Compounding (3)

https://am.jpmorgan.com/gb/en/asset-management/gim/adv/insights/principles-for-successful-long-term-investing

Compounding (2)

Compounding

Stock Market as a Compounding Machine and a Hedge against Inflation

The Importance of Saving Early

Market PE of Bursa Malaysia on 2.11.2017

Market PE and DY of Bursa Malaysia on 2/11/2017.
KLCI  1742.49
Company	Market Cap (billion)	Last Price	PE	DY	ROE	Net Inc (m)	DIV (m)	DPO
AMBANK (1015)	13.021	4.32	9.79	4.07	8.14	1330.0	530.0	0.40
ASTRO (6399)	14.703	2.82	19.92	4.43	108.1	738.1	651.3	0.88
AXIATA (6888)	48.591	5.4	81.94	1.48	2.31	593.0	719.1	1.21
BAT (4162)	11.01	38.56	15.72	7.21	164.6	700.4	793.8	1.13
CIMB (1023)	55.852	6.17	13.42	3.24	8.82	4161.8	1809.6	0.43
DIGI (6947)	38.253	4.92	25.65	4.25	274	1491.3	1625.8	1.09
GENM (4715)	29.809	5.02	10.8	3.29	13.62	2760.1	980.7	0.36
GENTING (3182)	34.936	9.07	12.57	1.38	7.84	2779.3	482.1	0.17
HAPSENG (3034)	23.104	9.28	21.86	3.77	17.92	1056.9	871.0	0.82
HLBANK (5819)	34.51	15.92	16.09	2.83	8.92	2144.8	976.6	0.46
HLFG (1082)	19.164	16.7	12.72	2.28	9.04	1506.6	436.9	0.29
IHH (5225)	46.221	5.61	50.4	0.53	4.14	917.1	245.0	0.27
IJM (3336)	11.502	3.17	17.3	2.37	7.02	664.9	272.6	0.41
IOICORP (1961)	28.026	4.46	37.7	2.13	9.94	743.4	597.0	0.80
KLCC (5235SS)	14.208	7.87	16.14	4.53	6.87	880.3	643.6	0.73
KLK (2445)	26.133	24.48	22.96	2.04	10.01	1138.2	533.1	0.47
MAXIS (6012)	46.629	5.97	21.82	3.35	31.09	2137.0	1562.1	0.73
MAYBANK (1155)	99.378	9.22	13.22	5.64	10.33	7517.2	5604.9	0.75
MISC (3816)	31.202	6.99	16.45	4.29	5.18	1896.8	1338.6	0.71
PBBANK (1295)	79.429	20.46	14.53	2.83	15.14	5466.6	2247.8	0.41
PCHEM (5183)	58.8	7.35	14.21	2.59	14.9	4137.9	1522.9	0.37
PETDAG (5681)	24.042	24.2	23.82	2.89	18.89	1009.3	694.8	0.69
PETGAS (6033)	35.855	18.12	20.18	3.42	14.55	1776.8	1226.2	0.69
PPB (4065)	19.822	16.72	14.96	1.5	6.33	1325.0	297.3	0.22
RHBBANK (1066)	20.211	5.04	11.43	2.38	7.83	1768.2	481.0	0.27
SIME (4197)	61.82	9.09	26.23	2.53	6.31	2356.8	1564.0	0.66
TENAGA (5347)	84.206	14.88	12.2	2.15	12.09	6902.1	1810.4	0.26
TM (4863)	23.074	6.14	30.56	3.5	9.83	755.0	807.6	1.07
WPRTS (5246)	12.617	3.7	21.18	3.78	27.95	595.7	476.9	0.80
YTL (4677)	13.747	1.26	17.26	7.54	5.18	796.5	1036.5	1.30
TOTAL MARKET	1059.87		17.1	3.1%		62047	32839	0.53

Market PE    17.1
Market DY   3.1%
KLCI  1,742.49 2.11.2017 =============== Compare this with the past.

Date	Market PE	Market DY	KLCI
2.11.2017	17.1	3.10%	1742.49
3.1.2014	17.1	3.20%	1804.03
7.6.2013	16.2	3.47%	1775.59
11.1.2013	16.6	3.17%	1682.7
19.10.2012	17.7	2.90%	1666.35
15.12.2011	15.1	3.42%	1464.11
6.1.2011	17.2	3.00%	1568.37
5.10.2010	17.5	5.70%	1462.27
10.2.2010	18.8	3.03%	1246.17
3.7.2009	10.2	3.71%	1153.7

Warren Buffett's Ground Rules (Words of Wisdom from the Partnership)

Warren Buffett set some ground rules for those who joined his earliest partnership in Omaha.  The new partners were each carefully taken through the ground rules.

"These ground rules are the philosophy.  If you are in tune with me, then let's go.  If you aren't, I understand."

THE GROUND RULES

1.  In no sense is any rate of return guaranteed to partners.  Partners who withdraw one-haLf of 1% monthly are doing just that - withdrawing.  If we earn more than 6% per annum over a period of years, the withdrawals will be covered by earnings and the principal will increase.  If we don't earn 6%, the monthly payments are partially or wholly a return of capital.

2.  Any year in which we fail to achieve at least a plus 6% performance will be followed by a year when partners receiving monthly payments will find those payments lowered.

3.  Whenever we talk of yearly gains or losses, we are talking about market values; that is, how we stand with assets valued at market at year end against how we stood on the same basis at the beginning of the year.  This may bear very little relationship to the realized results for tax purposes in a given year.

4.  Whether we do a good job or a poor job is not to be measured by whether we are plus or minus for the year.  It is instead to be measured against the general experience in securities as measured by the Dow-Jones Industrial Average, leading investment companies, etc.  If our record is better than that of these yardsticks, we consider it a good year whether we are plus or minus.  If we do poorer, we deserve the tomatoes.

5.  While I much prefer a five-year test, I feel three years is an absolute minimum for judging performance.  It is a certainty that we will have years when the partnership performance is poorer, perhaps substantially so, than the Dow.  If any three-year or longer period produces poor results, we all should start looking around for other places to have our money.  An exception to the latter statement would be three years covering a speculative explosion in a bull market.

6.  I am not in the business of predicting general stock market or business fluctuations.  If you think I can do this, or think it is essential to an investment program, you should not be in the partnership.

7.  I cannot promise results to partners.  What I can and do promise is that:
     a.  Our investments will be chosen on the basis of value, not popularity;
     b.  That we will attempt to bring risk of permanent capital loss (not short term quotational loss) to an absolute minimum by obtaining a wide margin of safety in each commitment and a diversity of commitments; and
     c.  my wife, children and I will have virtually our entire net worth invested in the partnership

Why few traders make money? What lessons can we learn from them?

Quote:  "I am sure you will come across relatives or friends who have traded the markets for ages but ended up generating more losses than profits.   Accumulation of trading losses over years not only hurt one's financial well-being but is also psychologically damaging as one's self-confidence is eroded along with growing losses.  Eventually these traders quit the markets when they can't tolerate the losses anymore. "

What contributed to their losses and what lessons can we learn from them?

Their mistakes:

1. Not cutting losses
2. Taking profits too early
3. Having too many stocks
4. Having non-existent or wrong trading rules
5. Borrowing money to trade/trade on contra
6. Not doing enough homework
7. Initiating positions based on tips
8. Not understanding the risks being taken
9. Buying high and selling low
10. Not reviewing after each trade

Ref:  Jumpstart in Stocks and Future Trading

Choong Ty'ng Ty'ng

My comment:  One of the better book I have read on this topic of trading.

"I think I could make you 50% a year on $1 million. No, I know I could." (Warren Buffett)

"If I were running $1 million, or $10 million for that matter, I'd be fully invested.  The highest rates of return I've ever achieved were in the 1950's.  I killed the Dow.  You ought to see the numbers.  But I was investing peanuts back then.  It's a huge structural advantage not to have a lot of money.  I think I could make you 50% a year on $1 million.  No, I know I could.  I guarantee that."

-  Warren Buffett, Businessweek, 1999.

Guide to the economic report and budget 2018.

The budget in a nutshell

Wednesday, 25 Oct 2017

AllianceDBS Research chief economist Manokaran Mottain said Budget 2018 would see the introduction and expansion of initiatives to support private consumption growth, while maintaining the commitment towards fiscal consolidation

PETALING JAYA: Every year from around the start of October, the media carries stories on the annual tabling of the Federal Government’s budget to inform and get a feel for what the ground needs.

Many people struggle to make sense of the reams of information from the news reports and expert opinions, especially on the economy, that come out over the weeks prior to the tabling of the budget, usually on the last Friday of October.

The information and stories include what will be published in the Economic Report, which lays out the state of the economy for the current year and forecasts for the coming year.

The budget showcases the Federal Government’s initiatives and measures for the upcoming fiscal year. Information from the Economic Report will be made public as the budget is being tabled.


AllianceDBS Research chief economist Manokaran Mottain said Budget 2018 would see the introduction and expansion of initiatives to support private consumption growth, while maintaining the commitment towards fiscal consolidation.

According to him, the Government will likely set a growth target of at least 5% for 2018 vis-a-vis the projected range of 4.3% to 4.8% GDP growth for 2017.

The Government will also likely revise the 2017 growth projection, following an impressive performance of 5.7% GDP growth in the first half of this year, thanks to improved conditions both domestically and externally.

Inflation remains a concern, as it will drive up the cost of living and cap consumer spending in the country. For 2017, inflation, as measured by the rise in the consumer price index (CPI), will likely be in the range of 3% to 4%.

The Government will likely project CPI to be below 4% next year.

Improving global crude oil prices, an important contributor to the Government’s revenue stream, will be good news, as this would mean more income from petroleum-related taxes and dividend income from Petroliam Nasional Bhd.

Revenue projections could rise for Budget 2018 on higher crude oil prices when compared with the oil price assumption of US$45 per barrel for this year.

Because the general election will be held next year, economists expect spending to be ramped up. Operating expenditure will likely increase on higher civil servant increments and bonuses in addition to other goodies, while development expenditure to support economic growth will also be expected to increase on the implementation of various infrastructure projects.

Manokaran expected development expenditure allocated for next year to accelerate the implementation of ongoing infrastructure projects such as the East Coast Rail Line, the Pan-Borneo Highway, the Kuala Lumpur-Singapore high-speed railway, the Mass Rapid Transit Line 2, and the Light Rail Transit Line 3. Such spending will benefit construction companies.

Despite increased expenditure, economists said the Government would likely remain on track with fiscal consolidation.

For Budget 2018, Manokaran expected budget deficit to be lowered to 2.8% of GDP, compared with the projected 3% of GDP in 2017, thanks to higher revenue.

Manokaran said Budget 2018 would include measures to contain government indebtedness below the self-imposed limit of 55% of GDP. He expected government debt-to-GDP to be contained within 53% of GDP for this year.

Meanwhile, the Government’s contingent liability level will remain steady at around 15% of GDP next year, as it has been since 2013, despite the increase in the infrastructure bill.

Malaysia’s standing as the second-largest producer of CPO means that the Government’s projections for CPO prices will also be closely watched because this will have an impact on export revenue.

Manokaran expected prices to remain range-bound next year compared with the estimated average of RM2,500 per tonne this year.

Given the country’s reliance on exports, an improving external trade landscape driven by demand for manufactured products next year would mean higher exports growth compared with the 2.5% growth this year, he pointed out.

Lastly, Malaysia’s current account surplus next year is expected to improve marginally on expectations of higher surplus in the goods account.

The Government has projected the country’s current account surplus to narrow to around 0.5% to 1.5% of gross national income (GNI) in 2017 from 1% to 1.5% of GNI in the preceding year on lower surplus in the goods accounts and continued deficit in the services and income accounts.


Read more at http://www.thestar.com.my/business/business-news/2017/10/25/everymans-guide-to-the-economic-report-and-budget-2018-the-budget-in-a-nutshell/#VqO2YdZU3AGg63TX.99


============

Lim Sue Goan is deputy executive chief editor of Sin Chew Daily.

Time to banish outdated budget model
October 26, 2017

Writer says country will face another dilemma if government distributes candies to please voters instead of allocating resources for creation of a better tomorrow

By Lim Sue Goan

Year after year, the annual budget has been working on the model of government allocating a whole year’s resources as per its revenue.

The Budget 2018 to be tabled in the Dewan Rakyat tomorrow will be the last budget before the general election, and it is therefore anticipated that the government will carry on with the same old modus operandi this year and may even allocate a bigger chunk of resources to specific target groups.
The government’s tax revenue is expected to increase by 4% to RM228.5 billion next year while total expenditure is expected to top RM270 billion for a 21st consecutive year of budgetary deficit.
How will this RM270 billion be distributed?

Operating expenditure will have the lion’s share at RM223.6 billion. Total remuneration for the country’s 1.6 million-strong army of civil servants stands at RM77.4 billion this year, while 775,000 retired civil servants will get RM23.2 billion, taking the total spent on civil servants to at least RM100 billion, with the remaining sum going to department operating expenses.
Development expenditure is expected to stay at RM46 billion next year.

Health Minister S Subramaniam has complained that the RM23 billion allocated to his ministry has not been enough, while other government departments are making the same requests for higher allocations.

For example, Defence Minister Hishammuddin Hussein has said he would arrange for military chiefs to meet Prime Minister Najib Razak to propose a higher defence allocation.

Meanwhile, Cuepacs has been rather unhappy with the RM500 annual handouts for civil servants over the past several years, and has been asking the government for at least one and a half months of bonus and additional allowances for urban civil servants.

The government has forked out RM1.19 billion on RM500 financial assistance for civil servants, and if it were to offer 1.5 months of bonus to each of them, the expenditure will instantly shoot up by billions of ringgit.

Indeed the country’s resources are limited while demands for more allocations continue to be heard.
If the government allocates more for civil servants, government departments and the Bottom 40% group (B40), it will mean less is available for those in the M40 group.

It would also not be surprising if many departments see their wishlists unfulfilled.

It is anticipated that the government will continue to offer tax rebates to please the M40 in a bid to relieve their financial burden.

But such assistance will not significantly reduce the financial pressure of the people in view of the skyrocketing prices of goods.

The CPI rose 4.3% in September, squeezing the people’s buying power and further dampening market sentiment. As a result, vehicle sales plummeted 21% month-on-month in September.
Going further, this will depress the overall market in the long run, and what the national economy needs most at this moment are some real solutions that will take the country out of the current doldrums.

Unfortunately, our leaders have hardly seen this problem and are continuously basking in the feel-good atmosphere of sustained economic expansion and salary growth.

The PM has quoted EPU data in saying that the monthly household income of B40 jumped by a robust 76% from 2009 to 2014, and almost 60% for the M40.

The government’s economic development strategy has been established upon the multiplier effects from mega projects such as Klang Valley MRT, Greater Kuala Lumpur, ECRL, KL-Singapore HSR, Pan-Borneo Highway and Digital Free Trade Zone projects. But, we cannot solely depend on these infrastructural projects.


The country’s development needs to be more all-rounded.

Indeed, we need a clear and targeted economic blueprint around which the government’s fiscal budgets must be evolved so that our resources will be more effectively utilised to achieve our long-term goals and aspirations.

However, all that we have seen in past budgets are chaotic and clueless pluses and minuses. For instance, allocations for the Prime Minister’s Department have been increased at the expense of the higher education ministry.

Education is a key factor that will thrust the nation forward and by right more resources should be channeled here and other initiatives that will lift the country’s overall competitiveness, such as Industry 4.0 and artificial intelligence.

We will be plunged into another dilemma very soon if the government distributes candies just to please some voters instead of allocating the resources, including GST collection, for the creation of a better tomorrow.

The antiquated model built upon political considerations has long been outdated. We must have brand new policies and mentality or we will remain stagnant always.

Lim Sue Goan is deputy executive chief editor of Sin Chew Daily.

Bargains in Bonds and Preferred Stocks: How to profit from these bargains?

Bargains in Bonds and Preferred Stocks

The field of bargain issues extends to bonds and preferred stocks which sell at large discounts from the amount of their claim.

It is far from true that every low-priced senior issue is a bargain (there are default risks on non payment of interest and/or  principals).

The inexpert investor is well advised to eschew or stay away these completely, for they can easily burn his fingers.

There is an underlying tendency for market declines in this field to be overdone; consequently the group as a whole offers an especially rewarding invitation to careful and courageous analysis.

In the decade ending in 1948, the billion-dollar group of defaulted railroad bonds presented numerous and spectacular opportunities in this area.

Bargain-Issue Pattern in Secondary Companies (2): How to profit from these bargains?

Bargains in stocks of Secondary Companies

If secondary issues tend NORMALLY to be undervalued, what reason has the investor to hope that he can profit by such a situation?

For if this undervaluation persists indefinitely, will he not always be in the same position market wise as when he bought the issue?

The answer here is somewhat complicated.

Substantial profits from the purchase of secondary companies at bargain prices arise in a variety of ways.

1. First, the dividend return is high.
2. Second, the reinvested earnings are substantial in relation to the price paid and will ultimately affect the price.  In a five- to seven-year period these advantages can bulk quite large in a well-selected list.
3. Third, when a bull market appears, it is most generous to low-priced issues; thus it tends to raise the typical bargain issue to at least a reasonable level.
4. Fourth, even during relatively featureless market periods a continuous process of price adjustment goes on, under which secondary issues that were undervalued may rise at least to the normal level for their type of security.

An illustration of performance of undervalued securities (bargains companies)

Performance of two groups of undervalued securities selected at the beginning of 1940.

(Reference:  pp 689 and 690 of Security Analysis, by Graham and Dodd, 1940 Edition)

                                               (Excluding Dividends Received)

                                         Market Price                            Market Price

                                         Dec 31, 1939                           Dec 31, 1947

Group A 

10 Stocks

Total                                 120 5/8                                    449

Group B

10 Stocks     

Total                                  115                                         367 7/8

Total of Both Groups        236                                         817 
                                                                                         INCREASE 246%

Observations and Inferences/Conclusions

This performance is superior not only to that of the Dow-Jones list but to that of the growth-stock list as well.

Allowance should be made for the fact, that nearly all the smaller companies benefited more from the war than did the bigger ones.  

The figures, thus, prove without a doubt that under favourable conditions, bargain issues can yield a handsome profit.

His experience over many years led Benjamin Graham to assert that the average results from this area of activity are satisfactory.

Bargain-Issue Pattern in Secondary Companies (1): What led to creating these bargains?

Definition of Secondary Companies

A secondary company is one which is not a leader in a fairly important industry.

It is usually one of the smaller concerns in the field.

It may also equally be the chief unit in an unimportant line.

Any company that has established itself as a growth stock is not ordinarily considered as "secondary" company.



Stock Market's Attitude toward Secondary Companies

(a)  1920

In 1920, relatively little distinction was drawn between industry leaders and other listed issues, provided the latter were of respectable size.

The public felt that a middle-sized company

• was strong enough to weather storms and 
• that it had a better chance for really spectacular expansion than one which was already of major dimension.

(b)  Post 1931 -1933 depression

The 1931 - 1933 depression had a particularly devastating impact on companies below the first rank either in size or inherent stability.

As a result of that experience, investors have since developed a pronounced preference for industry leaders and a corresponding lack of interest in the ordinary company of secondary importance.

This has meant that the latter group has usually sold at much lower prices in relation to earnings and assets than have the former.

It has meant further that in many instances the price has fallen so low as to establish the issue in the bargain class.



No sound rational reasons for rejecting stocks of secondary companies

When investors rejected the stocks of secondary companies, even though these sold at a relatively low prices, they were expressing a belief or fear that such companies faced a dismal future.

In fact, at least subconsciously, they calculated that ANY price was too high for them because they were heading for extinction - just as in 1999 the companion theory for the "blue chips" was that no price was too high for them because their future possibilities were limitless.

Both of these views were exaggerations and were productive of serious investment errors.  

Actually, a typical middle-sized listed company is a large one when compared with the average privately-owned business.

There is no sound reason why such companies should not continue indefinitely in operation, undergoing the vicissitudes characteristic of our economy but earning n the whole a fair return on their invested capital.



The stock market's attitude toward secondary companies create instances of major undervaluation.

The stock market's attitude toward secondary companies tends to be unrealistic and consequently to create in normal times innumerable instances of major undervaluation.


As it happens, the war period and the post-war boom were more beneficial to the smaller concerns than to the larger ones, because then the normal competition for sales was suspended and the former could expand sales and profit margins more spectacularly.

• Thus by 1946 the market's pattern had completely reversed itself.  
• Whereas the leading stocks in the Dow-Jones Industrial Average had advanced only 40 percent from the end of 1938 to the 1946 high, Standard & Poor's Index of low-priced stocks had shot up no less than 280 per cent in the same period.  
• Speculators and many self-styled investors - with the proverbial short memories of people in the stock market - were eager to buy both old and new issues of unimportant companies at inflated levels.   

Thus, the pendulum had swung clear to the opposite extreme.

• The very class of secondary issues which had formerly supplied by far the largest proportion of bargain opportunities was now presenting the greatest number of examples of over-enthusiasm and overvaluation.
• If past experience can be relied upon, the post-war bull market will itself prove to have created an enlarged crop of bargain opportunities.
• For in all probability a large proportion of the new common stock offerings of that period will fall into disfavour, and they will join many secondary companies of older vintage in entering the limbo of chronic undervaluation.

The Intelligent Investor
Benjamin Graham