Buffett (1994): Don't get bogged down by near term outlook and strong earnings growth; look for the best risk adjusted returns on a long-term basis

Warren Buffett highlighted, in his 1994 letter to shareholders, the futility in trying to make economic prediction while investing. Let us go further down the same letter and see what other investment wisdom the master has to offer.

One of the biggest qualities that separate the master from the rest of the investors is his knack of identifying on a consistent basis, investments that have the ability to provide the best risk adjusted returns on a long-term basis. In other words, the master does a very good job of arriving at an intrinsic value of a company based on which he takes his investment decisions. Indeed, if the key to successful long-term investing is not consistently identifying opportunities with the best risk adjusted returns than what it is.

However, not all investors and even the managers of companies are able to fully grasp this concept and get bogged down by near term outlook and strong earnings growth. This is nowhere more true than in the field of M&A where acquisitions are justified to the acquiring company's shareholders by stating that these are anti-dilutive to earnings and hence, are good for the company's long-term interest. The master feels that this is not the correct way of looking at things and this is what he has to say on the issue.

"In corporate transactions, it's equally silly for the would-be purchaser to focus on current earnings when the prospective acquiree has either different prospects, different amounts of non-operating assets, or a different capital structure. At Berkshire, we have rejected many merger and purchase opportunities that would have boosted current and near-term earnings but that would have reduced per-share intrinsic value. Our approach, rather, has been to follow Wayne Gretzky's advice: "Go to where the puck is going to be, not to where it is." As a result, our shareholders are now many billions of dollars richer than they would have been if we had used the standard catechism."

He goes on to say, "The sad fact is that most major acquisitions display an egregious imbalance:

• They are a bonanza for the shareholders of the acquiree; 
• they increase the income and status of the acquirer's management; and 
• they are a honey pot for the investment bankers and other professionals on both sides. 
• But, alas, they usually reduce the wealth of the acquirer's shareholders, often to a substantial extent. That happens because the acquirer typically gives up more intrinsic value than it receives."

Indeed, rather than giving in to their adventurous instincts, managers could do a world of good to their shareholders if they allocate their capital wisely and look for the best risk adjusted return from the excess cash they generate from their operations. If such opportunities turn out to be sparse, then they are better off returning the excess cash to shareholders by way of dividends or buybacks. However, unfortunately not all managers adhere to this routine and indulge in squandering shareholder wealth by making costly acquisitions where they end up giving more intrinsic value than they receive.

To read our previous discussion on Warren Buffett's letter to shareholders, please click here - Lessons from the master

http://www.equitymaster.com/detail.asp?date=2/7/2008&story=2

A quick look at Xingquan

Xingquan International Sports Holdings Limited Company

Business Description:
Xingquan International Sports Holdings Limited. The Group's principal acitivities are manufacturing shoe soles and shoes and selling shoe soles, shoes, apparels and accessories. Other activities include investment holding, provision of management services and lease of factory and land.
Wright Quality Rating: LANN Rating Explanations

Recent Financial Results

Announcement Date		Financial Yr. End		Qtr	Period End		Revenue RM '000		Profit/Lost RM'000		EPS		Amended
25-Feb-10		30-Jun-10		2	31-Dec-09		179,660		28,394		9.00		-
11-Nov-09		30-Jun-10		1	30-Sep-09		133,167		19,183		6.00		-
24-Aug-09		30-Jun-09		4	30-Jun-09		110,704		21,988		10.00		-

Date Announced: 25.2.2010
Xingquan-Q2 '10 Results.pdf


A quick look at XINGQUAN
http://spreadsheets.google.com/pub?key=tQ54VqUumqozmI_Y_SSAQKQ&output=html


Comment:

This is yet another recent IPO.  I am wondering why 'anonymous' likes IPOs.

Given its short history, one will not be able to assess with confidence the quality of this company.  Moreover, the integrity of the management is unknown and yet to be proven.  In the absence of a track-record, those wishing to buy into this stock should treat this more a speculation rather than an investment as defined by Benjamin Graham.

An additional note on valuing this stock.  When the price of a stock is low, all the valuations matrix look very 'beautiful'.  This is something one should beware and take note of.

Always invest into quality company and a good management.  In the absence of these, move on to another stock; don't even bother to value the stock.

Investing Money in Plain English (Video)

Shouldn't retail investors be wary of IPOs?

Legendary investor Warren Buffett is wary of IPOs. Shouldn’t retail investors walk his path? 


“It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller to a less-knowledgeable buyer,” Buffett reportedly said on IPOs. 


----


But why did majority of the IPOs fail to deliver? The usual answer from the companies and bankers will be “that’s the way market is”.Although there’s no single reason, a dominant one is the pricing as sellers try to get the maximum, which, at times may be even higher than their traded peers by sugar-coating prospects. Broadly speaking, the companies that debuted with high valuations compared to their listed peers failed miserably. 


----


Most of the IPOs failed to deliver simply because they were priced too aggressively.  Besides the company specific reasons, the common factor among them was their high price to earnings (P/E) multiple that they were asking. 

Why I usually avoid IPOs

A quick look at Kelington Group Berhad KGB (ACE)

Kelington Group Berhad Company

Business Description:
Kelington Group Berhad. The Group's principal activities are providing engineering services and general trading. It provides UHP gas and chemical delivery systems solutions that comprise of products and services, such as system design and installation, gas and chemical industry equipment, control and instrumentation, QA and QC, as well as maintenance and servicing to various foundries and clients who require UHP gas or chemical delivery systems in Malaysia, the People's Republic of China, Taiwan and Singapore.



Current Price (3/26/2010): .74
(Figures in Malaysian Ringgits)


Wright Quality Rating: LBNN


The ratings consist of three letters and a number. Each letter reflects a composite qualitative measurement of numerous individual standards which may be summarized as follows:
A = Outstanding; B = Excellent; C = Good; D = Fair; L = Limited; N = Not Rated.










Comment:
This is a recent IPO (November 2009).  
Probably better to avoid IPO in general.
Its longer term profitability and growth have yet to be established.  
Can relook after a few years when its business track record can be better assessed.




A quick look at KGB.
http://spreadsheets.google.com/pub?key=tHqBfx2E03AKh6UHmeay3aw&output=html
Once again, it is not easy to assess a newbie company.

Investors to be all ears at PM's address

By Chong Pooi Koon

Published: 2010/03/29

The two-day Invest Malaysia conference, beginning tomorrow, will most likely hog the spotlight of market-moving news flow this week.



It has traditionally been the stage where investor-friendly policies are announced by the government, while corporate chieftains strive to sell their story to fund managers attending the event.

Prime Minister Datuk Seri Najib Razak's keynote address will be the highlight, and he is expected to unveil the first stage of a new economic model.

Investors are also looking forward to more information on the next privatisation wave, in which the government is said to have identified companies that it may sell its stakes in later this year.

The anticipated details on this front will likely generate more excitement in the immediate term.

But how the government plans to reform Malaysia's economic structure is crucial to win over investors, especially after the disappointing twists in some previously announced policies.

"While the Najib administration undoubtedly exceeded our expectations in 2009 by announcing various reforms that required strong political will, of late, the pace of reform seems to have slackened," OSK Investment Research noted.

The stockbroker pointed out the scrapping of the proposed tiered fuel subsidy and the delay in a decision on the power tariff increase as well as the second reading of the Goods and Services Tax (GST) Bill in Parliament.

"We believe these developments may give rise to concern among foreign investors that there might be a potential slowdown in economic reform, thus making Malaysia less of an attractive investment destination," OSK said.

Last week, water-related stocks were in the spotlight after Gamuda's 40 per cent-owned subsidiary, Syarikat Pengeluar Air Sungai Selangor (Splash), made a RM10.8 billion offer to take over the Selangor state government's water-related assets and operations.

Bank Negara Malaysia's raised projection of economic growth this year of between 4.5 and 5.5 per cent provided some cheer.

The local stock market will likely face some volatile times ahead, OSK said. While corporate earnings reports in the fourth quarter of last year proved surprisingly strong and spurred a rally early this month, fears of a contagion effect from Greece's budget deficit problems, concern over interest rate movements in China and perceived risks of a possible slowing of reforms back home saw the benchmark FBM Kuala Lumpur Composite Index first rally some 58 points by March 10, only to give back more than half of it over the following weeks.

In view of the volatility, OSK said, investors should be cautious on cyclical blue chips. It advised investors to shift some of their portfolios to more-defensive big-caps, such as higher-yielding utility and gaming stocks like Tanjong, PLUS, Petronas Gas and Berjaya Sports Toto.

"At the same time, we do not advise total avoidance of small-caps. Indeed, the volatile market could provide ample opportunities to trade small-caps. We continue to advise trading in small-caps in the construction (particularly with exposure to Sarawak), steel, rubber glove and healthcare sectors. We believe the market may swing between the 1,250 (15 times price-earnings multiple) and 1,400 (16.5 times price-earnings multiple) levels for the next four to five months," the broker said in a market strategy report last week.



http://www.btimes.com.my/Current_News/BTIMES/articles/bell29/Article/

PM's Hong Kong visit eye-opener for investors

CREDIT Suisse group is forecasting a more bullish outlook for Malaysia with a gross domestic product of 6 per cent this year compared with Bank Negara Malaysia's (BNM) estimate of 5.5 per cent.

It also expects more senior investors to come to Malaysia for in-depth research on local listed companies following Prime Minister Datuk Seri Najib Razak's address at the Asian Investment Conference in Hong Kong last week.

"They now better appreciate that he is a prime minister who means business, but also respects the fact that he faces a herculean task in reforming Malaysia," said Stephen Hagger, country manager & head of equities for Credit Suisse in Malaysia.

He said that a key takeaway was that the prime minister understood what the market wanted, but has to balance that with socio-political considerations and getting elected.

"PM Najib's visit to Hong Kong served as a timely reminder to many investors not to forget about Malaysia," he said in response to questions sent via e-mail.

Credit Suisse is the number one institutional investor research company globally.

In Hong Kong, Hagger said he met several senior investors keen to come to Malaysia to "kick the tyres" or go the extra mile in doing company research after hearing the prime minister and realising that Malaysia was becoming "under-researched".

Najib last week met top-notch fund managers besides delivering a keynote address on Malaysia's attributes as an investment destination for equity and capital market investments and its ground-breaking economic reforms.

He also met Credit Suisse special adviser, Sir John Major, who moderated the luncheon address where Najib discussed Malaysia's economic transformation efforts to emerge as a high-income economy by 2020 and the soon-to-be unveiled new economic model.

Hagger said those who met the prime minister were surprised on the upside, particularly with regard to his openness and frank answers to questions.

Asked about concerns about investing in Malaysia, he said there were only a few well-capitalised stocks on Bursa Malaysia, while fund managers needed large and liquid stocks, so that they could buy or sell a position in one day.

"Malaysia has few such stocks and is competing for capital and 'air time' with the larger more liquid North Asian markets," he said.

Fund managers are also looking for well-managed companies, he said. 

However, he said the government has achieved considerable success with the government-linked companies' reform programme in scaling down equity in listed entities, particularly at Khazanah Nasional Bhd, the government's investment arm.

This has been followed up by the beginnings of a "selldown" by Khazanah, which should improve the liquidity of those stocks.

He cited how there was clearly a potential conflict of interest in the government owning controlling stakes in both Malaysia Airlines and Malaysia Airports Holdings, when there was no regulator to ensure "fair play" with other airline operators.

Hagger said Malaysia was struggling to stay relevant as an investment destination for global fund managers primarily due to size and liquidity, but also of course, valuation.

"We notice that the foreign ownership of the Malaysian market has fallen significantly and the number of visits by foreign fund managers has dwindled."

He said the annual Credit Suisse Asian Investment Conference was a great forum for companies, governments and investors to meet, whereby there were about 270 companies from around Asia, including 16 companies from Malaysia, meeting some 2,000 fund managers from around the world, including several from Malaysia.

In addition, working with CIMB, "we are proud to have "showcased" the prime minister and several Malaysian companies in New York last year."

"We have also assisted the three regulators - Securities Commission, Bursa Malaysia and BNM - to meet fund managers overseas.

"Unfortunately, some company chief executive officers take investor relations more seriously than others," said Hagger.

Hagger said Malaysia's problems looked very easy to fix "when you are sitting behind a desk in Boston".

The reform of the "30 per cent Bumi listing rule" would have been perceived as a "no brainer" by many foreign fund managers, who probably failed to appreciate that it was an incredibly brave step by the prime minister, he said.

"I believe that is why Prime Minister Najib took such pains to explain that ... he understands what the market wants, but he has to balance that with getting his party re-elected," he said. - Bernama


http://www.btimes.com.my/Current_News/BTIMES/articles/cres28/Article/

Undervalued good quality stocks in KLSE

Is KLSE over-valued?  What is KLSE market PE?

The historical market PE is around 10 to 20, averaging 15 over the long term.   With the KLSE index at 1312.48 recently, the  market PE was 19.23  (Source: iCap website).   This market PE was at the upper end of the normal market PE range.  The index-linked counters are probably trading at fair or high value. 

However, if one were to browse through the stock section of our local papers, there are still many stocks trading below ttm-PE of 10.  Many stocks maybe priced such due to lack of 'popular support' or 'neglect'.  They maybe 'fallen' stocks.  Amongst these, there are good quality stocks that are undervalued even in the present market.

If you discover any gem(s), please share here.  




Also read:

Is the Stock Market Cheap?

Valuation Models that better capture the meaning of “fundamental” financial analysis: the cash flow forecast and the discounted cash flow (DCF)

The unbearable lightness of value

As global markets have risen in the past year, some observers are at a loss to reconcile the trend with what they see as still soft fundamentals. At the macroeconomic level, such fundamentals would include unemployment, debt on a variety of levels, deficits of a variety of kinds. At the microeconomic level, fundamentals have to do with free cash flows and the relation between these and the value of a business. Watching global markets rise while fundamentals remain questionable, one wonders if the way we look at fundamentals, at least in the microeconomic sense, is outdated. Without becoming overly dramatic, I wonder if corporate finance theory is losing some of its meaning in an environment in which option value, rather than operating profit, becomes the dominant strain.

There are no models that better capture the meaning of “fundamental” financial analysis than the cash flow forecast and the discounted cash flow (DCF) valuation method that is its close affiliate. And in the DCF method, there is a permanence implied, that nowadays seems increasingly flawed. When a multi-year financial model is created, and when an enterprise valuation is estimated at the end of such a timeframe and discounted back to the present, we have an understanding that the business underlying this exercise will be more or less the same business in the future. For a widget producer, say, while there will be new widget competition, new widget markets, fluctuations in profit margins and economic cycles, it is nevertheless a given – inherent in the financial forecast – that there will always be widgets. The fluctuations are addressed with risk-adjusted discount rates, and with fine-tuned details and line-items, but widget production does not go away.

Yet what business, what industry segment, can we really point to nowadays, and with any confidence determine that its widget manufacture will continue? Ten years ago, we felt pretty good about newspapers, radio, and television. The telephone system. With hindsight, what did those AT&T financial forecasts mean? What do financial forecasts for newspapers and television mean now? I am unfair, I know, choosing my examples from among the vulnerable. We have had a technology revolution, after all… but is this era showing any signs of pause? With rumors going around about cloud computing, might Windows not become a niche product just like landline telephones are quickly becoming?

Media and technology are isolated and extreme cases, I suppose. I guess we could confidently assemble a long term perspective of the energy segment then? Or biotechnology? For that matter, healthcare? Basic manufacturing? There is some degree of permanence in real estate, as roofs over our heads will probably not be rendered obsolete within a 5-year forecast model, but that is sort of a sore subject nowadays, isn’t it… using real estate and financial forecasting in the same phrase together. I mean, considering what happened.

Before anyone jumps to the wrong conclusion in these musings, assuming incorrectly that such thinking is bound to lead to inaction if not downright paralysis, my point is not that value does not exist or is impossible to measure. Pagers had value, newspapers still do. Even Netscape (where is it now?) is discussed today as a success story, and the media sector is not going away. But the financial value in these and other assets, or asset classes, may be seen less through the filter of fundamentals, perhaps, and more on the basis of steps along the way of progress. What emerges, and what has greater value all the time in this affair, is optionality.

Option value: the unknown but real future opportunity that a current business makes possible. According to option theory, option value increase as volatility increases. Perhaps the rise in global financial markets that we have witnessed in the past twelve months, which seems to have occurred even as certain risks have mounted, serves as introduction to a new investor perspective, by which value rises not despite, but because of, uncertainty, fluctuation, and constant change.






http://discourseandnotes.com/blog/2010/03/28/the-unbearable-lightness-of-value-2/

Will Petdag close above or below RM 9.00 today?

It tested the MR 9.00 resistance on 3 occasions since October 2009.  This morning, it penetrated this level.

Check the charts occasionally to sense mob hysteria or panic at work

Some people in the markets use graphs of previous stocks or commodity movements in order to predict future price movements.  They are called "technicians" or "chartists."  They spend a lot of time pouring over the historic price movements and the formations these show on their charts as a way to predict what will happen next.

Ordinarily, I do not use charts to trade.  Occasionally, I will turn to them as a way to see what has been happening and to check facts if I sense mob hysteria or panic at work.  

Charts sometimes reveal a beeline rise, an indication that prices have increased far beyond actual value.  It means that people have lost perspective.  It shows the level of the hysteria.  I know that prices will eventually return to the appropriate level, so I sell short.  You need to be careful, though, that you are not selling short simply because prices are high.  Never sell short unless prices are astronomically expensive, AND you detect negative change coming.  

You can see panic in falling prices when you see them collapsing straight down day after day for extended periods.  Historically, long periods of selling have ended in "selling climaxes" when everyone finally panics and dumps to get out of the market at any price no matter what the fundamental reality might be.  Large price declines across the board should attract your attention. 

A good rule of thumb is to sell during times of market hysteria and buy during times of panic.  Always remember to buy low and sell high.


Ref:
Jim Rogers
A Gift to My Children

Selling Hysteria

For the most part, it is in short-term trades that prices are driven by emotion.  Mid-term and long-term investments are usually influenced more by the fundamentals.

Bubbles burst in the wake of hysteria, while plummeting prices usually end in panic.

You can see panic in falling prices when you see them collapsing straight down day after day for extended periods.  Historically, long periods of selling have ended in "selling climaxes" when everyone finally panics and dumps to get out of the market at any price no matter what the fundamental reality might be.

Large price declines across the board should attract your attention.  A good rule of thumb is to sell during times of market hysteria and buy during times of panic.  

Always remember to buy low and sell high.  It sounds so simple, but it is extremely difficult.  Just keep this dictum in mind always - especially when your emotions are getting the best of you.

Ref:
Jim Rogers
A Gift to My Children

Do not panic; learn the psychology

To be a successful investor, you really need to understand psychology as well as history and philosophy.  Very often emotions drive the market up or down.  Remember that economies and stock markets are two different things.  

As Paul Samuelson,l the Nobel Prize winning economists, once put it, "The stock market has anticipated nine of the last five recessions."

China's economy, for example, has been growing rapidly for years now, yet its stock market declined consistently for four years between 2001 and 2005.  The public overreacting to positive or negative news reports, will buy or sell short at the wrong time.  Investor psychology can accelerate such trends int he market.

Anybody can feel panicky.  Losing your perspective in the midst of market panic is equivalent to losing your money in that market.


Ref:

Jim Rogers
A Gift to My Children

Alan Greenspan on the Financial Collapse

By Morgan Housel 
March 23, 2010 | Comments (81)

Former Federal Reserve Chairman Alan Greenspan just published a 66-page letter on the causes of the financial meltdown and how to avoid a repeat. He presents some great points, and several ridiculous ones as well. Here are a few of each.

Great points
1. Fannie Mae (NYSE: FNM) and Freddie Mac's (NYSE: FRE) role in subprime:

"The firms accounted for an estimated 40% of all subprime mortgage securities … during 2003 and 2004. That was an estimated five times their share of newly purchased and retained in 2002, implying that a significant proportion of the increased demand for subprime mortgage-backed securities during the years 2003-2004 was effectively politically mandated ..."

Wall Street gets vilified for blowing up the financial system. As it should. But a big part of the mortgage mess had nothing to do with Wall Street. It started with commercial banks making shady loans and ended with Fannie and Freddie's political obligation to buy up these loans in bulk. What's scary is there isn't a plan on what to do with these two rascals. Functionally,nothing has changed since they collapsed.

2. On the role of the rating agencies:  

"[A]n inordinately large part of investment management subcontracted to the 'safe harbor' risk designations of the credit rating agencies. No further judgment was required of investment officers who believed they were effectively held harmless by the judgments of government-sanctioned rating organizations."

It's easy to have no sympathy for those who bought collateralized debt obligations only to learn they were filled with packing peanuts. And I don't. But stupidity wasn't these people's shortfall, to their credit. It was relying on the word of the ratings agencies -- Moody's (NYSE:MCO), Standard & Poor's, and Fitch -- that told them everything was fine and well. And as Greenspan points out, ratings agencies are government-sanctioned entities, so competition for good, high-quality analysis gets stifled.

3. On regulating financial markets:

"In dealing with nonbanks that come in all varieties under the label of 'shadow banking,' it is probably best to regulate financial products rather than institutions."

Bingo. Don't simply regulate Goldman Sachs (NYSE: GS). Its bankers will throw up smokescreens all day around regulators trying to decode its balance sheet. Start at the bottom and regulate (or ban) things like credit default swaps. The only way you'll outsmart these guys is to regulate from the bottom up, not the top down.

4. On "too big to fail":

"Federal Reserve research had been unable to find economies of scale in banking beyond a modest-sized institution."

Hear that, JPMorgan Chase (NYSE: JPM) CEO Jamie Dimon? Now quit acting like civilization will be forced back into hunting and gathering if four banks don't control the economy.

5. On crisis forecasting:

"Forecasters as a group will almost certainly miss the onset of the next financial crisis, as they have so often in the past and I presume any newly designated 'systemic regulator' will also."

I'm like my colleague Matt Koppenheffer on this one: The thought of risk-regulation committees and advisory boards makes me nauseated. Most regulators didn't even acknowledge anything was wrong until chaos was everywhere. And once you realize a bank such as Citigroup (NYSE: C) or Bank of America (NYSE: BAC) is in deep water, it's too late. You've got to install firm rules that prevent insanity in the first place, rather than rely on crisis committees or reactionary policies the way we did in 2008.

Ridiculous points
1. On the Fed's role in the housing boom: 

"The global house price bubble was a consequence of lower interest rates, but it was long-term interest rates that galvanized home asset prices, not the overnight rates of central banks, as has become the seeming conventional wisdom. … No one, to my knowledge, employs overnight interest rates -- such as the fed-funds rate -- to determine the capitalization rate of real estate ..."

If you assume everyone uses a 30-year fixed-rate mortgage, he's right. But how about the roughly one-third of borrowers in 2005 who used adjustable-rate mortgages linked to short-term interest rates set by the Fed? These borrowers represent some of the most egregious excesses of the housing boom, and they couldn't have done it without you, Al.

2. On the impracticality of controlling bubbles:

"At some rate, monetary policy can crush any bubble. If not 6 1/2%, try 20%, or 50% for that matter. Any bubble can be crushed, but the state of prosperity will be an inevitable victim."

Let's look at how this has played out in the past. Facing an inflation bubble in the early 1980s, Greenspan's predecessor, Paul Volcker, raised interest rates to 20%. That hurt for a while, but he's now considered an economic hero for doing it. Inflation collapsed, and real growth boomed. He looked past the short run to save the long run. Greenspan, on the other hand, let this bubble burn itself out. The result, in his own words, was "the most virulent global financial crisis ever." But we preserved prosperity in 2006, people, so apparently it was all worth it.

3. On choices: 

"Unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible. Assuaging their aftermath seems the best we can hope for."

It's a bit dramatic to assume we can pick either crippling bubbles or central planning, but nothing else. You can simultaneously have dynamic free markets and common-sense rules that prevent pizza delivery guys from living like they're on MTV Cribs. We had something close to this from the end of World War II up until the late '90s. And it was awesome. Bubbles are a natural part of human behavior. That's a given. But it's pretty weak to just roll over and accept their wrath as inevitable.

What do you think? How responsible is Greenspan for the financial meltdown, and what should he have done differently?

http://www.fool.com/investing/general/2010/03/23/alan-greenspan-on-the-financial-collapse.aspx?source=ihpdspmra0000001&lidx=1