Graham warned ". . . that while enthusiasm may be necessary for great accomplishments elsewhere, in Wall Street it almost invariable leads to disaster."
He didn't explain his rationale for this view, but enthusiasm destroys our critical faculties and leads us to believe we have a "sure thing". Coupled with greed, thinking an investment is a sure thing is most dangerous. We tend to bet heavily on the stock, forgetting the legendary Bernard Baruch's warning that every investment is something of a gamble. Moreover, enthusiasm leads a person into speculation, which Graham greatly deplored.
Friday 6 August 2010
The Prevalent Approach to Investing Often Does Not Work
The prevalent approach to investing is first to choose the best industry, and then to invest in the best company in that industry, regardless of the stock's price.
Graham did not think well of this approach because he believed it was too unreliable. Good business does not always translate into good investment returns, and even the experts have difficulty selecting and concentrating on those issues which will become winners. Finally, the application of this method may place an investor in popular, overvalued stocks.
Graham did not think well of this approach because he believed it was too unreliable. Good business does not always translate into good investment returns, and even the experts have difficulty selecting and concentrating on those issues which will become winners. Finally, the application of this method may place an investor in popular, overvalued stocks.
Famous Mr. Market Parable
Stocks will fluctuate substantially in value. For a true investor, the only significant meaning of price fluctuations is that they offer ". . . an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal."
Using his famous Mr. Market parable, Graham suggests the attitude one should adopt toward fluctuations in prices. Imagine owning a $1,000 interest in a business along with a partner, Mr. Market.
Every day the accommodating Mr. Market offers either to buy your interest or to sell you a larger interest. Sometimes his price is ridiculously high, allowing you a good opportunity to sell. At other times his price is ridiculously low, allowing you a good opportunity to buy. Still at other times, his quotes are roughly justified by the business outlook, and you can ignore them.
The point is that the market is there for your convenience and profit. And market valuations are often wrong. Price fluctuations, Graham believes ". . . bear no relationship to underlying conditions and values." It is a mistake, he argued, to let the market determine what stocks are worth. Generally an investor will be wiser to form independent stock valuations, and then to exploit divergences between those valuations and the market's prices.
Graham's Mr. Market parable is related to his view of technical analysis. According to Graham, nearly all of technical analysis is based on buying stock when prices have risen and selling when they have fallen. Based on over 50 years' experience, he had ". . . not known a single person who had consistently or lastingly made money by thus 'following the market.'" This approach, he declared, ". . . is as fallacious as it is popular."
Using his famous Mr. Market parable, Graham suggests the attitude one should adopt toward fluctuations in prices. Imagine owning a $1,000 interest in a business along with a partner, Mr. Market.
Every day the accommodating Mr. Market offers either to buy your interest or to sell you a larger interest. Sometimes his price is ridiculously high, allowing you a good opportunity to sell. At other times his price is ridiculously low, allowing you a good opportunity to buy. Still at other times, his quotes are roughly justified by the business outlook, and you can ignore them.
The point is that the market is there for your convenience and profit. And market valuations are often wrong. Price fluctuations, Graham believes ". . . bear no relationship to underlying conditions and values." It is a mistake, he argued, to let the market determine what stocks are worth. Generally an investor will be wiser to form independent stock valuations, and then to exploit divergences between those valuations and the market's prices.
Graham's Mr. Market parable is related to his view of technical analysis. According to Graham, nearly all of technical analysis is based on buying stock when prices have risen and selling when they have fallen. Based on over 50 years' experience, he had ". . . not known a single person who had consistently or lastingly made money by thus 'following the market.'" This approach, he declared, ". . . is as fallacious as it is popular."
Investment Experience and Stock Market History Are Important
Ben Graham's 57 years on Wall Street were most instructive, and he expressed his appreciation to them when he alluded to his "old ally, experience".
To an important extent, you learn to invest by investing. Too often we have to make the same mistake as others before the lesson is instructive. All of us, it seems, must learn through the school of hard knocks. We would do better to learn from the likes of Ben Graham.
Graham was a careful student of stock market history, and he placed great emphasis on it. He thought that "No statement is more true and better applicable to Wall Street than the famous warning of Santayana : `Those who do not remember the past are condemned to repeat it.'" Graham could ridicule investors grasp of stock market history, referring to their "proverbial short memories".
It was Graham's knowledge of the long sweep of stock market history that prompted his view that ". . . the investor may as well resign himself. . .to the probability . . . that most of his holdings will advance, say, 50% or more from their low point and decline the equivalent one-third or more from their high point at various periods in the next 5 years." Historical insight is critical to successful investing. It is only through knowledge of the past that we can tell anything about the future.
To an important extent, you learn to invest by investing. Too often we have to make the same mistake as others before the lesson is instructive. All of us, it seems, must learn through the school of hard knocks. We would do better to learn from the likes of Ben Graham.
Graham was a careful student of stock market history, and he placed great emphasis on it. He thought that "No statement is more true and better applicable to Wall Street than the famous warning of Santayana : `Those who do not remember the past are condemned to repeat it.'" Graham could ridicule investors grasp of stock market history, referring to their "proverbial short memories".
It was Graham's knowledge of the long sweep of stock market history that prompted his view that ". . . the investor may as well resign himself. . .to the probability . . . that most of his holdings will advance, say, 50% or more from their low point and decline the equivalent one-third or more from their high point at various periods in the next 5 years." Historical insight is critical to successful investing. It is only through knowledge of the past that we can tell anything about the future.
Did Graham Insist on a Sure Thing?
It is too strong to say that Graham insisted on a sure thing, but he clearly wasn't much of a risk taker.
In his own words, "From the first we wanted to make sure that we were getting ample value for our money in concrete, demonstrable terms. We were unwilling to accept the prospects and promises of the future as compensation for a lack of sufficient value in hand."
Graham is proof that successful investment need not be risky investment.
In his own words, "From the first we wanted to make sure that we were getting ample value for our money in concrete, demonstrable terms. We were unwilling to accept the prospects and promises of the future as compensation for a lack of sufficient value in hand."
Graham is proof that successful investment need not be risky investment.
Graham Declines to Predict Earnings
In The Intelligent Investor, Graham evaluated the investment merit of several stocks, but not once did he predict earnings for those stocks. (On other occasions, however, he did venture to predict earnings.) For instance, at the conclusion of his analyses of ELTRA and Emhart stocks, he concluded, "We make no predictions about the future earnings performance. . ."
That Graham, an eminent security analyst, should decline to predict earnings is intriguing. He obviously did not have much confidence in his ability to predict earnings - nor in others' predictions, especially long-term predictions. Sophisticated investors have always been aware of this difficulty. For instance, John Maynard Keynes, the brilliant British economist, more than a half-century ago emphasized the great difficulty involved in forecasting investment returns. In regard to this difficulty, Keynes said : "The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence. In fact, those who seriously attempt to make such estimates are often so much in the minority that their behavior does not govern the market. "
Apparently because of such problems, Graham believed that the security valuation process is not very reliable. After discussing some problems valuing ALCOA, Graham said, "ALCOA is surely a representative industrial company of huge size. . .[it] supports to some degree, the doubts we expressed [earlier] as to the dependability of the appraisal process when applied to the typical industrial company."
Because the appraisal process is unreliable, it is prudent to diversify one's investments. Perhaps it is enough, Graham thought, for an investor to be assured that he or she is getting good value, even if an accurate valuation is impossible.
Finally, the inherent inaccuracy of this valuation process may explain Graham's observation that he had never ". . . seen dependable calculations made about common-stock values . . . that went beyond simple arithmetic or the most elementary algebra." In valuing stock, crude, simple calculations often are as good as you can do.
That Graham, an eminent security analyst, should decline to predict earnings is intriguing. He obviously did not have much confidence in his ability to predict earnings - nor in others' predictions, especially long-term predictions. Sophisticated investors have always been aware of this difficulty. For instance, John Maynard Keynes, the brilliant British economist, more than a half-century ago emphasized the great difficulty involved in forecasting investment returns. In regard to this difficulty, Keynes said : "The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence. In fact, those who seriously attempt to make such estimates are often so much in the minority that their behavior does not govern the market. "
Apparently because of such problems, Graham believed that the security valuation process is not very reliable. After discussing some problems valuing ALCOA, Graham said, "ALCOA is surely a representative industrial company of huge size. . .[it] supports to some degree, the doubts we expressed [earlier] as to the dependability of the appraisal process when applied to the typical industrial company."
Because the appraisal process is unreliable, it is prudent to diversify one's investments. Perhaps it is enough, Graham thought, for an investor to be assured that he or she is getting good value, even if an accurate valuation is impossible.
Finally, the inherent inaccuracy of this valuation process may explain Graham's observation that he had never ". . . seen dependable calculations made about common-stock values . . . that went beyond simple arithmetic or the most elementary algebra." In valuing stock, crude, simple calculations often are as good as you can do.
How do you find stocks with a margin of safety?
In part, they are found by avoiding stocks which are unlikely to possess this margin. Popular stocks are avoided since they are likely to be fully priced, and growth stocks are avoided since they tend to be popular and since they tend to perform poorly in bad markets. And you follow rules pertaining to low price/earnings ratios, low price/book value ratios, etc., which are designed to exclude stocks without a margin of safety.
Graham's advice to avoid growth stocks may be surprising. The reason is that great wealth is seldom achieved without growth stock investment, and Graham himself apparently amassed much of his fortune, while considerably enhancing his reputation, from a single growth stock. However, when Graham and his investment partners violated this principle, they controlled the firm and thus possessed inside knowledge of its affairs. Graham and partners held on to this stocks, too, because it had become "family business." In this case, they also violated Graham's often -stated admonition to be well diversified ; 20 percent of their funds initially went into this one stock. Still, Graham's disdain for growth stocks - because they are often popular, tend to become overpriced in good markets, and tend to perform poorly in bad markets - is well founded.
Graham's advice to avoid growth stocks may be surprising. The reason is that great wealth is seldom achieved without growth stock investment, and Graham himself apparently amassed much of his fortune, while considerably enhancing his reputation, from a single growth stock. However, when Graham and his investment partners violated this principle, they controlled the firm and thus possessed inside knowledge of its affairs. Graham and partners held on to this stocks, too, because it had become "family business." In this case, they also violated Graham's often -stated admonition to be well diversified ; 20 percent of their funds initially went into this one stock. Still, Graham's disdain for growth stocks - because they are often popular, tend to become overpriced in good markets, and tend to perform poorly in bad markets - is well founded.
Margin of Safety Concept: Stocks should be bought like groceries, not like perfume
Graham was most insistent that any security purchased should represent good value. He felt stocks should be bought like groceries, not like perfume, and he distilled his investment philosophy down to just three words, "MARGIN OF SAFETY".
By margin of safety, he meant that any stock bought should be worth considerably more than it costs. He sometimes suggested at least 50 percent more. Stocks bought with a margin of safety give some assurance that one has invested wisely. And stocks bought with a margin of safety should be low risk, high return investments.
By margin of safety, he meant that any stock bought should be worth considerably more than it costs. He sometimes suggested at least 50 percent more. Stocks bought with a margin of safety give some assurance that one has invested wisely. And stocks bought with a margin of safety should be low risk, high return investments.
Investment Performance Depends on Intelligent Effort
Graham disagreed with the usual postulated risk-return relationship, that is, to earn a higher return an investor must accept higher risk. To the contrary, he felt that the more intelligent effort one put into investing, the better the bargains bought. And the better the bargains, the lower the risk.
Thus intelligent investing provides high yields and low risk. Finance academicians often fail to appreciate this point.
Thus intelligent investing provides high yields and low risk. Finance academicians often fail to appreciate this point.
Will Graham Make You Rich ?
Few investors--except in old age--will get rich adhering strictly to Graham's investment philosophy.
His conservative, diversified approach for most practitioners is likely to yield investment results only a little better than average. His aim is to assist investors to obtain good value for their money, not to make them rich quick.
Graham believed that this is the only legitimate function for an investment advisor. Most investors would do well to achieve such results because professional investors on average do not fare so well.
Still, it would be good to remember Graham`s caution that : "(A)ny approach to moneymaking in the stock market which can be easily described and followed by a lot of people is by its terms too simple and too easy to last. Spinoza`s concluding remark applies to Wall Street as well as to philosophy: "All things excellent are as difficult as they are rare."
Ben Graham offers a keen insight into moneymaking and a wise philosophy. The investment principles he enunciated are timeless. The seeker of investment truth will discover in the old sage a gold mine of wisdom, one who creditably promises a "fattening of the pocketbook", and a fine companion as well. We would do well before we make our next commitment to think his motto, MARGIN OF SAFETY.
His conservative, diversified approach for most practitioners is likely to yield investment results only a little better than average. His aim is to assist investors to obtain good value for their money, not to make them rich quick.
Graham believed that this is the only legitimate function for an investment advisor. Most investors would do well to achieve such results because professional investors on average do not fare so well.
Still, it would be good to remember Graham`s caution that : "(A)ny approach to moneymaking in the stock market which can be easily described and followed by a lot of people is by its terms too simple and too easy to last. Spinoza`s concluding remark applies to Wall Street as well as to philosophy: "All things excellent are as difficult as they are rare."
Ben Graham offers a keen insight into moneymaking and a wise philosophy. The investment principles he enunciated are timeless. The seeker of investment truth will discover in the old sage a gold mine of wisdom, one who creditably promises a "fattening of the pocketbook", and a fine companion as well. We would do well before we make our next commitment to think his motto, MARGIN OF SAFETY.
The Benefits and Drawbacks of Preferred Stock Investing
The Benefits and Drawbacks of Preferred Stock Investing
BY STOCK RESEARCH PRO • MAY 8TH, 2009
Some companies issue two types of stock: common and preferred stock. While each offers a portion of ownership in the company, there are significant differences between the two. Preferred stock is often seen as a hybrid instrument; a mix between a stock and a bond. Although preferred stock is an equity security, it has many characteristics that are similar to a debt instrument.
Why Companies Offer Preferred Stock
For the issuing company, preferred stock can be easier to market than common stock as most holders of preferred shares tend to be bond institutional investors. This is due to tax law that enables U.S. corporations that pay income taxes to exclude a large portion (70%) of their dividend income from taxable income. Additionally, if cash flow problems arise for the issuing company, they may suspend dividend payments to preferred shareholders.
Even so, the amount of preferred stock issued by a company usually represents a very small percentage of its funding (compared to common stock and debt).
Unique Features of Preferred Stock
The following is a list of common characteristics of preferred stock:
Redeemable: A preferred stock is said to be redeemable or “callable” in that the company that issues the shares reserves the right to redeem them at a pre-determined price and its own discretion.
Participating: This feature enables preferred share holders to participate in the dividends to common shareholders, usually at a pre-determined rate.
Convertible: The convertible option provides preferred shareholders with the option of converting preferred stock to common stock.
Cumulative: Under the cumulative feature, if the company fails to pay its dividend to preferred shareholders, it must make up the dividend before any dividends can be paid to common shareholders.
The Benefits of Preferred Stock Investing for Individuals
The fact that individuals do not enjoy the same tax advantages as corporations should not preclude them from considering investment in preferred stock. Some of the benefits of preferred stock investing for individual investors include:
• Greater price stability and payment priority (of both dividends and liquation proceeds) than common stock holders
• Greater liquidity than many bond holdings
• Relatively low investment per share
The Potential Downside to Investing in Preferred Stock
The “callability” and limited upside potential are the two negative factors most often referenced for preferred stock. Additionally, preferred shareholders do not receive voting rights and, like bond holders, are exposed to interest rate changes.
http://www.stockresearchpro.com/the-benefits-and-drawbacks-of-preferred-stock-investing
Bullbear Stock Investing Notes
http://myinvestingnotes.blogspot.com/
BY STOCK RESEARCH PRO • MAY 8TH, 2009
Some companies issue two types of stock: common and preferred stock. While each offers a portion of ownership in the company, there are significant differences between the two. Preferred stock is often seen as a hybrid instrument; a mix between a stock and a bond. Although preferred stock is an equity security, it has many characteristics that are similar to a debt instrument.
Why Companies Offer Preferred Stock
For the issuing company, preferred stock can be easier to market than common stock as most holders of preferred shares tend to be bond institutional investors. This is due to tax law that enables U.S. corporations that pay income taxes to exclude a large portion (70%) of their dividend income from taxable income. Additionally, if cash flow problems arise for the issuing company, they may suspend dividend payments to preferred shareholders.
Even so, the amount of preferred stock issued by a company usually represents a very small percentage of its funding (compared to common stock and debt).
Unique Features of Preferred Stock
The following is a list of common characteristics of preferred stock:
Redeemable: A preferred stock is said to be redeemable or “callable” in that the company that issues the shares reserves the right to redeem them at a pre-determined price and its own discretion.
Participating: This feature enables preferred share holders to participate in the dividends to common shareholders, usually at a pre-determined rate.
Convertible: The convertible option provides preferred shareholders with the option of converting preferred stock to common stock.
Cumulative: Under the cumulative feature, if the company fails to pay its dividend to preferred shareholders, it must make up the dividend before any dividends can be paid to common shareholders.
The Benefits of Preferred Stock Investing for Individuals
The fact that individuals do not enjoy the same tax advantages as corporations should not preclude them from considering investment in preferred stock. Some of the benefits of preferred stock investing for individual investors include:
• Greater price stability and payment priority (of both dividends and liquation proceeds) than common stock holders
• Greater liquidity than many bond holdings
• Relatively low investment per share
The Potential Downside to Investing in Preferred Stock
The “callability” and limited upside potential are the two negative factors most often referenced for preferred stock. Additionally, preferred shareholders do not receive voting rights and, like bond holders, are exposed to interest rate changes.
http://www.stockresearchpro.com/the-benefits-and-drawbacks-of-preferred-stock-investing
Bullbear Stock Investing Notes
http://myinvestingnotes.blogspot.com/
Understanding Earnings per Share and its Impact on Stock Price
Understanding Earnings per Share and its Impact on Stock Price
BY STOCK RESEARCH PRO • MAY 9TH, 2009
A company’s Earnings per Share (EPS) represents the portion of the company’s earnings (after deducting taxes and preferred share dividends) that is distributed to each share of the company’s common stock. The EPS measure gives investors a way to compare stocks in an “apples to apples” way.
The Importance of Earnings per Share in Evaluating Stocks
Fundamental stock evaluation revolves primarily around the earnings a company generates for its shareholders. Earnings, of course, represent what the company makes through its operations over any particular period of time. While smaller, newer companies may have negative earnings as they establish themselves, their stock prices will reflect future earnings expectations. Larger companies are judged mainly on the earnings measure. Decreased earnings for these companies are likely to negatively impact their stock prices.
The Earnings Cycle
Earnings are reported every calendar quarter with the process beginning shortly after the end of a fiscal quarter (a three month period).
Calculating Earnings per Share
The formula for earnings per share can be written as:
(Net Income – Preferred Stock Dividends) / Average Outstanding Shares
Because the number of shares outstanding can fluctuate over the reporting term, a more accurate way to perform the calculation is to use a weighted average number of shares. To simplify the calculation, though, the number used is often the ending number of shares for the period.
Investors can then divide the price per share by the earnings per share to arrive at the price to earnings ratio (P/E Ratio) or “multiple”. This ratio gives us an indication of how much investors are willing to pay for each dollar of earnings for any particular company.
Basic v. Diluted Earnings per Share
In calculating the EPS, one of two methods can be used:
Basic Earnings per Share: Indicates how much of the company’s profit is allocated to each share of stock.
Diluted Earnings per Share: Fully reflects the impact the firm’s dilutive securities (e.g. convertible securities) may have on earnings per share.
Types of Earnings per Share
EPS can be further subdivided into various types, including:
Trailing EPS: Calculated based on numbers from the previous year
Current EPS: Includes numbers from the current year and projections
Forward EPS: Calculated based on projected numbers
Please note that most quoted EPS values are based on trailing numbers.
http://www.stockresearchpro.com/understanding-earnings-per-share-and-its-impact-on-stock-price
Bullbear Stock Investing Notes
http://myinvestingnotes.blogspot.com/
BY STOCK RESEARCH PRO • MAY 9TH, 2009
A company’s Earnings per Share (EPS) represents the portion of the company’s earnings (after deducting taxes and preferred share dividends) that is distributed to each share of the company’s common stock. The EPS measure gives investors a way to compare stocks in an “apples to apples” way.
The Importance of Earnings per Share in Evaluating Stocks
Fundamental stock evaluation revolves primarily around the earnings a company generates for its shareholders. Earnings, of course, represent what the company makes through its operations over any particular period of time. While smaller, newer companies may have negative earnings as they establish themselves, their stock prices will reflect future earnings expectations. Larger companies are judged mainly on the earnings measure. Decreased earnings for these companies are likely to negatively impact their stock prices.
The Earnings Cycle
Earnings are reported every calendar quarter with the process beginning shortly after the end of a fiscal quarter (a three month period).
Calculating Earnings per Share
The formula for earnings per share can be written as:
(Net Income – Preferred Stock Dividends) / Average Outstanding Shares
Because the number of shares outstanding can fluctuate over the reporting term, a more accurate way to perform the calculation is to use a weighted average number of shares. To simplify the calculation, though, the number used is often the ending number of shares for the period.
Investors can then divide the price per share by the earnings per share to arrive at the price to earnings ratio (P/E Ratio) or “multiple”. This ratio gives us an indication of how much investors are willing to pay for each dollar of earnings for any particular company.
Basic v. Diluted Earnings per Share
In calculating the EPS, one of two methods can be used:
Basic Earnings per Share: Indicates how much of the company’s profit is allocated to each share of stock.
Diluted Earnings per Share: Fully reflects the impact the firm’s dilutive securities (e.g. convertible securities) may have on earnings per share.
Types of Earnings per Share
EPS can be further subdivided into various types, including:
Trailing EPS: Calculated based on numbers from the previous year
Current EPS: Includes numbers from the current year and projections
Forward EPS: Calculated based on projected numbers
Please note that most quoted EPS values are based on trailing numbers.
http://www.stockresearchpro.com/understanding-earnings-per-share-and-its-impact-on-stock-price
Bullbear Stock Investing Notes
http://myinvestingnotes.blogspot.com/
Evaluating Company Management in Fundamental Analysis
Evaluating Company Management in Fundamental Analysis
BY STOCK RESEARCH PRO • APRIL 21ST, 2009
When evaluating a stock, many investors will look at the strength and effectiveness of company management as part of the due diligence process. The corporate scandals of recent years have reminded all of us of the importance of having a high-quality management team in place. The role of the management team, as far as investors are concerned, is to create value for the shareholders. While most investors see the significance of strong management, assessing the competence of an executive team can be difficult.
The Role of Company Management
A strong management team is critical to the success of any company. These are the people who develop the ongoing vision of the company and make strategic decisions to support that vision. While it can be said that every employee brings value, it is the management team that “steers the ship” through competitive, economic and the other pressures associated with running a company. In measuring the effectiveness of the management team the investor is able to determine how well the company is performing relative to its industry competitors and the market as a whole.
Assessing Management Performance
Some of the metrics a fundamental investor might use in measuring the effectiveness of company management might include:
Return on Assets: The ROA provides an indication of company profitability in relation to its total assets. Part of effective company management is the efficient leverage of company assets to produce earnings.
Return on Equity: The ROE measures net income as a percentage of shareholders equity. For shareholders, the ROE provides a means of measuring company profitability against how much they have invested. The ROE is best used to compare the profitability of the company (and company management, by extension) with other companies in the industry.
Return on Investment: The ROI measures the effective use of debt for the benefit of the company. Skillful use of debt resources by company management can play a significant role in the growth and prosperity of the company.
http://www.stockresearchpro.com/evaluating-company-management-in-fundamental-analysis
Bullbear Stock Investing Notes
http://myinvestingnotes.blogspot.com/
BY STOCK RESEARCH PRO • APRIL 21ST, 2009
When evaluating a stock, many investors will look at the strength and effectiveness of company management as part of the due diligence process. The corporate scandals of recent years have reminded all of us of the importance of having a high-quality management team in place. The role of the management team, as far as investors are concerned, is to create value for the shareholders. While most investors see the significance of strong management, assessing the competence of an executive team can be difficult.
The Role of Company Management
A strong management team is critical to the success of any company. These are the people who develop the ongoing vision of the company and make strategic decisions to support that vision. While it can be said that every employee brings value, it is the management team that “steers the ship” through competitive, economic and the other pressures associated with running a company. In measuring the effectiveness of the management team the investor is able to determine how well the company is performing relative to its industry competitors and the market as a whole.
Assessing Management Performance
Some of the metrics a fundamental investor might use in measuring the effectiveness of company management might include:
Return on Assets: The ROA provides an indication of company profitability in relation to its total assets. Part of effective company management is the efficient leverage of company assets to produce earnings.
A Return on Assets Calculator
Return on Equity: The ROE measures net income as a percentage of shareholders equity. For shareholders, the ROE provides a means of measuring company profitability against how much they have invested. The ROE is best used to compare the profitability of the company (and company management, by extension) with other companies in the industry.
A Return on Equity Calculator
Return on Investment: The ROI measures the effective use of debt for the benefit of the company. Skillful use of debt resources by company management can play a significant role in the growth and prosperity of the company.
http://www.stockresearchpro.com/evaluating-company-management-in-fundamental-analysis
Bullbear Stock Investing Notes
http://myinvestingnotes.blogspot.com/
The Importance of Retained Earnings
The Importance of Retained Earnings
BY STOCK RESEARCH PRO • JUNE 9TH, 2009
Retained earnings, also known as “accumulated earnings” or “retained capital” refer to the portion of net income the company retains as opposed to distributing those funds to shareholders in the form of dividends. A company’s retained earnings are typically reinvested into its core business or used to pay down debt. A company’s retained earnings (or retained losses) are cumulative from year to year with losses and earnings offsetting and reported in the company’s Statement of Retained Earnings/ Losses.
Calculate Retained Earnings
The formula to calculate retained earnings can be written as:
Retained Earnings = Beginning Retained Earnings + Net Income – Dividends
The formula simply adds net income for the period (or subtracts a loss) from the beginning retained earnings and then deducts any dividends paid for the period.
Interpreting Retained Earnings
The Statement of Retained Earnings
The Statement of Retained Earnings or Statement of Owner’s Equity is a basic financial statement issued by a company to outline the changes in the company’s retained earnings over the reporting period. Using net income for the period and other company financial statements, the statement reconciles the beginning and ending retained earnings for the reporting period. The statement of retained earnings uses information from the income statement and provides information to the balance sheet.
http://www.stockresearchpro.com/the-importance-of-retained-earnings
Bullbear Stock Investing Notes
http://myinvestingnotes.blogspot.com/
BY STOCK RESEARCH PRO • JUNE 9TH, 2009
Retained earnings, also known as “accumulated earnings” or “retained capital” refer to the portion of net income the company retains as opposed to distributing those funds to shareholders in the form of dividends. A company’s retained earnings are typically reinvested into its core business or used to pay down debt. A company’s retained earnings (or retained losses) are cumulative from year to year with losses and earnings offsetting and reported in the company’s Statement of Retained Earnings/ Losses.
Calculate Retained Earnings
The formula to calculate retained earnings can be written as:
Retained Earnings = Beginning Retained Earnings + Net Income – Dividends
The formula simply adds net income for the period (or subtracts a loss) from the beginning retained earnings and then deducts any dividends paid for the period.
Interpreting Retained Earnings
- Reinvestment of retained earnings can be an important source of financing for many companies.
- Many creditors will closely monitor a company’s retained earnings statement because the company’s policy regarding dividend payments to its stockholders can have a direct impact on its ability to repay its debt.
- The importance of retained earnings to investors is in understanding the level to which the company reinvests its earnings to fund growth and expansion. If, however, the company reinvests retained earnings without demonstrating significant growth, investors would probably be better off if the company had issued a dividend.
The Statement of Retained Earnings
The Statement of Retained Earnings or Statement of Owner’s Equity is a basic financial statement issued by a company to outline the changes in the company’s retained earnings over the reporting period. Using net income for the period and other company financial statements, the statement reconciles the beginning and ending retained earnings for the reporting period. The statement of retained earnings uses information from the income statement and provides information to the balance sheet.
http://www.stockresearchpro.com/the-importance-of-retained-earnings
Bullbear Stock Investing Notes
http://myinvestingnotes.blogspot.com/
Find Growth Stocks Through Fundamental Analysis
Find Growth Stocks Through Fundamental Analysis
BY STOCK RESEARCH PRO • AUGUST 15TH, 2009
Growth investing is one of the primary investing approaches investors may choose in finding worth stocks for their portfolio. Finding growth stocks is about seeking out those companies that show promise for high growth when compared to other stocks within their industry or the market as a whole. Growth investors are typically making qualitative judgments in finding the stocks with the best growth potential and are committed to a longer-term approach to stock investing than other types of strategies (e.g. technical investing). Most investors see a growth strategy as more of an art than a science as there is no guaranteed method for finding the best growth stocks.
Fundamental Analysis and Growth Investing
The growth investing approach is one of several methods of evaluation that fall within fundamental analysis, along with Value, Income, and GARP (Growth at a Reasonable Price) investing. While a growth investor employs fundamental analysis to assess the strength and viability of a company, a growth strategy places a greater emphasis on qualitative factors, including the company’s business model, the strength of its management team, business model and the overall prospects for the industry in which the company operates.
Steps to Find Growth Stocks
Look for financial strength: The first step to think about in choosing a good growth stock is in making sure that the company is and will likely remain financially viable. Looking at the company’s current ratio, for example, will give you an idea of whether the company will be able to pay its short-term debts.
Assess the company’s industry: The strategy for many growth investors starts with finding those industries that show the most promise for future growth, and then finding the company within that industry that is best positioned to emerge as the leader. A top-down investment strategy can help to identify the most promising industries for the near future.
Emphasize profitability: Make sure to look at the company’s profitability by examining its return on equity. ROE measures profitability and will tell you the level of profit the company is generating for its shareholders with the money they invest. Because earnings cannot exceed a company’s ROE, growth investors will look at the measure to as a means of determining growth potential.
________________________________________________________________
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
http://www.stockresearchpro.com/find-growth-stocks-through-fundamental-analysis
http://myinvestingnotes.blogspot.com/
BY STOCK RESEARCH PRO • AUGUST 15TH, 2009
Growth investing is one of the primary investing approaches investors may choose in finding worth stocks for their portfolio. Finding growth stocks is about seeking out those companies that show promise for high growth when compared to other stocks within their industry or the market as a whole. Growth investors are typically making qualitative judgments in finding the stocks with the best growth potential and are committed to a longer-term approach to stock investing than other types of strategies (e.g. technical investing). Most investors see a growth strategy as more of an art than a science as there is no guaranteed method for finding the best growth stocks.
Fundamental Analysis and Growth Investing
The growth investing approach is one of several methods of evaluation that fall within fundamental analysis, along with Value, Income, and GARP (Growth at a Reasonable Price) investing. While a growth investor employs fundamental analysis to assess the strength and viability of a company, a growth strategy places a greater emphasis on qualitative factors, including the company’s business model, the strength of its management team, business model and the overall prospects for the industry in which the company operates.
Steps to Find Growth Stocks
Look for financial strength: The first step to think about in choosing a good growth stock is in making sure that the company is and will likely remain financially viable. Looking at the company’s current ratio, for example, will give you an idea of whether the company will be able to pay its short-term debts.
Assess the company’s industry: The strategy for many growth investors starts with finding those industries that show the most promise for future growth, and then finding the company within that industry that is best positioned to emerge as the leader. A top-down investment strategy can help to identify the most promising industries for the near future.
Emphasize profitability: Make sure to look at the company’s profitability by examining its return on equity. ROE measures profitability and will tell you the level of profit the company is generating for its shareholders with the money they invest. Because earnings cannot exceed a company’s ROE, growth investors will look at the measure to as a means of determining growth potential.
________________________________________________________________
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
http://www.stockresearchpro.com/find-growth-stocks-through-fundamental-analysis
http://myinvestingnotes.blogspot.com/
Latexx 2Q net profit surges 89% to RM21.55m
Latexx 2Q net profit surges 89% to RM21.55m
Tags: Latexx Partners Bhd
Written by Surin Murugiah
Friday, 06 August 2010 13:20
KUALA LUMPUR: LATEXX PARTNERS BHD [] net profit for the second quarter ended June 30, 2010 surged 88.9% to RM21.55 million from RM11.41 million a year ago on the back of a 80.7% jump in revenue to RM134.48 million.
The company declared a second interim tax exempt dividend of 2.5 sen per ordinary share of 50 sen each. Earnings per share was 10.39 sen while net assets per share was RM1.04.
In a filing to Bursa Malaysia Securities on Friday, Aug 6, Latexx attributed the increase in revenue and profit to its recent capacity expansion and fine tuning of glove production lines coupled with aggressive marketing strategy as well as overall cost savings.
The company said it was confident that the growth in FY 2010 would be sustained in tandem with the growth of world demand for medical gloves in the health sector.
The strategy of increasing capacity and switching to a better mix of products coupled with more aggressive marketing efforts by penetrating into new markets will contribute to sustainable profitability, it said.
http://www.theedgemalaysia.com/business-news/171384-latexx-2q-net-profit-surges-89-to-rm2155m.html
Bullbear Stock Investing Notes
Tags: Latexx Partners Bhd
Written by Surin Murugiah
Friday, 06 August 2010 13:20
KUALA LUMPUR: LATEXX PARTNERS BHD [] net profit for the second quarter ended June 30, 2010 surged 88.9% to RM21.55 million from RM11.41 million a year ago on the back of a 80.7% jump in revenue to RM134.48 million.
The company declared a second interim tax exempt dividend of 2.5 sen per ordinary share of 50 sen each. Earnings per share was 10.39 sen while net assets per share was RM1.04.
In a filing to Bursa Malaysia Securities on Friday, Aug 6, Latexx attributed the increase in revenue and profit to its recent capacity expansion and fine tuning of glove production lines coupled with aggressive marketing strategy as well as overall cost savings.
The company said it was confident that the growth in FY 2010 would be sustained in tandem with the growth of world demand for medical gloves in the health sector.
The strategy of increasing capacity and switching to a better mix of products coupled with more aggressive marketing efforts by penetrating into new markets will contribute to sustainable profitability, it said.
http://www.theedgemalaysia.com/business-news/171384-latexx-2q-net-profit-surges-89-to-rm2155m.html
Bullbear Stock Investing Notes
Calculate the Estimated Dividend Growth Rate for a Stock
As most investors know, mature companies tend to pay dividends, sending checks that represent a small fraction of the company’s profits to shareholders on a quarterly basis. While some investors prefer the volatility and excitement that often accompanies small-cap stock investing, the combination of capital gains through stock price appreciation along with income through dividends can be very attractive. Add to this the possibility of dividend growth and the case for investing in these more mature companies becomes quite compelling.
The key for shareholders is that, as long as the company maintains a constant dividend payout ratio as it grows, that payout ratio represents a continually growing amount.
Click Here for Dividend Payout Ratio Calculator
Estimating Dividend Growth Rates
What is Dividend Growth Rate?
The dividend growth rate refers to the annual rate of growth that a stock offers over a period of time. A history of solid dividend growth can provide an indication that continued dividend growth is likely for that company into the future. As the dividend grows, shareholders can count on the stock price to rise because the more income it produces the more valuable the stock becomes- a scenario referred to as a “double dip”.
Watching the Dividend Payout Ratio
The dividend payout ratio is the proportion of company earnings that it allocates to paying dividends to shareholders. The ratio offers an indication as to how well company earnings support its dividend payments. In general, more mature companies offer higher payout ratios.
The formula for the dividend payout ratio can be written as:
Dividend Payout Ratio
= Annual Dividend per Share / Earnings per Share
The key for shareholders is that, as long as the company maintains a constant dividend payout ratio as it grows, that payout ratio represents a continually growing amount.
Click Here for Dividend Payout Ratio Calculator
Estimating Dividend Growth Rates
It follows then that a company’s dividend growth rate can be estimated by projecting its earnings growth. In estimating the dividend growth rate, it is assumed that the return on equity and dividend payout ratio are held constant.
The formula to estimate the dividend growth rate can be written as:
Dividend Growth Rate
= Plow Back Ratio x Return on Equity
The plow back ratio is simply (1- dividend payout ratio)
Bullbear Stock Investing Notes
http://www.stockresearchpro.com/calculate-the-estimated-dividend-growth-rate-for-a-stock
Bullbear Stock Investing Notes
http://www.stockresearchpro.com/calculate-the-estimated-dividend-growth-rate-for-a-stock
World Cup drives Guinness’ 4Q profit
World Cup drives Guinness’ 4Q profit
Tags: fourth quarter | GAB | world cup
Written by Yong Min Wei
Thursday, 05 August 2010 12:03
KUALA LUMPUR: Guinness Anchor Bhd’s (GAB) net profit for the fourth quarter ended June 30, 2010 (4QFY10) rose 30.2% to RM35.66 million from RM27.39 million a year earlier, boosted by higher sales from commercial activities during the 2010 FIFA World Cup.
The leading brewer’s revenue climbed 11.7% to RM308.71 million from RM276.27 million, while basic earnings per share (EPS) came in at 11.81 sen versus 9.07 sen previously.
GAB proposed a final dividend of 35 sen per 50 sen share (tax exempt) under a single-tier system for the year ended June 30, 2010, bringing total dividend for the year to 45 sen. Its net asset per share stood at RM1.56 as at June 30.
For FY10, the group reported a record RM1.35 billion in revenue versus RM1.28 billion in FY09 while full year pre-tax profit rose 7% to another record of RM205.33 million from RM191.91 million. Net profit rose 7.5% to RM152.69 million from RM141.99 million, while EPS rose to 50.54 sen from 47 sen.
GAB managing director Charles Ireland said the group had achieved nine consecutive years of growth in revenue and profit. He said the group’s market share in the malt liquor market (MLM) had been improving every year and that it was currently controlling close to 60% share compared with the low 40%-plus levels five years ago.
“This track record really does show what an exceptional blend of people, brands, and performance we have in GAB,” he told a press conference yesterday.
“It is fitting that in the year of the tiger, Tiger beer is leading our growth. Guinness, Heineken, Kilkenny and Anchor also continue to contribute to our good performance,” Ireland said.
He said one of GAB’s core strengths was in its portfolio of international brands, adding the management had substantially invested in building brand equity to strengthen its value proposition to consumers.
He said GAB would be introducing a new range of products in the MLM market in the next six months but was tight-lipped on the number and origin of products except that they involved beer and stout.
Nevertheless, Ireland noted that the MLM was sensitive to overall economic conditions and excise duties although the group was optimistic that it would perform satisfactorily in FY11.
“As Malaysia has the second-highest excise duty on alcoholic products in the world, the industry hopes there will be no increase in excise duties in the coming Budget 2011,” he said.
On capital expenditure (capex), Ireland noted GAB spent in the region of RM40 million in FY10 and that it was expecting to spend about RM50 million in FY11, the bulk of which would be invested to supply the “highest quality” beer and stout as well as to ensure its brewery conformed to international standards of production.
GAB’s share price yesterday added eight sen to close at RM8.10 with 16,200 shares traded.
This article appeared in The Edge Financial Daily, August 5, 2010.
Tags: fourth quarter | GAB | world cup
Written by Yong Min Wei
Thursday, 05 August 2010 12:03
KUALA LUMPUR: Guinness Anchor Bhd’s (GAB) net profit for the fourth quarter ended June 30, 2010 (4QFY10) rose 30.2% to RM35.66 million from RM27.39 million a year earlier, boosted by higher sales from commercial activities during the 2010 FIFA World Cup.
The leading brewer’s revenue climbed 11.7% to RM308.71 million from RM276.27 million, while basic earnings per share (EPS) came in at 11.81 sen versus 9.07 sen previously.
GAB proposed a final dividend of 35 sen per 50 sen share (tax exempt) under a single-tier system for the year ended June 30, 2010, bringing total dividend for the year to 45 sen. Its net asset per share stood at RM1.56 as at June 30.
For FY10, the group reported a record RM1.35 billion in revenue versus RM1.28 billion in FY09 while full year pre-tax profit rose 7% to another record of RM205.33 million from RM191.91 million. Net profit rose 7.5% to RM152.69 million from RM141.99 million, while EPS rose to 50.54 sen from 47 sen.
GAB managing director Charles Ireland said the group had achieved nine consecutive years of growth in revenue and profit. He said the group’s market share in the malt liquor market (MLM) had been improving every year and that it was currently controlling close to 60% share compared with the low 40%-plus levels five years ago.
“This track record really does show what an exceptional blend of people, brands, and performance we have in GAB,” he told a press conference yesterday.
“It is fitting that in the year of the tiger, Tiger beer is leading our growth. Guinness, Heineken, Kilkenny and Anchor also continue to contribute to our good performance,” Ireland said.
He said one of GAB’s core strengths was in its portfolio of international brands, adding the management had substantially invested in building brand equity to strengthen its value proposition to consumers.
He said GAB would be introducing a new range of products in the MLM market in the next six months but was tight-lipped on the number and origin of products except that they involved beer and stout.
Nevertheless, Ireland noted that the MLM was sensitive to overall economic conditions and excise duties although the group was optimistic that it would perform satisfactorily in FY11.
“As Malaysia has the second-highest excise duty on alcoholic products in the world, the industry hopes there will be no increase in excise duties in the coming Budget 2011,” he said.
On capital expenditure (capex), Ireland noted GAB spent in the region of RM40 million in FY10 and that it was expecting to spend about RM50 million in FY11, the bulk of which would be invested to supply the “highest quality” beer and stout as well as to ensure its brewery conformed to international standards of production.
GAB’s share price yesterday added eight sen to close at RM8.10 with 16,200 shares traded.
This article appeared in The Edge Financial Daily, August 5, 2010.
F&N 3Q earnings up 18.4% to RM70m
F&N 3Q earnings up 18.4% to RM70m
Tags: dairies | Fraser & Neave Holdings | Fraser Business Park | soft drinks
Written by Joseph Chin
Thursday, 05 August 2010 18:19
KUALA LUMPUR: Fraser & Neave Holdings Bhd posted net profit of RM70 million for its third quarter ended June 30, 2010, up 18.4% from RM59.12 million a year ago as it benefited from lower tax rate.
It said on Thursday, Aug 5 group revenue increased 7% to RM893 million, boosted by strong volume growth in soft drinks.
"Soft drinks revenue improved 26% with all main product portfolios registering commendable volume growth on the back of strong promotional activities around some major sport events such as the Thomas Cup and the FIFA World Cup," it said.
As for the dairies division, it saw a 3% decline due to lower exports for both Malaysia and Thailand operations. Property revenue was lower due to completion of Fraser Business Park – Phase II.
Group operating profit for the quarter improved 17% mainly due to volume growth of soft drinks which was partly offset by higher raw material prices of the dairies division.
F&N said group profit after taxation for 3Q of RM72 million was 35% above the same quarter last year. Group effective tax rate declined to 20% from 29% previously, benefiting from the tax incentives secured last year for the new dairy plant investment in Rojana, Thailand.
http://www.theedgemalaysia.com/business-news/171315-fan-3q-earnings-up-184-to-rm70m.html
Tags: dairies | Fraser & Neave Holdings | Fraser Business Park | soft drinks
Written by Joseph Chin
Thursday, 05 August 2010 18:19
KUALA LUMPUR: Fraser & Neave Holdings Bhd posted net profit of RM70 million for its third quarter ended June 30, 2010, up 18.4% from RM59.12 million a year ago as it benefited from lower tax rate.
It said on Thursday, Aug 5 group revenue increased 7% to RM893 million, boosted by strong volume growth in soft drinks.
"Soft drinks revenue improved 26% with all main product portfolios registering commendable volume growth on the back of strong promotional activities around some major sport events such as the Thomas Cup and the FIFA World Cup," it said.
As for the dairies division, it saw a 3% decline due to lower exports for both Malaysia and Thailand operations. Property revenue was lower due to completion of Fraser Business Park – Phase II.
Group operating profit for the quarter improved 17% mainly due to volume growth of soft drinks which was partly offset by higher raw material prices of the dairies division.
F&N said group profit after taxation for 3Q of RM72 million was 35% above the same quarter last year. Group effective tax rate declined to 20% from 29% previously, benefiting from the tax incentives secured last year for the new dairy plant investment in Rojana, Thailand.
http://www.theedgemalaysia.com/business-news/171315-fan-3q-earnings-up-184-to-rm70m.html
Thursday 5 August 2010
More than meets the eye to fund charges
As high costs come under scrutiny we break down the typical fees.
More than meets the eye to fund charges
The Telegraph's revelation that we pay an extortionate amount in fund fees – about £7.3 billion every year – piles on the misery for British savers grappling with jittery stock markets and low returns.
When shares are soaring, little attention is paid to the amount in fees that investment companies rake in. But when fund values are falling, the costs paid by investors account for a greater proportion of their total returns – and it gets noticed.
"Now we have consistently low inflation, charges represent a far higher proportion of any investment return than in years gone by," says Clive Waller at CWC Research, the financial analyst. "Charges matter."
Understandably, companies need to levy charges to cover their costs and return a profit. Even something as simple as sending out a policy statement costs money, particularly when they have tens of thousands of investors on their books.
Then there is the cost to the company of paying commission to salesmen and independent advisers. These are generally funded by customers, regardless of whether they buy direct from the fund management group or through an independent financial adviser.
Tom Stevenson, investment director at Fidelity, says: "Our portfolio managers are supported by hundreds of analysts, meeting companies, talking to their suppliers and customers and scouring balance sheets for the information that can give our clients an investment edge. This is a costly but, we believe, essential activity and it is reasonable that this should be reflected in the annual management charges of our funds."
But investors should check to see what they are being charged. If, as many experts predict, we are in for several years of subdued investment performance, it is important to look at more than just the annual management charge.
There is a raft of additional charges on both unit trusts and open-ended investment companies (Oeics). These include audit fees, dealing costs and servicing charges.
What is the annual management charge (AMC)?
This is the figure that is published on the fact sheet and is the fee that most savers – incorrectly – understand to be the amount they pay each year for the fund manager to run the fund.
Taking the typical AMC of 1.5 per cent, about two thirds of this is used to pay for research, wages and costs associated with physically managing the money within the fund. The remaining 0.5 per cent is paid out as "trail commission" to independent financial advisers or the fund provider each year for so-called "servicing costs".
Trail commission is a controversial charge. Critics argue that many advisers get this annual fee for doing next to nothing and question whether many deserve the remuneration, given that they do little to encourage their clients to switch out of perennial poor performing funds.
But the AMC doesn't tell the whole story on fund fees and charges – there is also the TER.
I've never heard of the TER. What does it stand for?
For a better idea of the cost of your fund, you should look out for the total expense ratio (TER). Unfortunately, investment fund companies are not obliged to reveal TERs and many will publish only the annual management fee, leaving investors with the mistaken impression that this is all they have to pay. It is not.
The TER takes into account dealing costs, stamp duty and auditors' fees as well as the annual management charge. You can often find TERs of more than 150 basis points above the annual management charge. Take Threadneedle Managed Income, for instance. Its AMC is just 0.25 per cent, which you may be mistaken in thinking is a bargain. However, the fund's TER is 1.77 cent.
So does the TER include all the costs that I pay?
I'm afraid not. The TER does not include the trading costs – the costs for buying and selling shares within the fund. The more active a manager is in trading the underlying portfolio, the higher these costs.
That said, investors have to expect some extra cost here: after all, you would be seething if your manager just sat on his backside all year. On average, trading costs can add another 1 per cent to your annual fees but some argue that managers buy and sell shares simply to rake in this extra revenue.
A higher TER will obviously cause a drag on performance. For example, a £7,200 fund investment growing by 7 per cent each year will reach £14,163 after 10 years, before charges. A fund levying an annual TER of 1.55 per cent would be worth £12,240 after 10 years, but a fund with a TER of 2.25 per cent would be worth be £788 less, at £11,452, according to Lipper, the fund analysts.
Can I compare the true costs of investing in different funds?
No. Trading costs range from about 0.09 per cent a year to one per cent. "The AMC is a quite useless figure; the TER is misleading because it is not total – it does not include dealing charges or, if it's a fund of funds, the charges on the underlying funds," says Mr Waller. "If the buyer knows exactly what the true cost is, he can compare fund manager performance against charges and make an informed decision."
How do fund charges vary?
Charges vary according to the type of fund and what it invests in. The fees levied on specialist funds, such as those investing in smaller companies, will almost certainly be a lot higher than those for funds that simply track indices, so-called tracker funds.
For example, the average UK equity fund has a TER of 1.6 per cent compared with the average corporate bond fund's TER of 1.15 per cent. Actively managed funds cost more to run than trackers because the latter are effectively managed by computer programs while the former incur the costs of researching individual stocks.
Mr Stevenson says: "Simplistic comparisons between the charges levied on actively managed funds and index-tracking or passive funds miss the point. The two investment approaches incur different levels of cost, so the question is not whether stock-picking funds should be more expensive than trackers (they are) but whether their higher charges are transparent and a fair reflection of the extra resources and effort involved."
So are cheaper funds better?
Not necessarily. It is fair to say that the lion's share of funds underperform time after time and many do not offer value for money.
The fund groups that charge the most argue that investors are better off paying extra for decent performance. However, a significant number of funds fail to deliver consistent above-average performance year in, year out, and if you are paying a high TER for dismal performance it is time for a rethink.
It is clearly worth paying a higher TER for consistent outperformance and a high TER does sometimes pay. Take Jupiter Merlin Balanced Portfolio. This popular selling fund has a TER of 2.3 per cent, which is higher than the average – yet it outperforms its peers regularly and is justifiably recommended by many investment advisers.
http://www.telegraph.co.uk/finance/personalfinance/investing/7923367/More-than-meets-the-eye-to-fund-charges.html
http://www.telegraph.co.uk/finance/personalfinance/investing/7923367/More-than-meets-the-eye-to-fund-charges.html
Subscribe to:
Posts (Atom)