The Myth of 'Good' Debt

By David Francis
Apr 27, 2012

The economic crisis and the tepid pace of the recovery have left millions of Americans deep in debt. And amid this slow recovery, many are struggling to make minimum payments to keep ahead of creditors.

The amount of debt the average American holds is staggering, compared with the average American salary. In its latest findings in 2010, the Social Security Administration calculated the average American wage index to be $41,673.83.

According to Creditcards.com, a website that tracks the credit card industry, the average American household holds $15,956 in credit card debt. The Census Bureau has determined than 60 percent of Americans own their homes; many of these people still owe money to a bank for mortgage payments. Estimates on the size of these payments vary, but most organizations say the majority of monthly payments fall between $700 and $1,700 per month.

[Related: Is A College Degree Worth It?]

On top of that, most Americans have to borrow money to buy a car. According to the auto website Edmunds.com, monthly car payments should average between 8 and 11 percent of monthly income, although many people pay more. College students are also forced to take out loans to pay for education. The Project on Student Debt has found that the average graduate of a four-year nonprofit university carries more than $25,000 in loans.

Based on these numbers, it seems almost impossible for the average American to be debt-free. But there are steep variations among these loans. Paying off some loans should be a priority. Others, while burdensome, can wait.

Better debt vs. worse debt.
Prior to the Great Recession, many financial experts differentiated between "good" debt and "bad" debt. The former included loans with low interest rates, such as a home loan. Because the value of a home presumably appreciated over time, the debt helped the borrower work toward building wealth. "Bad" debt included credit card loans, or loans taken out to pay for things that current cash reserves couldn't cover. The value of the product purchased with the credit card immediately depreciates upon purchase, while the money placed on the credit card immediately begins to accrue interest.

But according to David Bach, author of the Finish Rich book series and founder of www.FinishRich.com, the financial downturn changed these perceptions. "Good debt and bad debt is almost a myth that we were sold for 20 years," Bach says. "There's just debt. For the most part, debt is basically bad and difficult. It comes down to the interest rate."

Debt now seems to fall into two new categories: better debt and worse debt. Better debt is a loan with a low interest rate used to purchase something that adds value. Worse debt is used to buy a depreciating asset or debt used as a substitute for cash. A home loan, according to Bach, is an example of better debt.

"For the most part, most people have to borrow money to buy a home. The key is if you borrow money to buy a home, the faster you pay that loan off, the faster you're free," Bach says.

[Related: How to Use the IRS as a Credit Card]

The Catch-22 of debt is that one needs to go into debt to be considered a credit-worthy borrower with the ability to pay off large loans. Rod Ebrahimi, founder and CEO of ReadyforZero, a website that helps people plan to get out of debt, says establishing a good credit score is imperative for transitioning out of college. "A good debt you could have had through college is a credit card you had going into college and never carried a large balance," he says. "It may actually make sense to have some history."

However, Bach warns that this kind of debt can quickly become burdensome if the cardholder doesn't manage it responsibly. "If you're going to borrow money on your credit card, the goal should to be pay it off in full at the end of the month," Bach says. "Don't get stuck in the trap of paying minimum payments. Pay off these cards as fast as possible."

Making sound education decisions.
Ebrahimi says the growing student loan burden and the poor state of the economy, especially for young people, means students must approach student loans differently. They are often necessary, but one needs to be strategic in how they are used. He warns against using loans at for-profit universities, which promise much but often fail to deliver jobs that allow students to pay off their loans.

"At for-profit schools, you can get all kinds of degrees and you end up with six-figure debt, then can't find a job that allows you to pay them," he says.

He adds that loans should also be used strategically at nonprofit universities. "There can be good and bad students loans" at nonprofit universities, Ebrahimi says. "Many people believe they can pay at any university," but often, payments at state school are easier to manage.

http://finance.yahoo.com/news/myth-good-debt-170611202.html

Bursa Stock Prices (October 15, 2012)

http://www.btimes.com.my/data/Portfolio/16btbm1a.pdf
October 15, 2012

How Buffett determined the combined value of Capital Cities and American Broadcasting

Murphy was named president of Capital Cities in 1964.  

Murphy agreed to sell Buffett 3 million shares of Capital Cities/ABC for $172.50 per share.

How Buffett determined the combined value of Capital Cities and American Broadcasting

Approximate yield of the thirty-year US government bond in 1985 = 10%.

Cap Cities had 16 million shares = 13 million shares outstanding plus 3 million issued to Buffett.

Market cap = 16 million x $172.50 = $ 2760 million

The present value (intrinsic value) of $ 2760 million of this business would need to have earnings power of $276 million.  ($2760 x 10%)

1984

Capital Cities earnings net after depreciation and capital expenditures = $ 122 million. 

ABC net income after depreciation and capital expenditures = $ 320 million.

Combined earnings power of these two companies = $ 442 million.

However, the combined company would have substantial debt:  the approximately $ 2.1 billion that Murphy was to borrow would cost the company $ 220 million a year in interest.

So, the net earnings power of the combined company = approximately $200 million.

Additional considerations

Capital Cities’ operating margins were 28%.

ABC’s operating margins were 11%. 

If Murphy could improve the operating margins of the ABC properties by one-third to 15%, the company would throw off an additional $125 million each year, and the combined earnings power would

= $ 200 million + $ 125 million

= $ 325 million annually.

The present value of a company earning  $ 325 million annually discounted at 10%

= ($325 million / 10%)

= $3250 million.

The per share present value of a company earning $ 325 million with 16 million shares outstanding

= $ 325 million / 16 million

=  $ 203 per share.

This gives a 15% margin of safety over Buffett’s $ 172.50 purchase price. 

The margin of safety that Buffett received buying Capital Cities was significantly less compared with other companies he had purchased.  So why did he proceed?

Murphy was Buffett’s margin of safety.   When Capital Cities purchased ABC, Murphy’s talent for cutting costs was badly needed.  With the help of carefully selected committees at ABC, Murphy pruned payrolls, perks, and expenses.  Once a cost crisis was resolved, Murphy depended on his trusted manager to manage operating decisions.  He concentrated on acquisitions and shareholders assets.

Appendix

The margin of safety that Buffett accepted could be expanded if we make certain assumptions.

1.  Buffett says that conventional wisdom during this period argued that newspapers, magazines, or television stations would be able to forever increase earnings at 6% annually - without the need for any additional capital.  The reasoning, explains Buffett, was that capital expenditures would equal depreciation rates and the need for working capital would be minimal.  Hence, income could be thought of as freely distributed earnings.  This means that an owner of a media company possessed an investment, a perpetual annuity, that would grow at 6% for the foreseeable future without the need for any additional working capital. 

Media company

Earned $ 1 million

Expected to grow at 6%.

The appropriate price to pay would be $25 million dollars for this business.

Calculation: 

Present value 

=  $ 1 million / (risk free rate of 10% - 6% growth rate)

=  $ 1 million / 4%

=  $ 25 million

Compare that, Buffett suggests, to a company that is only able to grow if capital is reinvested.  

Another business

Earned $ 1 million

Could not grow earnings without reinvested capital

The appropriate price to pay would be $ 10 million dollars for this business.

Calculation:

Present value 

=  $ 1 million / risk free rate of 10%

=  $ 10 million.

Apply the above to Cap Cities

Calculations:

6 million outstanding shares

Earned $325 million or $ 203 per share

Growth 6%

Risk free rate 10%

Present value = $325 million / (10% - 6%) = $ 8125 million

Per share value = $ 507 per share.

Present value increases from $ 203 per share to $ 507 per share.

Buffett paid $ 172.50 per share.  ($172.50 / $ 507 = 34%).  Therefore, he enjoyed a 66% margin of safety over the $172.50 price that Buffett agreed to pay.

But there are a lot of "ifs".

However, the margin of safety that Buffett received buying Capital Ciies was significantly less compared with other companies he had purchased. 

His ability to obtain a significant margin of safety in Capital Cities was complicated by several factors.  

1.  The stock price of Cap Cities had been rising over the years.  Murphy was doing an excellent job of managing the company, and the company's share price reflected this.  (So, unlike GEICO, Buffett did not have the opportunity to purchase Cap Cities cheaply because of a temporary business decline.  

2.  The stock market didn't help, either.  And, because this was a secondary stock offering, Buffett had to take a price for Cap Cities' shares that was close to its then-trading value.

How Investing has Changed Our Lives

The $5,000 Invest Better Video Contest Winner!
By Motley Fool Staff
October 11, 2012

We received many inspiring entries for our first annual Invest Better Video Contest, but one rose to the top to win the $5,000 grand prize.

Meet Edward Bautista and his family, who share their story of how investing took them from sleeping on the floor and eating ramen noodles every day to paying for their daughter's college education. Edward's video inspired us because it shows how even when starting small, patient, long-term investing provides financial security and opens up our options. For example, Edward and his family can now afford to escape their Maui home for trips to snowy spots like Idaho!

And see the honorable mentions below:

• Susan Olson: "Meet Emily Collins, an 8-year-old investor"
• Lydia Cline: "A family's investing journey" (video no longer available)
• Dan Lamoureux: "Investing connects you to the world"
• The Carnett Family: "Creating a vision for the future"

http://www.fool.com/investing/general/2012/10/11/the-5000-invest-better-video-contest-winner.aspx?source=ihpdspmra0000002&lidx=5

How Warren Buffett valued Washington Post Company

Washington Post Company (WPC)

1973: 
Total Market cap $ 80 million.
Most security analysts, media brokers, and media executives estimated WPC's intrinsic value at $400 to $500 million.


Here was Buffett's reasoning.

1. Owner's earnings for that year:
Owner's earnings =
net income $13.3 million
+ depreciation & amortisation $3.7 million
- capital expenditure $ 6.6 million

Owner earnings = $10.4 million

Long-term U.S. government bond yield 6.81%.

The value of WPC = $10.4 / 6.81% = $ 152.7 million; this is almost twice the market value of the company but well short of Buffett's estimate.


Buffett's further reasoned that:

Over time, the capital expenditures of a newspaper = depreciation and amortization charges.

Therefore, net income = approximately to owner earnings.

Knowing this, the value of WPC
= net income / risk-free rate
= $ 13.3 million / 6.81%
= $ 195 million.


His other assumptions:

1. The increase in owner earnings will equal the rise of inflation.
2. However, newspapers in the 1970s have unusual pricing power; because most are monopolies in their community, they can raise their prices at rates higher than inflation.
3. If it is assumed that WPC has the ability to raise real prices by 3%, the value of the company is
= net income / (risk-free rate - 3%)
= $ 13.3 million / (6.81% - 3%)
= about $ 350 million.
4. WPC's pretax margins were 10%, which were below its 15% historical average margins. If pretax margins improved to 15%, the present value of the company would increase by $135 million, bringing the total intrinsic value to $ 485 million.



Buffett bought WPC at an attractive price.

Market cap $ 80 million.

Based on the above calculations, Buffett bought the WPC for at least half of its intrinsic value.

However, Buffett maintained that he bought the company at less than one-quarter of its value.

Either way, he clearly bought the company at a significant discount to its present value.

Buffett satisfied Ben Graham's premise that buying at a discount creates a margin of safety.

Different strategies for investing available cash.

Different strategies for investing available cash. WHY KEEP CASH?

One significant difference between many investors is evident in the different strategies for investing available cash.

Some investors will typically choose to be fully invested at all times, since cash balances would likely cause them to lag behind a rising market.  

Other investors, by contrast, are willing to hold cash reserves (for the short term) when no bargains are available.  Among the reasons offered are:

1.  Cash is liquid and provides a modest, sometimes attractive nominal return, usually above the rate of inflation.
2.  The liquidity of cash affords flexibility, for it can quickly be channeled into other investment outlets with minimal transaction costs.
3.  Finally, unlike any other holding, cash does not involve any risk of incurring opportunity cost (losses from the inability to take advantage of future bargains) since it does not drop in value during market declines.

Definition of 'Tenbagger'

Definition of 'Tenbagger'

A stock whose value increases 10 times its purchase price. This expression was coined by Peter Lynch, one of the greatest investors of all time, in his book "One Up On Wall Street" (1989).

Investopedia explains 'Tenbagger'

These types of returns are considered once-in-a-lifetime investments. Some of the most famous examples of tenbaggers include now blue-chip stocks like Wal-Mart, Hewlett-Packard and General Electric. Many investors are constantly in search of the elusive tenbagger, but there isn't an exact science to discover tenbagger stocks. Generally, these explosive companies are smaller companies (market cap under $1 billion) with large potential markets. Over time, these companies grow into their potential markets, providing patient investors with handsome returns.

Read more: http://www.investopedia.com/terms/t/tenbagger.asp#ixzz29TLSeRzN



Where did the term "tenbagger" originate?

On February 15, 1989, Peter Lynch's investing book, "One Up On Wall Street", made its debut. At the core of the book was a call to arms for individual investors. Lynch believed that individual investors could outperform highly educated Wall Street stock pickers by keeping their eyes open during their daily life and learning basic research skills. Lynch pointed out that, as consumers, workers, mothers and fathers, individual investors are much closer to the market than the people in Wall Street's ivory towers. When new products are introduced or new businesses opened up, consumers get first-hand information that Wall Street firms wait months for analysts to come up with.

Lynch explained that once a stock becomes noticeable enough to make the institutional approved list, most of the gains have already happened. He coined the term tenbagger to describe a stock that returns ten times the money that you put into it and gave numerous examples of ten, twenty, and even fortybaggers that individual investors could've spotted before Wall Street jumped in. These include everything from Dunkin' Donuts, Wal-Mart, The Limited and Stop & Shop. Lynch showed that Wall Street funds came in late on the majority of multi-baggers, seeing only a small percentage of the overall gains.

Boiled down to two precepts, "One Up On Wall Street" tells investors to invest where they have an edge in knowledge and keep up with the "story" of their stocks. Lynch didn't want investors to blindly buy companies that they encountered in their daily lives, but he suggested that those companies were the best place to start looking for great stocks rather than searching in an industry that they knew nothing about. He also emphasized the need to create a storyline for a company and keep up with any changes in that story so that investors can eliminate the market noise before deciding to buy or sell. The mixture of real world examples and practical advice made Lynch's book a classic and it continues to be a source of inspiration and instruction for individual investors today.

For more, read Pick Stocks Like Peter Lynch.

This question was answered by Andrew Beattie.

Read more: http://www.investopedia.com/ask/answers/09/tenbagger-peter-lynch.asp#ixzz29TOJzaAi

How do you value company DEF?

Company DEF

This company is in a business sector with durable competitive advantage and economic moat.  Its management has delivered many years of consistently good performance.  Its long term shareholders have been richly rewarded.


Financial data

ttm-Earnings $ 367 million
DPO 48%
Dividends paid $ 177 million
Market cap $ 5100 million


PBT Margin 36%
PAT Margin 27.3%
ROE  22.1%

ttm-PE 13.9x

EY  7.2%
DY 3.47%

Risk free interest rate 4%


How much would you pay to own this company?

Based on earnings stream:   Asset value = $ 9175 million
Based on dividends stream:  Asset value = $ 4425 million

At present market capitalization of $ 5100 million, the reward: risk ratio is as follows:

Upside = $ 4075 million
Downside = $ 675 million

Upside reward :  Downside risk = 6 : 1


Now, this company has been growing its earnings at 15% per year for the last 10 years.  It has also paid growing dividends over these years.  It is also predicted to a high degree of confidence that this company can continue to deliver such growth.

For those with a long term horizon in their investing, is this company under-valued, fairly valued or over-valued?

Present Value is the discounted value of all its future cash flows, and remember that growth is a factor in the calculation of Present Value.

Remember also the three important words in investing - Margin of Safety.

Do you have a margin of safety in your investing into this company at today's price?

Do You Invest Like a Grasshopper or an Ant?

When it comes to retirement planning, are you Aesop’s grasshopper or ant?

Like the ant in the fable, should you hoard and invest as much money as you can now, depriving yourself of little luxuries and gambling that you’ll live to a grand old age? Or should you have a bit of fun, like the grasshopper, spend that cash and then end up in your 90s living on Ramen noodles?

Jim Miller’s article posted earlier on this blog— “How Much Should You Save?” — underlines the challenge everyone working without the backup of a pension faces.

A recent Bloomberg.com article (see article posted below) suggests that more of us may be grasshoppers, but caving into immediate gratification may give our finances as much as a six-figure hit. The article notes that a “unique challenge for retirement planning is that the end goal is so far away that it’s hard to see how actions we take or don’t take today will have a huge impact on our older selves.”

Bloomberg further references a contract created by the Allianz Global Investors Center for Behavioral Finance. The contract, written to help financial advisers hold their clients to the investing course, includes this passage: “Should the portfolio value decline by 25 percent, we commit to avoid the urge to panic and sell the portfolio. Similarly, should the portfolio value increase by 25 percent, we commit to avoid the urge to chase the hottest investments.”

If you really want a look at how your savings will pile up if invested in a retirement plan, it’s worthwhile to play around with the 401(k) savings calculator at Bankrate.com. Then tinker with the retirement income calculator at the same website — a fascinating, but also scary, numbers game that may have you joining the ant farm.

http://blog.betterinvesting.org/?p=2836&utm_source=MailingList&utm_medium=email&utm_campaign=BI+Weekly_10-15-12

Retrain Your Brain for Financial Success
By Carla Fried - Oct 9, 2012

Dismal market returns haven’t exactly created a tailwind for 401(k) and IRA portfolios over the last decade or so, but an equally pernicious -- and more entrenched -- problem is that our brains are messing with our retirement plans.

“We are wired for financial defeat,” says Rapid City, South Dakota, certified financial planner Rick Kahler. “Whatever has the most emotional juice right now is what gets our attention. Invest $5,000 in your IRA for a retirement that is 10, 20, 30 years away? Or spend the $5,000 for a vacation to the Bahamas?” All too often, the Bahamas wins out.

William Meyer, founder of Social Security Solutions, notes that our thirst for immediate gratification can easily take a six-figure toll. More than two-thirds of folks opt to claim a lower Social Security benefit starting as early as age 62. For a married couple, than can mean leaving as much as $100,000 on the table. “If you wait to claim until age 70, you’re locking in a benefit that is 76 percent larger," says Meyer.

More productive planning

Forever tweaking your asset allocation probably won’t get you near the retirement payoff that tweaking your brain will achieve. Consider these strategies for engaging your brain in more productive retirement planning:

Get Thee to a Calculator, Pronto: OK, you know you probably should be saving more for retirement. And when life keeps intervening -- that Bahamas vacation you and yours really really need, or the realization that the kid’s orthodontia isn’t covered by insurance -- you tell yourself that next year, you’ll ramp up your savings rate. You’ve got plenty of time, right?

What you may not realize is how expensive that time is. Research conducted by Craig McKenzie, a psychology professor at the University of California, San Diego, shows that we have a tendency to “massively underestimate the cost of waiting to save. It’s difficult to appreciate the difference between giving yourself 20 years to save and 40 years.”

For example, a 30-year-old who is saving $10,000 a year and earning an annualized 6 percent will have $1.2 million at age 65. Care to guess what someone starting at 45 will have? About $390,000. The younger saver invests $150,000 more than the 45-year-old does, and in return has an ending balance that's $800,000 larger. Even if you’re already past your 20s and 30s, you might find it eye-opening to see how extending your investment timeline by delaying retirement on the back end of the calculation can help matters. Your company retirement plan probably has an online calculator you can play with; or try this one.

Make it Personal: How you frame retirement savings decisions can help boost your ability to delay gratification. When individuals were asked if they'd prefer to have $3,400 in one month or $3,800 in two months, 57 percent chose the latter. When the same scenario was framed in terms of one’s personal age -- “when you are 2 months older” -- 83 percent chose to wait for the bigger payoff.

How does that translate to better retirement planning? Yale School of Management marketing professor Shane Frederick, one of the study’s authors, says a 50-year-old who frames a savings goal as “when I am 65” will likely be more patient to focus on that delayed gratification, than someone who frames it as a more generic “in 15 years.”

Time Travel: Another unique challenge for retirement planning is that the end goal is so far away that it’s hard to see how actions we take or don’t take today will have a huge impact on our older selves. When researchers showed individuals doctored photos of their future selves, the human guinea pigs said they would save more than twice as much for retirement, compared to a control group that wasn’t given a glimpse of their older self.

Work is afoot to bring this visual exercise to a 401(k) plan near you. In the meantime, Hal Hershfield, who led the research, says he wouldn’t recommending using apps that age your face. “They're just not accurate enough, and I think seeing a strange-looking version of your future self may actually have the perverse effect of causing you to identify less.”

Hershfield, an assistant professor of marketing at New York University’s Stern School of Business, says new research that has yet to be published shows that simply writing a letter to your future self can help you become more invested in the welfare of that older person. “In a way, this task is a very low-tech version of the age-progression [photo morphing] techniques: Both have the same goal of creating a more vivid image of the future self.” Hershfield says hanging out with older folks -- parents, grandparents, volunteering with an organization for the elderly -- can also have a beneficial impact on your resolve to save more today.

Channel Ulysses. Most of us suffer from a bad case of recency bias, the tendency to extrapolate that whatever is happening today will keep happening. That’s why it’s so hard to buy low and sell high. If your recent experience is a falling market and bad returns, it’s not exactly easy to belly up to the bar and buy stocks, or simply stay committed to what you already own.

A Ulysses Contract -- a one-page statement that lays out your long-term strategy and the fact that you’re committed to staying the course -- can be a line of defense against over-reacting to current events. Like the Greek warrior, you are pre-planning for how you will circumvent alluring emotional sirens that can thwart your retirement plan.

For example, a sample Ulysses contract -- created by the Allianz Global Investors Center for Behavioral Finance for financial advisers to use with clients -- includes this passage: “Should the portfolio value decline by 25 percent, we commit to avoid the urge to panic and sell the portfolio. Similarly, should the portfolio value increase by 25 percent, we commit to avoid the urge to chase the hottest investments.”

Another useful step is to include a clause in your contract saying that before you ever deviate from your plan, you will write down your rationale. As Nobel Laureate Daniel Kahnemann explained in his book, "Thinking, Fast and Slow," you don’t want to cede all power to the quick-twitch intuitive part of your brain. Slowing down and simply writing down why you want to change course triggers more deliberate rational thinking. That’s the key to getting ahead and staying ahead.

(Carla Fried is a freelance writer based in California.)

http://www.bloomberg.com/news/2012-10-05/retirement-planning-2-0-retrain-your-brain-for-financial-success.html

10 Money Mistakes That Can Ruin a Marriage

By Renee Morad
Fri, Oct 12, 2012

As anyone who’s been there knows, there’s no such thing as a friction-free marriage. But arguing can be ominous when the topic is money.

Couples who reported disagreeing about finances once a week were 30 percent more likely to get divorced than couples who reported disagreeing about them once a month, according to a Utah State University study.

In another survey, published in the Forum for Family and Consumer Issues, finances proved to be the leading cause of conflict in marriage, with 39 percent of respondents listing it as their primary issue and 54 percent as their secondary issue.

Here are 10 of the most common mistakes couples make when dealing with money.

1. Not talking enough about finances

There’s a time and place for everything, but it’s often difficult to find the right time and place to talk money.

Some couples benefit from scheduling a time to talk about money matters, just like they would for a date night or business meeting. Other couples might choose to set a monetary limit that would initiate a conversation: Let’s say, for example, they decide purchases under $500 are discretionary but spending money over that amount warrants a discussion.

Find what works for you and your spouse and commit to it. It might not be the most enjoyable way to spend time together, but you’ll thank yourselves later.

2. Thinking you can buy love

If you think splurging on a new diamond ring or luxury car will help improve your marriage, think again.

A Brigham Young University study found couples with two materialistic spouses were worse off on nearly every measure. Following behind were couples with one materialistic spouse.

Couples who claimed money was not important to them, however, were lucky in love: They scored 10 to 15 percent better on marriage stability and other measures of relationship quality than couples with one or two materialistic spouses.

Interestingly, it didn’t matter how much money they had, but how much value they put on money. In the study, couples who were better off financially but admitted to having “a strong love of money” found that money was a bigger source of conflict.

3. Ignoring conflicting spending habits

Scholars have found that individuals gravitate toward spouses who look, sound, and act as they do – except when it comes to money, according to surveys conducted by the University of Pennsylvania, University of Michigan, and Northwestern University.

Penny pinchers and reckless spenders tend to marry the other, but these couples report unhappier marriages than those in which both spouses had similar spending habits, the studies revealed.

Disparity in spending can be manageable, but if issues aren’t addressed, research says this could increase your likelihood of divorce. The Utah State University study found individuals who feel their spouse spends money foolishly reported lower levels of marital happiness and gauged their likelihood of divorce at 45 percent.

4. Not agreeing on how to divide money

Whether you have joint or separate accounts – or both – doesn’t really matter. What does is whether your financial plan is the right one for your marriage.

This comes down to you and your spouse’s spending habits and money values. If you’re unnecessarily stressing about small, day-to-day purchases, for example, it might be better to put part of your finances in separate accounts – so you’re less likely to question your spouse’s every buy. If you work better as a team knowing where all your money is and where it’s going at all times, then merged accounts could be better.

5. Taking on too much debt

About 76 percent of Americans admit money is a significant source of stress in their lives, according to an American Psychological Association report.

There’s nothing more stressful about money than debt – especially the high-interest, hard-to-pay-off kind. If there’s debt hanging overhead that’s threatening to come between you, read stories like A Simple System to Destroy Debt and focus on paying it off – together.

6. Hiding purchases or debts

Eighty percent of married couples hide some purchases from their spouse, according to a survey by nonprofit CESI Debt Solutions – with men admitting they’re more likely to routinely cover up their spending.

The survey revealed 30 percent of respondents view financial infidelity as being just as harmful as sexual infidelity. What’s more, 79 percent of married respondents were more likely to confess about their financial infidelity to a friend than their spouse.

7. Lending or borrowing money from family

In our recent story The 7 Dumbest Ways to Borrow Money, we explained that borrowing money from family comes with major strings attached. After all, you’re risking your relationship if the deal goes bad.

These waters are even more treacherous for married couples. Rule of thumb: Whether it’s borrowing or lending, the fewer in-laws involved, the better.

Of course, with the right scenarios, borrowing money from or lending it to family can be a success. But proceed with caution: Consider drafting a legal document to ensure everyone’s on the same page, and resist splurging on luxury items while you still owe family members money.

8. Believing you need to split up financial responsibilities traditionally

Traditional roles suggest that women manage the day-to-day finances, like balancing the checkbook and paying the utility bills, and men typically handle investing and financial planning. But traditional isn’t always best.

A better option: Recognize each other’s individual strengths and divvy up the financial tasks accordingly. You want the best candidate for the job, regardless of what other couples do or used to do.

9. Failing to recognize that money matters carry emotional weight

Compared with disagreements over any other topic, research shows financial disagreements last longer, are more salient to couples, and generate more negative conflict tactics, such as yelling.

Money conflicts in marriage particularly affect men. Research suggests that since they are socialized to be providers, men tend to take financial conflict harder than women.

10. Not enjoying your money together

Money doesn’t always have to be a source of stress or conflict. It can also be a source of pleasure. Some of my happiest memories with my husband wouldn’t have been possible without us spending money – on things like exploring Italy, or taking our daughter on her first trip to Florida.

In fact, research indicates that spending money on new experiences, like concert tickets or a wine tasting, produces longer-lasting satisfaction than spending money on material possessions. Experiences bring us happiness not only when we’re experiencing them, but also whenever we reflect back on them as memories.

Fond memories, after all, usually turn out to be one of the most valuable assets in a marriage.

http://www.moneytalksnews.com/2012/10/12/10-money-mistakes-that-can-ruin-a-marriage/

How do you value this company OPQ?

I have been looking at this company.  Its business is doing very well.  It has grown its revenues, profit before tax and earnings consistently over many  years.  Its business is growing due to its excellent products and marketing.

Its PBT margin and net profit margins have grown over the years from single digits to double digits.  It latest PBT margin and net profit margins were 17.4% and 13% respectively.  Its ROE is consistently above 30% for many quarters and the last few years.  It DPO ratio averages 70%.

Its latest trailing-twelve months earnings was $110 million and its market capitalisation recently was $ 3200 million.  It is projected that it will probably deliver $130 million in this financial year with a high degree of predictability.

(A)  Calculating the value of this company today.
How would you value the earnings and dividends of this company?

Using the thinking similar to that of Buffett:

1.  The risk free interest rate offered by the banks is 4% per year.
2.  How much deposit would you need to put in the bank to earn $110 million per year?
3.  Answer:  $110 million / 4% = $2750 million.
4.  This company pays out 70%+ of its earnings as dividends, i.e. about $77 million.
5.  How much deposit would you need to put in the bank to earn $77 million at present prevailing interest rate of 4% per year?
6.  Answer:  $77 million / 4% = $1925 million.
7.  A fixed deposit gives you a fixed interest rate of the same amount every year, assuming that the interest rate paid remains unchanged.
8.  On the other hand, this company's earnings are expected to grow quite fast in the coming years.
9.  Assuming that this company can grow its earnings at 2% per year for the next few years, with a high degree of predictability, how would you value this company?
10.  Let's continue with the analogy above.
11.  With its earnings of $ 110 million, growing at 2% per year, you will need to have a fixed deposit of the equivalent of $ 110 million / (4% - 2%) = $ 5500 million.
12.  With its dividend of $ 77 million, growing at 2% per year, you will similarly have to have a fixed deposit of the equivalent of $ 77 million / (4% - 2%) = $ 3850 million.


To summarise:

Assuming no growth in its earnings or dividends, and using 4% risk free interest rate as the discount factor, the present values of
- the earnings stream is the equivalent to an asset of $ 2750 million.
- the dividends stream is the equivalent to an asset of $1925 million.

When growth is factored into the earnings and dividends stream, even at a low rate of growth of 2% and still using the 4% risk free interest rate as the discount factor, the present values of:
- the earnings stream is $ 5500 million.
- the dividends stream is $ 3850 million.

This company's market capitalization was $ 3200 million recently.  Assuming no growth in the earnings of this company, the value of this company is anywhere between $1925 million (this price is supported by its dividend yield) and $ 2750 million (supported by its earning yield).

At $ 3200 million, its reward:risk ratio is against the investor as the current price of this company is higher than your calculated intrinsic value of $ 2750 million.

(B)  Calculating the value of this company at the end of this financial year, using (projected earnings and dividends).

However, it is projected that this company will deliver $ 130 million in earnings and at DPO of 70%, $91 million in dividends.

Let's recalculate the values you will place on these earnings stream and dividend streams.

How would you value the earnings and dividends of this company?

Using the thinking similar to that of Buffett:

1.  The risk free interest rate offered by the banks is 4% per year.
2.  How much deposit would you need to put in the bank to earn $130 million per year?
3.  Answer:  $130 million / 4% = $ 3250 million.
4.  This company pays out 70%+ of its earnings as dividends, i.e. about $91 million.
5.  How much deposit would you need to put in the bank to earn $91 million at present prevailing interest rate of 4% per year?
6.  Answer:  $91 million / 4% = $ 2275 million.
7.  A fixed deposit gives you a fixed interest rate of the same amount every year, assuming that the interest rate paid remains unchanged.
8.  On the other hand, this company's earnings are expected to grow quite fast in the coming years.
9.  Assuming that this company can grow its earnings at 2% per year for the next few years, with a high degree of predictability, how would you value this company?
10.  Let's continue with the analogy above.
11.  With its earnings of $ 130 million, growing at 2% per year, you will need to have a fixed deposit of the equivalent of $ 130 million / (4% - 2%) = $ 6500 million.
12.  With its dividend of $ 91million, growing at 2% per year, you will similarly have to have a fixed deposit of the equivalent of $ 91 million / (4% - 2%) = $ 4550 million.

To summarise:

Assuming no growth in its earnings or dividends, and using 4% risk free interest rate as the discount factor, the present values of
- the earnings stream is the equivalent to an asset of $ 3250 million.
- the dividends stream is the equivalent to an asset of $ 2275 million.

When growth is factored into the earnings and dividends stream, even at a low rate of growth of 2% and still using the 4% risk free interest rate as the discount factor, the present values of:
- the earnings stream is $ 6500 million.
- the dividends stream is $ 4550 million.

This company's market capitalization was $ 3200 million recently.  Assuming no growth in the earnings of this company, the value of this company is anywhere between $ 3250 million (this price is supported by its dividend yield) and $ 2275 million (supported by its earning yield), at the end of its financial year..

At $ 3200 million, it is priced close to the calculated intrinsic value for the company in the end of its financial year of $ 3250 million.  There is little margin of safety as demanded by Benjamin Graham in his teaching.  The upside reward = 50 million and the downside risk = 925 million, that is, a reward;risk ratio = 1 : 18.5.

But what if you also factored in the strong growth of this company?  What would be its intrinsic value?

Conclusion:

Since, this company is projected to grow its earnings with a high degree of predictability in the future, will you buy this company at its current price of $ 3200 million?

Those with a short term perspective in their "investing" will realise that the current price has priced in the growth expected for this financial year. 

However, for those with a longer term perspective in their investing, for example 5 years, they will realise that the earnings of this company will continue to grow consistently and predictably.  Considering the earnings growth potential, and including this factor into their calculation of intrinsic value, they may rightly be of the opinion that this company is indeed undervalued.  

How do you value this company XYZ?

I have been looking at this company.  Its business is doing very well.  It has grown its revenues, profit before tax and earnings consistently over the last few years.  Its business is growing and it is opening new branches in various towns/cities in our country.

Its net profit margins are high (>20%), its ROE is high (> 25%) and it pays about 30%+ of its earnings as dividends.

Its trailing-twelve months earnings was $113.1 million and its market capitalisation recently was $1642 million.


How would you value the earnings and dividends of this company?

Using the thinking similar to that of Buffett:

1.  The risk free interest rate offered by the banks is 4% per year.
2.  How much deposit would you need to put in the bank to earn $113.1 million per year?
3.  Answer:  $113.1 million / 4% = $2827.5 million.
4.  This company pays out 30%+ of its earnings as dividends, i.e. about $40 million.
5.  How much deposit would you need to put in the bank to earn $40 million at present prevailing interest rate of 4% per year?
6.  Answer:  $40 million / 4% = $1000 million.
7.  A fixed deposit gives you a fixed interest rate of the same amount every year, assuming that the interest rate paid remains unchanged.
8.  On the other hand, this company's earnings are expected to grow quite fast in the coming years.
9.  Assuming that this company can grow its earnings at a very low 2% per year for the next few years, with a high degree of predictability, how would you value this company?
10.  Let's continue with the analogy above.
11.  With its earnings of $ 113.1 million, growing at 2% per year, you will need to have a fixed deposit of the equivalent of $ 113.1 million / (4% - 2%) = $ 5655 million.
12.  With its dividend of $ 40 million, growing at 2% per year, you will similarly have to have a fixed deposit of the equivalent of $ 40 million / (4% - 2%) = $ 2000 million.


To summarise:

Assuming no growth in its earnings or dividends, and using 4% risk free interest rate as the discount factor, the present values of
- the earnings stream is the equivalent to an asset of $ 2827.5 million.
- the dividends stream is the equivalent to an asset of $1000 million.

When growth is factored into the earnings and dividends stream, even at a low rate of growth of 2% and still using the 4% risk free interest rate as the discount factor, the present values of:
- the earnings stream is $ 5655 million.
- the dividends stream is $ 2000 million.

This company's market capitalization was $ 1642 million recently.  Assuming no growth in the earnings of this company, the value of this company is anywhere between $1000 million (this price is supported by its dividend yield) and $2827.5 million (supported by its earning yield).

At $ 1642 million, its reward:risk ratio = 64.9%: 35.1%.


Conclusion:

Since, this company is projected to grow its earnings with a high degree of predictability, at its present price of $ 1642 million, those who are buying into this company at the present price, enjoy a large margin of safety.

How to Determine the VALUE? Illustrated by Buffett's investment in GEICO.

GEICO

1976

When Buffett started buying GEICO, the company was close to bankruptcy.

But he says GEICO was worth a substantial sum, even with a negative net worth, because of the company's insurance franchise.

In 1976, the company had no earnings, and this defied a mathematical determination of value as put forth by John Burr Williams.

Williams postulated that the value of a business is determined by the net cash flows expected to occur over the life of a business discounted at an appropriate rate.  

Despite the uncertainty over GEICO's future cash flows, Buffett was sure that the company would survive and earn money in the future.  

How and when was open to speculation.

1980

In 1980, Berkshire Hathaway owned one-third of GEICO, invested at a cost of $47 million.   That year, GEICO's total market value was $296 million.  

Even then, Buffett estimated that the company possessed a significant margin of safety.

In 1980, the company earned $60 million on $705 million in revenues.  Berkshire's share of GEICO's earnings was $20 million.

According to Buffett, "to buy a similar $20 million in earnings in a business with first class economic characteristics, and bright prospects would cost a minimum of $200 million" - more if the purchase was for a controlling interest in a company.

Let's look at Buffett's $200 million assumption.  Is it realistic, given the theory by Williams?

Assuming that GEICO could sustain this $60 million in earnings without the aid of any additional capital, the present value of GEICO, discounted at the then-current 12% rate for a thirty-year U.S. government bond, would have been $500 million - almost twice GEICO''s 1980 market value.

PV (no growth)

= $60 / 12% 

= $500 million.

IF the company could grow this earnings power at 2% real, or at 15% before current inflation, the present value of GEICO would increase to $600 million, and Berkshire's share would equal $200 million.  

PV (2% earnings growth rate)

= $60 million / (12%-2%) 

=  $60 million / 10% 

= $ 600 million.

Conclusion

In other word, in 1980, the market value of GEICO's stock was less than half the discounted present value of its earnings power.

My First Post in this Blog was on 1.8.2008 on the Investment Policies based on Benjamin Graham's teachings.

I started my blog on 1.8.2008 and my first post was:

Investment Policies (Based on Benjamin Graham)
Summary of Investment Policies
http://myinvestingnotes.blogspot.com/2008/08/investment-policies-based-on-benjamin.html

It was highly educational to blog during that period at the start of the global financial crisis.  There were so much uncertainties.  

However, when you have a philosophy and strategy to guide your investing that is sound and safe, it was a great time to see if this can withstand the onslaught of a severe bear market.  Actually, you should not fear the bear market.  You should fear the bull market instead.

In June 12, 2009, when the market had turned, I reviewed my investing for the previous 12 months.  Here are my lessons learned from the recent severe bear market.
http://myinvestingnotes.blogspot.com/2009/06/lessons-from-recent-severe-bear-market.html

Here are 2 articles to guide investing in the different phases of the stock market.
What to Do in a Up (Bull) Market?
http://myinvestingnotes.blogspot.com/2010/03/what-to-do-in-up-bull-market.html

What to Do in a Down (Bear) Market?
http://myinvestingnotes.blogspot.com/2010/03/what-to-do-in-bear-market.html

Hong Leong Bank Berhad (28.8.2012)

Date announced 28-Aug-2012
Quarter 30/6/2012
Qtr 4
FYE 30/6/2012
STOCK HLBank
C0DE  5819 

Price $ 13.68
Curr. PE (ttm-Eps) 13.7
Curr. DY 2.78%

Dividends		% chg
Curr. FY0	38.00	90.0%
Prev FY1	20.00	0.0%
Prev FY2	20.00
Curr. DY	2.78%
Risk vs Returns
Upside	2.58	72%
Downside	1.00	28%
Returns
One Yr Apprec Pot.		15%
Avg Yield		6%
Avg Tot. Ann Return		21%
(for next 5 years)
INPUT VARIABLES
Today's Share Pr $		13.68
EPS GR %		15%
Avg H. PE		12.0
Avg. L. PE		10.0
Rec. Severe Low Pr		9.64
Current PE		13.71
Signature PE		11.00
RV		125%
Rational Price		10.98
Dividends
Present Dividend		38.00
Avg % DPO		38%
Present Div Yield		2.78%
Present High Yield		3.94%
EPS G. RATE		15%
Present Market Pr.		13.68