Some Valuation Models are conservative, some are aggressive.

Friday, March 12, 2010

Valuation Models

A private equity player of my acquaintance once confessed that he had a basic rule of thumb about investments: double estimated expenses and halve projected future profits!


There are more systematic methods of valuation. Some valuation methods are themselves optimistic, others conservative. The multiples assigned to the valuation may also be conservative or optimistic. For example, the price to book value (PBV) ratio is a conservative valuation method. The underlying assumption: in bankruptcy, the investor will receive some portion of the original investment back. A cut-off PBV of 1 or less would be a conservative multiple.


But in an emerging market such as India with its high growth rates, a more optimistic PBV multiple can be assigned. In fact, if one examines average index PBV since 1991, the PBV has never dropped below 1.5.

A dividend yield-based valuation method is also conservative. It assumes no capital appreciation and treats the original investment like debt. Again, a high or low cut-off yield could be set depending on the risk-appetite.

Earnings growth-based valuations such as the PEG (Price-earnings to projected Earnings Growth) ratio are optimistic. A PEG valuation implies that a reliable projection of forward earnings and forward earnings growth is possible. A PEG multiple of less than 1 is conservative but the valuation method itself is optimistic.

Another, more conservative valuation method using earnings, is comparing earnings yield with the yield from a risk-free instrument. If the earnings yield is higher than the risk-free yield, the stock is worth investment. Again, conservative investors will keep greater margins of safety.

In a bull market, people give maximum weight to PEG ratios. In bear markets, more conservative methods come to the fore. At the peak of a business cycle, businesses will tend to be optimistically valued at high multiples. At the bottom, the same businesses will be available at low multiples.

In fact, historically, peaks and troughs in the same economy tend to be associated with similar levels of valuation. In India, bear market bottoms tend to be associated with conservative average multiples.  

• Usually the Nifty will be available at an earnings yield that is higher than the 364-day T-Bill yield. 
• The PEG will be well below 1. 
• The Price-book-value ratio will be down to less than 2.5 and 
• the Nifty's dividend yield will be over 2 per cent.

At the top of a bull market on the other hand, these multiples are all optimistic. 

• The PEG will be 1 or higher. 
• The earnings yield will be below the T-Bill yield. 
• The PBV will be higher than 4 and 
• the dividend yield will be below 1 per cent. 

Usually the PEG ratio is the last to go into the red zone by rising above 1. This is because the PEG is subjective and growth estimates tend to be optimistic during bull markets. There are minor variations but these average multiples have held good through the cycles of the last 15 years. This means that a conservative value-investor can buy when the multiples are in the bear-market range. And, it is time to sell when the multiples are in the range of a bull-market top.


Since January 2006, most of the valuation multiples have been high. However until late 2007, the PEG was below 1. It was only in early 2008 that the PEG rose beyond 1 and gave the final sell signal. By then, the market had already peaked.


The crash in October has pulled all the valuation multiples back close to the levels that would be expected at a bear market bottom. Right now, at a Nifty level of 2900, the PBV is at 2.42, while the dividend yield is 1.96 per cent and the PE ratio is 12.57, with an earnings yield of 7.9 per cent in comparison to the T-Bill yield of 7.4 per cent.


At the 2550 levels that prevailed for a while in late October, these multiples were even more attractive. The PEG ratio incidentally is close to 1. While the current PE ratios have dropped, so have the forward earnings growth estimates for 2008-09. But given the turmoil, there could be further EPS downgrades.


Is it worth buying into this market? Yes, it looks that way. Certainly systematic accumulation at these prices should work over the long-term.


This column appeared in the November 2008 Issue of Wealth Insight.

http://stockmakers.blogspot.com/2010/03/valuation-models.html

"The real key to making money in stocks is not to get scared out of them." Use a proven strategy and stay in the market for the long term.

 Lynch recognized that the stock market was unpredictable in the short term, even to the smartest investors. Over the long term, however, good stocks rise like no other investment vehicle. Lynch's philosophy: Use a proven strategy and stay in the market for the long term and you'll realize those gains, jump in and out and there's a good chance that you'll miss out on a chunk of them.

That, of course, means resisting the temptation to bail when the market takes some short-term hits and good stocks fall in value - no easy task. But as Lynch once said, "The real key to making money in stocks is not to get scared out of them."

Volatility is not risk. Avoid investment advice based on volatility.

So if volatility is not risk, what is?

The major risk is not the short-term stock price volatility that many thousands of academic articles have been written about. Rather it is the possibility of not reaching your long-term investment goal through the growth of your funds in real terms.

Click:
It sure beats FD rates and it is safe too.
http://spreadsheets.google.com/pub?key=tWENexpUrXS_RMxB7k73RgQ&output=html 
  
Take Home Lesson

Using the above definition of risk, stocks are actually the safest investment out there over the long term.

Investors who put some or most of their money into bonds and other investments on the assumption they are lowering their risk are, in fact, deluding themselves.

"Indeed, it goes against the principle we were taught from childhood - that the safest way to save was putting our money in the bank."


Also read:
The Four Essentials of Successful Investing
Forget about Everything Else and Buy Only Stocks
The story of Uncle Chua
Uncle Chua's Portfolio & Dividend Income 
Investment Owner's Contract
What keeps most individual investors from succeeding?
Think for Yourself
Controlling Yourself at Your Own Game: You are your own Worst Enemy
Controlling the Controllable
Time is Money for the Young Investor
Be a shrewd investor
Timing is of no real value to the investor unless it coincides with pricing
Be confident in the quality of your investments
To Invest or Not to Invest: That is NOT the Question
It is the Business that Matters
Finding companies that can be held long-term
Ten Habits of Highly Successful Value Investors

Newspaper Articles predicting the Market Bottom of March 2009

A market bottoms when we reach what is known as the "point of maximum pessimism". This means that investors have lost so much money they completely throw in the towel - and shares correct to an undervalued level.


"All the things are in place for the bear market to have ended," he said. "When there's a strong consensus, a very negative one, and cash positions are very high, as they are at the moment, I'd like to bet against that."



http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5252775/FTSEs-11-week-high-sparks-hope-that-bull-market-may-be-arriving.html

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5252775/FTSEs-11-week-high-sparks-hope-that-bull-market-may-be-arriving.html

Market timing requires two smart moves

It’s no use taking money out of the market at the right time unless it is put back in at the right time. So to get the most from their move, you will have to be right twice.


And if he did know, he’d rather not tell. “I hate giving people financial advice,” he said. “If they make money they might say thank you; if they miss the next run-up, they hate you.” 


 Studies from the field of behavioral finance indicate that investors' confidence level--and in turn their perceived ability to handle risk--ebbs and flows with the market's direction. Thus, an investor might rate highly his own ability to handle risk at the very worst time--when the market is skyrocketing and stock valuations are high--only to exhibit much less confidence in the event of a market drop. (Not surprisingly, buoyant markets are also when most financial-services firms hawk the riskiest products.)


However, with the market dropping sharply over the past year, I'd wager that being too conservative is a bigger risk for many investors right now than is maintaining a portfolio that's too aggressive.


You should always sell when you have a better place to put your money -- and today, a host of superior companies are on sale.

A Long Look at Risk: Avoid making the wrong choices at precisely the wrong moments.

A Long Look at Risk 

Most of us aren’t honest with ourselves about how much investment risk we can handle. Even worse, we tend to change our minds at market tops and bottoms, making the wrong choices at precisely the wrong moments.

An accurate assessment of risk is important. But you can view risk in many ways.

RISK CAPACITY:  David B. Jacobs of Pathfinder Financial Services in Kailua, Hawaii, usually starts with risk capacity. Young people have a great deal of risk capacity, since they have their whole career ahead of them to make up for any mistakes. A football player might have much less risk capacity, since he could have only a few years of high earnings. And some retirees have plenty of risk capacity, if they have a solid pension.

RISK NEED:  Then Mr. Jacobs moves to risk need. Need is driven by goals.Someone with no heirs and $20 million in municipal bonds might not care so much about significantly growing the portfolio. But if that person suddenly becomes passionate about a cause, he or she may want to double that amount in a decade to create an endowment or put up a building.

RISK TOLERANCE:  Only then does risk tolerance become a factor. “You have to help people visualize what the risk means,” Mr. Jacobs said. “If a year from now, your $1 million is $700,000, how would it change your life? Does that mean you can’t go visit your grandchildren? I’m trying to dig down and make people think of exactly what their day would be like.”

But how do you know if a stock is "quality"?

Go for dividends.

It's a no-brainer that quality matters in a market like this. But how do you know if a stock is "quality"?


Dividends are one indicator. That's because dividend income--which is essentially a portion of company profits paid out to shareholders--helps offset fluctuations in a stock's share price, creating a cushion during turbulent markets. 


"During trying times, dividend-paying stocks tend to do well," says Paul Alan Davis, portfolio manager of the Schwab Dividend Equity Fund. Davis also looks for companies on solid footing, which have plenty of cash and aren't in "financial straits."  During the first 11 months of year, Davis says, the S&P's dividend-paying stocks fell by roughly 36 percent; meanwhile, nondividend payers were down about 45 percent. 


You'll find those dividend payers in more developed industries such as consumer staples, utilities, and healthcare. Examples include Philip Morris, Coca-Cola, General Mills, Bristol-Myers Squibb, and Pfizer.

The Best Stock Investment Strategy For Beginners

The Best Stock Investment Strategy For Beginners By James Leitz

The best stock investment strategy for beginners focuses on stock funds as the best stock investment to keep it simple, and emphasizes investment strategy over stock picking. You don't need to pick the best stock or even the best stock funds to do well if you have an investment strategy that keeps you out of trouble. Here's how to keep it simple and make money, with less risk.

Funds that invest in stocks are often called equity funds and they come in two popular varieties: mutual funds and exchange traded funds (ETFs). You can best get started on your own in one of two different ways: by opening a mutual fund account with a major no-load fund company, or by opening a brokerage account with a discount broker. Either way, you can put the best stock investment strategy for beginners that I know of to work for you.

Earmark this account as your stock investment account. All of your money will be either in stocks (equity funds) or in cash in the form of a money market fund that is safe and pays interest in the form of dividends. The key to our best investment strategy is that you are never 100% invested in equity funds or stocks, and never 100% invested on the safe side. Instead, you pick your target allocation and stick with it. I'll give you an example.

You don't want to be too aggressive, so you pick 50% as your target allocation to stocks. This means that no matter what happens in the market, you will keep half of your money in equity funds and half in the safety of a money market fund earning interest. This is your investment strategy, and it takes the need to make micro decisions out of the picture. You have a plan and you intend to stick with it to avoid major mistakes and the major losses that can result from emotional decisions.

Now let's take a look at how this simple investment strategy works to keep you out of trouble. Bad news hits the market and stocks go into a nose dive. What do you do? Since your equity funds will fall as well, if you fall below your 50% target you move money from your safe money market fund into equity funds. In other words, you buy stocks when they are getting cheaper. On the other hand, if stocks go to extremes on the up side, what do you do?

If your equity funds represent 60% or more of the total, you cut back to 50%. In other words, you take some money off of the table. How often should you move money back and forth? This best investment strategy is meant to be simple and not time consuming. When your asset allocation gets to 60-40 or 40-60, it's definitely time to move money. If you want to be more active, use 55-45 or 45-55 as your guidelines.

This stock investment strategy makes the buy and sell decisions for you so you can relax. Consider the bear market of 2008 when the market fell by over 50% by March of 2009. Stocks then went up about 70% over the next 12 months. Did most investors make money? Quite the contrary. They made poor decisions because they got scared and lacked a sound investment strategy. With this simple plan, you would be doing just fine in 2010. Plus, there would be no reason to fear a market reversal, because you have an investment strategy.

It's easy to move money back and forth between mutual funds, but be a bit careful. Don't do it any more often then is necessary. Second, to keep the tax issue simple do this in an account that is tax deferred or tax qualified... like an IRA or 401k. You can roll your existing IRA into an IRA with a no-load mutual fund company. Then your buy and sell transactions are not reportable for income tax purposes.

Do not go into the stock investing game as a beginner trying to pick the best stock investment. You'll never do it. Instead, go with a few equity funds, and include international equity funds as well. Then concentrate on the best stock investment strategy and sleep well at night.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals. Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com. Article Source: http://EzineArticles.com/?expert=James_Leitz

Slowly, Americans are regaining their lost wealth

Mar 11, 7:06 PM EST

Slowly, Americans are regaining their lost wealth

WASHINGTON (AP) -- Americans are recovering their shrunken wealth - gradually. Household net worth rose last quarter, mainly because the healing economy boosted stock portfolios. But the gain was slight. And it was less than in the previous two quarters.

The Federal Reserve said Thursday that net worth rose 1.3 percent in the fourth quarter to $54.2 trillion. It marked the third straight quarter of gains. But economists say consumers would need a stronger and more prolonged increase in their wealth to persuade them to ratchet up spending.

Net worth had risen by a more robust 4.5 percent in the second quarter of 2009 and an even faster 5.5 percent in the third quarter. Net worth is the value of assets such as homes, checking accounts and investments minus debts like mortgages and credit cards.

Even with the gain, Americans' net worth would have to rise an additional 21 percent just to get back to its pre-recession peak of $65.9 trillion. That illustrates Americans' vast loss of wealth from the worst downturn since the 1930s.

Growth in stock portfolios delivered the biggest lift to net worth in the October-to-December period. The value of stocks rose by nearly 4 percent to $7.7 trillion. Higher home prices helped a bit. The value of real-estate holdings edged up 0.2 percent.

During the recession, which began in December 2007, household net worth had plunged as low as $48.5 trillion in the first quarter of 2009. Stock holdings and home values nose-dived. As their net worth evaporated, Americans felt less inclined to spend.

For all of last year, consumer spending dropped 0.6 percent. This year, as wealth, the economy and financial conditions slowly recover, consumer spending is projected to grow around a modest 2.2 percent, according to the National Association for Business Economics.

By contrast, in 1983, when the economy was recovering from the 1981-82 recession, consumer spending surged 5.7 percent. Unlike past rebounds led by ordinary shoppers, this one so far has been driven more by spending from businesses, foreigners and - until it runs out - government stimulus. Consumers have been spending more lately. But they remain cautious.

"It would take a string of increases of a size that they believe can continue and that they can have faith in for consumers to really boost their spending," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com.

Each dollar increase in household wealth translates into roughly three to four cents of consumer spending over two years, Hoyt said.

That isn't much.

Just ask Marcia Karon, 55, of Atlanta. She's felt little benefit from the economic rebound or the stock market. Her family's finances are being crimped in other ways. Her husband has taken two pay cuts in the past year, their property taxes remain high and "everything else is going up," she says.

"Things are tight," says Karon, who works at home as a calligrapher and bookkeeper. "Over the last year we've had to go through what little savings we had set aside just to get by."

Not until 2012 does Hoyt think household wealth will return to its pre-recession levels. A severe setback to the economy could delay it further, he added.

Americans reduced their borrowing last year at a record pace. They did so amid rising defaults on mortgages and credit card debt. The drop also reflected concern among households about their diminished net worth.

Household debt - including mortgages, credit cards, auto and student loans - contracted at an annual rate of 1.75 percent in 2009, the Fed report said. It was the first annual decline on records going back to 1945.

Benefiting most in the fourth quarter were those invested in the stock market. The Standard & Poor's 500, a broad barometer of stocks, climbed 5 percent in the quarter. The Dow Jones industrial average gained 7 percent.

But the gains have slowed this year. The two indexes have risen just 2 percent and 1 percent, respectively. Even with the market's rally, the S&P 500 is still 27 percent off its October 2007 peak.

Holders of 401(k) retirement accounts have recovered somewhat from the walloping they took in the meltdown. But even with continued contributions to those accounts, many are still struggling. Average account balances for 401(k) contributors ages 45 and older remained 2 to 3 percent lower at the end of December than at the end of 2007, according to the Employee Benefit Research Institute.

Some have fared better.

Julie Arnheim, 43, of Los Altos Hills, Calif., returned to work a year ago because the economy had beaten down her and her husband's finances. Now, thanks to the stock market's rebound, their net worth has come all the way back from a 30 to 35 percent drop.

"We've lost a year and a half of growth, but it's easy to be upbeat," says Arnheim, an entrepreneur. "There's a lot of retired people I know who were hurt, and they don't have the longevity for the market to come back and keep growing."

Forbes list: Robert Kuok is world's 33rd richest man

Robert Kuok, whose business empire covers palm oil, real estate, shipping and media, moved up from No 62 in 2009.  Sadly, he has been selling assets in Malaysia the last few years.

Dividend Valuation: dividends are the boldest way that a company can announce their performance and earnings potential.

Dividend Valuation

Valuing a company based on its ability to provide regular and increasing dividends is a worthy practice.  This is because dividends represent the only real gains of investors in a company where they have stake.

• Either in cash or asset payout, dividends are the boldest way that a company can announce their performance and earnings potential.  

• Unlike market value which indicates the idle wealth of shareholders, dividend valuation injects the past, present, and future earnings performance of the firm as it cannot distribute dividends without any excess money to finance operations and expand.  

• On this ground, however, growing companies are likely not regularly distributing dividends.  This is caused by their interests to reinvest excess earnings and concentrate them to growth prospects rather than disbursed to individual investors.

The dividend policy of a firm tells so much of its life cycle. 

• When companies reached their maximum growth potential, dividend payouts tend to be a practice.  This is because the firm wants to retain investors and encourage them to maintain their investment even growth had stopped.  

• Investors can use dividend policy as reference whether a firm is facing financial difficulties and failed to produce planned profits.  This scenario is observed in cases of dividend payment cuts.  

• On the other hand, consistent and even rising dividend payment may also represent a negative feature like financing such payments with debt.  In effect, the benefits of dividends are waived by costs and risks of debt and interest financing.  

• With dividends coming directly from earnings or buyback programs, continuity and regularity of its distribution minimizes the probability that managers will manipulate accounting data particularly earnings.

Computing for corporate value, specifically common shares, using dividends is done in at least three ways as there are numerous models that have been developed.

• Zero and constant dividend growth is a formula appropriate for mature companies which can minimally expand their operations.  Discount rate and expected dividend payout are required variables.  Although with less uncertainty and greater potential to accurately value the firm, growth potential is not present.

• The second formula offers the ability to estimate future dividend growth of a firm.  As this relies on historical data of actual dividends, the quality of valuation is a function of the quantity of the periods that have been collected.  If the firm do not have an ample historical data, results may not likely be as statistically significant as with a sufficient data under study.

• Lastly, irregular dividend to be followed by constant growth is apparently a version that follows the corporate life cycle (e.g. from growth to mature years).  This formula requires the beta or the degree of share sensitivity to market changes as well as the forecasted dividend growth.  This computation requires extensive market research and analysis which is vital to investing but troublesome to some investors.

http://ivythesis.typepad.com/term_paper_topics/2010/03/valuation-method-analysis-a-case-study-of-tesco.html

Schools are churning out the unemployable

http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article7034975.ece

Schools are churning out the unemployable
Harriet Sergeant

The latest unemployment figures are a shocker. Eight million adults are “economically inactive”. That means one in five people of working age does not have a job. A new and expanding group, poignantly described as “discouraged” workers, have even given up looking.

They are right to be discouraged but wrong that there is no work. A report out on Friday points out that a fifth of firms and a quarter of employers in the state sector are still hiring — despite the recession. Except they are taking on migrant workers — not our home-grown “discouraged” variety.

The managing director of a medium-sized IT company explained why. High-flyers — Oxford and Cambridge graduates — are still as good as any in the world. His problems come when he tries to recruit middle management. Last year he interviewed 52 graduates — all educated in state schools. On paper they looked “brilliant students”. Each had three As at A-level and a 2:1 degree. He shook his head. “There’s a big difference between people passing exams and being ready for work.”

This was obvious even before the interview began. Of the 52 applicants, half arrived late. Only three of the 52 walked up to the managing director, looked him in the eye, shook his hand and said, “Good morning.” The rest “just ambled in”. When he asked them to solve a problem, only 12 had come equipped with a notebook and pencil.

The three who had greeted him proved the strongest candidates and he hired them. Within a year they were out because of their “lackadaisical” attitude. They did not turn up on time; for the first six months a manager had to check all their emails for spelling and grammar; they did not know how to learn. It was the first time they had ever been asked to learn on their own. Their ability to “engage in business” was “incredibly” disappointing and “at 5.30 on the dot they left the office”.

This year the managing director has joined the 20% of companies recruiting overseas. “We are an English company but we have no English staff. It’s just too much trouble,” he said.

It is the same story with employers at every level in the UK. Sir Terry Leahy, the chief executive of Tesco, put it bluntly. Too many children have been leaving school after 11 or 13 years of compulsory education “without the basic skills to get on in life and hold down a job”. He said 5m adults were functionally illiterate and 17m could not add up properly. “On-the-job training” cannot act as a “bandage or sticking plaster” for “the failure of our education system”.

A CBI survey revealed that literacy and numeracy were not the only problems. More than 50% of employers complained that young people were inarticulate, unable to communicate concisely, interpret written instructions or perform simple mental calculations.

This goes a long way to explain why, of the 1.7m jobs created since 1997, 81% have gone to foreign workers. The Department for Work and Pensions (DWP) agrees with Leahy. UK citizens are on the dole because of “issues around basic employability skills, incentives and motivation”. It is a pity it has not passed that insight on to the Department for Children, Schools and Families.

The DWP has made it clear: work is where the inflated claims for our state education finally hit the buffers. At every stage we have a system in which the expediency of politicians and the ideology of the educational establishment take precedence over the interests of pupils.

We have children who can barely read and write scoring high marks in their Sats because it makes the school, and therefore politicians, look good. We have exam boards competing to offer the lowest pass mark because it allows heads to fulfil their GCSE targets. We have pupils pushed into easy subjects at A-level — which excludes them from applying to a top university — because it benefits the school. And we have universities that offer a 2:1 degree, as the IT company director put it, to “anyone who bothers to sit down and take the exam”.

On top of that is the attitude of the staff themselves. I was visiting schools to discover why so many black Caribbean and white working-class boys were failing. One reason soon became obvious. Their teachers, middle class themselves, failed to pass on those very values that had allowed them to progress in life.

They viewed inculcating attributes such as lucidity, spelling, grammar, punctuality and manners as “patronising”. They feared anything that smacked of the didactic. “I am not a teacher. I am a facilitator,” said one teacher primly. The head of another school insisted she was a “head learner” rather than a headmistress.

Joseph P Parkes is clear who he is and it is definitely not a head learner. Father Parkes is the president of Cristo Rey, a Catholic coeducational school in East Harlem, New York. His mainly black and Puerto Rican pupils come from single-parent homes; many have fathers in prison. But he is determined that no one is going to turn them down for a job.

His school operates an ingenious work-share scheme with some of New York’s most prestigious companies and charities. Once a week pupils put on their identity cards, go down to Wall Street and enter another world — of law firms and investment banks.

From the age of 14 they join a team of five pupils each performing clerical work one day a week. They know their salary pays “a big chunk” of their education. As one young man said: “They treat me like an adult.” Parkes explained: “It encourages them to take school seriously.”

How seriously I saw for myself when Parkes addressed morning assembly. We stood in rows, teachers patrolling on either side, straightening a shoulder here, checking a tie there. The talk was entitled First Impressions. “Now what kind of first impression have you made on our visitor from the UK here?” asked Parkes. “Have you shaken Miss Sergeant by the hand and looked her in the eye?” he demanded. Seventy pairs of eyes immediately engaged me. “Have you greeted her?” “Good morning,” they all chanted enthusiastically.

He held up a sheaf of papers, printouts of emails. The previous day, he had set them the task of applying for a job interview on the internet. First, had they researched the company? He summoned one boy to the front, who listed his company’s interests fluently. Parkes nodded approval, then turned back to us. Now then, how many had tracked down the right address for the email? Who was dispatching their precious job application to the man in the post room? Everyone laughed.

No detail seemed too small for Parkes. Had they spelt names correctly? He waved the papers accusingly. Some of the students had addressed their emails to him: “You were not following directions. You have got to learn to follow directions.” He selected three or four sheets. “And some of you have an email address that is inappropriate for a job application. Put yourself in the company’s shoes. Are you really going to give an interview to JosetheNiceGuy, FastandFurious@Hotmail” — the boy next to me blushed — “or Cristo Rey Hottie?” The pupils erupted. Finally, the head demanded: “What happens when you are not proactive?” “You are being a procrastinator,” they shouted back.

Parkes knows that his school is the only chance these young people have. Education has to make up for their background and the lack of those values that ensure success. He knows they are totally dependent on him for their future. If employers like the managing director are to recruit in England again, it is a lesson that our state schools will have to learn.

Valuation Method Analysis: A Case Study of Tesco

http://ivythesis.typepad.com/term_paper_topics/2010/03/valuation-method-analysis-a-case-study-of-tesco.html

http://ivythesis.typepad.com/term_paper_topics/valuation-methods/

Thursday March 11, 2010

Stronger ringgit boosts Bursa

By IZWAN IDRIS and YVONNE TAN

starbiz@thestar.com.my

PETALING JAYA: The ringgit is on a roll after Bank Negara raised interest rates last week amid mounting evidence the nation’s economic recovery is gaining traction.

And the currency strength has rubbed off on the share market, propelling the FTSE Bursa Malaysia KL Composite Index (FBM KLCI) to a fresh two-year high of 1,328.22 points at the close yesterday.

“Many thought that Indonesia or South Korea would be the first to hike interest rates but Malaysia was the one which started the ball rolling in the Asian region,” Datuk Lee Kok Kwan, deputy chief executive officer, group treasury and investments at CIMB Group, told StarBiz yesterday.

As a result, “funds are flowing back in,” he said.

The ringgit had risen 1.5% against the US dollar since March 4 to 3.321 yesterday after Bank Negara increased its key overnight policy rate (OPR) from its historic low by 25 basis points to 2.25%.

Year-to-date, the local currency had shot up 3.18% yesterday and was the best performing currency in Asia ahead of the Korean won’s 2.9% gain over the same period.

The local unit’s performance against embattled European currencies was even more impressive, up 10% against the British pound and 8.7% against the euro since the start of the year.

Royal Bank of Scotland Group Plc, in a recent report, advised investors to buy the ringgit against the won and yen on expectations of further interest rate hikes here.

Its strategist Chia Woon Khien told Bloomberg yesterday that Bank Negara “could do a few more” rate hikes. “The question is whether they want to go straight to neutral level or stay a little dovish along the way,” he said.

OSK Investment Bank Bhd director and head of treasury Yeo Chin Tiong expects rates to “gradually” rise as the economy recovers. “Our house target for the ringgit is 3.20 versus the US dollar by year-end,’’ he toldStarBiz yesterday.

Meanwhile, RAM Ratings Services Bhd in its 2010 edition of its CreditPulse report said the ringgit was expected to strengthen to 3.20-3.30 against the greenback by end-2010.

It said there would be a “gradual” currency appreciation boosted by high current account surplus, international reserves and low inflation.

The stronger outlook for the ringgit, fuelled by rising rates and improving economy, has also boosted the appeal of local assets, especially for foreign investors.

At yesterday’s close, the FBM KLCI was up 4.36% since the start of the year. But the stronger ringgit means returns calculated in US dollar terms have shot up to 8.4% over the same period.

This made the local bourse the second best performer in the region behind Indonesia’s Jakarta Composite Index which gained 9%.

http://biz.thestar.com.my/news/story.asp?file=/2010/3/11/business/5839792&sec=business

What To Expect From The Market In The Next 8 Years

Mar. 10, 2010

(GuruFocus, March 9, 2010) This much we have a consensus: The current bull market was officially born on March 9, 2009 and market has rallied about 70% since then. What we do not know and we cannot agree on whether we are in a secular bull market or a bear market rally. 

That is the topic of debate between Robert Shiller of Yale University, Jeremy Siegel of University of Pennsylvania’s Wharton School, and Ben Inker of GMO LLC, as it is written up in today’s Wall Street Journal. Shiller and Siegel became friends since their student years in MIT in the 1970s, yet they disagree on which way the market is going.

Shiller, author of famous book Irrational Exuberance in which he warned of the tech bubble before it burst in 2000, is on the bearish side. His reasons, according to the WSJ:

• Despite the two bear markets, stock have spent almost all their time since 1991 priced above historic average. History suggests that when the stock prices are high, performance in ensuing years is disappointing.
• Shiller compiled market data back to 1881, measuring stock prices month by month relative to corporate profits, To avoid short-term profit distortions, he uses an average of profits over the previous 10 years. Over the long run, by his measure, stocks trade at an average of about 16 times annual corporate profits.
• Today the ratio is about 20. Historically, when stock market hit that number, the average return a decade after that is about -2%, adjusted for inflation
• Catalyst for the bearish scenario could be when the government takes away the support in the housing market. Housing market could be turning down after a brief recovery, which could contribute to a decline in U.S. stocks.

Siegel, also author of a well-read book called “Stocks for the Long Run” is on the bullish side. He contends that Shiller’s method of looking at earnings of the past 10 years doesn’t work well in the current environment due to the large write-offs of the financials in 2008. Instead, he prefers to use the forecasted earning:

• When economy came out of recession, the common P/E is 18.5.
• Currently the market is selling at about 14.5 times forecast 2010 profits, making it cheap in comparison to the past after-recession market.
• If the P/E expand to 18.5, S&P could rise to1400 this year, a 23% gain from today’s level.
• What’s more, ”We could easily see 10% to 12% stock returns with low inflation in future years”, Siegel predicts.

Ben Inker, in consistence of the firm’s stance on the matter, presented his arguments from a different angle – he uses historical profit margins to forecast future corporate profits. His reasoning:

• Internet and real estate bubbles pushed corporate profit margin to 7% above historical level of 6%. The higher margin was due to exceptional borrowing and investment by corporations and consumers.
• While the one percent seems to be small, it represents a 17% jump in profitability which is not sustainable.
• Use the historical 6% margin and applying it to an expected rise in corporate revenues as the economy recovers, he finds that the stocks today trade at almost 19 times expected profits, making them expensive.
• To be reasonably priced, he calculates the S&P 500 would have to fall 21% to about 900.

Of course, true value investors will consider guessing the short-term move of the market is a fool’s game. Whether the market will climb 20% or decline 20% next is really everybody’s guess. Guessing the long-term’s performance might be a fool’s game too, if it is up to guys like Warren Buffett, Bruce Berkowitz, and Donald Yacktman to say. For them, one ought to buy a good business on the assumption that no matter how the market will performance in the next couple of years, the business will do well so will the stock follow.

But at least one can answer question of long term expected investment return of the market with a bit more intelligence.

What to Expect in the Next 8 Years?

GuruFocus has developed a webpage dedicated to answer that question. The theory behind (it is actually explained on the webpage itself, I repeat here in case you do not want to click to another page) is that market return consists of three component: dividend yield, profit growth, and change in market valuation. Quoting from the page:

1. Business growth 

If we look at a particular business, the value of the business is determined by how much money this business can make. The growth in the value of the business comes from the growth of the earnings of the business growth. This growth in the business value is reflected as the price appreciation of the company stock if the market recognizes the value, which it does, eventually.

If we look at the overall economy, the growth in the value of the entire stock market comes from the growth of corporate earnings. As we discussed above, over long term, corporate earnings grow as fast as the economy itself.

2. Dividends

Dividend is an important portion of the investment return. Dividend comes from the cash earning of a business. Everything equal, higher dividend payout ratio, in principle, result in a lower growth rate. Therefore, if a company pays out dividend while with growing earnings, the dividend is an additional return for the shareholders besides the appreciation of the business value.

3. Change in the market valuation

Although the value of a business does not change overnight, stock price does. The market valuation is usually measured by the well-known ratios such as P/E, P/S, P/B etc. These ratios can be applied to individual business, as well as the overall market. The ratio Warren Buffett uses for market valuation, TMC/GNP, is equivalent to the P/S ratio of the economy.

Putting all the three factors together, the return of an investment can be estimated by the following formula:






Investment Return (%) = Dividend Yield (%)+ Business Growth (%)+ Change of Valuation (%)

Armed with this analysis and assuming in 8 years, the TMC/GDP ratio takes any one of the 40% (doom’s day scenario), 80% (average scenario), and 120% (happy ending), one can calculate the expected investment return.








As of now, we should expect an average gain of 5.7% for the next 8 years if the market ends the 8-year period at TMC/GDP=80%. Yes, it is mediocre gain as compared to the historical average gain, but it does beat the 10-year treasury yield by about 2%.

Market could sink an average of 2.6% per year if TMC/GD ratio declines to 40%, an extreme level seen in the 1975 to 1985 period. During that period, OPEC was on our case and inflation ran as high as 12%, and long term treasury bonds were yielding at a double digit. Will we go there?

However, if the market participants decides to irrationally exuberant again and TMC/GDP jumps to a 120%, level seen in the 1998-2000 period, we could actually expect a 11.6% gain per annum. What medicine do we need to take in order for us to be so happy again?

So even in long run anything is possible -- if the market goes to the extremes in the next 8 years, the bears like Shiller and Inker could be right, so could be the bullish Jeremy Siegel. Investors are better equipped to know what to expect under each scenario. GuruFocus memebers can access the Broad Market Valuation in real time.

"That's why the value of expertise and the ability to interpret information will someday go to infinity", so says Investment Guru Wilbur Ross recently. 

http://www.gurufocus.com/news.php?id=87078

Stock Picking Strategy- The Parameters That One Needs To Look At

Stock Picking Strategy- The Parameters That One Needs To Look At

October 4th, 2009 | Author: admin

When investing in stocks, an investor needs to be aware of what they are putting themselves into. This is to say that, they should have the facts right about the securities they hope to invest in. Stocks, in this case, come in many characteristics and an investor needs to be fully aware of their behaviour before committing their money. A characteristic of stocks is that, they are those that are value-oriented and others are growth oriented.

Value oriented stocks are those that are trading at a price that is lower than what they are really worth. An investor buys them with the hope that, the price will rise above the stocks worth and that, they will then realize a profit, hence adding value to their investment. On the other hand, the growth oriented stocks are focused on future prices. They look at the potential of the company, and not necessarily the securities.

Under the growth stocks, there are those that grow faster than others and it is upon the investors to find to more about them. There is no laid out formula as to how the stocks experience growth, but the growth is based on speculation. As an investor chooses to look at growth as a stock picking strategy, they should first make an observation of how they have performed in the past.

Another stock picking strategy that an investor may chose to adopt is the income factor. As we can see, there are value and growth stocks and income stocks as well. Stocks that generate dividends are popular among many people today. Many investors have preference over high yield stocks, or those that guarantee them a steady income.


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