Top 100 Companies of KLSE 3.1.2014 (Market P/E is 17.1 and DY is 3.2%)

TOP 100 COMPANIES (Market Price on January 3 (RM)
Rank	Company	Shares(m)		Mkt price		Mkt Cap(m)		PE	DY	PAT(m)		Div(m)
1	Maybank	8862.30		9.91		87825.4		13.6	6.6	6457.8		5796.5
2	PBBank	3531.93		18.90		66753.4		17.1	2.6	3903.7		1735.6
3	Tenaga	5643.61		11.00		62079.7		13.3	2.3	4667.6		1427.8
4	Axiata	8540.63		6.80		58076.5		22.7	5.1	2558.4		2961.9
5	CIMB	7729.35		7.51		58047.4		12.9	3.1	4499.8		1799.5
6	Sime	6009.46		9.39		56428.9		15.2	3.6	3712.4		2031.4
7	Pchem	8000.00		6.84		54720.0		15.5	3.2	3530.3		1751.0
8	Maxis	7503.40		7.13		53499.2		28.9	5.6	1851.2		2996.0
9	PetGas	1978.73		23.60		46698.1		33.2	2.1	1406.6		980.7
10	DiGi	7775.00		4.85		37708.8		31.3	5.4	1204.8		2036.3
11	Genting	3719.48		10.08		37492.4		9.3	0.8	4031.4		299.9
12	IHH	8134.97		3.91		31807.7		34.1	0.0	932.8		0.0
13	PetDag	993.45		30.40		30201.0		36.1	3.5	836.6		1057.0
14	IOICorp	6444.29		4.58		29514.8		14.9	3.4	1980.9		1003.5
15	SKPetro	5992.16		4.57		27384.1		43.6	0.0	628.1		0.0
16	HLBank	1879.91		14.24		26769.9		13.5	3.2	1983.0		856.6
17	GENM	5937.48		4.38		26006.2		17.7	2.0	1469.3		520.1
18	KLK	1067.50		24.12		25748.2		28.0	2.1	919.6		540.7
19	MISC	4463.79		5.51		24595.5		0.0	0.0			0.0
20	AMBank	3014.18		7.29		21973.4		13.4	3.0	1639.8		659.2
21	RHBCap	2546.91		7.97		20298.9		10.1	2.8	2009.8		568.4
22	TM	3577.40		5.39		19282.2		15.3	4.1	1260.3		790.6
23	PPB	1185.50		15.92		18873.2		22.4	1.3	842.6		245.4
24	BAT	285.53		63.88		18239.7		22.9	4.3	796.5		784.3
25	YTL	10738.93		1.60		17182.3		12.4	1.6	1385.7		274.9
26	FGV	3648.15		4.53		16526.1		15.9	3.1	1039.4		512.3
27	HLFG	1052.77		15.50		16317.9		10.9	2.3	1497.1		375.3
28	Nestle	234.50		67.96		15936.6		31.5	3.1	505.9		494.0
29	Astro	5198.30		2.98		15490.9		13.4	1.3	1156.0		201.4
30	UMW	1168.29		12.28		14346.6		15.1	4.1	950.1		588.2
31	YTLPowr	7176.08		1.85		13275.7		12.5	0.5	1062.1		66.4
32	Armada	2931.59		4.08		11960.9		31.0	0.7	385.8		83.7
33	Airport	1232.44		8.80		10845.5		26.5	1.5	409.3		162.7
34	KLCC	1805.33		5.94		10723.7		0.0	0.0			0.0
35	Gamuda	2292.32		4.61		10567.6		18.2	2.6	580.6		274.8
36	UEMS	4537.44		2.32		10526.8		22.4	1.3	469.9		136.8
37	MMCCorp	3045.06		2.85		8678.4		9.4	1.6	923.2		138.9
38	WPRTS	3410.00		2.53		8627.3		0.0	0.0			0.0
39	Bkawan	435.95		19.60		8544.6		16.8	2.8	508.6		239.2
40	UMWOG	2162.00		3.91		8453.4		0.0	0.0			0.0
41	Dialog	2451.67		3.40		8335.7		42.1	1.0	198.0		83.4
42	GENP	758.85		10.98		8332.1		25.5	1.1	326.7		91.7
43	IJM	1413.59		5.85		8269.5		19.2	2.2	430.7		181.9
44	AFG	1548.10		4.80		7430.9		13.6	3.5	546.4		260.1
45	SPSetia	2458.71		2.95		7253.2		16.5	3.7	439.6		268.4
46	LAFMSIA	849.70		8.41		7145.9		20.5	4.4	348.6		314.4
47	F&N	365.16		18.40		6718.9		25.7	3.3	261.4		221.7
48	AirAsia	2781.03		2.37		6591.1		3.5	10.1	1883.2		665.7
49	BIMB	1493.51		4.38		6541.6		19.5	2.6	335.5		170.1
50	HapSeng	2205.00		2.95		6504.8		15.1	3.6	430.8		234.2
51	Affin	1494.58		4.26		6366.9		10.1	3.5	630.4		222.8
52	Bstead	1034.18		5.60		5791.4		13.9	5.8	416.6		335.9
53	MHB	1600.00		3.61		5776.0		23.9	2.8	241.7		161.7
54	MBSB	2621.80		2.17		5689.3		6.8	13.3	836.7		756.7
55	Utd Plant	208.13		26.18		5448.9		15.9	4.8	342.7		261.5
56	BJToto	1351.03		4.01		5417.6		13.8	7.0	392.6		379.2
57	Harta	745.64		7.23		5391.0		22.5	2.0	239.6		107.8
58	MAS	16710.78		0.32		5347.4		0.0	0.0			0.0
59	DRBHCOM	1933.24		2.72		5258.4		9.1	2.2	577.8		115.7
60	Orient	620.39		8.39		5205.1		22.1	1.0	235.5		52.1
61	GasMsia	1284.00		3.95		5071.8		31.2	3.2	162.6		162.3
62	GAB	302.10		15.90		4803.4		22.1	4.3	217.3		206.5
63	Aeon	351.00		13.64		4787.6		22.5	1.8	212.8		86.2
64	Sunway	1723.52		2.75		4739.7		7.7	1.9	615.5		90.1
65	Magnum	1437.75		3.15		4528.9		13.3	5.1	340.5		231.0
66	Kulim	1294.05		3.38		4373.9		5.0	29.1	874.8		1272.8
67	Bursa	532.61		8.13		4330.1		28.5	3.3	151.9		142.9
68	BJLand	5024.37		0.82		4120.0		124.2	1.2	33.2		49.4
69	IGBReit	3422.62		1.20		4107.1		26.6	1.5	154.4		61.6
70	IGB	1490.30		2.72		4053.6		21.8	2.8	185.9		113.5
71	Tchong	672.00		5.98		4018.6		24.7	2.0	162.7		80.4
72	PavReit	3009.68		1.32		3972.8		6.3	5.2	630.6		206.6
73	KPJ	1025.59		3.87		3969.0		24.7	2.0	160.7		79.4
74	IJMLand	1558.85		2.52		3928.3		16.4	2.0	239.5		78.6
75	LPI	221.32		17.46		3864.3		23.0	3.7	168.0		143.0
76	Carlsbg	308.08		12.24		3770.9		19.5	5.1	193.4		192.3
77	SunReit	2923.69		1.25		3654.6		8.9	6.6	410.6		241.2
78	MSM	702.98		5.10		3585.2		17.7	3.7	202.6		132.7
79	Top Glove	620.53		5.73		3555.6		18.1	2.8	196.4		99.6
80	Bintulu Port	460.00		7.50		3450.0		20.5	4.0	168.3		138.0
81	QL	832.02		4.10		3411.3		25.9	1.1	131.7		37.5
82	Mah Sing	1413.61		2.27		3208.9		9.9	2.7	324.1		86.6
83	Parkson	1093.90		2.86		3128.6		12.9	6.3	242.5		197.1
84	Dayang	550.00		5.66		3113.0		30.5	1.8	102.1		56.0
85	Dlady	64.00		47.30		3027.2		24.5	5.5	123.6		166.5
86	Pos	537.03		5.57		2991.2		19.7	3.1	151.8		92.7
87	Shang	440.00		6.78		2983.2		44.3	1.5	67.3		44.7
88	SOP	438.20		6.65		2914.1		21.5	0.9	135.5		26.2
89	Media	1100.46		2.62		2883.2		13.5	5.0	213.6		144.2
90	IJMPlnt	802.23		3.48		2791.8		23.3	2.0	119.8		55.8
91	TSH	903.83		2.92		2639.2		31.4	0.9	84.1		23.8
92	Kossan	639.47		4.10		2621.8		25.1	1.4	104.5		36.7
93	UOADev	1339.78		1.87		2505.4		7.6	6.4	329.7		160.3
94	CMMT	1772.82		1.40		2481.9		9.9	6.0	250.7		148.9
95	HLCap	246.90		10.00		2469.0		26.1	0.0	94.6		0.0
96	Kseng	362.09		6.73		2436.9		28.7	1.5	84.9		36.6
97	BJCorp	4299.56		0.56		2407.8		29.6	1.8	81.3		43.3
98	WCT	1092.46		2.14		2337.9		5.5	1.8	425.1		42.1
99	CMSB	339.70		6.78		2303.2		16.0	2.5	144.0		57.6
100	Zhulian	460.00		4.93		2267.8		19.4	3.1	116.9		70.3

1 billion = 1000m Total Market Cap (RM m) 1,404,453.40 1,404.5  billion Total Market Earnings (m) 81,920.85 81.9 billion Total Market Dividends (m) 44,611.00 44.6 billion Market PE 17.1 Market DY 3.2% Market Earnings Yield 5.8% My thanks to Amy for the hard work.

Asking the ONE most important question: How much cash can be generated from the business?

Asking the ONE most important question: How much cash can be generated from the business?

If a businessperson is asked about what goes into consideration when purchasing a business, the number one answer should be:

How much cash can be generated from the business?


Other answers, though important, are of secondary importance, such as:

What is the business worth?
Who is the biggest competitor?
What is motivating the seller of the business?


Therefore, the businessperson when purchasing a business should examine the business aspects of his investments.  This involves looking at:

1.  the income statements
2.  the capital reinvestment requirements, and
3.  the cash generating capabilities of the business or investments.

The only 2 classes that an investment student needs to take

Buffett believes that investment students need only two well-taught classes:

1.  How to Value a Business?

2.  How to Think about Market Prices?

Return on Equity (ROE) - the financial metric that investors should use to judge a company's annual performance

Buffett considers earning per share a smoke screen.

Most companies will retain a portion of their previous year's earnings as a way to increase their equity base.

Warren Buffett believes there is nothing spectacular about a company that increases earning per share by 10% if, at the same time, the company is growing its equity base by 10%.

He says this is no different than putting money in a savings account and letting the interest accumulate and compound.

Buffett prefers return on equity to earnings per share when analyzing a company.

He will make appropriate adjustments to the reported earnings to give a clear picture of how returns were generated as a return on business operations.

Buffett believes a business should achieve good return on equity while employing little or no debt.

Most investors judge annual performance by focusing on earnings per share.

According to Buffett, the proper way to judge a company's performance is though focusing on return on equity.

Return on equity is a better measure of annual performance because it takes into consideration a company's growing capital base.

Buffett uses ROE as his preferred financial metric to judge a company's annual performance; investors should do likewise.

The question of how to allocate profits is linked to where a company is in its life cycle

One of the most important decisions management makes is how to allocate profits.

The decision of what to do with earnings is linked to where a company is in its life cycle.

The question of how to allocate profits is linked to where a company is in its life cycle.

1.  Development Stage

In the development stage, a company loses money as it develops products and establishes markets.

2.  Rapid Growth Stage.

The next stage would be rapid growth, in which a company is profitable but growing so fast that it may need to retain all earnings and also borrow funds or issue equity to finance this growth.

3.  Maturity and Decline

In later stages, maturity and decline, a company will continue to generate excess cash, and the best use of this cash may be allocating it to shareholders.

My equity bond (Nestle)

Nestle Malaysia

Latest after-tax ttm-EPS is $2.39 per share

Nestle's underlying earnings are so consistent.

And Nestle is growing its earnings at about 8% per year.

A company with a durable competitive advantage, over time, the stock market will price the company's equity bonds or shares at a level that reflects the value of its earnings relative to the yield on long-term risk free interest rate.

Capitalized at the risk free interest rate of 3.5%, Nestle's after-tax earning of $2.39 per share is worth approximately $68.30 per equity bond/share.  ($2.39/3.5% = $68.30).


Here is a difference worth noting. 

Nestle is worth $68.30 per share  and it is trading today at around $68.00.  Therefore, for the Graham-based value investors, who wants to buy only at $40 per share, Nestle is not "undervalued"

But for those who are willing to apply their reasoning or thinking cap, just take a look at this scenario.

1.  You are being offered a relatively risk-free initial after-tax rate of return of 3.5% today when you buy at $68.30 sen per share.

2.  This after-tax rate of return is expected to increase over the next 20 years at an annual rate of approximately 8% per year.

3.  Then ask this question:  Is this an attractive investment given the rate of risk and return on other investments?

4.  What other attractive investment give the rate of risk and return of this nature?




I bought a long time ago at $10.20 per share

Thus, Nestle is my equity bond or share that is currently giving an after-tax yield of 23.4% ($2.39 / $10.20 = 23.4%) that is relatively risk-free and which is expected to increase over the next 20 years at an annual rate of approximately 8%. 

The Great, Good and Gruesome Businesses of Buffett

Buy good quality companies with durable competitive advantage and trustworthy managers and holding them for the long term. Just buy them at fair or bargain prices and never at high prices.

"It is better to own the great companies at good prices, than the good companies at great prices."

Here is a nice table summarizing the great, good and gruesome companies according to Buffett.

Let me give you some pointers:

1. Select a small cap stock.

2. The one that you have the confidence that it will grow its revenues and earnings for many many years to come.

3. The one with some durable competitive advantage (it can be difficult in early years to notice or identify this).

4. Get into this early.

5. Continue to monitor its performance.










Yes, you can hold for the long term too.

For this you need to assess its quality (both qualitative and quantitative, and the management).

Don't be too focus on the price of the shares (the least important in your assessment).

The Magic of Compounding - Buffett's story

Wealth takes time.

Charlie Munger, Warren Buffett's investing partner, put it best: "You don't have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time."
 
Warren Buffett is a great investor, but what makes him rich is that he's been a great investor for seven decades. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His skill is investing, but his secret is time.
 
Understanding the value of time is the most important lesson in all of finance. The single best thing we can do to improve the financial state of Americans is encourage people to save from as early an age as possible.




Buffett's wealth

For this discussion:  1 billion = 1,000 million.

He was born on 30th August 1930.

2014  Age 83  - $60 billion net worth

1990  Age 60 -  $ 3 billion net worth.

1980  Age 50 -  $0.3 billion or $300 million net worth



1980 - 1990
CAGR 25.89% over 10 years


1990 - 2014
CAGR 13.29% over 24 years

A billion is equal to how many million?

Answer:

In the 'short scale' a billion is 1000 million. The short scale is the system officially used in the USA, the UK and most English-speaking countries. 

In the 'long scale' it is a million million. More or less the rest of the world supposedly uses this terminology.

One million (1,000,000) or one thousand thousand.
One billion (1,000,000,000) or one million thousand.    

1. The cardinal number equal to 10⁹.
2. Chiefly British The cardinal number equal to 10¹²

.http://wiki.answers.com/Q/A_billion_is_equal_to_how_many_million

The Most Successful Dividend Investors of all time

Dividend investing is as sexy as watching paint dry on the wall. Defining an entry criteria that selects quality dividend stocks with rising dividends over time and then patiently reinvesting these dividends while sitting on your hands is not exciting. While active traders have a plethora of hedge fund managers on the covers of Forbes magazine there are not many well-publicized successful dividend investors. Even value investing has its own superstars – Ben Graham and Warren Buffett.

I did some research and uncovered several successful dividend investors, whose stories provide reassurance that the traits of successful dividend investing I outlined in a previous post are indeed accurate.

The first investor is Anne Scheiber, who turned a $5,000 investment in 1944 into $22 million by the time of her death at the age of 101 in 1995. Anne Scheiber worked as an IRS auditor for 23 years, never earning more than $3150/year. The one important lesson she learned auditing tax returns was that the surest way to become rich in America is by accumulating stocks. She accumulated stocks in brand name companies she understood and then reinvested dividends for decades. She never sold, in order to avoid paying taxes and commissions. She also never sold even during the 1972-1974 bear market as well as the 1987 market crash because she had high conviction in her stocks picks. She also held a diversified portfolio of almost 100 individual securities in brand names such as Coca-Cola (KO), PepsiCo (PEP), Bristol-Myers (BMY), Schering Plough (acquired by Pfizer in 2009). She read annual reports with the same inquisitive mind she audited tax returns during her tenure at the IRS and also attended annual shareholders meetings. Anne Scheiber did her own research on stocks, and was focusing her attention on strong franchises which have the opportunity to increase earnings and pay higher dividends over time.

In her later years she reinvested her dividends into tax free municipal bonds, which is why her portfolio had a 30% allocation to fixed income at the time of her death. At the time of her death, her portfolio was throwing off $750,000 in dividend and interest income annually. She donated her whole fortune to Yeshiva University, even though she never attended it herself.

The second investor is Grace Groner, who turned a small $180 investment in 1935 into $7 million by the time of her death in 2010. Ms Groner, who worked as a secretary at Abbott Laboratories for 43 years invested $180 in 3 shares of Abbott Laboratories (ABT) in 1935. She then simply reinvested the dividends for the next 75 years. She never sold, but just held on to her shares.

She was frugal, having grown up in the depression era, and was the classical millionaire next door type of person who was not interested in keeping up with the Joneses. Grace Groner left her entire fortune to her Alma Mater. Her $7 million donation is generating approximately $250,000 in annual dividend income.

The reason why dividend investors are not highly publicized is because dividend investing is not sexy enough to be featured in the financial mainstream media. In addition to that, it is not profitable for Wall Street to sell you into the idea that ordinary investors can invest on their own. Compare this to mutual funds, annuities and other products which generate billions in commissions for Wall Street, despite the fact that they might not be in the best interest of small investors.

The third dividend investor is Warren Buffett, the Oracle of Omaha himself. In a previous article I have outlined the reasoning behind my belief that Buffett is a closet dividend investor. He explicitly noted in his 2009 letter that "the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow". His investment in See's Candy is the best example of that.

Some of Buffett's best companies/stock that he has owned such as Geico, Coca Cola , See's Candy are exactly the types of investments mentioned above. He has mentioned that at Berkshire he tries to stick with businesses whose profit picture for decades to come seems reasonably predictable. Per Buffett the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. In addition, his 2011 letter discussed his dividend income from all of Berkshire Hathaway investments, including his prediction that Coca Cola dividends will keep on increasing, based on the pattern of historical dividend increases.

In this article I outlined three dividend investors, who managed to turn small investments into cash machines that generated large amounts of dividends. They were able to accomplish this through identifying quality dividend growth companies at attractive valuations, patiently reinvesting distributions and in two out of three cases maintaining a diversified portfolio of stocks. These are the lessons that all investors could profit from.

http://www.dividendgrowthinvestor.com/2012/06/most-successful-dividend-investors-of.html

Temporary Price Fluctuations is to be expected. It is not possible to avoid random short-term market volatility.

Relevance of Temporary Price Fluctuations 

In addition to the probability of permanent loss attached to an investment, there is also the possibility of interim price fluctuations that are unrelated to underlying value. 

Many investors consider price fluctuations to be a significant risk: if the price goes down, the investment is seen as risky regardless of the fundamentals.


But are temporary price fluctuations really a risk?  

-  Not in the way that permanent value impairments are and then only for certain investors in specific situations. 

-  It is, of course, not always easy for investors to distinguish temporary price volatility, related to the short-term forces of supply and demand, from price movements related to business fundamentals.

-  The reality may only become apparent after the fact. 

-  While investors should obviously try to avoid overpaying for investments or buying into businesses that subsequently decline in value due to deteriorating results, it is not possible to avoid random short-term market volatility.

-  Indeed, investors should expect prices to fluctuate and should not invest in securities if they cannot tolerate some volatility. 



If you are buying sound value at a discount, do short-term price fluctuations matter? 

-  In the long run they do not matter much; value will ultimately be reflected in the price of a security.

-  Indeed, ironically, the long-term investment implication of price fluctuations is in the opposite direction from the near-term market impact. 

-  For example, short-term price declines actually enhance the returns of long-term investors.



There are,however, several eventualities in which near-term price fluctuations do matter to investors. 

1. Security holders who need to sell in a hurry are at the mercy of market prices. 

- The trick of successful investors is to sell when they want to, not when they have to.


2.  Near-term security prices also matter to investors in a troubled company. 

-  If a business must raise additional capital in the near term to survive, investors in its securities may have their fate determined, at least in part, by the prevailing market price of the company's stock and bonds.


3. The third reason long-term-oriented investors are interested in short-term price fluctuations is that Mr. Market can create very attractive opportunities to buy and sell. 

-  If you hold cash, you are able to take advantage of such opportunities. 

-  If you are fully invested when the market declines, your portfolio will likely drop in value, depriving you of the benefits arising from the opportunity to buy in at lower levels.

-  This creates an opportunity cost, the necessity to forego future opportunities that arise
.
-  If what you hold is illiquid or unmarketable, the opportunity cost increases further; the illiquidity precludes your switching to better bargains.



www.safalniveshak.com

Buffett investment thought process

Answering the following questions will guide you through the Buffett investment thought process.

QUALITY AND MANAGEMENT ANALYSIS

1.  Does the company have an identifiable durable competitive advantage?

2.  Do you understand how the product works?

3.  If the company in question does have a durable competitive advantage and you understand how it works, then what is the chance that it will become obsolete in the next twenty years?

4.  Does the company allocate capital exclusively in the realm of its expertise?

5.  What is the company's per share earnings history and growth rate?

6.  Is the company consistently earning a high return on equity?

7.  Does the company earn a high return on total capital?

8.  Is the company conservatively financed?

9.  Is the company actively buying back its shares?

10.  Is the company free to raise prices with inflation?

11.  Are large capital expenditures required to update plant and equipment?

PRICE ANALYSIS

12.  Is the company's stock price suffering from a market panic, a business recession, or an individual calamity that is curable?

13.  What is the initial rate of return on the investment and how does it compare to the return on risk free Treasury Bonds?

14.  What is the company's projected annual compounding return as an equity/bond?

15.  What is the projected annual compounding return using the historical annual per share earnings growth?

Making investing enjoyable, understandable and profitable… A Simple and Obvious Approach

Making investing enjoyable, understandable and profitable…

Is it not true, that the really big fortunes from common stocks have been garnered by those 

• who made a substantial commitment in the early years of a company in whose future they had great confidence and who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?

The answer is "Yes."

Most valuations (even good ones) are wrong

Now this can be shocking to you if you spend a lot of time arriving at that magical number (intrinsic value) that helps you ascertain whether you must buy a stock or not.

Damodaran talks about three kinds of errors that cause most valuations – even the ones “meticulously” calculated – to go wrong:

1. Estimation error…that occurs while converting raw information into forecasts.
2. Firm-specific uncertainty…as the firm may do much better or worse than you expected it to perform, resulting in earnings and cash flows to be quite different from your estimates.
3. Macro uncertainty…which can be a result of drastic shifts in the macro-economic conditions that can also impact your company.

The year 2008 is one classic example when most valuations – even the good ones – went horribly wrong owing to the last two factors – firm-specific and macro uncertainties.

As Damodaran writes…

While precision is a good measure of process in mathematics or physics, it is a poor measure of quality in valuation.

So, to value or not value?
Knowing that your valuation could be wrong (and in most cases, it would be) despite any kind of precision you employ in your calculations, it should not lead you to a refusal to value a business at all.

This makes no sense, since everyone else looking at the business faces the same uncertainty.

Instead what you must do to increase the probability of getting your valuations right is…

1. Stay within your circle of competence and study businesses you understand. Simply exclude everything that you can’t understand in 30 minutes.
2. Write down your initial view on the business – what you like and not like about it – even before you start your analysis. This should help you in dealing with the “I love this company” bias.
3. Run your analysis through your investment checklist. A checklist saves life…during surgery and in investing.
4. Avoid “analysis paralysis”. If you are looking for a lot of reasons to support your argument for the company, you are anyways suffering from the bias mentioned above.
5. Calculate your intrinsic values using simple models, and avoid using too many input variables. In fact, use the simplest model that you can while valuing a stock. If you can value a stock with three inputs, don’t use five. Remember, less is more.
6. Use the most important concept in value investing – ‘margin of safety’. Without this, any valuation calculation you perform will be useless.

At the end of it, Damodaran writes…

Will you be wrong sometimes? Of course, but so will everyone else. Success in investing comes not from being right but from being wrong less often than everyone else.

So don’t justify the purchase of a company just because it fits your valuation. Don’t fool yourself into believing that every cheap stock will yield good returns. A bad company is a bad investment no matter what price it is.

Charlie Munger explains that – “a piece of turd in a bowl of raisins is still a piece of turd”…and…“there is no greater fool than yourself, and you are the easiest person to fool.”

So, get going on valuing stocks…but when you find that the business is bad, exercise your options.

Not a call or a put option, but a “No” option.

Have you ever avoided buying a stock you “loved” because its valuations were not right? 

http://www.safalniveshak.com/avoid-2-bitter-truths-of-stock-valuations/

2 Bitter Truths of Stock Valuation

1. All valuations are biased

2. Most valuations (even good ones) are wrong

How to find “conservative” investments? The ones with the greatest probability of preserving your purchasing power and with the least amount of risk.

Buffett resisted buying large and popular companies because he thought this category was valued irrationally by investors. But then, he was not in favour of buying small, unproven companies as well. As he wrote in his 2010 letter…

At Berkshire, we make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it.

Instead, we try to apply Aesop’s 2,600-year-old equation to opportunities in which we have reasonable confidence as to how many birds are in the bush and when they will emerge (a formulation that my grandsons would probably update to “A girl in a convertible is worth five in the phonebook.”).

Obviously, we can never precisely predict the timing of cash flows in and out of a business or their exact amount. We try, therefore, to keep our estimates conservative and to focus on industries where business surprises are unlikely to wreak havoc on owners.

Even so, we make many mistakes: I’m the fellow, remember, who thought he understood the future economics of trading stamps, textiles, shoes and second-tier department stores.

This reiterates Buffett’s key definition of conservatism over these years – conservatism depends on how you choose and not what you choose.

In other words, investing conservatively is not about simply identifying large well-known businesses, but going through a process that identifies why a particular company qualifies as a conservative investment.

As Buffett would want you to understand, there is one simple way to look at a conservative investment.

Conservative investment = Preservation of capital

A conservative investment is one that has the greatest probability of preserving your purchasing power and with the least amount of risk.

This probability can in turn arise from the process that you follow to identify such opportunities that will preserve your purchasing power in the future.

So, where most investors fail in attempting to invest “conservatively” is blindly assuming that by purchasing any security that qualifies as a conservative investment, they are in fact, conservative investors.

In other words, such investors are thinking conservatively, but not acting conservatively.

If you indulge in such things, it could prove to be a costly affair.

Here is what Buffett wrote in 1965…

Truly conservative actions arise from intelligent hypotheses, correct facts and sound reasoning. These qualities may lead to conventional acts, but there have been many times when they have led to unorthodoxy. In some corner of the world they are probably still holding regular meetings of the Flat Earth Society.

We derive no comfort because important people, vocal people, or great numbers of people agree with us. Nor do we derive comfort if they don’t. A public opinion poll is no substitute for thought. When we really sit back with a smile on our face is when we run into a situation we can understand, where the facts are ascertainable and clear, and the course of action obvious. In that case – whether other conventional or unconventional – whether others agree or disagree – we feel – we are progressing in a conservative manner.

The above may seem highly subjective. It is. You should prefer an objective approach to the question. I do. My suggestion as to one rational way to evaluate the conservativeness of past policies is to study performance in declining markets.

http://www.safalniveshak.com/wit-wisdom-warren-part5/

Emotional Intelligence

You don’t need to be a rocket scientist. 

Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.

This is also what Buffett says. 

Of course, some knowledge about finance is important before investing in the stock markets, but this knowledge alone won’t be of any help to you.

What you also need is emotional intelligence while investing in stock.

Emotional intelligence is the ability to identify, assess, and control your own emotions.