what a sustainable bull market is made of.
A look at the Dow Jones measured in gold shows just how overvalued stocks denominated in U.S. dollars (aka Dow Jones) have become. Indicative of their implications, we've dubbed the composite indicators consisting of P/E ratios, dividend yields, the Gold-Dow, and mutual fund cash levels as the 'Four Horsemen.'

The ETF Profit Strategy Newsletter contains details of the 'Four Horsemen,' plotting stock market prices and each indicator individually against historic market bottoms, along with a short, mid and long-term forecast that includes the target range for the ultimate market bottom.

http://www.etfguide.com/research/260/8/Earnings-How-Will-They-Affect-The-Market?/