The foundation of long-term investing is the notion that the company's earnings drives the price of a share of its stock.

The foundation of long-term investing is the notion that the company's earnings drives the price of a share of its stock. The higher the earnings, the higher the price.





Comparing the above 2 charts, I will be excited with the bottom one.  The pattern here is that of 3 lines going up "almost parallel" to each other (monotonous "tramlines").  This company's earnings have been growing consistently over many years.  It was therefore not surprising that its share price has risen in tandem.   In addition, it has given dividends consistently over the years.  This dividend too has grown in tandem with the earnings.  However, since the share price has also risen, the DY over the years hovered probably around the same range.

Click here to see more companies with "monotonous tramlines" charts.

For long term investors, the total shareholder returns are from dividend and capital appreciation.  Look at this post here:

Selected Stock Performance Review
http://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdGZuWktpR2dvQUhhSmpkNElXY0NvWmc&output=html

Most of the total shareholder returns will be from capital appreciation of the stock prices.  I will concentrate on ensuring that I invest in a company's earnings.  The dividend is at best a "surrogate" indicator of this company's good earnings.

Related readings:

The story of Ellis Traub:  Investing for Beginners

Padini expects slower sales growth in fiscal 2010 (10/9/2009)

Padini expects slower sales growth in fiscal 2010


2009/09/10

Malaysian fashion retailer Padini expects annual sales growth in fiscal 2010 to slow from a year ago as it expands at a slower pace.

The pace at which the company will add retail space will fall by more than half, Padini executive director Chan Kwai Heng said.

Sales for the year to June 2009 jumped 24 per cent to RM477 million from a year ago and net profit was up 19 per cent at RM49.5 million, company data showed.

"That kind of growth could be a bit hard pressed to sustain, because for FY2010 we are not adding a lot more space," Chan said in an interview yesterday.

Padini will add about 40,000 square feet of retail space in fiscal 2010, versus 90,000 sq ft in 2009 and 140,000 sq ft in 2008, said Chan.

Malaysia, Asia's third most trade-dependent economy after Singapore and Hong Kong, shrank 3.9 per cent in the second quarter after a 6.2 per cent drop in the first quarter from a year ago.

Padini's business is growing despite the downturn and the company is rolling out new product lines and opening more outlets.

"The increase in sales is mainly generated from (new retail space)," said Chan.

A company that began as a garment manufacturer for bigger brands in 1971, Padini moved to building its own brands in the late 80's and early 90's when a booming economy boosted domestic consumption in the Southeast Asian country.

The company now sells nine brands of fashion goods ranging from garments to women's shoes and accessories in 12 countries in Southeast Asia and the Middle East.

Foreign retail brands such as Top Shop, Zara and MNG have flooded the local retail market in recent years to tap into the growing consumer market.

Chan said the company has no intention of beefing up its exports in spite of rising competition at home. Currently, overseas sales account for about 10 per cent of the total.

"We do not have a concerted plan or strategy as to what we shall do to go for the export market," said Chan.

"For us, the retail market at home is still so lucrative and it is still doing so well for us, because of that we will really pay attention to this part," he said.

Padini shares have outperformed that of its rivals so far this year but lagged the performance of the wider market.

The stock has risen 14.63 per cent so far this year, compared to the benchmark stock index's 37 per cent gain while competitor Voir is down 10.56 per cent and Bonia has fallen 12.28 per cent. - Reuters

Yet another look at Hing Yiap versus Padini

Another look at Hing Yiap versus Padini
https://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdHpGNURZU29NUnVlMnNUOGQ4LUduX1E&output=html

This is a good way to compare 2 companies.

Would you prefer buying a good company at fair price or a fair company at a good price?

Which company would you choose?  For the short term?  For the long term?

Finding great companies: What you want to see on their financial statements?

If you're committed to finding great companies and investing in them, it is time to state clearly what you should actively seek out on financial statements.  Here now is what you should hope to find when you're studying the report of a company that you're considering for investment.  


What you want to see on a balance sheet?

1.  Lots of Cash

• Cash-rich companies don't have trouble funding growth, paying down debts, and doing whatever they need to build the business.  
• Increasing cash and equivalents is good.

2.  A low Flow Ratio


Flow ratio
=  (Current assets - Cash) / (Current Liabilities - Short term Debt)
=  Noncash Current Assets / Noncash Current Liabilities

Ideally, a company's flow ratio is low.  Once cash is removed from current assets, we are dealing almost exclusively with accounts receivable and inventories.  In the very best businesses, these items are held in check.  Inventories should never run high, because they should be constantly rolling out the door.  Receivables should be kept as low as possible, because the company should require up-front payments for its products and services.

So we certainly want the numerator of the equation (current assets minus cash) to be held low.

What about the denominator (current liabilities minus short-term debt)?  Rising payables indicate one of two things:

• either the company cannot meet its short-term bills and is headed for bankruptcy, or 
• the company is so strong that its suppliers are willing to give it time before requiring payment.  

You can be sure that companies in the latter category use their advantageous position to hand on to every dollar they can.   Again, think of every unpaid bill as a short-term, low-interest or interest-free loan.  If a company has plenty of cash to pay down current liabilities but doesn't, it is probably managing its money very well.  Those are the companies that we are looking for.

Ideally, we like to see this flow ratio sit low.  The very best companies have:  (1) Plenty of cash  (2)  Noncash current assets dropping (inventories and receivables are kept low) and (3)  Rising current liabilities (unpaid bills for which cash is in hand).

You'll prefer the flow to be below 1.25, which would indicate that the company is aggressively managing its cash flows.

Inventories are down, receivables are down, and payables are up.  This is a perfect mix when a company has loads of cash and no long-term debt.  Why?  Because it indicates that while the company could (1) afford to pay bills today and (2) doesn't have to worry about rising receivables, they are in enough of a position of power to hold off their payments and collect all dues up front.

When the flow ratio is high, another red light whirs on the balance sheet.

It must be noted here, however, that larger companies generally have lower flow ratios due to their ability to negotiate from strength.  Thus, don't penalize your favorite dynamically growing small-cap too much for a higher flow ratio.


3.  Manageable debt and a reasonable debt-to-equity ratio

Investors have very different attitudes toward debt.  Some shun it, choosing to not invest in companies with any or much debt.  This is fine and can result in highly satisfactory investment performance results.  But debt shouldn't be viewed as completely evil.  Used properly and in moderation, it can help a company achieve greater results than if no debt is taken on.

Debt can be good for companies too.  Imagine a firm that has a reliable stream of earnings.  Let's say that it raises $100 million by issuing some corporate bonds that pay 8 percent interest.  If the company knows that it earns about 12 percent on the money it invests in its business, then the arrangement should be a very lucrative one.

Note, though, that the more debt you take on, the greater your interest expense will be.  And this can eat into your profit margins.  At a certain point, a company can have too much debt for its own good.  Another feature of debt (or 'leverage') is that it magnifies gains and losses (just as buying stock on margin means that your gains or losses will be magnified).  Debt, like anything, is best taken in moderation.

To finance their operations, companies need sources of capital.  Some companies can survive and grow simply on the earnings they generate.  Others issue bonds, borrow from banks, issue stock, or sell a chunk of the company to a few significant investors.  The combined ways that a company finances its operations is called its "capital structure."  If you take the time to evaluate a company's debt, it could be worth your while.  Properly managed debt can enhance a company's value.

When you calculate debt-to-equity ratios for your companies, remember that there really isn't a right or wrong number.  You just want to make sure that the company has some assets on which to leverage its debt.  To that end, look for low numbers, ideally.  A debt-to-equity ratio of 0.05 isn't necessarily better than one of 0.15, but 0.65 is probably more appealing than 1.15.  You should also evaluate the quality of the debt and what it's being used for.  If you see debt levels spiking upward, make sure you research why.  Certainly, long-term debt can be used intelligently.  But in our experience, the companies in the very strongest position are those that don't need to borrow to fund the development of their business.  We prefer those companies with a great deal more cash than long-term debt.



Are any of our balance sheet guidelines hard-and-fast rules?  No.

We can imagine reasonable explanations for each.

• A company can run inventories very high relative to sales in a quarter, as they prepare for the big Christmas rush, for example.  So, inventories may be seasonally inflated (or deflated) in anticipation of great oncoming demand.
• And accounts receivable may be a tad high simply by virtue of when a company closed out its quarter.  Perhaps, the very next day, 75 percent of those receivables will arrive by wire transfer.  Here, the calendar timing of its quarterly announcement hurt your company.
• Rising payables can also be a very bad thing.  If the company is avoiding short-term bills because it can't afford to pay them, look out!
• Finally, flow ratios can run high for all the reasons listed above.

Having qualified our assertions, we still believe that the best businesses

• have such high ongoing demand that inventories race out the door, 
• product distributors pay for the merchandise upfront, 
• the company has enough cash to pay off payables immediately but doesn't, and 
• future growth hasn't been compromised by present borrowing.  

Look to companies like Coca-Cola and Microsoft to find these qualities fully realised.


What you want to see on the income statement?

1.  High Revenue Growth


You will want to see substantial and consistent top-line growth , indicating that the planet wants more and more of what your company has to offer.  Annual revenue growth in excess of 8 - 10 percent per year for companies with more than $5 billion in yearly sales is ideal.  Smaller companies ought be growing sales by 20 - 30 percent or more annually.

2.  Cost of Sales under wraps


The Cost of sales (goods) figure should be growing no faster than the Revenue line.  Ideally, your company will be meeting increasing demand by supplying products at the same cost as before.  In fact, best of all, if your company can cut the cost of goods sold during periods of rapid growth.  It indicates that the business can get its materials or provide its services cheaper in higher volume.  Where cost of goods sold rose outpacing sales growth, a red light just blinked from the income statement.


3.  Gross margin above 40%


We prefer to invest in companies with extraordinarily high gross margin - again, calculated by (a) subtracting cost of goods sold (cost of sales) from total sales, to get gross profit, then (b) dividing gross profit by total sales.

A gross margin above 40% indicates that there is only moderate material expense to the business.  It is a "light" business.  We like that.

Not all businesses are this light, of course.  Many manufacturing companies have a hard time hitting this target, as do many retailers.  Does that mean you should never invest in them?  No.  Does it mean you should have a slight bias against them in favour of higher-margin companies, all other things being equal?  Yes.

4.  Research and Development costs on the rise

Yes, we actually want our companies to spend more and more on research every year, particularly those in high technology and pharmaceuticals.  This is the biggest investment in the future that a company can make.  And the main reason businesses spend less on R&D one year than the last is that they need the money elsewhere.  Not a desirable situation to be in.  Look for R&D costs rising.  Of course, though, not all companies spend much on R&D.  A kiss is still a kiss, a Coke is still a Coke.

Generally, the best way to go about measuring R&D is as a percentage of sales.  You just divided R&D by revenue.  You want to see this figure trend upward, or at least hold steady.

5.  A 34% plus tax rate


Make sure that the business is paying the full rate to the government (Uncle Sam).  Due to previous earnings losses, some companies can carry forward up to a few years of tax credits.  While this is a wonderful thing for them, it can cause a misrepresentation of the true bottom-line growth.  If companies are paying less than 34% per year in taxes, you should tax their income at that rate, to see through to the real growth.

6.  Net profit margin above 7% and rising.

How much money is your company making for every dollar of sales?  The profit margin - net income dividend by sales - tells you what real merit there is to the business.

We prefer businesses with more than $5 billion in sales to run a profit margin above 7 percent, and those with less than $5 billion to sport a profit margin of above 10 percent.  Why go through all the work of running a business if out of it you can't derive substantial profits for your shareholders?

Another way of thinking about this is that in a capitalistic world, high margins - highly profitable businesses - lure competition.  Others will move in and attempt to undercut a company's prices.  So companies that can post high margins are winning; competition is failing to undercut them.  As with gross profits above, some industries do not lend themselves to a high profit margin.   For example, a certain company is unlikely to ever show high profits, but it remains a wonderful company.


What you want to see on the cash flow statement?

Net cash provided by (used in) operating activities is positive or negative.

If a company is cash flow negative, it means that these guys are burning capital to keep their business going.  This is excusable over short periods of time, but by the time companies make it into the public marketplace, they should be generating profits off their business.

If a company you are studying is cash flow negative, it's critical that you know why that's occurring.

• Perhaps it has to ramp up  inventories for the quarter, or had a short, not-to-be-repeated struggle with receivables.  
• Some companies are best off burning capital for a short-term period, while they ramp up for huge business success in the future.  
• But if the only reason you can find is that their business isn't successful and doesn't look to be gaining momentum, you should steer clear of that investment.

Summary

You now have a fine checklist of things to look for (and hope for) on the balance sheet, income statement, and statement of cash flows.  Few companies are ideal enough to conform to our every wish.

The best businesses show financial statements strengthening from one quarter to the next.

For smaller companies with great promise and for larger companies hitting a single bad bump in the road, shortcomings in the financial statements can be explained away for a brief period.

But when you do accept these explanations, be sure you're getting the facts.  You want to thoroughly understand why there has been a slipup and do your best to assess whether or not it's quickly remediable.

We have, up to until now,  merely outlined the ideal characteristics, without ever putting a price tag on them.  Make sure you've mastered these basic concepts before fishing for some companies.

Do you want to take your knowledge of investing to the next level?

Learning to invest can be an enjoyable pastime for those inclined toward it.  It is not a mystery that has to be left to the professionals.  Do you want to take your knowledge of investing to the next level?

You can do it as successful investing relies primarily on the proper understanding of basic mathematics and basic principles of business.

You want to learn about business.  

You want to learn how to value individual stocks.

You want to determine whether or not to buy more of the stock of your employer.

You want to own the greatest companies on the planet, hold them for decades, and turn a couple of thousand dollars into a couple of million dollars by the time you retire, or your kids retire, or their kids.

To get there, you need only add 6 + 17 successfully (23).  You need only multiply 12 X 2.6 (31.2).  You need only divide 178 by 14 (12.7).

Mostly, you'll just need to keep your eyes and mind open.  

The future of your financial situation rests more on these abilities than on working triple overtime next month or inheriting a whole mess of money from your great-uncle.


So, let's ask again:  is it time for you to step beyond the index fund and start investing in individual stocks?

Why invest in individual stocks?  

Because if you're methodical, you may beat the index funds that beat the majority of managed funds.  

Chances are you won't make much money at all in your first year of investing.

You'll still be learning and you'll probably make plenty of mistakes.

And there certainly are other alternatives to common stock.  Index funds are a great way to begin investing.

With method and resolve, private investors can manage to outperform the market over the long term.

Which type of Company would you rather own?

Would you prefer to own:

A.  One that consistently posts better earnings and whose stocks plows steadily higher?

or

B.  One that made the same amount of money for six years but was (a) profitable and (b) disciplined in paying hefty dividends back to investors?  (Note:  These companies are harder to find, but in such situations, a no- or low-growth company may actually be OK.)

or

C.  One that has made the same amount of money for six straight years, has little sense of enterprise, and has a stock that is trading at the same price it was ten years ago?


Related:

Be a stock picker: Buy GREAT companies and hold for the long term until their fundamentals change

Examples of companies in:

A - PetDag, PBB, LPI, PPB

B - Nestle, Guinness, DLady

C - Too many in this group in the KLSE.

China signals plans for stronger yuan

China signals plans for stronger yuan
June 20, 2010 - 9:11AM

China said it will allow a more flexible yuan, signaling an end to the currency's two-year-old peg to the US dollar a week before a Group of 20 summit.

The decision was made after the world's third-largest economy improved, the central bank said in a statement on its website, without indicating a timeframe for the change. It ruled out a one-time revaluation, saying there is no basis for ``large-scale appreciation,'' and kept the yuan's 0.5 per cent daily trading band unchanged.

``The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,'' the People's Bank of China said. ``It is desirable to proceed further with reform of the renminbi exchange-rate regime and increase the renminbi exchange-rate flexibility.''

The move may help deflect criticism from President Barack Obama and other G-20 leaders, who have blamed China for relying on an undervalued currency to promote exports. It also affirms Treasury Secretary Timothy F. Geithner's policy of encouraging China to loosen restrictions on the yuan while resisting calls in Congress for trade sanctions. Geithner in April delayed a report to lawmakers assessing whether China or any other country is unfairly manipulating its exchange rate.

``This is another small victory for Tim Geithner,'' Goldman Sachs's Chief Global Economist Jim O'Neill said in an interview with Bloomberg Television in St. Petersburg, Russia.

The Australian dollar is buying about 5.9 yuan. A stronger yuan may slow the Chinese economy as its exports become less competitive in international markets. On the other hand, China is likely to import more, and its currency will make overseas investments by Chinese companies - such as in Australia's resources and property - more attractive.

`China bashing'

``It makes it a lot more difficult for Washington and Congress to do China bashing,'' O'Neill said. ``The Chinese are increasingly confident they can make this adjustment to a domestic-driven economy rather than the one relying on exporting low-value-added stuff to the rest of the world.''

Geithner, in a statement, praised China's decision and added that ``vigorous implementation would make a positive contribution to strong and balanced global growth.'' The Obama administration received advance notice of the announcement, US officials said.

China, by moving on its currency ahead of the G-20 meeting June 26-27 in Toronto, has shifted attention to the budget deficits of developed nations, said Eswar Prasad, a senior fellow at the Brookings Institution in Washington.


``It can now argue that the G-20 leaders should focus on the major determinants of global imbalances, especially the buildup of debt in advanced economies,'' said Prasad, a former head of the China division at the International Monetary Fund. The move ``also serves to acknowledge that they have an important responsibility to the international community.''

Helping exporters

Chinese authorities have prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis.

The currency appreciated 21 per cent in the three years after a peg to the US dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen. The yuan is a denomination of China's currency, the renminbi.

``This move is a vote of confidence in the global recovery and a reaffirmation of Beijing's longstanding commitment to a flexible currency regime,'' Stephen Roach, chairman of Morgan Stanley Asia Ltd., said in an e-mail. ``This shift, however, is not a panacea for an unbalanced global economy. Surplus savers like China still need to take additional actions to stimulate internal private consumption.''

Import costs

Companies focused on the Chinese market, including Beijing-based computer maker Lenovo and Shanghai-based China Eastern Airlines, said in March that they would gain from lower import costs and stronger consumer purchasing power should the yuan appreciate. Textiles makers would stand to lose the most and some would ``face bankruptcy'' with profit margins as low as 3 per cent, Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, said in March.

A more flexible currency would give China more freedom to decide on monetary policy and reduce inflationary pressures by lowering import costs, the World Bank said in a report last week.

China's inflation rate jumped to a 19-month high of 3.1 per cent in May, higher than the government's full-year target of 3 per cent. Central-bank dollar buying has left the nation with $US2.4 trillion in currency reserves, the world's largest holding.

`Crisis mode'

``China has ended its crisis-mode exchange-rate policy as the economy recovers strongly and inflationary pressure continues to build,'' Li Daokui, an adviser on the People's Bank of China's policy board, said in an interview. ``The yuan's future trend depends on the euro's movement, and the trends of other major currencies.''

Yuan 12-month forwards rose the most this year two days ago, gaining 0.5 per cent to 6.7125 per US dollar. The contracts reflect bets the currency will appreciate 1.7 per cent from the spot rate of 6.8262. They had been pricing in appreciation of 3.2 per cent on April 30 before a slump in the euro and a worsening of Europe's debt crisis eased pressure for appreciation.

``The central bank's statement means China's exit from the dollar peg,'' said Zhao Qingming, an analyst in Beijing at China Construction Bank, the nation's second-biggest bank by market value. ``If the euro continues to remain weak, it could also mean that the yuan may depreciate against the dollar.''

Deadline postponed

Geithner postponed an April 15 deadline for a semiannual review of the currency policies of major US trading partners, which might have resulted in China being labeled a currency manipulator. China owned $US900 billion of US Treasuries as of April, the largest foreign holdings.

China's exports jumped 48.5 per cent in May from a year earlier, the biggest gain in more than six years, according to customs bureau data June 10. Exports exceeded imports by $US19.5 billion, from $US1.68 billion in April and a deficit of $US7.24 billion in March that was the first in six years.

China's narrowing balance-of-payments gap indicates that there's no basis for ``large-scale appreciation'' by the yuan, the central bank said in the English version of its statement. The Chinese version said no ``large-scale volatility.''

Twelve of 19 respondents surveyed by Bloomberg in April predicted the central bank would allow the currency to float more freely this quarter, while the rest saw a move by year-end. Eleven ruled out a one-time revaluation, while 15 predicted a wider daily trading range.

``Continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies,'' the statement said. That suggests a looser link to the dollar, said Ben Simpfendorfer, chief China economist at Royal Bank of Scotland Group Plc, in Hong Kong.

``China has to offer something ahead of the G-20,'' he said. ``Greater flexibility allows them the option to appreciate against the dollar, perhaps during periods of dollar weakness.''

Bloomberg News

Review: Apple iPad for business

The Apple iPad has plenty of affordable and useful business applications but it may be worth waiting for the iPad version 2

Techbyte
Published: 11:43AM BST 16 Jun 2010

Apple iPad

Of course, you’ve read a lot about the iPad, but here we’re concerned with business and gadgets that make our professional lives easier. Could Apple’s iPad really have a useful impact?

Ignore, then, the indisputable good looks, silent operation and sleek styling. These are good for showing off, and the iPad is certainly a pleasure to use because of how it sits in the hand, but these factors score no points for improved business use.

The iPad is a blank slate, designed to perform the tasks you set it. There are 5,000 iPad-specific applications (apps) along with 200,000 iPhone apps, many of which have strong business uses. The iPhone apps don’t look as good as dedicated iPad versions, marooned in the centre of the screen or enlarged to the point that they look blocky.

But many of these apps are gaining iPad versions, often free and achieved simply by updating your iPad. Most are free or inexpensive, such as PayRecord (£1.79) which is good for road warriors eager to keep a record of time worked and calculate payment earned. This info can be emailed to an employer client or accounts department. There are many more of these, almost certainly enough to make an iPad useful – just check out the Business category of iPad apps in iTunes if you’re not sure.

But what else is the iPad good for? It’s not great for typing – there’s no feedback to let you know you’ve hit a key, so touch typists will want the optional Bluetooth keyboard. This is not ideal as it compromises portability. Even so, Pages (£5.99), Apple’s own word processor built for the iPad, is sophisticated, elegant and capable, not to mention very cheap. Pages, which creates Word-compatible documents, goes a long way to redress the iPad’s keyboard deficiencies.

And if you want to travel light, you can carry hundreds of books in the iPad, though the glossy screen’s backlight is not as easy on the eye as paper.

The iPad lacks extensive connectivity, though you can connect USB devices with a suitable add-on, and there’s no camera on board to power augmented reality apps. What’s more, a front-facing camera that would allow video conferencing is also absent.

The iPad is a highly desirable piece of kit, with exceptional capabilities and a fast-increasing number of brilliant apps. So the blank slate Apple has created has enormous potential and will change its purpose quickly. Even so, you may want to hold off until the inevitable second edition which may have improved connectivity and extra capabilities – if you can wait a whole year.

iPad
3 stars
From £429
www.apple.com/uk

http://www.telegraph.co.uk/finance/yourbusiness/7832342/Review-Apple-iPad-for-business.html

Investors ignore signs and pile into property

Investors ignore signs and pile into property

Peter Martin
June 16, 2010 - 1:00AM

AUSTRALIANS are diving into negatively geared property even as the Reserve Bank signals that another interest rate rise could be only weeks away.

Figures from the Bureau of Statistics show that while lending to buy homes in which to live fell a seasonally adjusted 10 per cent in the first four months of the year, lending to property investors rose 11 per cent. In the past year lending to investors rose 30 per cent nationwide, and 20 per cent in NSW.

''These investors aren't concerned about interest rates,'' said a BIS Shrapnel analyst, Angie Zigomanis. ''They can see prices rising and real estate looks a safer bet than the stockmarket.''

While some of the new real estate investors were taking money out of the sharemarket, most were using funds they had been keeping on the sidelines.

''You've got people who have still got their jobs and have been fiscally conservative - and potentially money is burning a pocket,'' he said.

''If you stick money in a term deposit it faces tax. A lot of people are averse to putting it in the sharemarket, given how it's been going, and residential property has bottomed out and been climbing for 12 months. That's given people confidence to jump back in.''

Mr Zigomanis said a key factor for some would have been the government's decision not to move against negative gearing after the Henry tax review.

Tax Office figures show a record 1.2 million investors said they spent more money on their rental properties than they earned in 2007-08. One in every 10 taxpayers owned negatively geared property.

Reserve Bank figures released yesterday show that in other respects we are being more careful with our money. Credit card cash advances are down 5.5 per cent over the year and the proportion of those withdrawing cash from their bank's ATMs rather than another banks' has risen to a record 62 per cent.

The minutes of the Reserve's board meeting this month suggest it will leave rates on hold next month but consider lifting them in August in response to inflation figures to be released next month.

The minutes identify international developments and the outlook for inflation as the key drivers of rates and, unusually, nominate the next month's figures as the ones to watch.

The Reserve's deputy governor, Ric Battellino, told a conference he was unconcerned about household debt, noting that since 2006 it had stayed steady relative to disposable income.

Claims that house prices were high compared with income did not differentiate between city and regional salaries.

This story was found at:
http://www.watoday.com.au/business/investors-ignore-signs-and-pile-into-property-20100615-ydds.html

Wealth and happiness from the power of 10

Wealth and happiness from the power of 10

Marcus Padley
June 19, 2010 - 3:00AM

You don't have to be a genius to work out that if only we could avoid the losses, we would all be winners. The first rule of making it is not losing it. So here are my top 10 tips on not losing money.

1 Inside information. A colleague has professionally traded all his life. It's what he does. He says: ''If I had never been given any inside information … I would be a million pounds better off than I am today.''

2 IPOs. The golden rule of IPOs is that if it's any good, it won't be offered to you. If you get offered it … then you don't want it.

3 Pretending to be Warren Buffett. The concept that Buffett can be emulated has cost investors more than it has ever made them. No one has ever managed to replicate his performance. The idea that you can is the biggest drawcard the equity market has and it is a lie. We all keep buying the dream.

4 Gurus. Go to any rainforest, discover any tribe and you will find them huddling under some concept of god and creed. It is a human need to be able to answer the unanswerable questions and we do it by deifying someone or something. In our search for answers to the stockmarket's unanswerable questions, we credit our commentators with vastly more powers than they could possibly deserve or possess. And dangerously, he who guesses the boldest guesses the longest.

5 Greed. The biggest killer of them all. Approaching the stockmarket with greed is like running onto a battlefield in bright orange. We'll get you.

6 Leverage. The mechanism of greed. Leverage is marketed one way, but it works both ways. You lose much faster as well. That means it only works for some of the time and not all of the time.

It only works when you are right. And with average equity returns after interest, transaction costs, inflation and tax of less than zero, man, you had better be right, and right at the right time. You cannot habitually use leverage to ''invest''. Only trade and trade at the right time, not all the time. That's a big ask for someone with a day job.

7 Confidence. What's the core skill of the finance industry?

I'll tell you: it's marketing. And oh, do we have some material to work with. The finance industry is never short of a success story to free your wallet from your pocket. But we cannot all be successful, and of course we aren't. But the concept of success from mere participation in the financial markets is sold and endures because of one convenient fact of life. Crappy cars and small houses don't attract attention. The winners stay, and we raise them up. The losers, conveniently, go away. Thank goodness for that. Imagine how much product we'd sell if we raised them up.

8 Expectations. The root of all happiness. The root of all unhappiness. Expect the unexpectable and expect the inevitable. Best you expect the expectable.

9 Laziness. The nucleus of many of the stockmarket's very large and public losses. There has been more money lost through laziness than through effort - in particular, from putting your future in the hands of financial products you haven't taken the time to understand (Opes Prime, Storm Financial), from ''investing'' without investigating (otherwise known as gambling), from relying on someone else's grand declaration rather than taking responsibility yourself. Let's get this straight. There is no easy route to riches in the stockmarket and there is no free lunch, so participation without effort is not enough.

10 Life. My mum used to say there are three foundations for spiritual and financial happiness and success: your relationship, your job and where you live. Get one of those wrong, and all three will go wrong. Note there's no mention of the stockmarket in there. The stockmarket is not life. It is a side issue. The biggest financial decisions you will make in your life have nothing to do with the stockmarket - such as getting married, getting divorced, having kids, investing in your home, committing to your career or your business. These are the biggest financial decisions you'll ever make. Focus on them. The stockmarket is not a priority.

Marcus Padley is a stockbroker with Patersons Securities and the author of the daily stockmarket newsletter Marcus Today.



This story was found at: http://www.smh.com.au/business/wealth-and-happiness-from-the-power-of-10-20100618-ymsd.html

Foreign Investment funds now also 'surfing' (Vietnam News)

Foreign investment funds now also ‘surfing’

13:42' 10/12/2009 (GMT+7)

VietNamNet Bridge – Foreign investment funds, generally considered to be long term investors, have been observed making ‘surfing investments’ inVietnam’s stock market, according to a report in Dau Tu Chung Khoan. A lot of investment funds have been set up over the last two years Though on average, trading by foreign investors on Vietnam’s stock market just accounts for just seven percent of the market’s volume, their moves have always attracted attention.  That’s because the foreign investors are mainly investment funds – reputed to be professional, experienced and only rarely money-losers. In two years, over 300 new foreign funds In the early part of this decade, the first years of Vietnam’s stock market, only a few investment funds were active in Vietnam, among them Vietnam Dragon Fund, VinaCapital and Mekong Capital.  Because then there were only a few dozen companies listed on the bourse, it was easy to guess what the investment funds purchased and what they sold. A lot of domestic investors followed the  funds’ lead, hoping for a bigger profit. As Vietnam’s stock market boomed, the number of foreign investment funds increased rapidly.  By 2007, there were 70, including Sumitomo Mitsui VN, Fullerton Vietnam Fund, Tong Yang VN, Maxford Growth - VN Focus, Vietnam Resource Investments (VRI) and Credit Agricole Fund, which mostly came from Japan, South Korea, Singapore and Malaysia. The rapidly growing stock market prompted fund management companies to set up more funds. Dragon Capital, for example, added two more funds, VinaCapital spawned Vinaland and Jaccar launched three funds. According to the Ministry of Finance, by November 2009, Vietnam had had 46 fund management companies and 382 foreign investment funds. The figure is a five-fold increase over 2007. Foreign funds also dabble in short-term buys The investment strategies of new funds in Vietnam are not so clear yet. What is clear that there are some changes in the investment strategies of the longer-established funds. The director of a well known foreign fund in Vietnam, who requested anonymity, commented that in view of the big gap between the VN Index’s highs and lows, no investment institution will dedicate all its investment capital to a buy and hold strategy. The VN Index crested 1,000 in late 2007, only to plunge to 200 in early 2009.  It is now hovering around 500. Khong Van Minh, Director of the Jaccar Vietnam Fund, stresses that long term investment will remain the strategy of the fund.  However, in order to get adapted to Vietnam’s stock market’s conditions, investment funds will use part of their capital to make short term, profit-maximizing investments. The 382 investment funds make different moves on the market.  What they have in common is ample capital, which allows them to purchase shares continuously in many trading sessions and then sell shares in many trading sessions The managing director of the SAM Investment Fund says that “value investors” investors do not care if the market is rising or falling. They simply purchase shares when they find the prices reasonable.  He says that a reasonable range for the VN Index now is 500-550 points. VietNamNet/DTCK http://english.vietnamnet.vn/biz/200912/Foreign-investment-funds-now-also-‘surfing’-883488/

Be a stock picker: Buy GREAT companies and hold for the long term until their fundamentals change

All the above are GREAT companies.

NEVER buy these GREAT companies at HIGH prices.

You can often buy them at FAIR prices.

On certain occasions, you have the chance to buy them at slightly BARGAIN prices.

Rarely, for example during the recent 2008 Crash, you had the chance to buy them at GREAT prices.

It is better to buy a GREAT company at a FAIR price than to buy a FAIR company at a GREAT price.

It is safe to hold these stocks for the long term since these companies have competitive advantages, selling only when their fundamentals change.

The present prices of these stocks are near or above their previous high prices.

Those who bought regularly into these stocks would have capital gains, through dollar-cost averaging.

Further comments:

1. Warren, on the other hand, after starting his career with Graham, discovered the tremendous wealth-creating economics of a company that possessed a long-term competitive advantage over its competitors.  
2. Warren realized that the longer you held one of these fantastic businesses, the richer it made you.  
3. While Graham would have argued that these super businesses  were all overpriced, Warren realized that he didn't have to wait for the stock market to serve up a bargain price, that even if he paid a fair price, he could still get superrich off of those businesses.  
4. In the process of discovering the advantages of owning a business with a long-term competitive advantage, Warren developed a unique set of analytical tools to help identify these special kinds of businesses.  
5. Though rooted in the old school Grahamian language, his new way of looking at things enabled him to determine whether the company could survive its current problems.  
6. Warren's way also told him whether or not the company in question possessed a long-term competitive advantage that would make him superrich over the long run.  
7. By learning or copying Warren, you can make the quantum leap that Warren made by enabling you to go beyond the old school Grahamian valuation models and discover, as Warren did, the phenomenal long-term wealth-creating power of a company that possesses a durable competitive advantage over its competitors.
8. In the process you'll free yourself from the costly manipulations of Wall Street and gain the opportunity to join the growing ranks of intelligent investors the world over who are becoming tremendously wealthy following in the footsteps of this legendary and masterful investor.

Related:

The Evolution of Warren Buffett

Learning and Understanding the Evolution of Warren Buffett
Li Lu sharing his Value Investing Strategies (Video)
The Three Gs of Buffett: Great, Good and Gruesome

The GREAT company has long-term competitive advantage in a stable industry.  This company:

• takes a one time investment capital and 
• pays you a very attractive return (dividend + capital appreciation), 
• which will continue to increase as years pass by;

Here are the golden words of Buffett on the GREAT businesses to own:

1.  On 'Great' businesses, Buffett says, "Long-term competitive advantage in a stable industry is what we seek in a business.

• If that comes with rapid organic growth, great. 
• But even without organic growth, such a business is rewarding. 
• We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere. 
• There's no rule that you have to invest money where you've earned it. 
• Indeed, it's often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can't for any extended period reinvest a large portion of their earnings internally at high rates of return."

Learning and Understanding the Evolution of Warren Buffett

The Evolution of Warren Buffett

It will be difficult for Buffett to continue to beat the market, assuming that he can do so. There are basically three ways for him to try.

• The first is to substitute faster-growing foreign stocks for large cap U.S. stocks. That is, he may try to beat Exxon Mobil (XOM) using the stocks of PetroChina (PTR) (owned in the past), or Petrobras of Brazil, to play the emerging markets theme.
• The second way to try to beat the market is to try to time purchases near lows or obtain special terms, as Berkshire did with its large stakes in General Electric and Goldman Sachs (GS).
• The third way is to avoid stocks of clearly dying "leading" companies such as International Paper (IP), General Motors, and Eastman Kodak (EK), a quasi-index strategy that, if successful, would still lead to modest outperformance.

All in all, Buffett has come a long way from his early days.

Further Comments:  

1. The first and second strategies are termed OFFENSIVE STRATEGIES to improve the return of the portfolio.  
2. The third strategy is a DEFENSIVE STRATEGY to reduce harm to the return of the portfolio.

--------

1. Imitating Ben Graham: Buffett's early investments were clearly in the Graham and Dodd mold.


The first major one, in 1957, was National Fire American Insurance, operated by the Ahmanson brothers (the older, H.F., also gave his name to a savings and loan). The brothers tried to buy in the stock for $50 a share (just above its annual earnings), but Buffett sent an agent all over to Nebraska with a counteroffer of $100 a share. Even at this higher price, he just about doubled his money.


In 1958, Buffett put 20% of the partners' money in Commonwealth Bank of Union City, at a price of $50 a share, because he estimated its stock value at $125 a share, and the company was growing at 10% a year. This was a more than adequate (60%) "margin of safety." If the gap between price and value closed in 10 years, he would realize some $325, or a return of about 20% annualized. But he sold a year later at $80 a share, earning 60% in a year, while the ten-year return had fallen to "only" an annual 16%.


In 1959, he placed 35% of the partners' money in Sanborn Map, a company that produced detailed city maps of buildings, whose users were insurance companies, fire stations, and the like. This had been a prosperous business in the 1930s and 1940s, before a cheaper substitute rendered it unprofitable in the 1950s. Nevertheless, the stock had fallen from $110 a share to $45 a share in 20 years, even though the company had built up an investment portfolio worth $65 a share during that time using excess cash. In Ben Graham style, Buffett's partners and two allies obtained 46% of the stock and forced management to distribute most of the portfolio to shareholders, at a 50%-ish (pre-tax) gain to the investors who elected this option.


Going into the 1960s, Buffett continued to buy companies at a discount to asset value Graham style. These included Berkshire Hathaway, a struggling textile producer with per-share working capital approximating its $15 share price, Dempster Mills, and Diversified Retailing. Buffett bought all of these companies with the expectation of getting the underlying businesses for "free." This was true only for Dempster, a badly-managed company that was turned around in less than three years for triple the investment. In the case of Berkshire, at least, even "free" was too much to expect.


But Buffett eventually used Berkshire's cash flow to acquire Diversified, and then redeployed the two companies' cash elsewhere. What's more, when he distributed partnership assets pro rata in 1970, he had effectively changed the form of his investment vehicle from a partnership (where capital gains were taxed every year), to a corporation (where gains were taxed only when realized).


There was one investment during this period that signalled Buffett's eventual departure from the Graham style. That was the purchase of the stock of American Express, whose main business was credit cards, but whose stock suffered when the firm's warehousing operation vouched for the value of "salad oil" deposited by a crook. This man,Tino deAngelis, borrowed (and lost) money on the strength of phony collateral, leaving Amex holding the bag. The stock took a hit when Amex paid out $60 million, its entire net worth, to settle the resulting claims. But Buffett realized that he was really getting the credit card business at a discount. Late in the 1960s, he sold his Amex stock for between three to five times his acquisition cost, three to five years after he had bought it.

Further comments:

1. 
   
   Investment analysis during the late 19th century and the early part of the 20th century was focused primarily on determining a company's solvency and earning power for the purposes of bond analysis.  
2. 
   
   Benjamin Graham had adapted early bond analysis techniques to common stocks analysis. 
3. 
   
   
   
   

   But Graham never made the distinction between a company that held a long-term competitive advantage over its competitors and one  that didn't.  
4. 
   
   
   
   

   He was only interested in whether or not the company had sufficient earning power to get it out of the economic trouble that had sent its stock price spiraling downward.  
5. 
   
   
   
   

   He wasn't interested in owning a position in a company for 10 or 20 years.  
6. 
   
   
   
   

   If it didn't move after 2 years, he was out of it.  
7. 
   
   
   
   

   It's not like Graham missed the boat; he just didn't get on the one that would have made him, like Warren, the richest man in the world.

--------

2. Transition to a "GARP" Style: Warren Buffett then evolved into what we would call a "GARP" (growth at a reasonable price) investor, albeit one with a strong value bent.


This transition occurred during the early years of his "new" (post Buffett partnership) incarnation, after he had hooked up with Charlie Munger, who believed that it was better to buy a great company at a good price, rather than a good company at a great price..


(a) What happened in the early 1970s was that certifiable growth companies got not only into value, but deep value territory (great companies at great prices).


One of them was Washington Post That company had publishing and broadcasting assets worth perhaps $400 million in 1970, but which sold in the market for $80-$100 million. Buffett bought some 12% of the company, which not only closed the gap between market value and asset value, but also grew earnings per share in excess of 15% over the next decade.


GEICO, a low cost insurer, had represented one of Buffett's first investments as a boy. Started with $100,000 in seed capital in 1936, it was worth about $3 million when Ben Graham bought a controlling stake in 1948. From there, it advanced in spectacular fashion to a peak of over $500 million, over 100 times, in two and half decades, before falling onto hard times in the early 1970s.


By 1976, it was near bankruptcy when Buffett had Salomon Brothers organize a rescue via a $76 million capital infusion. Berkshire provided $19 million of it, and basically co-underwrote the convertible preferred offering with Salomon. Adding this to an earlier $4 million investment in common gave Buffett a 33% stake in a company that would grow per-share earnings at about 15% a year over the next two decades.


Other, less celebrated, long term holdings from the period include Affiliated Publications, the Interpublic Group (IPG), Media General, and Ogilvy and Mather.




(b) Buffett also experimented with cheaply priced leaders of their respective industries:


Safeco for insurance, General Foods (GIS) in food, and the former Exxon in energy. There was a group of inflation hedges in the form of Alcoa (AA), Cleveland Cliffs Iron (CLFQM.PK), GATX, Handy and Harman, and later Reyolds Aluminum. Finally, there were arbitrage operations in Arcata Corporation and Beatrice Foods.


Buffett also dabbled in larger media companies such as ABC (DIS), Capital Cities, and Time Inc (TWX). He made a proposal to the management of the latter company that he take a large blocking position, to prevent a takeover, which Time rejected, to its later regret. (A takeover attempt by Paramount forced it into an ill-advised merger with Warner Communications.)


Both ABC and Capital Cities came back onto Buffett's radar screen when the chairman of the former retired, and the chairman of the latter, Buffett's good friend Tom Murphy, wanted to acquire the former, a move that had the blessing of the outgoing chairman. On its own, Capital Cities had no chance to acquire ABC, but an over $500 million investment from Berkshire provided the "equity" slice that made the leveraged deal possible. It also had the effect of making Berkshire a nearly 20% shareholder in the combined company, discouraging a takeover. At 16 times earnings, it was not a Graham investment, and had no margin of safety on the balance sheet.


But Tom Murphy reduced the combined companies' debt by over $1 billion (nearly half) within a year, while growing earnings at a mid-teens rate. (The stock grew at nearly 20% a year for a decade, because of multiple expansion, before the company was taken over by Disney.




(c) Buffett's next moves were among the most controversial of his career (and foreshadowed his recent purchases of General Electric and Goldman Sachs preferred).


Not finding any cheap common stocks around the run-up to Black Monday (1987), Buffett bought converitble preferred stocks in Champion International, Gillette, Salomon Brothers and US Airways (UAUA) issued specifically to him.


Champion was a mediocre investment and U.S. Air was a money-losing one. Salomon fell onto hard times and had to be personally rescued by Buffett. Gillette was a fundamentally strong company that paid out essentially all of its net worth in a special dividend to avoid a takeover (before Buffett's investment recapitalized it). In this regard, it was much like American Express (AXP) of the 1960s. Buffett returned to American Express in the mid 1990s with a similar $300 million investment in convertible preferred.




(d) During this time, Buffett completed his transformation as a GARP investment by buying Coke (KO).


With a mid-teens P/E ratio, this was not a classic Graham and Dodd investment, but the company was selling at "only" 1.25 times the market multiple, a ratio that expanded to 3 times in a decade, tripling the absolute multiple. Earnings more than tripled during this time, making Coke a huge winner for Berkshire.


In recent years, Buffett has added "international" to his repertoire, investing in Guinness (drinks) and Tesco (TSCDY.PK) (retail) of Britain, Posco (PKX), the South Korean steel company, PetroChina and the Brazilian real.

Further comments:

1. Warren, on the other hand, after starting his career with Graham, discovered the tremendous wealth-creating economics of a company that possessed a long-term competitive advantage over its competitors.  
2. Warren realized that the longer you held one of these fantastic businesses, the richer it made you.  
3. While Graham would have argued that these super businesses  were all overpriced, Warren realized that he didn't have to wait for the stock market to serve up a bargain price, that even if he paid a fair price, he could still get superrich off of those businesses.  
4. In the process of discovering the advantages of owning a business with a long-term competitive advantage, Warren developed a unique set of analytical tools to help identify these special kinds of businesses.  
5. Though rooted in the old school Grahamian language, his new way of looking at things enabled him to determine whether the company could survive its current problems.  
6. Warren's way also told him whether or not the company in question possessed a long-term competitive advantage that would make him superrich over the long run.  
7. By learning or copying Warren, you can make the quantum leap that Warren made by enabling you to go beyond the old school Grahamian valuation models and discover, as Warren did, the phenomenal long-term wealth-creating power of a company that possesses a durable competitive advantage over its competitors.  
8. In the process you'll free yourself from the costly manipulations of Wall Street and gain the opportunity to join the growing ranks of intelligent investors the world over who are becoming tremendously wealthy following in the footsteps of this legendary and masterful investor.