Never mind the gyrations, see the opportunities.

Beware: massive gains are not a sign of good health

October 9, 2011

JUST when we were getting used to the ''$X billion wiped off shares'' stories, along came a week that wiped $90 billion back on, but neither headline is particularly healthy.

Of course, most investors will happily take the wipe-on over the wipe-off, let alone the occasional wipe-out, but such extreme volatility speaks more of continuing nervousness and uncertainty than investment-inducing stability.

For all the relief of the week's relief rally, nothing much has really changed with the markets. We remain captives of dubious European political resolve and prey to more wild swings over the months ahead as the continent stumbles from one precipice to another.

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The odds are that the Europeans will muddle through, that they won't be totally stupid given the knowledge of this crisis, but it's not going to be a quick process and it will be marked by more sharp falls and rallies along the way.

And then there's the US. While the Europeans stumble along, the Americans are bumbling from one economic indicator to the next with the focus on whether the country could be facing a double-dip recession. It matters less as it doesn't immediately threaten the global financial system, but it still chews up a lot of media coverage and Wall Street sentiment still holds disproportionate sway over the world's markets.

As it turned out, last week's American figures were mainly favourable, topped by Friday night's better-than-expected payroll numbers, but again the fundamentals haven't much changed. The US and Europe are facing an extended period of low or no growth as the world order changes and they collectively deal with their debt habits. Fortunately the developing world is picking up the slack, leaving the global growth rate about average.

The sooner that is generally accepted, the calmer markets will become, allowing investors to get back to trying to pick which companies will perform best. It is a less spectacular pastime than riding the roller-coaster of boom or doom, but considerably better for general health.

Within that general scenario, your columnist remains a rare fish as I'm happy for both the North Atlantic economies and our stockmarket to be flat.

The former because it helps make room for developing nations to live up to their name: to develop, to get their share.

Just as Australia's patchwork economy frees up resources in some industries and regions, encouraging them to travel to those industries and regions that need them more, the global two-speed economy prevents commodity prices going over the top.

And weaker developed nations encourage some developing nations to get over their tendency to depend on Western consumers' credit cards to pay for their growth. The world ends up stronger for the diversification.

As for our stockmarket staying down, that's fine by me as I'm still investing.

I hope to continue working, continue to put money into my superannuation, continue to add to a dividend-paying source of wealth.

Let the traders worry about stocks bouncing around, I'm happy for my super fund to keep accumulating shares in solid companies as cheaply as possible for as long as possible. Never mind the gyrations, see the opportunities.

Michael Pascoe is a BusinessDay contributing editor.

Read more: http://www.theage.com.au/business/beware-massive-gains-are-not-a-sign-of-good-health-20111008-1lew0.html#ixzz1aH13kv58

Walter Schloss's thinking on value investing

Walter Schloss’ Presentation at The Benjamin Graham Center for Value Investing

July 25th, 2010 · 

Walter Schloss conducted a recorded video / audio presentation at the Richard Ivey School of Business’ Benjamin Graham Center for Value Investing.  If you would like to see the audio / video, we have it on our value investing resource page.  In this post, I am going to take notes on Schloss’ speech and add some commentary later in the week.  Enjoy.

• Started fund in 1955 when Graham said he was going to retire
• Schloss was left handed (I never knew that)
• Started out with 19 partners, each with approximately $5,000
• Stayed in field until 2001 (or 2003…couldn’t recall).  Son couldn’t find any good value stocks.
• Started work when his father lost his job – the family had no money.  Started off making $15/week.  Wanted in the research department.  Was denied.  Was told to read “Security Analysis”
• Question: How do you choose stocks?  Answer: Stocks that are hitting new lows.  Schloss fines Value Line very helpful.  He doesn’t have a computer and likes to look at the numbers.  He doesn’t talk to management teams.
• Went to work for Graham in the beginning of 1946
• Question: What process did you follow to minimize mistakes?  Answer: I don’t like to lose money and therefore buy stocks that are protected on the downside and then the upside takes care of itself.  Look for companies that do not have a lot of debt.  By looking at the proxy statement and annual reports, can get a sense of how much stock the directors own, who owns a fair amount of stock, and the history of the company.
• Look at companies selling at new lows.  It means the company has problems. Debt exacerbates these problems.
• Love companies with simple capital structures.  Not a lot of debt.  The company has to have history.  Management needs to own stock.
• Schloss admits he was never good at evaluating management character.  Therefore he stuck to the numbers.
• Value Line is helpful because you get a good sense of history on the company because they have 10-15 years of performance data.
• Question: If stock falls, what do you do?  Answer: If I like a company, I’ll buy more on the way down.  Stock brokers do not like recommending stocks that are going down.  The stockbrokers don’t want to look like fools. People get nervous when stocks go lower.
• Likes to try to get 50% profit.  Only long-term profits (don’t want to pay short term taxes)
• Admits that he makes mistakes in sales.  He will buy at $30, sell at $50, and see it go to $200
• Likes stocks selling below book value. Reiterates how much he hates debt.
• Read annual report.  Figure out why the company is having problems.
• If you get a stock selling significantly below book value, has a good history over 20 years, and little debt with lots of management holdings, probably a good purchase.
• Margin of Safety to Schloss is if the company’s book value is substantially higher than the market price. Companies get bought out that are trading at significant discounts to book.
• Question: Emotional mistakes? How do you control? Answer: Schloss does not get emotional about stocks. One reason he doesn’t talk to management teams is because management presents the company the way you want to see them.  Schloss is not a good judge of people.  Warren Buffett is.  Schloss says you have to look at situations logically, not the way you WANT to look at it.
• He wants to buy things the way there are, not the way they may be in the future. He wouldn’t buy a company with a prospect of an electric car just because of that prospect.
• Seems to me that he uses Good to Cancel Orders
• Question: Outstanding company at a fair price or a fair company at an outstanding price? Answer: He doesn’t want to buy good companies at what they are worth – he wants to buy these companies at a discount. Sometimes people get VERY nervous and bargains arise, but that is not too often.  You want to buy stocks that you can make 50% over a couple of years.
• He doesn’t like to lose money.  So he buys companies that are having problems. He likes companies with no debt.
• Quite often the stock market reacts emotionally.  Bad news causes troubles.  If you are managing money for other people you should not tell your limited partners what you own – Why?  Don’t want competition.  Don’t want to deal with investors emotions and don’t want to hear their complaints. If LPs are worried, don’t take them as investors.
• Question: Three traits to be a successful value investor?  Answer: Be calm and not to be emotional.  Be intellectual and look at the facts.  Never get emotionally involved in a stock.
• Distinguish between temporary and permanent problems.
• He likes companies to be a success.  If you sell early, and the stock triples, who cares?  Move on.
• Question: Is the upcoming recession worse than previous ones?  Answer: Schloss tries to stay away from what is going on in the overall economy.  He has no idea what is going on in the economy.  He buys stocks on what they are worth – and not what is going on in the macro economy.
• Stop worrying about what is going on in the overall economy or where the market is going – buy cheap stocks – if you go into a recession, you’ll have to wait longer to make your money.  Just buy cheap stocks.
• Graham liked to compare stocks that started with the same letter of the alphabet.  Intellectual exercise. Compared the stocks.
• Compare stocks in the same field.  Two liquor companies for instance.  What are their trading levels?
• Question: Has market become more efficient?  Answer: As an analyst, your job is to determine why one stock is selling lower than another. If an industry is having a problem, take a look.  A lot more competition but that being said, “value analysts” are still not happy buying stocks that are going down.
• Harder to determine when to sell versus when to buy.
• Question: Personal view on diversification?  Answer: Stay away from industries that are outside of your circle of competence.  More comfortable with very old industries. More comfortable in stocks than bonds because inflation eats up return. Very few people become millionaires buying bonds.  Bonds are for old people.
• Seems to me this guy is incredibly humble.  Jives with what I have read in the past.
• Question: Raising capital in the 50s as a young fund manager?  Answer: Not an aggressive man in going around to raise capital.  Get your feet wet with family money.  Very difficult to start a fund. You don’t want to lose money. If you like math, if you like investing, you can do it as long as you control your emotions.
• Question: Biggest mistake? Answer:  ”I forget my mistakes.”  Awesome.Schloss didn’t lose money often.  Never put a great amount of money in any one stock.  Held over 100 stocks at any one time.
• Compared value of a company versus its working capital…i.e the company was trading at 2 dollars a share but had 7 dollars of working capital per share.
• Didn’t like getting involved in legal actions
• Never focused on mistakes – including selling too early
• Question: China?  Answer: Schloss does not buy foreign companies. It is not easy to judge foreign companies. Insiders have too much advantage overseas.
• Question: When to sell / mechanics of sales? “I don’t know when to sell”  Schloss will sell at 100% profit. At Graham Newman will scale their sales.  Will usually hold stocks for 3 years. Schloss likes profit, but he has no formula for when to sell.
• If a stock gets high enough, it becomes a lot more vulnerable.
• Schloss quotes from Ben Graham from the 3rd edition of Security Analysis: McDonald’s was selling at $14, down from $35.  Graham’s arbitrage formula for return per year.
• Question: Max you would allocate to a stock in a portfolio?  If you really like, individually, you might put 20% in one stock for yourself.  In a partnership, you may put only 10% in.
• Shorted stocks in the tech bubble.  Historically never did it before.  It made him feel uncomfortable.
• Question: Research – just Value Line and Annual?  Answer:  Less than book value, not much debt.  Then you look at company itself – company might suck, but it may have a lot of book value.
• Question: How do you become comfortable with an industry?  He likes simple manufacturing companies.  Companies might have lots of growth, but stockholders might do poorly.  Simply capitalized companies.  Look at the last 20 years.  And then get an annual report.
• Buys stocks where the outlook is not good.
• Value Line: Look where stock was ten years ago.
• The point is: You do not want to lose money.  Buy stocks that are depressed, that aren’t going broke.
• Warren Buffett – very brilliant guy – but some people were reluctant to invest because there was no income.
• Question: What is the most important thing in investing and in life that you have learned in the past 50 or so years?  Answer: Honesty is the best thing you could have.

http://www.schloss-value-investing.com/2010/07/walter-schloss-presentation-at-the-benjamin-graham-center-for-value-investing/

World facing worst financial crisis in history

World facing worst financial crisis in history, Bank of England Governor says


The world is facing the worst financial crisis since at least the 1930s “if not ever”, the Governor of the Bank of England said last night.

Mervyn King, Governor of the Bank of England Photo: PAUL GROVER

By James Kirkup

10:00PM BST 06 Oct 2011

941 Comments

Sir Mervyn King was speaking after the decision by the Bank’s Monetary Policy Committee to put £75billion of newly created money into the economy in a desperate effort to stave off a new credit crisis and a UK recession.

Economists said the Bank’s decision to resume its quantitative easing [QE], or asset purchase programme, showed it was increasingly fearful for the economy, and predicted more such moves ahead.

Sir Mervyn said the Bank had been driven by growing signs of a global economic disaster.

“This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing.”

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Announcing its decision, the Bank said that the eurozone debt crisis was creating “severe strains in bank funding markets and financial markets”.

The Monetary Policy Committee [MPC] also said that the inflation-driven “squeeze on households’ real incomes” and the Government’s programme of spending cuts will “continue to weigh on domestic spending” for some time to come.

The “deterioration in the outlook” meant more QE was justified, the Bank said.

Financial experts said the committee’s actions would be a “Titanic” disaster for pensioners, savers and workers approaching retirement. Sir Mervyn suggested that was a price worth paying to save the economy from recession.

Under QE, the Bank electronically creates new money which it then uses to buy assets such as government bonds, or gilts, from banks. In theory, the banks then use the cash they gain to increase their lending to businesses and individuals.

By increasing the demand for gilts, QE pushes down the interest rate yields paid to holders of these and other bonds. Critics of the policy say it pushes up inflation and drives down sterling.

The National Association of Pension Funds yesterday called for urgent talks with ministers to address the negative impact of lower gilt yields on pension funds. Joanne Segars, its chief executive, said QE makes it more expensive for employers to provide pensions and will weaken the funding of schemes as their deficits increase. “All this will put additional pressure on employers at a time when they are facing a bleak economic situation,” she said.

Ros Altman, of Saga, said the latest round of QE was “a Titanic disaster” that would increase pensioner poverty. As well as fuelling inflation, she said, falling bond yields would make annuities more expensive, “giving new retirees much less pension income for their money and leaving them permanently poorer in retirement”.

The MPC also voted to keep the Bank Rate at its historic low of 0.5 per cent, another decision that hurts savers. Yesterday, protesters outside the Bank’s headquarters smashed a giant piggy bank to symbolise the situation of pensioners and others forced to raid savings to keep up with the rising cost of living.

Asked about the plight of savers, Sir Mervyn said it was more important to support the wider economy than to support them. He suggested that savers would not be helped by deliberately pushing the British economy into recession. Yesterday’s decision was the first move on QE since 2009, during the global credit crisis, when the Bank injected £200 billion into the economy.

Some analysts believe that this round of QE could be less effective than the previous one, forcing the Bank to create even more money this time.

Michael Saunders of Citigroup, forecast that there could be as much as £225 billion more QE by next year. “I think they will do lots more QE,” he said. “It’s both that the economy is weak but also that the MPC’s view is that QE is not a very powerful tool, or rather it takes a large amount of QE to have much effect on the economy.”

The Bank is supposed to keep inflation near a target of 2 per cent. Inflation now stands at 4.5 per cent, and the Bank admitted it is likely to hit 5 per cent as soon as this month. The Bank’s own research shows that as well as stimulating the economy, QE pushes up prices.

Sir Mervyn insisted that yesterday’s move was still consistent with the 2 per cent inflation target, saying that the slowing economy means inflation could actually fall below that mark “by the end of next year or in 2013”.

The Governor insisted that the MPC’s decisions had been the correct response to events. “The world economy has slowed, America has slowed, China has slowed, and of course particularly the European economy has slowed,” he said. “The world has changed and so has the right policy response.”

City traders took heart from the Bank’s move to boost growth, with the FTSE 100 rising 3.7 per cent to 5,29, its biggest two-day gain since 2008.

The Bank’s decision came after mounting political pressure from ministers worried that Sir Mervyn was not reacting urgently enough to the darkening global economic outlook.

George Osborne, the Chancellor, welcomed the Bank’s move, saying: “The evidence shows that it [QE] will help keep interest rates down and boost demand and that will be a help for British families.”

http://www.telegraph.co.uk/finance/financialcrisis/8812260/World-facing-worst-financial-crisis-in-history-Bank-of-England-Governor-says.html

Oprah Winfrey's 2008 Stanford Commencement Address

Oprah talks about:

Feeling
Failure
Finding happiness

The great financial crisis facing US and Europe will be with us for a long time

Dr M warns of long financial crisis

By Shannon Teoh October 08, 2011

KUALA LUMPUR, Oct 8 — Tun Dr Mahathir Mohamad warned the ongoing global economic crisis will continue long into the future as the West continues spending in a “state of denial.”

The former prime minister said in his blog yesterday that Western countries continue “believing that they can somehow continue to remain rich. They are unable to behave like poor people.”

On the same day Datuk Seri Najib Razak tabled a budget that aims to rein in the deficit to 4.7 per cent, Dr Mahathir (picture) said the West “will not recover because they are still in a state of denial.

“They still believe they are rich, as rich as before they plunged into the crisis. They must keep up the big power wealthy country image even if their people have no jobs, riot and protest.

“The great financial crisis will be with us for a long time. Even when it is resolved the aftermath will see slow recovery for the giants of the West,” he wrote.

“How nice it would be if our pocket is picked, we are allowed to print some money to replace what is lost,” he said, mocking the United States’ quantitative easing measures which has seen its federal reserve print US$3 trillion (RM9.5 billion) since the start of the financial crisis in 2008.

“Now Britain is following in the footsteps of elder brother,” he added, referring to the United Kingdom’s recent move to print £75 billion (RM370 billion) to help distressed banks.

The debt crises in Europe and the US have caused the global economy to wobble in recent months and is likely to stunt Malaysia’s export-driven economy in the near future.

Analysts said yesterday that Najib’s prediction of a 5 to 6 per cent growth for 2012 is “too high” which may in turn see Putrajaya fail to meet its deficit forecast.

The prime minister tabled a budget yesterday which saw cash handouts, more money for civil servants, schools and a fund for “high-impact development” projects to put cash in the pockets of voters ahead of a general election expected soon.

http://www.themalaysianinsider.com/malaysia/article/dr-m-warns-of-long-financial-crisis/

Steve Jobs' 2005 Stanford Commencement Address

On facing death and dying

No one wants to die. Even people who want to go to heaven don’t want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life’s change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.

Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma — which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.

Steve Jobs 1955-2011

"The Collapse Is Coming...And Goldman Rules The World"

BBC Speechless As Trader Tells Truth: "The Collapse Is Coming...And Goldman Rules The World"

Malaysian Budget 2012

Market Volatility: Know your psychological biases

The more you know about your psychological biases, the better you can function in the volatile stock market.

Everyone has opinions and psychological biases.  However, people may not know their own biases. 

The more you know about your psychological biases, the better you can function in the volatile stock market.

The entire market may be influenced by psychological reasons, not by fundamental reasons alone. 

From an investment perspective, the bottom line is that the market will continue to fluctuate and give you solid opportunities every so often.

Value in the long run is determined by fundamentals, while short-term gyrations reflect market participants' psychological weaknesses, such as herding.  

Knowledge is the best antidote to making wrong decisions.

If you are a long-term investor, the rational thing to do is to make decisions based on long-term fundamentals of the business.

Europe bids to prop up banks

Europe bids to prop up banks


AFP
2011-10-07

The European Central Bank has announced new measures to provide cash-strapped banks with liquidity as US President Barack Obama stressed Europe must act quickly on its ongoing debt crisis.

Markets cheered the news the ECB would beef up "non-standard" action to help out lenders as the European Commission called for "co-ordinated action" to recapitalise banks and Germany said it should be done without delay.

European equity markets were up more than three per cent as hopes grew that political leaders were finally getting to grips with the crisis.

While ECB chief Jean-Claude Trichet stopped short of cutting rates at the last meeting of his eight-year term, he said the bank would continue to assist lenders although he also urged them to bolster their balance sheets.

The ECB "urges banks to do all that is necessary to reinforce balance sheets (and governments) ... need to take decisive and front-loaded action to bolster public confidence in the sustainability of government finances", said Trichet.

The Bank of England also took bold steps to reinvigorate the sluggish British economy, reinstituting its quantitative easing (QE) policy - whereby it pumps cash directly into the system to boost activity.

The BoE voted in favour of increasing its QE policy by STG75 billion ($A120 billion) to STG275 billion over a four-month period while keeping its main interest rate at a record-low 0.50 per cent.

Earlier, European Commission president Jose Manuel Barroso said: "We are now proposing to the member states to have a co-ordinated action to recapitalise banks and get rid of toxic assets they may have."

Speaking to Euronews TV, Barroso urged action to clear up what he termed a "real mess" in the eurozone.

While Europeans scrambled to reassure investors that the continent's banks were safe, Obama reiterated his warning that a failure to tackle the crisis in Europe would quickly spread.

"Our economy really needs a jolt right now. The problems Europe is having today could have a very real effect on our economy at a time when it's already fragile," Obama told a White House news conference.

Europeans "have got to act fast", he said.

"We have got a G20 meeting coming up in November. My strong hope is that by the time of that G20 meeting, that they have a very clear concrete plan of action that is sufficient to the task."

In Berlin, Chancellor Angela Merkel insisted banks should be recapitalised without delay, if needed.

"I think there would be a very clear need (to recapitalise) because this is money that is safely invested ... I don't think we should hesitate," Merkel said.

There would be "far greater damage" if banks needed to be rescued by governments, she said. "But the first step is for banks to recapitalise themselves."

As if to emphasise the urgency of the task facing Europe, the NYSE Euronext stock exchange suspended trading in the shares of the under-fire Franco-Belgian bank, Dexia, at the request of the Belgian market regulator as the French and Belgian governments put together a rescue package for the lender.

The European Banking Authority is readying an audit of the strength of the continent's main banks, assuming they would have to take large losses from their holdings of bonds issued by weak eurozone member states, especially Greece.

Speculation is growing that private investors will have to write off more of Greece's debt than previously thought, perhaps as much as 50 per cent.

But in some positive news for Greece, eurozone chief Jean-Claude Juncker said that an international group of auditors assessing the state of Greek reforms would likely give the green light for its next slice of aid.

"The troika (the International Monetary Fund, the European Central Bank and the European Union) will probably present the report on October 24," said Juncker, who heads the group of eurozone finance ministers.

"I think the troika will make a positive decision," he added.

Greece says it needs the next tranche of aid, worth some eight billion euros, to pay its bills, but eurozone finance ministers delayed action on the bailout at a meeting Monday in Luxembourg.

Richard Carter