myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.

Monday 12 January 2009

Avoid Pro Forma financial figures

Avoid Pro forma financial figures
Pro forma financial figures are unreliable for a valuation exercise

Value investing eschews pro forma financial figures.

These are pictures of performance based on making various assumptions other than those applied in preparing actual financial statements.

While useful for certain exercises such as depicting how a newly merged company would have looked if the merger had occurred some years earlier, they do not represent useful valuation resources in other contexts.

Pro forma figures are the least reliable data in financial reporting and are invariably unreliable for a valuation exercise.

Also read:

Adjustments in Current Earnings figure

Adjusting current earnings figure

Valuation based on current earnings is equal to current earnings divided by the company’s current cost of capital.

V = E/k
E = Earnings.
k = The cost of capital.

Apart from estimating the cost of equity capital, earnings-based valuation relies on some accounting judgments to confirm the integrity of current earnings.

The exercise may call for adjustments in the reported figures to render the current earnings figure the best estimate of the company’s sustainable long-term cash flows.

Distortion caused by one-time charges
Among justifications for adjusting current earnings is the distortion caused by one-time charges. Companies sometimes bury bad news affecting multiple years into a single charge and dismiss the result as a nonrecurring episode. Adjusting for this practice requires reallocating the one-time charge across multiple periods and adjusting the current year’s earnings accordingly.

Distortion caused by noncash charges
Other justifications for adjusting current earnings are accounting allocations for noncash charges such as depreciation and amortization. These are intended to serve as a proxy for how close a company’s capital assets are drawing to the ends of their useful lives and must be replaced. It is common for the required reinvestment in such capital assets to exceed the amount allocated in the accounting.

Distortion caused by aberrant current year earnings
Current earnings may also be adjusted to the extent that the current year is an aberration for substantive economic reasons. If the year is a cyclical down year for the company, an upward adjustment based on earnings of prior years is indicated; if at a boom in the corporate or industrial business cycle, the reverse would be true.

Also read:

Income Statement Value: The Earnings Payoff

Income Statement Value: The Earnings Payoff

Successful asset leveraging shows up in the income statement.

The income statement reports revenues less expenses and depicts an important measure of business performance. This is not a picture of cash flows because GAAP uses accrual, not a cash method of reporting.

In accrual accounting, economic activity is recorded according to the relationship between revenue and expense, rather than the timing of cash inflows or outflows. This is not an idiosyncrasy of accounting tradition, but a reflection of accounting’s goal of measuring and allocating business events that reflect economic reality. Those accruals capturing noncash costs of doing business reflect that cash will be absorbed in the future.

Pure value investors (Graham and Dodd) believe that current earnings (adjusted) are the most reliable indicator of a company’s sustainable long-term cash flows.

Adding a further constraint, pure value investors believe that the most reliable way to use current earnings as a valuation metric is to assume they will be constant in the future at current rates – not grow according to estimates.

The math is easy.

Valuation based on current earnings is equal to current earnings divided by the company’s current cost of capital.

That is,

V = E/k.

E = Earnings are earnings.
k = The cost of capital. (This is the company’s weighted average cost of debt and cost of equity. The former can be calculated simply; the latter still requires some estimating).

The virtues of this approach are simplicity and reliability:

Characteristic of simplicity is that investors need not bother with growth rates because no growth is assumed.
Both data points are known or can be reliably estimated.

How long will it take to become a millionaire?

How long will it take to become a millionaire?

(Comment: Make a $1,000 per day for 1000 days. 1000 x 1000 = 1 million)

The movie Slumdog Millionaire will reignite our dreams to become super-rich but the reality is that few of us will be one question away from winning the quiz Who Wants to be a Millionaire?. If you had to save, how long would it take you to save £1m?

By Paul Farrow Last Updated: 4:59PM GMT 09 Jan 2009

How long will it take to become a millionaire? Photo: BBC
Go on, admit it. You have dreamed that one day you will become a millionaire. More than two-thirds of the 23m people who have bought National Savings & Investments' Premium Bonds have done so in the hope of becoming a millionaire.
However, the odds are stacked against you and the chances of winning the Premium Bond jackpot are 1.6m to one if you have £1,000 worth of bonds.
Tens of thousands play the National Lottery each week in the hoping of becoming a millionaire. Most of us only win a tenner every now and then by matching three numbers. Matching six numbers is an entirely different ball game. With six numbers drawn at random from the set of integers between 1 and 49, the jackpot odds are 1 in 13,983,816 – or approximately 1 in 14m.
Del Boy Trotter from TV's Only Fools and Horses always dreamed of becoming a millionaire. But the odds are also firmly stacked against you finding an antique watch worth £1m in your garage – as Del Boy did to finally fulfil his lifelong dream.
For most of us, all we can do is graft away and put what money we have going spare by to build up a tidy nest egg. You are likely to be far short of a £1m – but just in case you are interested, our new calculator will show you how much you will need and how long it will take for various rates of return.

http://www.telegraph.co.uk/finance/personalfinance/consumertips/4209254/How-long-will-it-take-to-become-a-millionaire.html

Millionaire calculator

http://www.telegraph.co.uk/finance/personalfinance/4209223/millionaire-calculator.html

Harsh economic realities await the Obama team

Harsh economic realities await the Obama team
The realisation is growing that Barack Obama may already have made a terrible mistake – before he's even entered the White House.

By Liam Halligan Last Updated: 6:00PM GMT 10 Jan 2009
Five weeks ago, this column raised questions about several members of the incoming President's then newly-unveiled economics team. Weren't they among those history would likely judge as most responsible for causing this crisis? That observation was lost was lost at the time amid the cacophony of praise as mainstream commentators gushed over Obama's "star-studded" line-up.
But since then, among bloggers and others with the "audacity" to think for themselves, the notion that Obama's economics team could become a political liability has started to gain real momentum.
The point at issue is the Glass-Steagall Act – passed in 1933, in response to the Wall Street crash. Named after the two Democrat senators who sponsored it, Glass-Steagall prevented commercial banks – which take deposits from ordinary households and firms – from engaging in high-risk speculative activities undertaken by investment banks.
Or at least it did until 1999 when, after millions of dollars of political donations from Wall Street, it was repealed by President Clinton.
That repeal, more than any other single factor, unleashed the forces that culminated in this financial crisis. Investment banks took over commercial banks using their retail deposit base, on which there was an implicit government guarantee for risky speculative trading – not least in opaque derivatives.
Wall Street's example, in turn, led to the scrapping of similar regulations in financial centres elsewhere. And we all know what happened next.
One of the main proponents of scrapping Glass-Steagall was Clinton's Treasury Secretary Larry Summers. Removing this crucial banking firewall, he proclaimed at the time, would "better enable American companies to compete in the new economy".
All the repeal achieved, though, was to allow Wall Street firms to engage in recklessly risky behaviour while growing "too big to fail" – sparking today's grotesque taxpayer-funded bail-outs, to say nothing of the freezing-up of interbank markets, blocking of worldwide credit channels and the resulting global slump. Despite his key role in enacting this historic blunder, Summers is to be Obama's chief economic advisor.
Last week, in yet another soft-focus newspaper profile of Summers, one of his academic friends claimed that "when the facts change, Larry changes his mind". Well, Larry, the facts on Glass-Steagall have changed. You and your buddies goofed. So when are you going to reinstate the safeguards upon which the stability of global banking depends?

http://www.telegraph.co.uk/finance/comment/liamhalligan/4213828/Harsh-economic-realities-await-the-Obama-team.html

Related Content
More on Liam Halligan
Obama's inauguration party to remember
Barack Obama to 'engage' with Iran
Barack Obama needs to re-introduce Glass-Stegall to begin to end this crisis
Financial crisis: Strong medicine needed to cure ills of cheap money
Barack Obama or John McCain need to tackle the 5 C's to get the US economy roaring again
Global financial crisis: does the world need a new banking 'policeman'?
Strong medicine needed to cure ills of cheap money

Merrill Lynch says rich turning to gold bars for safety

Merrill Lynch says rich turning to gold bars for safety
Merrill Lynch has revealed that some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or "paper" proxies.

By Ambrose Evans-PritchardLast Updated: 10:32AM GMT 09 Jan 2009

Rich investors are spurning gold exchange traded funds in favour of krugerrands.
Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment. "People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs," he said, referring to exchange trade funds listed in London, New York, and other bourses.
"They are so worried they want a portable asset in their house. I never thought I would be getting calls from clients saying they want a box of krugerrands," he said.
Merrill predicted that gold would soon blast through its all time-high of $1,030 an ounce, and would hit $1,150 by June.
The metal should do well whatever happens. If deflation sets in and rocks the economic system it will serve as a safe-haven, but if massive monetary stimulus gains traction and sets off inflation once again it will also come into its own as a store of value. "It's win-win either way," said Mr Dugan.
He added that deflation may prove the greater risk in coming months. "It's very difficult to get the deflation psychology out of the human brain once prices start falling. People stop buying things because they think it will be cheaper if they wait."
Merrill expects global inflation to hover near zero, with rates of minus 1pc in the industrial economies. This means that yields on AAA sovereign bonds now at 3pc will offer a real return of 4pc a year, which is stellar in this grim climate. "Don't start selling your government bonds," Mr Dugan said, dismissing talk of a bond bubble as misguided.
He warned that the eurozone was likely to come under strain this year as slump deepens. "There is going to be friction as governments in the south start talking politically about coming out of the euro. I don't see the tensions in Greece as a one-off. It is a sign of social strain in countries that have lost competitiveness."

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4177766/Merrill-Lynch-says-rich-turning-to-gold-bars-for-safety.html

Sunday 11 January 2009

Balance Sheet Value: Summary

The figures resulting from analyzing the balance sheet remain baselines.

The company is worth at least the net of its total assets less total liabilities.

Whether it is worth a premium depends on its ability to leverage the asset base through competitive advantages that result in barriers to entry that keep competitors out.

Also read:
1.Balance Sheet Value: Assets at Work
2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary

Subtracting liabilities in asset valuation

Subtracting liabilities

The liabilities of a going concern, taken at face value, are subtracted from assessment in the reproduction cost method of valuation.

Judgment is required for certain liability classes, however, such as for deferred tax liabilities or contingencies. A new entrant would not necessarily face such obligations. If not, they may be omitted.

Debt, however, should be subtracted, either at its carrying amount or its market value, whichever is higher.

Analysing the balance sheet includes assessing the level of liabilities and determining whether all liabilities are properly recorded.

It is also prudent to examine the relationship between recorded depreciation over time and capital reinvestment levels. The former is a proxy for the latter; as a proxy, it must be tested to determine whether actual reinvestment needs are more or less than recorded depreciation expenses.

Also read:
1.Balance Sheet Value: Assets at Work
2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary

Valuing Hidden assets

Hidden assets

In addition to assets appearing on a going concern’s balance sheet, numerous resources bearing value do not appear under GAAP. These so-called hidden assets include:

Brand-name identity
Product qualities
Know-how
Employee training
Specialized production
Distribution arrangements.

For example, a new entrant might need to invest in research and development (R&D) to replicate the target company. The exact value is difficult to estimate.

An informed guess can be made by estimating the life cycle of the resulting product and multiplying this by the target’s average annual level of R&D expense.

For a patented pharmaceutical, for example, product life could be up to the 17-year life of a patent. So if the company spends 5 percent annually on R&D for its patented products, an amount equal to about 85 percent of current revenues would be warranted.

Similar estimating is appropriate to value customer relationships. These take time and resources to build. They may be judged by some multiple of the target’s annual selling and administrative expenses – perhaps between one and three years’ worth of these.

Additional estimating goes into other hidden assets such as

government licenses,
franchise agreements, and
other valuable resources

that are not listed on a balance sheet under standard accounting rules.

Also read:
1.Balance Sheet Value: Assets at Work
2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary

Asset valuation approaches in active companies

Going concerns

For a going concern, three asset valuation approaches are recognized:

Net-net working capital
Book value
Reproduction cost method

Net-net working capital

The most conservative form of value investing examines solely current assets, subtracts all liabilities, and estimates the difference as the company’s value.

Graham made this famous as the net-net working capital figure.

If the target is selling for less than that difference, a sizable margin of safety exists.

It is somewhat impractical, however, for few companies today operate using current assets that are greater than total liabilities.

Such results are as rare as hen’s teeth today.

Book value

If a company can be bought for a per-share price equal to less than the difference between its reported total assets and reported total liabilities, it probably furnishes a comfortable margin of safety as well.

While such companies sometimes exist in contemporary corporate America, they too are not common.

Also, value investing inclines some scepticism towards reported figures, justifying consideration of the third method of asset valuation called the reproduction cost method.

Reproduction cost method

In the reproduction cost method of balance sheet valuation, the concept is to value a going concern on the basis of what it would take a new entrant to its business to build it from scratch at current costs or replacement value.

All a target’s resources and claims against it are separately assessed and netted out. The cash, securities, receivables, and inventory probably can be taken at face value, as can prepaid expenses.

Investigation is required to ensure that receivables have been adequately reserved through the allowance for bad debt accounts.
Further investigation is required to ensure that inventory accounting is neither overstated (due to aging that suggests they are non-saleable for example) nor understated (due to inflation in sales prices compared to historical records concerning the cost of those goods held for sale).
Fixed assets should be adjusted to reflect current market conditions, compared to the historical prices (net of depreciation) at which they are carried on the books.
Accounting goodwill remains an asset class warranting little valuation accretion.

Asset valuation approach in liquidation

Liquidation

Liquidation value is the net realizable amount that could be generated by selling a company’s assets and discharging all its liabilities.

When valuing a business for liquidation, most assets are marked down and the liabilities treated at face value.

Cash and securities are taken at face value.
Receivables require a small discount (perhaps 15 percent to 25 percent off).
Inventory a larger discount (perhaps 50 percent to 75 percent off).
Fixed assets at least as much as inventory.
Any goodwill should probably be ignored.
Most intangible assets and prepaid expenses should be ignored.

The residual is the shareholders’ take.

This valuation method is useful for companies being dissolved.

It doesn’t consider value arising from deploying the resources in combination. It is thus of limited use for valuing businesses as going concerns.

Also read:
1.Balance Sheet Value: Assets at Work
2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary

Reliability of financial data

Key Insight into Reliability of financial data

A key insight about Graham and value investing endures. This focus relates to the data’s reliability.

Current assets are the most reliable of all financial data. Valuation data become more unreliable as one moves down:

the balance sheet from cash into longer-term current assets and into long-term assets,
into the income statement and down it, and
onto the cash flow statement.

Balance sheet data becomes less reliable for valuation because items tend to be more firm- or industry-specific:

· Every business can use cash so a dollar held is pretty much worth a dollar.

· Accounts receivable are generally more easily collected by the company that generated them, but they can be assigned or sold, and the buyer can collect most of what the company could (this commonly occurs by the process of factoring in the textile industry for example).

· Inventory can be used only by other merchandisers or manufacturers in the same or similar industries.

· Property, plant and equipment may be less adaptable even by peers, or can be illiquid.

· Goodwill is all but unique to a firm (other intangible assets such as trademarks, patents, and copyrights typically don’t appear on the balance sheet).

Also read:
1.Balance Sheet Value: Assets at Work
2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary

Balance Sheet Value: Assets at Work

Balance Sheet Value: Assets at Work

Pure value investing starts with the balance sheet, the list of assets and liabilities, and the resulting difference called book value.

The following metrics can be derived:
· Net-net working capital
· Net asset value
· Liquidation value, and
· Reproduction cost

In some areas, our economic environment has outpaced our accounting principles so that sizable asset classes called intangibles bearing large values remain unrecorded on the asset side of a balance sheet.

Examples are:
· Intellectual property (copyrights, patents, and trademarks), and
· Human capital (a well-trained workforce, know-how, and specialized skill sets).

Also read:
1.Balance Sheet Value: Assets at Work
2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary

What data most reliably indicate value

While all investors agree that intrinsic worth is the present value of cash that an asset generates for its owners, serious disagreement arises concerning the factors used to estimate cash flows and the relevant discount rate.

Debate concerning cash flows focuses on what data most reliably indicate this value.

Cash flows are picture of the future, and gauging the future can only be done by drawing on the past.

Historical indicators

Which historical indicators are the best gauges of future performance?

Candidates include:

historical cash flows themselves,
recent earning history, and
existing asset and liability levels.

Even among prominent value investors, emphasis varies concerning which gauges are best suited for valuation exercises.

All agree that in order of importance, analysis must focus on

the balance sheet,
the income statement, and
the cash flow statement.

Hunting for good investment prospects

Selecting investments

In selecting investments, value investors choose those shown by valuation analysis to be the cheapest.

Valuation analysis takes account of all relevant business factors, including:

financial strength,
relative business growth, and
steadiness of earnings.

Once a valuation estimate is made, no additional consideration should be given to such factors.

Good investment prospects

Hunting for good investment prospects entails assessing only the group of companies most likely to win the valuation contest.

Among these businesses are those ablest to deploy additional capital at high rates of return compared to capital costs.

Businesses to avoid are those that must employ additional capital at low rates of return compared to capital costs.

The former population is far smaller than the latter.

To minimize error risk: margin of safety

Applying the valuation equation to this universe of companies is difficult and poses substantial risk of error.

To minimize error risk, value investing calls for a key disciplining attitude: margin of saftety.

It prescribes never paying a price approximately equal to ( or greater than) the value estimate you've made. If the investor is wrong, he will lose.

If the investor insists on paying only a fraction of any value estimate she makes, even if she is wrong, she may avoid future losses and certainly will reduce them.

Also read:
Valuation
1. Value Measurements
2. Hunting for good investment prospects
3. What data most reliably indicate value

Value Measurements

Value Measurements

The value of any asset (stock, bond, business, or other) is a function of the cash inflows and outflows, discounted at an appropriate rate that an investor can reasonably expect it to generate during its remaining life.

Bonds

Bond values are easiest to measure.

Standard bonds bear a designated interest rate and a set maturity date.

The combination defines expected cash flows and appropriate discount rate.

Stocks

Common stocks have no such coupon, and their life is perpetual.

An analyst thus must estimate both components (expected cash flows and discount rate) of the valuation exercise.

Another crucial difference is that qualitative variables such as managerial probity and skill have a direct bearing on common stock values, but a limited effect on bond values.

Also read:
Valuation
1. Value Measurements
2. Hunting for good investment prospects
3. What data most reliably indicate value

Saturday 10 January 2009

Shares are cheap but it's not the time to buy

Shares are cheap but it's not the time to buy
Three days after Lehman Brothers collapsed in mid-September, stock markets were in freefall.

By Chris Hughes, breakingviews.com
Last Updated: 6:33AM GMT 09 Jan 2009

The world looked so gloomy that some equity investors hailed the week as the so-called "capitulation event" - the painful point of maximum bearishness that clearly establishes the trough of the market. The announcement of the US Troubled Asset Relief Programme arrested the selling.

But by late November, the MSCI World Index and S&P500 had fallen another 35pc. Equities had fallen 54pc from their October 2007 high, before the worst of the crisis hit.

Equity investors never know when they are at the bottom. But if the market rout prompted by Lehman was a false floor, the rally since late November is proving resilient. As of January 8, the World Index was up 22pc from last year's low, touched only seven weeks earlier. The question facing equity investors is whether this is just another bear-market rally, and, if not, how quickly markets will continue to recover.

Bear markets usually last longer than two years. But the latest downturn has been particularly accelerated. And there are multiple arguments why equities have now found their floor.

While higher current dividend yields partly reflect the risk of imminent dividend cuts, the equity yields still look good compared to government bonds and cash, whose yields have plummeted. Cash has never looked so expensive. The equity risk premium is at its highest in a decade, according to Morgan Stanley. Furthermore, corporate insiders, who should know something, are buying at record levels.

Analysts expect the recession to cut corporate earnings in half, including a 10pc decline in 2008. But equities appear to have fallen enough to reflect that savage drop. Global equities have not been so cheap on either spot or trough earnings for over two decades, says Citigroup. They are trading on a historic price-earnings ratio of around 11 times. Credit Suisse says historic consensus earnings multiples were an average 15 in the last four market lows.

Stock market history suggests that equity markets recover before bad news from corporations has stopped and while earnings are still falling. Equities can bottom out as early as five quarters before earnings trough, and do so on average after two quarters.
But to be buying now, equity investors need to satisfy themselves of two things.

First, that earnings will indeed trough this year.
And second, that this time will not be different, even in the face of a global deleveraging of unprecedented intensity.

Neither of those tests is easily satisfied. The risk that recession will become a slump, while not high, persists.

The massive government stimulus packages that investors hope will underpin recovery carry risks of their own, in particular if weak currencies create an inflationary squeeze on corporate profits. The financial pummeling could slow the pace of any stock market recovery, even if profits are recovering. There must also be doubts about the new normal price-to-earnings ratio is a de-levered world.

And these uncertainties should be sufficient to keep equities cheap for a while yet.

For more agenda-setting financial analysis, visit www.breakingviews.com

http://www.telegraph.co.uk/finance/markets/4205812/Shares-are-cheap-but-its-not-the-time-to-buy.html

Also read:
Investing in time of uncertainties

Friday 9 January 2009

How Bad Will It Get?

How Bad Will It Get?
By Tim Hanson October 9, 2008 Comments (74)

It's grim out there. The market is down 24% since the beginning of September. The financial contagion that started with the U.S. subprime mortgage defaults has spread to Europe and Asia. Fully 60% of Americans now believe that a depression -- replete with 25% unemployment and widespread homelessness and hunger -- is "likely." And just 9% of Americans, an all-time low, are satisfied with the way things are going in the country.
It's gotten so bad, in fact, that the Booyah Bull himself, Jim Cramer, told investors on Monday to pull any money they need for the next five years out of the market.

Now, that's not necessarily bad advice
Of course, you should never be investing the hard-earned dollars that you need to pay your bills over the next few years. But if you heed the wisdom of the late Sir John Templeton -- whom we recently eulogized as the world's most important investor -- you should always be ready, willing, and able to invest some of your long-term savings in common stocks at -- and this is crucial -- the point of maximum pessimism.
What can happen when you buy at the point of maximum pessimism? Well, as Sir John proved when he famously purchased 100 shares of 104 companies trading for $1 per share or less in 1939, as the market panicked at the outset of World War II, you can make a lot of money.
The good news for you today is that given that data presented above, we're getting pretty darn close to that point -- only 9% of Americans are left to be convinced.

An important caveat
This, however, does not mean that the market has bottomed. It could well get worse before it gets better, particularly since the credit markets remain frozen and home prices look like they have a bit more "rationalizing" to do.
But some stellar businesses are already selling at hefty discounts to the norm:

Company
Current P/E ....5-Year Average P/E

Microsoft (Nasdaq: MSFT)
12.3....25.1
Paychex (Nasdaq: PAYX)
17.9....35.3
Intel (Nasdaq: INTC)
13.4....24.4
Fastenal (Nasdaq: FAST)
20.9....33.9
Ritchie Bros. Auctioneers (NYSE: RBA)
27.2....31.2
Nike (NYSE: NKE)
15.3....20.0
Best Buy (NYSE: BBY)
12.1....22.4
Data from Morningstar.com.

Are you brave enough to start today?
Rather than try to time the market and catch these names on the way back up, start dollar-cost averaging into an array of superior names now (remember, Sir John purchased shares in 104 companies) with a commitment to holding shares for the next five years or more. That's the only time-tested way to turn current market volatility to your advantage, and the rewards will be great for those with the courage and resources to do so.
The key, though (and this bears repeating), is to average in -- keeping some money on the sidelines if the market continues to drop -- and adding new money, even in a small amounts, on a regular basis. That's a particularly prudent tack today, given the low costs of trading and the violent unpredictability of today's stock market.

Tim Hanson owns no shares of any company mentioned ... yet. The Motley Fool owns shares of Best Buy. Microsoft, Intel, and Best Buy are Motley Fool Inside Value recommendations. Best Buy is also a Stock Advisor pick. Paychex is an Income Investor selection.
Read/Post Comments (74)

http://www.fool.com/investing/general/2008/10/09/how-bad-will-it-get.aspx

Satyam: Slumdog Millionaire

Satyam: Slumdog Millionaire
By Rick Aristotle Munarriz January 7, 2009 Comments (32)

SAY it ain't so, Satyam.
Shares of Indian IT outsourcing giant Satyam Computer Services (NYSE: SAY) got pummeled this morning, after Chairman B. Ramalinga Raju admitted that the company's books are cooked.
It's not pretty. Satyam's balance sheet cash is inflated by the rupees equivalent of more than $1 billion, as the result of several years of inflated profits.
"It was like riding a tiger, not knowing how to get off without being eaten," Raju confesses in a note to the company's board, presumably unaware of the chairman's number-crunching trickery. Fearing that the gaps would become public under a buyout -- and the stock had risen yesterday on newspaper reports that it was an acquisition target -- Raju came clean.
Investors knew that something wasn't quite right with Raju. The stock took a spill last month when Raju announced the proposed $1.6 billion purchase of distressed assets. The problem? The targeted Maytas Properties buy consisted of businesses owned by the chairman's sons, and completely unrelated to Satyam's outsourcing stronghold.
"How would shareholders have known whether Satyam was simply bailing out family members by sorely overpaying for these assets?" I asked at the time.
It turns out that it was actually the sons trying to bail out Raju.
"The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones," he confesses.
The crushing Satyam news is having a favorable impact on its rivals. Cognizant Technology (Nasdaq: CTSH) and Infosys (Nasdaq: INFY) are moving higher today, while Wipro (NYSE: WIT) is only trading marginally lower. Rather than focus on the lack of market credibility in India-based companies, savvy investors realize that incensed Satyam customers are likely to head elsewhere for their IT outsourcing needs.
Other Indian-based growth stocks, like online access specialist Sify (Nasdaq: SIFY) and new media player Rediff.com (Nasdaq: REDF), are trading all over the map.
In the critically acclaimed Slumdog Millionaire, the Indian protagonist surprises a quiz show host by knowing all of the right answers. As it turns out, the correct responses typically come from heart-wrenching episodes in his life. Satyam has it the other way around, with investors getting poorer as Raju provides all of the wrong answers.
He is naturally stepping down, ready to face his fate. Satyam will likely settle for a bargain-priced buyout from someone -- anyone -- willing to take a chance on the mystery box of a company that Satyam has become.
"It is written," is how Slumdog Millionaire ends, before breaking into an uplifting Bollywood dance sequence at a train station. Satyam's ending now appears to be more of a train wreck instead.
The painful Satyam saga:
No Heads Rolling at Satyam -- Yet
Satyam Seeks to Build Future for Its Family
How Bad Will It Get?

http://www.fool.com/investing/general/2009/01/07/satyam-slumdog-millionaire.aspx

This Could Destroy Your Retirement: Inflation

This Could Destroy Your Retirement
By Todd Wenning September 10, 2008 Comments (0)

I'm sure none of us has spent time with our grandparents without hearing statements like "I remember when the movies only cost a quarter," and "A thousand dollars sure doesn't buy what it used to."
After a few college economics courses, I simply chalked it up to stuff that grandparents say. Obviously, they just didn't understand the forces of inflation compounded over 40 years.
What a smart aleck But after a recent trip to the grocery store, I caught myself sounding like my grandparents. "Four dollars for milk?" I lamented to my wife. "I remember when a gallon of milk cost $2! And that was just a few years ago."
Without getting into a complex macroeconomic analysis of why milk prices have doubled in eight years, my trip to the grocery store was a valuable reminder of inflation's destructive power.
I don't even want to think about what a gallon of milk will cost when I retire. But I'm still going to want it on my cereal, so it's best to develop a plan now that will let me enjoy my Apple Jacks when I'm 70.

Affording $12 milk in 2040

In May, The Economist reported the average world inflation rate had risen to 5.5%. The U.S. rate is slightly above that figure at 5.6%. In emerging markets like China and India, prices have risen 8% to 10% -- and those are the official statistics.
Try outpacing those rates with Treasury bills. At present, you'd actually be losing purchasing power by investing in most Treasuries.
When it comes to battling inflation, our only good defense is a good offense. That means keeping an appropriate allocation of your portfolio in equities, even well into retirement.
Note that this Vanguard fund is designed for investors currently in retirement. The further you are from your ideal retirement age, the greater the percentage of your portfolio that should be invested in equities.

Bring inflation to its knees

See, prices will continue to rise for the rest of our lives. Equities give us the best chance to not only keep up with inflation, but even stay ahead of it, in order to increase our purchasing power down the road.

http://www.fool.com/personal-finance/retirement/2008/09/10/this-could-destroy-your-retirement.aspx

Hyperinflation Is U-G-L-Y

Hyperinflation Is U-G-L-Y
By Selena Maranjian January 7, 2009 Comments (1)

Do you know what hyperinflation is? It's what you get when inflation gets way, way out of hand. It's happening in Zimbabwe. In fact, what you can buy with a million Zimbabwean dollars right now might cost you twice as much by the time you finish reading this article. The country's inflation rate is estimated (conservatively, according to some) to be around 230 million percent.

You might buy a loaf of bread with a bill that sports 12 zeros on it. A month later, you'd need to add several more zeros. People are having trouble keeping up. It's causing chaos. And it's not a good environment for investors, either.

Fortunately, we don't have it bad like that. Inflation in America has generally been between 2% and 4% per year. In 1979 and 1980, though, it was around 13%, and it was around 9% in the years before and after that. Let's take 10% as an approximation of how bad we might expect it to get in America for a number of years, and see what that looks like, shall we? Let's start with a $5 sandwich in 2008 and see how the price grows at 10% over a decade:

Year..Price
2009 $5.50
2010 $6.05
2011 $6.66
2012 $7.32
2013 $8.05
2014 $8.86
2015 $9.74
2016 $10.72
2017 $11.79
2018 $12.97

Wow -- the price doubled after only eight years. A $20,000 car in 2008 would cost you nearly $52,000 in 2018! That's a big difference.

Are we in imminent danger of 10% inflation rates? I don't think so -- though inflation rates did recently spike when gas prices were soaring, along with many food prices. These days some are worrying about deflation, although it's not all bad.
Still, a big increase in inflation is often a concern to many, and even now some worry that it might be in our future.

Dangers of inflation

If inflation starts rising, many companies will suffer, and we investors will therefore be affected. We'll be affected as consumers, too. Journalist Robert Samuelson recently described 1979's inflation environment, noting that as prices rose quickly, people couldn't predict costs of everyday items and were concerned that their wages wouldn't keep up. As he put it, "Americans were horrified. ... People couldn't plan; their savings were at risk."

There are signs that prices will stop growing so rapidly in the coming year. Food commodity prices have already fallen. Assuming they keep falling, we'll eventually see prices fall for many grocery items from companies such as Kraft (NYSE: KFT), General Mills (NYSE: GIS), and ConAgra (NYSE: CAG), as well as institutional food services from companies like Sysco (NYSE: SYY). Of course, as the costs of their supplies fall, we shouldn't expect these companies to immediately slash prices. They'll likely amble slowly in their price-cutting, benefiting temporarily from heftier profit margins.

Meanwhile, if gas prices rise again, which isn't unthinkable, that will pressure the entire economy, as it will affect transportation costs for supplies and finished goods. And of course, the transportation companies themselves, such as FedEx (NYSE: FDX), United Parcel Service (NYSE: UPS), and Southwest Airlines (NYSE: LUV), will take a hit.

One way to fight inflation while investing is to seek out dividend-paying companies, which will keep paying you while the economy sorts itself out. Sticking with stocks in inflationary times can protect your retirement.

http://www.fool.com/investing/dividends-income/2009/01/07/hyperinflation-is-ugly.aspx

Thursday 8 January 2009

Thriving In Every Market

Thriving In Every Market
Value Investing Made Easy (Janet Lowe):

IF YOU ABSOLUTELY MUST PLAY THE HORSES

IF YOU ABSOLUTELY MUST PLAY THE HORSES

Though Ben Graham in no way recommended trying it, he did say that there is a way to combine market timing and value investing principles. This method was originally developed by Roger Babson, a contemporary of Graham’s who provided financial services and investment counsel. However, Graham noted, the method makes heavy demands on human fortitude, and it can keep an investor out of long stretches of a booming market. It sounds simple. Yet for those who realize how difficult it is to follow, this strategy can diminish the risk of trading on market movements.

Here is the way it works:

1. Select a diversified list of common stocks. (The investor can even create an index fund by buying the DJIA, or better yet, deciding which stocks are undervalued in the DJIA and buying only those.)

2. Determine a normal value for each stock (choose any multiplier of earnings that seems appropriate, using 7- to 10-year average earnings.

3. Buy the stocks when shares can be bought at a substantial discount – say, two-thirds of what the investor has established as normal value. As an alternative to buying at one target price, the investor can start buying as the stock declines, beginning at 80 percent of normal value.

4. Sell the stocks when the price has risen substantially above normal value – say 20 percent to 50 percent higher.

The investor thus would buy in a market decline and sell in a rising market.

THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):

BUYING TIME

BUYING TIME

When the market hits its low, true value investors feel that harvest time has arrived. “The most beneficial time to be a vluae investor is when the market is falling,” says investment manager Seth Klarman. There are plenty of companies ripe for the picking. In the summer of 1973, when the stock market had plunged 20 percent in value in less than 2 months, Warren Buffett told a friend, “You know, some days I get up and I want to tap dance.”

Unfortunately, this is the time when investors are feeling most beat up by the markets. Fear and negative thinking prevail, and anyone who has faced down a bear knows how paralyzing fear can be. This, at the depths of a bear market, is the time to buy as many stocks as are affordable. “Value bargains aren’t found in strong markets,” writes money manager Charles Brandes. “A good rule is to examine stock markets that have reacted adversely for a year or so.”

Undervalued stocks quite often lie dormant for months – many months – on end. The only way to anticipate and catch the surge is to identify the undervalued situation, then take a position, and wait, Graham said.

-----
Buying a neglected and therefore undervalued issue for profit generally proves a protracted and patience-trying experience.
-----

THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):

SIGNS AT THE BOTTOM

SIGNS AT THE BOTTOM

The bottom – or near enough the bottom – of a market cycle theoretically should be easier to call than the top or near top. The evidence is found in the corporate balance sheets, income statements, PE ratios, dividend yields, and other quantitative measures. It is likewise reflected in low ratios for the market as a whole. The quantitative factors speak for themselves.

The dividend yield on the Dow Jones Industrial Average, for example, usually cycles between a high yield of 6 percent at the market’s bottom and a low yield of 3 percent at the top. The Dow’s average dividend yield sometimes stretches beyond these boundaries, but historically this is a trustworthy parameter of undervalue and overvalue.

THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):

BARGAINS AT THE BOTTOM

BARGAINS AT THE BOTTOM

In 1932 Graham was 38 years old and had already made and lost millions of dollars. To survive the Great Depression he taught at several universities, testified as an expert witness in securities cases, wrote freelance pieces for the financial press, and with his partner, Jerome Newman, bought and liquidated defunct companies.

In June 1942, Forbes published the first in a series of articles written by Graham alerting investors that the shares of many companies were selling at prices below the value of the actual cash held in the company vaults. The series was called “Is American Business Worth More Dead Than Alive?”

Graham pointed out that 30 percent of the companies listed on the NYSE were selling at less than their net working capital, with some going for less than their cash assets. In other words, if an investor bought all the shares of a company, then sold off its assets, he would reap considerable profits. That series of articles was widely read. It gave dispirited investors the courage to return to the stock market and spurred a long, sustained recovery.

Graham’s wisdom inspired investors again in 1974, when the stock market was in a deep depression. He addressed the annual meeting of the Institute of Chartered Financial Analysts (which he helped found), the predecessor to the Association for Investment Management and Research (AIMR). In a speech entitled “A Renaissance of Value,” Graham pointed out that once more, stocks were selling at deep discounts to their intrinsic value. “How long will such “fire-sale stocks” continue to be given away?” he asked. Graham encouraged the investment managers to buy as many bargain issues as possible while prices were low. The Dow, at the time, had receded to 600.

Again, Graham sounded the wake-up call that led to a market revival. By 1976 the DJIA topped 900.

THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):

MAKING FRIENDS WITH A BEAR

MAKING FRIENDS WITH A BEAR

When corrections come quickly, the question always arises: Is this a repeat of 1929? Will brokers be jumping out of windows? Is this the start of another Great Depression? Certainly Graham knew about such experiences.

Though he realized the 1929 stock market was on dangerously high ground, he’d chosen his investments carefully and hedged his accounts. Graham believed he’d protected his accounts, yet he’d failed to fully execute all his hedges and he’d overused margin. His accounts were badly damaged by the crash. Nevertheless, he hung in, rebuilt his portfolio, and soon afterward triggered a market recovery by telling the world that the time to resume buying had arrived.

THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):

THE PAUSE AT THE TOP OF THE ROLLER COASTER

THE PAUSE AT THE TOP OF THE ROLLER COASTER

There is only one strategy that works for value investors when the market is high – patience. The investor can do one of two things, both of which require steady nerves.

· Sell all stocks in a portfolio, take profits, and wait for the market to decline. At that time, many good values will present themselves. This may sound easy, but it pains many investors to sell a stock when its price is still rising.

· Stick with those stocks in a portfolio that have long-term potential. Sell only those that are clearly overvalued, and once more wait for the market to decline. At this time, value stocks may be appreciating at slow pace compared with the frisky growth stocks, but not always.

But come the correction, be it sudden or slow, the well-chosen value stocks have a better chance of holding their price.

The portfolio of one value investor shows what can happen when markets stumble off a cliff. In early September 1987, Walter Schloss’s portfolio was up 53%. The market as a whole had risen 42%, after a DJIA peak of 2722.42. Then in October the market fell off the mountain and the Dow lost 504 points in a single day. The market struggled back and Schloss finished 1987 with a 26% gain while the overall market made only a 5% advance. Schloss followed one of the first rules of investing – don’t lose money. Making up for lost ground puts an investor at a serious disadvantage when calculating long-term average returns.

Schloss is an experienced investor, and not all value investors will do as well in a rising market. It takes patience, “At a guess I’d say that (the value investor) should do a good 20% better than the market over a long period – although not during the most dynamic period of a bull market – if he is rigorous about applying the method,” says author John Train.

As for the hot stocks, when they take a hard hit the investor is cornered. If the stock is sold, the loss becomes permanent. The lost money cannot grow. If the investor hangs on to the deflated stock, the long trail back to the original purchase price will deeply erode the overall return.

THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):

BELIEVING A BULL MARKET

BELIEVING A BULL MARKET

When markets are rapidly rising, value investing invariably falls out of favor with the investing public. In an upward racing market, value stocks appear dull and stodgy as the more speculative issues rush toward new market highs. But come the correction, it all looks different. Stable value stocks seem like trusted friends.

Most bull markets have well-defined characteristics. These include:

Price levels are historically high.
Price to earnings ratios are high.
Dividend yields are low compared with bond yields (or compared with a stock’s particular dividend yield pattern).
Margin buying becomes excessive as investors are driven to borrow to buy more of the high-priced stocks that look attractive to them.
There is a swarm of new stock offerings, especially initial public offerings (IPOs) of questionable quality. This bull market is what investment bankers and stock promoters call the “window of opportunity.” Because IPOs so often occur when Wall Street is primed to pay top dollar, seasoned investors joke that IPO stands for “it’s probably overpriced.”

THRIVING IN EVERY MARKET

Value Investing Made Easy (Janet Lowe):

My 18 points guide to Successfully compounding your money in Stocks

Be a good stock picker.
Think as a business owner.
Always look at value rather than the price. Do the homework.
Buy and hold is alright for selected stocks.
Compounding is your friend, get this to work its magic.
Mr. Market is there to be taken advantage of. Do not be the sucker instead. BFS;STS.
Always buy a lot when the price is low.
Never buy when the stock is overpriced.
It is alright to buy when the selected stock is at a fair price.
Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the price is still obviously too high.
Do not time the market for such or any stocks.
By keeping to the above strategy, the returns will be delivered through the growth of the company's business.
So, when do you sell the stock? Almost never, as long as the fundamentals remain sound and the future prospects intact.
The downside risk is protected through only buying when the price is low or fairly priced.
Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.
Sell urgently when the company business fundamental has deteriorated irreversibly.
You may also wish to sell should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality. However, unlike point 16, you can do so leisurely.
In conclusion, a critical key to successful investing is in your stock picking ability.

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html

11 Lessons From Peter Lynch

Peter Lynch taught me:

1. Behind every stock is a company. Find out what it’s doing.
2. Never invest in any idea you can’t illustrate with a crayon.
3. Over the short term, there may be no correlation between the success of a company’s operations and the success of its stock. Over the long term, there’s a 100% correlation.
4. Buying stocks without studying the companies is the same as playing poker – and never looking at your cards.
5. Time is on your side when you own shares of superior companies.
6. Owning stock is like having children. Don’t get involved with more than you can handle.
7. When the insiders are buying, it’s a good sign.
8. Unless you’re a short seller, it never pays to be pessimistic.
9. A stock market decline is as predictable as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.
10. Everyone has the brainpower to make money in stocks. Not everyone has the stomach.
11. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

Lynch’s advice had a profound effect on my stock market approach. He taught me that investment success isn’t the result of developing the right macro-economic view or deciding when to jump in or out of the market. Success is about researching companies to identify those that are likely to report positive surprises.

Capital Expenditure

A great company with a Durable Competitive Advantage will have a ratio of Capital Expenditures to Net Income of less than 25%. Less is better.

Capital Expenditures are expenses on:
- fixed assets such as equipment, property, or industrial buildings
- fixing problems with an asset
- preparing an asset to be used in business
- restoring property
- starting new businesses

A good company will have a ratio of Capital Expenditures to Net Income of less than 50%.

A great company with a Durable Competitive Advantage will have a ratio of less than 25%.

Less is better.

Benjamin Graham's 113 Wise Words

The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

Philip Fisher's Wise Words

"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

The Ultimate Hold-versus-Sell Test

Here is the overriding primary test, followed by observations on why it is so critically important:

Knowing all that you now know and expect about the company and its stock (not what you originally believed or hoped at time of purchase), and assuming that you had available capital, and assuming that it would not cause a portfolio imbalance to do so, would you buy this stock today, at today's price?

No equivocation. Yes or no?

Answers such as maybe or probably are not acceptable since they are ways of dodging the issue. No investor probably buys a stock; they either place an order or do not.

Here is the implication of your answer to that critical test: if you did not answer with a clear affirmative, you should sell; only if you said a strong yes, are you justified to hold.

Some thoughts on Analysing Stocks (KISS)

Ideally a stock you plan to purchase should have all of the following charateristics:

• A rising trend of earnings dividends and book value per share.
• A balance sheet with less debt than other companies in its particular industry.
• A P/E ratio no higher than average.
• A dividend yield that suits your particular needs.
• A below-average dividend pay-out ratio.
• A history of earnings and dividends not pockmarked by erratic ups and downs.
• Companies whose ROE is 15 or better.
• A ratio of price to cash flow (P/CF) that is not too high when compared to other stocks in the same industry.

Margin of Safety Concept: Stocks should be bought like groceries, not like perfume

The high CAGR in the early years of the investing period, due to buying at a discount, tended to decline and approach that of the intrinsic EPS GR of the companies over a longer investment time-frame.

Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?