Margin of Safety. Paying Up Doesn't Pay Off

Paying Up Doesn't Pay Off
	1999	2004	1999	2004	5-Year	5-Year
	P/E	P/E	Price $	Price $	EPS Growth	Total Return
Coca Cola	47	20	58	42	66%	-28%
Pfizer	42	13	32	27	165%	-16%
Wal-Mart	58	23	69	53	93%	-23%
Dell	75	35	51	42	78%	-18%
Microsoft	78	21	58	27	69%	-53%
Intel	36	21	41	24	-4%	-41%
Cisco	134	24	54	19	100%	-65%
Average	67	22	52	33	81%	-35%

The above chart contains seven of the best businesses in existence.

In the five years from 1999 to 2004, these wonders of American business boosted their earnings per share by an average of 81%, yet had you invested in all of them in 1999, your aggregate return would have been a disappointing negative 35%.

The cause of your loss would be the high price you paid for these businesses in 1999 when their price/earnings ratio averaged a breathtaking 67 times.

By 2004, the average price/earnings ratio had returned to a more rational 22 times, more than offsetting the spectacular gains in earnings per share posted by these corporate giants.

An intelligent investor would have recognized that even for the greatest businesses in the world, at 67 times earnings, Mr. Market was asking too high a price and no margin of safety was available.

MARGIN OF SAFETY

If you had asked Graham to distill the secret of sound investing into three words, he might have replied, "margin of safety/"  These are still the right three words and will remain so for as long as humans are unable to accurately predict the future.

As Graham repeatedly warned, any estimate of intrinsic value is based on numerous assumptions about the future, which are unlikely to be completely accurate.  By allowing yourself a margin of safety - paying only $60 for a stock you think is worth $100, for example - you provide for errors in your forecasts and unforeseeable events that may alter the business landscape.

Just think, if you were asked to build a bridge over which 10,000 pound trucks were to pass, would you build it to hold exactly 10,000 pounds.  Of course not - you'd build the bridge to hold 15,000 or 20,000 pounds.  That is your margin of safety.

Think Independently. You should derive no comfort in either standing with or against the crowd.

Warren Buffett said the best advice he ever got from Graham was to think independently.

Just as you ignore Mr. Market's daily communications (unless, of course, he gives you an interesting quote), you should also derive no comfort in either standing with or against the crowd.

As Graham wrote, "You are neither right nor wrong because the crowd disagrees with you.  You are right because your data and reasoning are right."

If you have reached a rational conclusion about a stock based on sound judgement, you should act even though others around you may hesitate or differ.

The rakyat speaking up for their rights

All tyranny needs to gain a foothold is for people of good conscience to remain silent.

... Thomas Jefferson

Maybe Diamonds Aren't Forever

http://www.businessweek.com/articles/2012-11-15/maybe-diamonds-arent-forever#r=lr-fst

Gold plunges to lowest in more than 2 years

Gold plunges below $1400 an ounce, lowest in more than two years, as selling intensifies

By Steve Rothwell, AP Markets Writer | Associated Press

NEW YORK (AP) -- Gold plummeted to its lowest level in more than two years as traders rushed to sell their holdings following a big price drop on Friday.

The precious metal has plunged almost $200 over the past two days and is trading below $1,400 an ounce for the first time since February 2011.

The sell-off started Friday when the U.S. government reported that wholesale prices fell in March by the most in 10 months. Investors had been buying gold in anticipation of a pickup in inflation. With prices now falling, the attraction of the metal as an alternative investment has waned.

The gold market was also rattled by a proposal last week that Cyprus sell some of its gold reserves to support its banks. Traders worry that Spain, Italy and other weak European countries might follow suit, flooding the market with excess supply just as demand for the metal is weakening.

"This is panic, this it isn't organized at all," said Phil Streible, a senior commodities broker at RJ O'Brien Futures. "If you look at Italy or Spain....if they start liquidating, that's when you get serious movements."

The price of gold plunged $120, or 8 percent, to $1,381 an ounce as of noon EDT Monday. The price of the metal has dropped almost 12 percent in the last two days. Gold peaked at $1,900 an ounce in September 2011 during the market turmoil that followed a downgrade to the U.S. government's credit rating.

Gold has been declining from a recent high of $1,792 on Oct. 4 as the outlook for the U.S. economy improved, diminishing the metal's appeal as a safe haven investment.

Some Federal Reserve officials have also been calling for an early end to the central bank's bond-buying program. If that happens, it would likely cause U.S. interest rates to rise, resulting in an appreciation of the U.S. dollar. That gives traders another reason to sell gold, since they see the metal as an alternative to holding dollars.

Industrial metals also fell after China reported that economic growth slowed unexpectedly in the first three months of the year. The world's second-largest economy grew by 7.7 percent over a year earlier, slowing from the previous quarter, and short of many private sector forecasts that growth would accelerate slightly to 8 percent.

Copper, which tends to follow the outlook for global growth, dropped 12 cents, or 3.5 percent, to $3.23 a pound.

Silver plunged $2.95, or 11.2 percent, to $23.36 an ounce. Palladium dropped $43.05, or 6.1 percent, to $655.70 an ounce and platinum dropped $72.70, or 4.9 percent, to $1,423.40.

The price of oil dropped nearly $3, or 3 percent, to $88 a barrel on Monday, its lowest level since mid-December. The slowdown in China's growth added to doubts about the strength of global demand for crude.

http://finance.yahoo.com/news/heres-why-gold-getting-crushed-164844311.html

"The speed of this sell-off is really amazing."

(Gartman on Gold: We've Never Ever Seen Anything Like It )

http://finance.yahoo.com/news/heres-why-gold-getting-crushed-164844311.html

The Day the Dollar Died

The first 12 hours of a U.S. dollar collapse! http://inflation.us

Extraordinary Popular Delusions And The Madness Of Markets

The twin bubbles of today: Government bonds (which are set to burst) and gold (which is getting ready to enter the mania phase).

How I Learned To Stop Trading And Love The Farm

@ 20 min

Great Quotes from Great Leaders

The Wisdom of Thomas Jefferson

Thomas Jefferson was one of our founding fathers and his words still ring true today. He knew that we would make mistakes with our government and he also knew what we should do to fix it. After viewing this pass it on to others.

All tyranny needs to gain a foothold is for people of good conscience to remain silent.

Educate and inform the whole mass of the people .....  They are the only sure reliance for the preservation of our liberty.

Experience hath shewn, that even under the best forms of government, those entrusted with power have, in time and by slow operations, perverted it into tyranny.

I predict future happiness for Americans if they can prevent the government from wasting the labours of the people under the pretense of taking care of them.

Information is the currency of democracy.

It does me no injury for my neighbour to say, there are twenty gods or no God.

It is error alone which needs the support of government.  Truth can stand by itself.

It is incumbent on every generation to pay its own debts as it goes.  A principle which if acted on would save one-half the wars of the world.

It takes time to persuade men to do even what its for their own good.

Liberty is to the collective body, what health is to every individual body.  Without health no pleasure can be tasted by man; without liberty, no happiness can be enjoyed by society.

No government ought to be without censors; and where the press if free no one ever will.

That government is best which governs the least, because its people discipline themselves.

The government is the strongest of which every man feels himself a part.

The care of human life and happiness, and not their destruction, is the first and only object of good government.

The democracy will cease to exist when you take away from those who are willing to work and give to those who would not.

We hold these truths to be self-evident: that all men are created equal; that they are endowed by their Creator with certain unalienable rights; that among these are life, liberty and the pursuit of happiness.

When the press if free and every man able to read, all is safe.

When the people fear their government, there is tyranny; when the government fears the people, there is liberty.

The Wisdom of Abraham Lincoln

Abraham Lincoln (February 12, 1809 April 15, 1865) served as the 16th President of the United States from March 1861 until his assassination in April 1865. He successfully led his country through its greatest internal crisis, the American Civil War, preserving the Union and ending slavery.


Let not him who is houseless pull down the house of another, but let him work diligently and build one for himself, thus by example, assuring that his own shall be safe from violence when built.

My great concern is not whether you have failed, but whether you are content with your failure.

Any people anywhere, being inclined and having the power, have the right to rise up and shake off the existing government, and form a new one that suits them better. This is a most valuable - a most sacred right - a right, which we hope and believe, is to liberate the world.

As I would not be a slave, so I would not be a master. This expresses my idea of democracy.

Better to remain silent and be thought a fool than to speak out and remove all doubt.

The Wisdom of Mark Twain

The Wisdom of Mother Teresa

Mother Teresa (26 August 1910, 5 September 1997), born Agnesë Gonxhe Bojaxhiu, was an Albanian Catholic nun with Indian citizenship who founded the Missionaries of Charity in Kolkata (Calcutta), India in 1950. For over 45 years she ministered to the poor, sick, orphaned, and dying, while guiding the Missionaries of Charity's expansion, first throughout India and then in other countries. Following her death she was beatified by Pope John Paul II and given the title Blessed Teresa of Calcutta.

The miracle is not that we do this work, but that we are happy to do it.

The most terrible poverty is loneliness and the feeling of being unloved.

The Wisdom of Napoleon Hill

There is one quality which one must possess to win, and that is definiteness of purpose, the knowledge of what one wants, and a burning desire to possess it.

The Wisdom of Benjamin Franklin

Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.

The Wisdom of Socrates

The Wisdom of Confucius

Confucius (Chinese: 孔子; pinyin: Kǒng zǐ; Wade-Giles: K'ung-tzu, or Chinese: 孔夫子; pinyin: Kǒng Fūzǐ; Wade-Giles: K'ung-fu-tzu), literally "Master Kong," (traditionally September 28, 551 BCE -- 479 BCE was a Chinese thinker and social philosopher, whose teachings and philosophy have deeply influenced Chinese, Korean, Japanese, and Vietnamese thought and life.

His philosophy emphasized personal and governmental morality, correctness of social relationships, justice and sincerity. These values gained prominence in China over other doctrines, such as Legalism (法家) or Taoism (道家) during the Han Dynasty (206 BCE -- 220 CE). Confucius' thoughts have been developed into a system of philosophy known as Confucianism (儒家). It was introduced to Europe by the Italian Jesuit Matteo Ricci, who was the first to Latinise the name as "Confucius."

The Wisdom of John D. Rockefeller

7 Most Effective Exercises Slideshow

Does Your Workout Really Work?

Done right, these seven exercises give you results that you can see and feel. You can you do them at a gym or at home. Watch the form shown by the trainer in the pictures. Good technique is a must. If you're not active now, it's a good idea to check in with your doctor first.

No. 1: Walking

Why it's a winner: You can walk anywhere, anytime. Use a treadmill or hit the streets. All you need is a good pair of shoes.

How to: If you're just starting to walk for fitness, begin with five to 10 minutes at a time. Add a few minutes to each walk until you get to at least 30 minutes per walk. Add time to your walks before you  quicken your pace or add hills. 

No. 2: Interval Training

Why it's a winner: Interval training lets you boost fitness, burn more calories, and lose weight. The basic idea is to vary the intensity within your workout, instead of going at a steady pace.

How to: Whether you walk, run, dance, or do another cardio exercise, push up the pace for a minute or two. Then back off for two to 10 minutes. Exactly how long your interval should last depends on the length of your workout and how much recovery time you need. A trainer can fine-tune the pacing.. Repeat the intervals throughout your workout.

No. 3: Squats

Why it's a winner: Squats work several muscle groups -- your quadriceps ("quads"), hamstrings, and gluteals ("glutes") -- at the same time.

How to: Keep your feet shoulder-width apart and your back straight. Bend your knees and lower your rear as if you were sitting down in a chair. Keep your knees right over your ankles.

Squats Done Right

Practice with a real chair to master this move. First, sit all the way down in the chair and stand back up. Next, barely touch the chair's seat before standing back up. Work up to doing the squats without a chair, keeping the same form.

No. 4: Lunges

Why it's a winner: Like squats, lunges work all the major muscles of your lower body. They can also improve your balance.

How to: Take a big step forward, keeping your back straight. Bend your front knee to about 90 degrees. Keep weight on your back toes and drop the back knee toward the floor. Don't let the back knee touch the floor. 

Lunges: Extra Challenge

Try stepping not just forward, but also back and out to each side, with each lunge.

No. 5: Push-Ups

Why it's a winner: Push-ups strengthen your chest, shoulders, triceps, and core muscles.

How to: Facing down, place your hands slightly wider than shoulder-width apart. Place your toes on the floor. If that's too hard, start with your knees on the floor. Your body should make a straight line from shoulders to knees or feet. Keep your rear-end muscles and abs engaged. Bend your elbows to lower down until you almost touch the floor. Lift back up by pushing through your elbows, Keep your torso in a straight line throughout the move.

Push-Ups: Too Hard? Too Easy?

If you're new to push-ups you can start doing them by leaning into a kitchen counter. As you get stronger, go lower, using a desk or chair. Then you can move onto the floor, starting with your knees bent. For a challenge, put your feet on a stair, bench, or couch while keeping good form.

Crunches -- Method A

Start by lying on your back with your feet flat on the floor and your head resting in your palms. Press your lower back down. Contract your abdominal muscles (abs) and in one smooth move, raise your head, then your neck, shoulders, and upper back off the floor. Tuck in your chin slightly. Lower back down and repeat.

Crunches -- Method B

You can also do crunches with your feet off the floor and knees bent. This technique may keep you from arching your back. It also uses your hip flexors (muscles on your upper thighs below your hip bones).

Mastering Crunches

Keep your neck in line with your spine. Tuck in your chin so it doesn't stick out. Breathe normally. To keep chest and shoulders open, keep your elbows out of your line of vision.

No. 7: Bent-Over Row

Why it's a winner: You work all the major muscles of your upper back, as well as your biceps.

How to: Stand with your feet shoulder-width apart, bend your knees, and bend forward at the hips. Engage your abs without hunching your back. Hold weights beneath your shoulders, keeping your hands shoulder-width apart. Bend your elbows and lift both hands toward the sides of your body. Pause, then slowly lower your hands to the starting position.

http://www.webmd.com/fitness-exercise/ss/slideshow-7-most-effective-exercises