What dictates dividend policy?

Management determines if it is going to 

• distribute earnings in the form of a dividend or 
• reinvest all earnings to further the business plan of the company. 

The ratio of dividends paid out to investors versus the amount of earnings retained is called the payout ratio.  

The Dividend Decision

Changes in tax law and investor preference can influence decisions in the corporate boardroom regarding how much profit to retain or to pay out to investors in the form of dividends.  

However, dividend increases often lag behind an increase in earnings because management will want to be certain that a new higher dividend payment will be sustainable going forward.

Change in Dividend Yield has a lot to do with change in Share Price

Looking back over market history, we can see that dividend policy and payouts have remained relatively steady and that any change in dividend yield has had a lot more to do with the change in stock prices than with changes to dividend policy made by corporate directors.  (Note:  You can 'price' your stocks by looking at historical dividend yields.)




A cut in dividends is often perceived negatively

Management is usually very reluctant to reduce dividends because a cut is often perceived as a sign of financial weakness.  

Even during the Great Depression, companies were loath to cut dividends.  

• From 1929 to 1932, dividend yields soared because most companies maintained their dividends as stock prices collapsed in the crash.  
• But, as stock prices rose from 1933 to 1936, dividend yields fell - even though companies were actually increasing the dividends they paid.

This inverse relationship between dividend yield and price was really evident during the huge bull market run from 1982 to 1999.  

• Companies increased dividends steadily over the period, actually increasing dividends paid by almost 400 percent.  
• Yet the dividend yield collapsed to historic lows because stock prices increased by 1,500 per cent.

Some companies do run into trouble and cut or omit their dividend payments, but this is the exception rather than the rule. 



The typical dividend-paying company

The typical dividend-paying company not only maintains the dividend payout it establishes, but follows a policy of steadily increasing its dividend as earnings increase. 

Some companies increase their dividend payments 

• (1) every quarter, 
• (2) some once per year, and 
• (3) others only as profits allow.

Some companies will even pay extra or special dividends if earnings have been quite good for a number of years.


Dividend policy

Many established public companies pay cash dividends and have a dividend policy that is well known to their investors.  

Some of them have been paying cash dividends for a very long time.

The Investment shown by the DCF calculation to be the cheapest is the one that the investor should purchase.

How does Buffett value his companies?

For Buffett, determining a company's value is easy as long as you plug in the right variables: 

• the stream of cash and 
• the proper discount rate.

If he is unable to project with confidence what the future cash flows of a business will be, he will not attempt to value the company  This is the distinction of his approach.



Critics of Buffett's DCF valuation method.

Despite Buffett's claims, critics argue that estimating future cash flow is tricky, and selecting the proper discount rate can leave room for substantial errors in valuation.

Instead these critics have employed various shorthand methods to identify value:

• low price-to-earnings ratios, 
• price-to-book values and 
• high dividend yields.  

Practitioners have vigorously back tested these ratios and concluded that success can be had by isolating and purchasing companies that possess exactly these financial ratios.




Value investors versus Growth investors

People who consistently purchase companies that exhibit low price-to-earnings, low price-to-book, and high dividend yields are customarily called "value investors."

People who claim to have identified value by selecting companies with above-average growth in earnings are called "growth investors."  Typically, growth companies possess high price-to-earnings ratios and low dividend yields.  These financial traits are the exact opposite of what value investors look for in a company.



Growth and Value investing are joined at the hip.

Investors who seek to purchase value often must choose between the value and growth approach to selecting stocks.

Buffett admits that years ago, he participated in this intellectual tug-of-war.  Today he thinks the debate between these two schools of thought is nonsense.  

Growth and value investing are joined at the hip, says Buffett.

Value is the discounted present value of an investment's future cash flow; growth is simply a calculation used to determine value.




Growth can be add to and also can destroy value.

Growth in sales, earnings, and assets can either add or detract from an investment's value.

Growth can add to the value when the return on invested capital is above average, thereby assuring that when a dollar is being invested in the company, at least a dollar of market value is being created.
However, growth for a business earning low returns on capital can be detrimental to shareholders.

For example, the airline business has been a story of incredible growth, but its inability to earn decent returns on capital have left most owners off theses companies in a  poor position.



Which valuation method(s) to use?  Which stock to buy?

All the shorthand methods - high or low price-earnings ratios, price-to-book ratios, and dividend yields, in any number of combinations - fall short, Buffett says, in determining whether "an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value for his investments.............Irrespective of whether a business:

• grows or doesn't,
• displays volatility or smoothness in earnings , 
• or carries a high price or low in relation to its current earnings and book value, 

the investment shown by the discounted -flows-of-cash calculation to be the cheapest is the one that the investor should purchase.

Burned by Dubai, Mobius joins chorus of doom after property bust

Thursday, 4 Apr 2019


Mark Mobius is worried about the frenzy of construction that’s adding to the existing glut in Dubai real estate.

DUBAI: Three years ago, Mark Mobius saw his luxury apartments in Dubai go up in flames. While the suites have by now been restored to their old splendor, the investor has something else to worry about: the frenzy of construction that’s adding to the existing glut in real estate.

The downturn “will get much worse from here,” said Mobius, a pioneer in emerging-market investing, adding he’d hold off on buying more property.

“I would probably want to wait until there’s a real slump when all this new building comes in and people are really hurting to sell.”

Prices and rents have already dropped by as much as a third in the past five years during what S&P Global Ratings has called the property market’s “long decline.”

The slump will run for another 12 to 18 months because government measures to stimulate the economy -- including granting long-term visas which benefit the affluent and people with specialized expertise -- won’t be enough to revive demand, said Lahlou Meksaoui, a Dubai-based analyst at Moody’s Investors Service.

Mobius recalls how he watched on television from Singapore as revelers in Dubai rang in 2016 with fireworks shooting off the iconic Burj Khalifa.

Just steps away from the world’s tallest building, flames were engulfing Address Downtown and the two luxury apartments he owns in the 63-story tower.

Dubai, one of seven of the United Arab Emirates, lives and dies by real estate. When a property bubble burst a decade ago, it needed a $20 billion rescue from neighboring Abu Dhabi to pull back from the brink of default.

Since prices peaked in 2014, the $108 billion economy had a softer landing as it transitioned from boom to bust.

Early signs of a bottoming out in the property sector even prompted Morgan Stanley to “double-upgrade” U.A.E. stocks in February. An index tracking the city’s real-estate and construction stocks climbed 5.8 percent in the first three months of the year, snapping five quarters of losses.

But Mobius said shares of Dubai’s developers aren’t cheap enough. While the World Expo 2020 fair will reinforce the city’s position on the world map, it won’t be enough to revive the emirate’s property sector unless the government relaxes its immigration policies, he said.

“That’s where you’re going to have real problems,” he said.- Bloomberg

Read more at https://www.thestar.com.my/business/business-news/2019/04/04/burned-by-dubai-mobius-joins-chorus-of-doom-after-property-bust/#IxMsdcbKXA628xpI.99

Hyflux scraps restructuring plan after spats with investors

CORPORATE NEWS
Thursday, 4 Apr 2019


Hyflux’s catastrophic slump has spotlighted the plight of about 34,000 retail investors who were lured by the promise of a 6 percent annual return forever from a company that seemed to have a gold seal of government approval.


SINGAPORE: The embattled Singapore water and power company Hyflux Ltd. has canceled a crucial debt restructuring vote after failing to get a commitment from its would-be savior, throwing one of the country’s highest-profile distressed cases into disarray.

Hyflux’s catastrophic slump has spotlighted the plight of about 34,000 retail investors who were lured by the promise of a 6 percent annual return forever from a company that seemed to have a gold seal of government approval. Their ordeal is now even more uncertain.

The company said in a filing Thursday that it has no confidence that SM Investments Pte, the consortium of Indonesian businessmen that agreed last year to rescue Hyflux in return for a majority stake, is prepared to complete a S$530 million ($392 million) cash infusion plan that forms the core of its survival plan.

Hyflux sought “a final clear and unequivocal written confirmation” from the investor on the proposal that would have enabled voters to make an informed decision, it said.

The investor has declined to provide the company with such written confirmation, and thus repudiated the restructuring agreement, it added.

The breakdown follows public spats over some terms in the Hyflux restructuring plan as the company faces demands from creditors. The case also sparked a rare public protest over the weekend in Singapore.

“The restructuring agreement is therefore terminated and the company intends to take all necessary action in connection with such termination,” Hyflux said.

It now intends to work closely with the key creditor groups and relevant stakeholders to find mutually acceptable bases to pursue alternative opportunities, it said. - Bloomberg

Read more at https://www.thestar.com.my/business/business-news/2019/04/04/hyflux-scraps-restructuring-plan-after-spats-with-investors/#WGR1wsEwbfbfZUGy.99





Background story

Business
Once a star company, Singapore’s Hyflux faces major challenges

Hyflux, one of Singapore’s most successful business stories, has applied for court protection to begin a reorganisation of its business and address its growing pool of debt.


SINGAPORE: It had been another record year for Hyflux, as its founder and group CEO Olivia Lum described in its 2010 annual report.

That was the year when the Singapore-based water treatment specialist saw its market capitalisation peak at an eye-popping S$2.1 billion, while raking up another high in revenue and net profit on the back of rapid growth.

But fast forward eight years, and the homegrown firm sent ripples through Singapore for a very different reason.

On Tuesday (May 22), Hyflux said it had applied to the High Court to begin a court-supervised process of debt and business reorganisation – an announcement that some market observers told Channel NewsAsia “has been a long time coming”.

The company blamed “prolonged weakness” in the local power market for its financial woes, which has led to “short-term liquidity constraints in recent weeks”.

In a separate letter to stakeholders, Ms Lum, who also holds the position of executive chairman, said the decision will provide the space and time to focus on ongoing discussions with strategic investors and among other things, optimise operations.



FROM UPSTART TO ICONIC SUCCESS STORY

Founded in 1989 with S$20,000, Hyflux has since grown from a fledgling three-person start-up into a leading player in water and fluid treatment with worldwide presence employing more than 2,500 people.

Its rise was synonymous with its founder’s rags-to-riches story.

Much has been said about Ms Lum’s challenging early life. Abandoned at birth and later adopted by a widow whom she called "grandmother", Ms Lum, a Malaysian, started work from a very young age to support the family.

She was determined to do well in school and later moved to Singapore, where she graduated from the National University of Singapore and found a job as a chemist at Glaxo Pharmaceuticals.

However, she soon decided to strike it out on her own and founded Hydrochem with “a big dream and youthful idealism” to solve the world’s water problems.

The initial years of entrepreneurship weren’t easy. In various interviews done over the years, Ms Lum shared how she worked 14 hours a day to sell water treatment products and systems by knocking on the doors of factories in Singapore and Malaysia.

The company got its first break in 1992 when it obtained the exclusive rights from a supplier to distribute membranes and membrane filtration plants to industrial customers. This later paved the way for a research and development team in 1999, which aimed to make its own membranes that would set it apart from competitors.

Then came 2001 – the “defining year” when Hyflux, with Hydrochem as its wholly-owned subsidiary, made a splash by becoming the first water treatment company to be listed in Singapore. It also secured its first municipal water treatment project in Singapore to supply and install the process equipment for the country’s first Newater plant in Bedok.

Other key projects that followed included Singapore’s third Newater plant in Seletar and the SingSpring Desalination Plant, the country’s first seawater reverse osmosis desalination plant.

It also began reaching out further beyond the shores of Singapore, with projects in China, India and the Middle East North Africa (MENA) region, which included Oman and Algeria.

In 2011, Ms Lum became the first Singaporean and the first woman to be crowned the Ernst & Young (EY) World Entrepreneur of the Year award.

That year, it also clinched Singapore’s second and largest seawater desalination project, and proposed incorporating an on-site 411 megawatt combined cycle power plant to produce electricity for the desalination plant and power grid.

MULTIPLYING RISKS

But that marked the start of the company’s woes, analysts said.

Touted to be the first in Singapore and Asia, the Tuaspring Integrated Water and Power Project was expected to raise efficiency levels and reduce the cost of desalination. The power plant, which began operations in 2016, also marked Hyflux’s foray into the energy business.

It has, however, been a drag on earnings.

For the full year ended Dec 31, 2017, the integrated water and power plant registered a net loss of S$81.9 million, with wholesale electricity prices clearing at levels that are below fuel costs.

This contributed in a big way to the company’s first annual loss since listing – a loss of S$116.4 million, compared to a restated profit of S$3.8 million for FY2016.

The losing streak continued in the three months to March 31 as Hyflux logged losses of S$22.2 million, widening considerably from a restated loss of S$64,000 a year before. To turn a profit in 2018, a stronger rebound in wholesale electricity prices at a sustained pace will be needed, the company had said.

This strain in the balance sheet and financial covenants coming up may have proven too much.

The water treatment firm has a coupon payment due May 28 on its S$500 million of 6 per cent perpetual securities, which it has said it will not make. It also has S$100 million of 4.25 per cent bonds that will mature in September.

“Hyflux seems to have borrowed too much and the debt is a millstone around your neck when the environment becomes adverse,” said Associate Professor Nitin Pangarkar from the National University of Singapore (NUS) Business School.

While companies with strong balance sheets can survive these downturns, “too much debt can bring down a company”, he warned.

In the case of Hyflux, there was “too much risk” that included the oversupply and deregulation of the local electricity market. “These different sources of risk will tend to multiply.”

Agreeing, CMC Markets sales trader Oriano Lizza said Hyflux has incurred a mounting debt burden from “over-expansion into additional sectors that (the company) may not be so specialized in”.

In addition, market conditions like the massive overcapacity depressing prices and an influx of natural gas as an alternative energy source certainly did not help Hyflux to sizzle in its energy venture.

With the company having “overcapitalised too rapidly and spread itself too thin in terms of asset allocation”, Mr Lizza said Tuesday’s announcement "has been a long time coming".

For iFast’s senior fixed income analyst Ang Chung Yuh, “the speed at which things went downhill” exceeded his forecasts. He had expected Hyflux to be able to meet its obligations for the next 12 to 18 months.

Mr Ang added that he is also unsure as to why Hyflux opted for a court-driven reorganisation process, instead of first approaching creditors, including bondholders, with a proposal.

“But in any case, if management has crunched the numbers and found that it is impossible for them to come up with the money needed one or two years down the road, we think it is a good thing that management has chosen to bite the bullet now rather than later,” he added.

WHAT ARE ITS OPTIONS?

Analysts agreed that the 30-day moratorium, which kicked in automatically from the date of Hyflux’s application to court, will buy the company some much-needed time.

Mr Lizza thinks the immediate remedies for Hyflux include turning to its investors and shareholders for additional capital injection or speed up the sale of its existing loss-making assets.

“If they are able to shift these assets for cash in the short term, it will give them continued breathing space until they can balance their books.”

Hyflux said in February last year that it is exploring a partial divestment of Tuaspring, and has also been looking at a potential divestment of its Tianjin Dagang desalination plant. Alongside the release of its first-quarter financial report earlier this month, it said that divestment discussions for these two projects are in progress with interested parties.

But now that things have changed, Hyflux will have to play its cards carefully.

“The problem is that investors will be circling these assets in hope of a bargain because they know the situation that Hyflux is in,” said Mr Lizza. “If they sell too little, it won’t get them out of the current situation but if they are unwilling to budge on current prices, they won’t (get) any interest.”

“They are really in a sticky situation,” he added.

Mr Ang reckons a debt restructuring could be a “virtual certainty”.

“In our opinion, to have some chance of restoring Hyflux’s financial health for the long run, the exercise needs to involve a debt-to-equity conversion of a substantial part of the perpetual securities,” he said, adding that the firm had about S$2.4 billion of debt outstanding at end-March if the perpetual securities are taken into account.

“Short of a Government bailout, it is difficult for us to conceive a scenario where a capital injection by external investors could achieve a sustainable capital structure for Hyflux.”

Hyflux on Wednesday morning called for a suspension of trading in all its shares and related securities, which had been halted since Monday and analysts do not rule out the prospect of heavy selling when it resumes trading.

The route ahead for Hyflux will not be an easy one, experts added.

Describing the trading halt and seeking of court protection as “a broad, open admission of its festering business problems”, NUS Assoc Prof Lawrence Loh said: “Hyflux’s ongoing reorganisation move is necessary to ensure that any asset divestments will get the best value for its stakeholders, particularly creditors and shareholders.”

“While there were already market expectations for the troubles at Hyflux, the issue has probably brewed for a time much longer than necessary. Hyflux has probably seen this coming and could have been more expeditious and decisive in its restructuring efforts along the way,” he added.

As Ms Lum had forewarned in the company’s latest annual report, 2018 was going to “be another challenging year”. But with “boldness, entrepreneurial spirit, customer satisfaction focus, and teamwork”, she said she was confident of overcoming the obstacles ahead.

During a 2016 interview with Channel NewsAsia, the award-winning entrepreneur described herself as a “more optimistic person”, and that challenges and uncertainties are the norm for any business.

“I still have the hunger in me,” she said. “Every day, I still look forward to more and more exciting business opportunities and persevere to manage the challenges.”

And with that, all eyes will likely be now on the businesswoman to see if her unique brand of tenacity can reverse the fate of one of Singapore Inc’s most-visible success stories.

Source: CNA/sk
Read more at https://www.channelnewsasia.com/news/business/hyflux-singapore-court-supervision-faces-major-challenges-10260230

OCK's tower leasing to drive earnings in FY19, says RHB

ANALYST REPORTS
Friday, 5 Apr 2019



KUALA LUMPUR: OCK Group's tower leasing business will drive long-term recurring earnings for the group, says RHB research.

In a note, the research house said it expects the tower leasing business to remain the group's key growth driver, underpinned by strong orderbook for built-to-suit sites and inorganic expansion in Myanmar and Vietnam, domestic build and lease contract for U-Mobile and rising tower co-locations.

"We see a recovery in domestic contracting revenues in FY19 after the 15% YoY decline in FY18.

"We project tower leasing revenue contribution to reach 34% and >40% in FY19 and FY20 (FY18: 28%)," said RHB.


The research house also sees OCK as a key beneficiary of 5G spending on higher demand for sites and network densificaiton by the operations.

It expects the group to be well placed in securing potential fiberisation jobs falling within the scope of the National Fiberisation and Connectivity Plan given its good deployment track record.

In the meantime, OCK is planning a joint bid for a RM2bil solar farm project under the large-scale solar scheme in mid-August.

"A successful bid would bolster recurring revenues although the solar project contribution is likely to only account for less than 5% of group revenue," said RHB.

The research house maintained its buy call with a lower target price of 82 sen from 89 sen previously after incorporating the higher cost of debt at its Vietnam operations.

FY19F-20F core earnings were raised by 3-6% to build in higher lease revenue assumptions for Vietnam and Myanmar as well as the recovery in domestic contracting revenue.

Read more at https://www.thestar.com.my/business/business-news/2019/04/05/ocks-tower-leasing-to-drive-earnings-in-fy19-says-rhb/#fqQoUcUlTpTohiUA.99

EU’s palm oil ban dampening industry’s near-term prospects

EU’s palm oil ban dampening industry’s near-term prospects — Analysts
BY YVONNE TUAH ON APRIL 4, 2019, THURSDAY AT 12:11 AM BUSINESS


Looking ahead, the research team expect the upcoming results season in May to see a sequential recovery in most planters’ earnings as improvements in CPO prices likely outweighed a seasonal drop in FFB output in 1QCY19.



KUCHING: The European Union’s (EU) ban on palm oil will dampen near-term prospects of planters despite some positive factors developing domestically in the plantation sector.

The research team at Kenanga Investment Bank Bhd (Kenanga Research) said while some positive factors are developing in the plantation sector, negative news flows have diffused negative sentiments and weighed on CPO prices, dampening near-term prospects of planters under its coverage.

“In addition, stockpiles have not eased as quickly as we had hoped in the January to February 2019 period, no thanks to shorter working month during Chinese New Year,” it said in its sector report outlook yesterday.

However, it pointed out that as the negative news flows subside in coming months, it believed crude palm oil (CPO) price will return to the recovery trajectory.

“Over the next three months, key positive factors that we are monitoring closely are as follows easing stockpiles in both Malaysia and Indonesia, higher exports to China given its pledge to buy 50 per cent more palm oil from Malaysia, and further clarity on new biodiesel initiatives (B30 in Indonesia and B20 in Malaysia).

“Nevertheless, we believe these positive factors have been largely priced in with the KLPLN index staging a handsome 11 per cent recovery from the low in December 2018,” it added.

Currently, it noted that planters under its coverage are on average trading at minus one standard deviation (range: minus two to 0.5 SD) from their respective mean PER, which is consistent with the uncertain environment but lacks comfortable margin of error to turn positive on the sector at this juncture.

“However, should the biodiesel initiatives and palm oil offtake from the Chinese pan out better than expected, we would relook our valuation basis with an upward bias. On the other hand, if the EU and the Philippines’ palm oil biodiesel ban escalates further, we are likely to downgrade our CPO price assumption,” Kenanga Research said.

Looking ahead, the research team expect the upcoming results season in May to see a sequential recovery in most planters’ earnings as improvements in CPO prices likely outweighed a seasonal drop in FFB output in 1QCY19.

“This has also been verified by several planters under our coverage. Furthermore, from our observation of the movement of daily futures curves in the past two quarters, we believe the average CPO price realised by planters could have improved by five to six per cent or more in 1Q19,” it added.

Despite expected improvements in CPO prices, Kenanga Research maintained its ‘neutral’ outlook on the plantation sector as it believed the positive developments have been largely priced in with the KLPLN index staging a handsome 11 per cent recovery from the low in December 2018.

“However, should the biodiesel initiatives and palm oil offtake from the Chinese pan out better than expected, we would relook our valuation basis with an upward bias. On the other hand, if the EU and the Philippines’ palm oil biodiesel ban escalates further, we are likely to downgrade our CPO price assumption,” it added.


https://www.theborneopost.com/2019/04/04/eus-palm-oil-ban-dampening-industrys-near-term-prospects-analysts/

No One is Immune from The Party Effect or Recency Bias

What is the Recency Bias?

When describing the stock market each participant sees their portfolio’s performance 

• from their perspective only and 
• thus they are always “right”.

This leads to what I call The Party Effect or what Financial Behaviorist call the Recency Bias.

An illustration

Historical average rate of return is 12%.  What does this imply? Would everyone have the same rate of return?

Imagine that you attended a party hosted by your investment advisor and that in addition to you, also in attendance were several other clients. As you go around the room and meet people you learn that everyone at the party owns the exact same S&P 500 index mutual fund. I use the S&P 500 for this tale because by many measures it has historically produce an average rate of return of about 12% and as many people know, and now you know as well, it represents what many investors call “the stock market.” 


The question then is would everyone have the same rate of return at this party? 

• Of course the answer is, no they would not. 
• If they started at the same time they would but since people invest or come into the life of the investment advisor at different times, the answer is no.

A party with only 30 guests, specially selected for illustration.

Let’s tighten up the party attendee list and invite only 30 guests. For simplicity, let’s assume that Guest 1 purchased the fund 30 months ago, that Guest 2 purchased it 29 months ago, that Guest 3 purchased it 28 months ago, etc. 

What would the guests discuss? What would be their perspectives of the stock market?  In order to determine what the guests would discuss and how they would evaluate their performance we need to have some data in the form of monthly rates of return. So we need to develop a monthly rate of return for 30 months to see what they see. 

A 30-month cycle: 18 months bull market phase and 12 months bear market phase 

Again, for simplicity, assume that for the first 18 months the fund goes up 3% per month and for the next 12 months it goes down 2% per month. 

• Please note that I didn’t pick this sequence of numbers randomly. I have a purpose to this. 
• This particular sequence approximates how the stock market moves in terms of bull and bear market duration and after 30 months returns approximately 12%; 12.28% to be exact. 
• This sequence of numbers is a good sequence to illustrate The Party Effect or Recency Bias. 
• We can characterize the first 18 months as the bull market phase of the 30-month cycle and the last 12 months as the bear market phase of the 30-month cycle.

Focus on 4 guests (1, 10, 19 and 25) to illustrate the Party Effect

To illustrate The Party Effect lets focus on 4 guests and see how they describe the stock market. Let’s look at guests 1, 10, 19 and 25. I picked these 4 because readers of this tale can relate in some form or another to one of these 4.

• Guest 1 started 30 months ago, at the beginning of the bull market phase, and his rate of return is 12.28% for the entire 30-month cycle. He enjoyed the ride up for 18 months and now the ride down for the last 12.
• Guest 10 started 21 months ago, halfway through the bull market phase, and his rate of return is 1.36%  for the 21-month period he has been invested.
• Guest 19 started 12 months ago, at the beginning of the bear market phase, and his rate of return is  -21.53% for the 12-month period he has been invested.
• Finally, Guest 25 started 6 months ago, halfway through the bear market phase, and his rate of return is  –11.42 for the 6-month period he has been invested.

These 4 guests experienced entirely different rate of return outcomes and view their portfolios and thus the stock market completely different. 

• All 4 are correct. 
• All 4 are right and yet they couldn’t possibly have more divergent outcomes. 
• If they don’t have a complete picture of the stock market, they can get themselves in trouble. 
• The difference between the best performing portfolio that is up 12.28% and the worst performing portfolio that is down 21.53% is an astounding 33.81%. 

Stock market investing will always produce different outcomes

Is this too obvious? You may say, of course they have different outcomes, they started at different times but that is not the point.  The point is that stock market investing will always produce different outcomes. 

• One guest started at the worst time possible. 
• Another guest started at the best possible time. 
• How they look at the past determines how they see the present. 
• Most importantly, it will determine how they will act going forward.

Pitfalls and dangers of the Party Effect or Recency Bias

The Party Effect simply states that stock market participants evaluate their portfolio performance based on their perspective and their perspective only. 

They do not see the market as it is but as they are. 

Without an expert understanding of how the stock market works, this leads to incorrect conclusions that ultimately lead to incorrect decisions. 

The field of Behavioral Finance (BF) has shown time and time again that people have variable risk profiles. BF demonstrates that fear is a stronger emotion than greed. 

• This means that in our simple 4 guest example, Guests 3 and 4 are more likely to exit the stock market at just the wrong time since their recent, thus Recency Bias, experience is one of losing money. 
• It means that Guest 1 and 2 are more likely to stay invested, thus catching the next wave up that is likely to follow. 

No one is immune to the Party Effect or Recency Bias

All 4 have intellectual access to the events of the last 30 months.  All 4 can educate themselves on the stock market. 

• However, their particular situation is so biased by recent events that the facts are unimportant. They behave irrationally. 
• I have witnessed this irrational behavior throughout my career. 
• No one is immune, even advisors.

To overcome:  be an expert on the stock market yourself.

There are ways to combat The Party Effect trap but it is the deadliest of all the stock market traps that I know. Few can overcome it.  

The only sure way to overcome it is to

• become an expert on the stock market yourself, 
• learn to manage your emotions, and 
• then either manage your own money or hire competent managers that you recognize are expert in their chosen investment discipline. 

However, if you hire an expert on the stock market you have not solved the problem if you do not have expertise. Let me repeat this sentence and highlight it. If you hire an expert on the stock market you have not solved The Party Effect trap if you do not have expertise yourself. 

When you hire an expert on the stock market without being an expert yourself all you have done is added complexity to a complex problem. 

• You have inserted another variable between you and the stock market. 
• You now have three variables to worry about, the stock market, your advisor and yourself. 

Without expertise you have no way of knowing if your advisor is an expert. You are in an endless loop. 

• You are in a recursive situation. Just like we ask, what came first the chicken or the egg? 
• The Party Effect asks, how do I hire an expert without being an expert myself?

If you are unwilling to become an expert on the stock market you must find a way to solve The Party Effect trap? 

Investment Appraisal

When buying stocks, you are investing cash today in expectation of future returns.

There should  be a process to evaluate opportunities to see if their benefit is greater than their cost and also which stocks should recevie priority where capital is limited.

This process is known as "investment appraisal".

The main benefits from an investment are its future net cash inflows.  

Its two main costs are

• the amount of the actual investment (capital outflows) and 
• the cost of financing the investment over the long term (the cost of capital).

The non-financial benefits and costs of an investment as well as its risk are also releveant considerations.

There are several ways to appraise investments:

1.  Payback period

2.  Annual yield

3.  Measures which use discounted cash flows.

Walter Schloss: Making money out of junk

Walter Schloss made 21% per year for 47 years, investing in a simple, methodical, low stress manner working 9-4:30 with no other employees or assistants other than his son Edwin.

Here are some key takeaways from the interesting Forbes piece:

• Focus on cheap stocks. This means not worrying about earnings at the moment, only asset protection.
• You have three things in your favor here:
• Earnings turn around and the stock appreciates significantly
• Someone buys control of the company (buyout)
• The company begins buying its own stock (share-buyback)

Read the whole article here:

http://basehitinvesting.com/wp-content/uploads/2012/11/Making-Money-Out-of-Junk.pdf

http://basehitinvesting.com/walter-schloss-1973-forbes-article-two-ways-to-outperform-the-market/?fbclid=IwAR3Qv5txUFIKimx75SCguoZdeODT6Wu79-tC3CJ6EAlSBmakr0g1KrGGHCY

Lessons from – “The Five Rules for Successful Stock Investing” by Pat Dorsey.

Lessons from – “The Five Rules for Successful Stock Investing” by Pat Dorsey.

by Adib Motiwala

Pat Dorsey is the Director of Stock Analysis at Morningstar.
· Picking individual stocks requires hard work,discipline and an investment of time (and money)
· You need patience, an understanding of accounting and competitive strategy and a healthy dose of skepticism
· Buying stock means part ownership in a business
· Courage of conviction
· Companies with most conflict of opinion are often best investments ( think contrarian)

Chapter 1 · Core principles of investing
o Doing your homework
o Finding companies with strong competitive advantages
o Having a margin of safety
o Holding for the long term
o Knowing when to sell

Chapter 2 · What mistakes to avoid
o Swinging for the fences
o Believing its different this time.
o Falling in love with products
o Panicking when the market is down
o Trying to time the market
o Ignoring valuation
o Relying on earnings for the whole story

Chapter 3 Moats
o Firms that earn high profits.
o Focus on FCF, net margins, ROE and ROA
o Source of moat

• § Product differentiation
• § Driving costs down
• § High switching costs for customers
• § High barriers to entry for competitors

o Moats have depth (how much money can be made)and width ( how long can they sustain it)

Chapter 6: Company analysis · Checklist to analyze a company
o Can growth be sustained over time? Source of growth
o Growth via acquisition is not sustainable,usually acquisitions don’t produce returns for shareholders of acquiring firm,difficult to evaluate true growth rate
o If Earnings growth outstrips sales growth, need to investigate
o ROE is a good measure of profitability but check the leverage levels that can make ROE look better.
o Be wary of companies with too much financial leverage

Chapter 7: Management evaluation · Checklist to evaluate management
o Compensation information from the proxy statement. Does pay vary with firms performance. Check pay package.
o Avoid companies that give loans to executives, have many related party transactions or give out too many stock options. Look for executives that have substantial stock ownership positions.

Chapter 8: Avoiding financial Fakery
Six red flags
1. Declining cash from operations even as net income increases or cash from operations increases slowly compared to net income
2. Firms that take frequent one-time charges and write-downs.
3. Serial acquirers
4. CFO or Auditor leaves the company.
5. If A/R increases rapidly compared to sales. If sales go up by 10% and A/R by 20%, the company is booking sales faster than its receiving cash from customers. Also, watch for “allowance for doubtful accounts”. This should move up in sync with A/R.
6. Changes in credit terms and accounts receivable.

Seven pitfalls to watch out for:
o Gains from investments recorded as revenue
o Underfunded Pension plan
o Pension padding : Subtract gains on pension plan from net income.
o Cash flow due to options exercise by employees
o Inventories rising faster than sales
o Changes in accounting assumptions such as depreciation expenses, allowance for doubtful accounts, revenue recognition,expense recognition.
o Capitalizing costs such as marketing and software development.

Chapter 9: Valuation
· Buy undervalued relative to earnings potential
· Don’t rely on a single valuation metric
· If firm is cyclical or spotty earnings history,use P/S
· P/B used for financial firms and with tangible assets. Least useful for service oriented firms.
· P/E can be compared to the market, similar firm or firm’s historical P/E ( most reliable)
· Use PEG with caution.
· Lowest P/E isn’t always the best. Prefer low risk stable firm that produces good FCF than paying less for a cyclical company that is very capital intensive.

Chapter 11: Worth the price of the book. 
Complete analysis on two companies based on everything in the book ( moat, financial statement analysis, management and company analysis, valuation and DCF)

Chapter 12: 10 Minute test
Here Dorsey proposes a list of question to ask of any company so that we can eliminate the poor investment candidates from the good ones really fast.
1. Min quality hurdle
    a. Avoid IPOs and avoid companies that trade on pink sheets and micro caps.
2. Has the company ever made an operating profit?
3. Does the company generate consistent cash flow from operations?
4. Is ROE consistently over 10% with reasonable leverage?
5. Is earnings growth consistent or erratic?
6. How clean is the balance sheet?
     a. If D/E is greater than 1,

• i. Is the firm in a stable business?
• ii. Has debt been going down or up as a % of total assets
• iii. Do you understand the debt?

7. Does the firm generate FCF?
8. Are there many one-time charges?
9. Has the number of shares outstanding increased markedly over the past several years?

Beyond 10 minutes
· Look at 10 year summary financial statements.
· Read the latest 10-K filing front to back.
o Company, industry, risks, competition, legal issues, MDA, loans, guarantees, contractual obligations.
o Read two most recent proxies DEF-14A. Look for reasonable compensation and options granting policy.
o Read last 3 annual reports.
o Look at two most recent 10-Q filings.
o Start valuation of the stock.

Chapter 13 – 26 : Covers major industries and what to look for in those companies, valuation, etc.
This is excellent material and a good way to learn about the different industries, how to understand them, what makes them tick, what are ways to value them.


http://motiwalacapital.com/blog/lessons-from-%E2%80%93-the-five-rules-for-successful-stock-investing-by-pat-dorsey/

Checklist for Buying Good Companies at Reasonable Prices

Here is a summary of the questions an investor should ask for investing in good companies at fair prices.


Questions 1 - 19:  Focus on the areas of the business.

Business Nature
1.  Do I understand the business?
2.  What is the economic moat that protects the company so it can sell the same or a similar product five or ten years from today?
3.  Is this a fast-changing industry?
4.  Does the company have a diversified customer base?
5.  Is this an asset-light business?
6.  Is it a cyclical business?
7.  Does the company still have room to grow?

Business Performance
8.  Has the company been consistently profitable over the past ten years, through good times and bad?
9.  Does the company have a stable double-digit operating margin?
10. Does the company have a higher margin than competitors?
11. Does the company have a return on investment capital of 15% or higher over the past decade?
12. Has the company been consistently growing its revenue and earnings at double digits?

Business Financial Strength
13. Does the company have a strong balance sheet?

Business Management
14. Do company executives own decent shares of stock of the company?
15. How are the executives paid compared with other similarly sized companies?
16. Are insiders buying?

Business Valuation
17. Is the stock valuation reasonable as measured by intrinsic value, or P/E ratio?
18. How is the current valuation relative to historical range?
19. How did the company's stock price fare during the previous recessions?


Question 20:  Confidence in Your Business Analysis or Research

20. How much confidence do I have in my research?




The final question centers on how you feel about your research.  Though it is not directly related to the company, your own analysis is a vital consideration.  It determines your action once the stock suddenly drops 50% after you buy.

That same 50% drop can trigger opposing actions depending on your level of confidence.

• If you are assured in your research, the 50% drop in price is a great opportunity to buy more of the stock at half the price.  
• If you don't have confidence, you will likely be scared into selling at a 50% loss.

It will happen after you buy the stock and, paradoxically, it happens only after you buy.  So, get prepared!


The checkup questions are based on the company's financial data.  None of them should replace your work of understanding the business and learning about its products, its customers, its suppliers, its competitors, and the people who work in the company.  The warning signs serve as reminders of where you are.  They are not meant to substitute for understanding.  If we paid attention only to the numbers and signs and ignore the business itself, understanding of the company business is incomplete.

If we gain a solid understanding of the business, these numbers and signs will help us to appreciate where we are and where we are probably going.  If business understanding is qualitative and the numbers are quantitative, both are needed to gain the confidence we need for our research.

The checklist is a useful tool for investors to maintain discipline in their stock picking.

Deep Value Investing has its Inherent Problems.

Buffett said it best:

Unless you are a liquidator, that kind of approach to buying businesses is foolish.

• First, the original 'bargain' price probably will not turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen. 
• Second, any initial advantage you secure will be quickly eroded by the low return that the business earns ...

There are better ways to make money (see below).


Warren Buffett, Berkshire Hathaway shareholder letter, 1989.
http://www.berkshirehathaway.com/letters/1989.html





When the overall market valuation is high, and everything else is rising, those dropping and appearing in the deep-bargain screener probably deserved to be traded by low valuations.

• Their stock prices were likely low for the right reasons, and buying these would likely have resulted in deep losses.
• Therefore, when it comes to deep-value investing, investors need to be cautious and aware of this approach's inherent problems.

The inherent problems with deep value investing

"Cigar-butt investing"

This was coined by Buffett for the strategy of buying mediocre businesses at prices that are much lower than the companies' net asset values.

He said the approach is like "a cigar butt found on the street that has only one puff left in it and may not offer much of a smoke, but the "bargain purchase" will make that puff all profit."




There are several problems with this approach.

1. Erosion of value over time.

Mediocre businesses do not create value for their shareholders; instead, they destroy business value over time.

The value of the business can decline and the initial margin of safety may gradually shrink, even if the stock price doesn't go up.

Investors need to be lucky enough to have the stock prices rise in time and sell before prices drop again following the intrinsic value of the business.

"Time is the friend of the wonderful business, the enemy of the mediocre." Buffett wrote in his 1989 shareholder letter.


2. Timing and Pain

Buy these bargain portfolios when you can find plenty of them, but if the broad market is in quick decline, like in 2008, the bargain portfolio will be very likely to lose much more than the general market.

• If the decline lasts longer, many of the companies in the portfolio may suffer steeper operating losses and may even go out of business.
• It is much more painful to hold such a portfolio in bad times, as anyone who owns these stocks during bear markets or recessions will attest - and lose much sleep over.

Because of the quick erosion of business value, selling the deep-asset bargains quickly is key, even if stock prices do not appreciate. The biggest profits are usually achieved within the first 12 months.

"If you buy something because it is undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That's hard." (Charlie Munger.)

Buffett likens buying mediocre businesses at deep bargain prices for a quick profit to dating without the intent of getting married. In that situation, it is essential to end the courtship at the right time and before the relationship turns sour.


3. Not Enough Stocks Qualify

To avoid errors and disasters caused by single stocks in the deep-bargain portfolio, it is important to have a diversified group of them.

But when the market valuation is high, it is just not possible to find enough stocks to satisfy the diversification requirement. They simply dried up as the market continued to tick higher.

This situation may last a long time, as the close-to-zero interest rate has lifted the valuations of all assets.


4. Tax Inefficiency

Because of the short holding time, any gain from the portfolio is subject to the same tax rate as the investor's income tax (for U.S. investors, unless it is in a retirement account.)

This drastically reduces the overall return over the long term.




If buying mediocre businesses at deep bargain prices for a quick profit is like a date without the intent of getting married, buying them and getting involved long term is like a marriage without love. A lot of other things need to be right to work things out, and it will never be a happy marriage.




Important Notes on Deep-Asset Bargains strategy


Though buying deep-asset bargains can be very profitable, this strategy comes with its inherent problems.

- This strategy comes with a much higher mental cost to investors.

- More importantly, business deterioration and the erosion of value put investors in a riskier position.

- As a result, they need to strictly follow the rules of maintaining a diversified portfolio and selling within 12 months whether investments worked out or not.




Ask yourself:

Why would you, as an investor, want to get involved in this mess (a deep-asset-bargain) and witness things deteriorating, hoping the situation will improve?

Even if it works out eventually, which is very unlikely (in the majority), the mental and psychological drain is simply not worth it.



There are better ways to make money.

Buy Only Good Companies!


"Bargain-purchase folly."


Instead of buying companies with deteriorating values on the cheap and hoping things will improve, why not buy companies that grow value over time?

Warren Buffett summarized in a single sentence the priceless lessons he learned from his personal "bargain-purchase folly".

"It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Marks, Howard – Mastering the Market Cycle

Marks, Howard – Mastering the Market Cycle
Houghton Mifflin Harcourt, 2018 [Finance] Grade

The holy grail of investing is market timing and its
realization is about as elusive. This is a guide on
how to master the financial market cycle, which is
something in a way related to market timing, but
still very, very, very different. The master (that
word again…) corporate bond investor and
investment writer Howard Marks at Oaktree
Capital Management is among those whom I
admire most in financial markets and his first book
The Most Important Thing ranks among my top five
all time investment books. In a way this is a slight
problem when it comes to Mastering the Market
Cycle. A classical advice to companies reporting
their financials is to “under-promise and overdeliver”
– the thing is that Marks’ first book drives
up expectations for this one to a level it cannot
fully live up to. But it’s still a really inspiring book
on an important and under-discussed area that I
will put to good use immediately.

A fundamental cornerstone for the author is that
financial markets cannot be predicted with any
practically usable precision in the short to medium
term. This doesn’t mean that all market outcomes
are equally probable at all times. By looking to
current conditions and by this forming an opinion
on where we are in the market cycle an investor,
according to Marks, can tilt his portfolio to take
advantage of what is more likely to happen in the
years ahead. It’s both about what one thinks will
happen depending on where one is and about the
probability of this happening compared to other
scenarios. If an investor is good at this game it
should pay off in the long run and he tilts the odds
for success in his favor. Prepare, don’t predict. I
think he is totally spot-on in this respect.

Another key basis in mastering the cycle is to
understand that things don’t just happen one thing
after another in – unfortunately irregular – cyclical
patterns. What happens in one stage of a market
cycle is instead causing it to move on to the next
stage. Cycles are chains of cause-and-effect
relationships. After a pair of introductory chapters
the main part of the book is devoted to describing
a large set of interrelated and parallel such cycles:
the economic cycle, the profit cycle, the risk
attitude cycle, the credit cycle and so on.

Underlying all these is the cyclical patterns in
investor psychology – a topic clearly nearest to
Marks’ heart. To a large extent Marks reads various
psychological markers and positions himself in the
cycle by these. Next comes one chapter that tries
to assemble all the above cycle inputs into the full
mosaic of the market cycle. The book finishes with
a few concluding more practical chapters and a
needlessly cut-and-paste type of summary.

It is honestly a luxury to have 50 years of hard won
experience condensed in such a graspable format.
Marks is a simply superb writer. Much like Warren
Buffet the language can be deceptively simple,
causing fairly complex issues to sound like child’s
play. Make no mistake – this is investment thinking
on the highest level. Still, compared to the high
standards set by the author’s investment letters
some passages of the book are a bit repetitive with
their long and recurring chains of cause-and-effects
and some newly written chapters that don’t build
on previous investment letters, but are required to
make an coherent story, are perhaps slightly less
inspired than the others.

There are clearly others who have made
contributions to the understanding of market
cycles such as Hyman Minsky, various Austrian
economists, the books from Marathon Asset
Managed edited by Edward Chancellor plus many
others. However, since Marks is so focused on
reading non-fundamental and non-economic
signposts I think the most complementary book
might be Big Debt Crisis by the more Borg-ish Ray
Dalio with his “economic machine”-concept, who
obviously mostly zeros in on the central bank
dominated cycle of monetary policy.
When it comes to books on market cycles this is a
must read – but it could have been even better.


Mats Larsson, December 15, 2018


https://static1.squarespace.com/static/5325c4b3e4b05fc1fc6f32ed/t/5c150aed562fa7836b23f752/1544882938556/2018-12-15_BR_ML.pdf

The Three Fundamental Truths of a Bear Market

The three fundamental truths of a bear market.

1.) A bear market is only bad if you plan on selling your stock or need your money immediately.
2.) Falling stock prices and depressed markets are the friends of the long-term investor.
3.) You must learn to separate the stock price from the underlying business. They have very little to do with each other over the short-term.



So what do I do with my money in a bear market?

The first thing you need to do is to look for companies and funds that are going to be fine ten or twenty years down the road. If the market crashed tomorrow and caused Gillette's stock price to fall 30%, people are still going to buy razors. The basics of the business haven't changed.

When you understand this, you will see falling stock markets like a clearance sale at your favorite furniture store... load up on it while you can, because before long, the prices will go back up to normal levels.

Digital economy in Malaysia will be worth RM85.8 billion by 2025.

Realising the RM85 billion industry



BY JEREMY CHEW ON MARCH 3, 2019

A recent update from Google, predicts that the digital economy in Malaysia will be worth RM85.8 billion by 2025. The key sector in digital economic growth is the e-commerce industry followed by the online tourism industry and the ride-hailing industry.

However, the same study by Google states that the contribution of the internet to the country’s GDP is 2.7 per cent in 2018 and is expected to grow rapidly in the coming year. However, what needs to happen to realise it?

Replicating the success of e-commerce from foreign countries

Jim Jarmusch, an independent film director, states: “Nothing is original. Take from anywhere that echoes with inspiration or spark your imagination.” In other words, the original idea usually sparks when one combines two or more ideas and makes it something new.

It has also been proven to work in the commercial world, where local businesses have managed to profit by replicating successful brand business models.

While various e-commerce platforms can produce genuine products and solutions for the market, it may sometimes be better to localise the successes seen abroad.

This is the inspiration behind the e-commerce business such as FashionValet (FV).

Vivy Yusof, founder of FV, said he was inspired by the fashion e-commerce platform when he was exposed to consumerism in the United Kingdom. With just a few clicks, users can easily purchase products and receive the purchase at their doorstep easily.

Together with Fadzarudin Shah Anuar (her boyfriend and her husband), FV was launched in 2010 with a minimum budget of RM100,000 from their savings and personal loans. A few years later, FV became more prominent and has successfully raised funds RM310 million from investors to date.

Today, FV receives more than 438,000 visitors each month and has four major physical stores throughout Malaysia.

Although FV was born out of a western e-commerce model, Vivy localized its business model for Malaysians and is now one of the most popular fashion brands in the country starting from the online space.

With so much success from around Southeast Asia and the world, entrepreneurs and entrepreneurs can observe successful e-commerce players abroad as an inspiration for their business ventures.

Changing the way we hire

According to market research, e-commerce businesses experiences major challenges when looking for highly skilled personnel in technical fields such as

• software engineering, 
• digital marketing, 
• data science, and 
• product marketing.

Finding employees working with experience in this technical role can be challenging due to the rapid growth of e-commerce in the region, meaning that there was no previous workforce supply for the digital economy in previous years in certain technical roles.

The lack of talent for specialized e-commerce is an issue identified as the most critical challenge in Google & Temasek’s recent report as well. Therefore, regular practice for e-commerce to recruit foreign talents with relevant experience and knowledge.

Although this solves the problem in some sense, this may not be the best long-term solution as most expatriates work on short contracts and only a handful of them would stay in the job for more than five years.

The ideal solution is to invest in local talent who are more likely to commit to a career in the long run.

Resolving this problem requires the participation of both recruiters and future workforce. One way to resolve this issue is to change the traditional recruitment process to a new process for digital economy.

One of the ways to solve this problem is to rethink the hiring process and prioritize highly motivated candidates, with high skills in problem solving and creative thinking.

This may mean putting lower importance on the technical skills and industry-specific knowledge. Recruiters from the digital sector need to invest their resources in training their workforce as well to reduce the lack of technical skills and knowledge.

Jeremy Chew is the head of content marketing for iPrice group, the fastest growing product meta-search platform in Southeast Asia. For further information, please visit https://iprice.my.


https://www.theborneopost.com/2019/03/03/realising-the-rm85-billion-industry/