Diary of a private investor: 'Dash for so-called trash shares has given me a 16pc return this year'
My shares which had been hardest hit – such as Enterprise Inns, which owns pubs – began to rise faster than the rest.
By James Bartholomew
Last Updated: 10:48AM BST 06 May 2009
'Enterprise Inns, which owns pubs, began to rise faster than the rest' Photo: GETTY This year has started extraordinarily well. As at the beginning of this week, my Individual Savings Account (ISA) in which I have most of my investments was up 16 per cent. That compares with a four per cent fall in the FTSE 100 index.
How on earth did this outperformance happen?
In the first few months, things went badly for me. But from early March, everything changed. My shares which had been hardest hit – such as Enterprise Inns, which owns pubs – began to rise faster than the rest. Some people have called this a "dash for trash" but that is unfair.
What has happened, rather, is the reverse of what occurred in 2008. At that time, panic and fear set in. I remember it vividly and felt it myself.
People sold out of any company that had the slightest element of doubt about its future: clothing companies – "demand might collapse"; banks – "you can't trust their supposed assets"; house-builders – "probably will go bust"; heavily-indebted companies – "the banks might pull the plug". Investors sold them down. Then others saw the shares falling and joined in the selling. The shares fell further and further to – I would suggest – absurdly low levels. Shares in Enterprise Inns fell so low that, to my mind, the share price was mere option money on the company's survival.
These companies were not really 'trash'. They were just ones who had extra problems to face in the recession. My difficulty was finding the courage to buy shares that had done nothing but fall for six months or more. How could one presume to call the bottom?
Well, I don't claim to have declared 'the bear market is over' loud and clear. The best I managed was to say in March that shares were "extremely good value". But I did steadily start re-investing, especially after Tim Congdon said with such confidence that the economy would turn round towards the end of this year because of the 'quantitative easing'.
I bought more share in R.E.A. Holdings, a palm oil plantation company, in Enterprise Inns, in Home Products a Thai DIY store chain, Staffline, a blue-collar recruitment company, Griffin Mining and a few others. Most of these have risen and some of them quite spectacularly.
I bought more REA Holdings at prices varying between 209p to 287p.The price has since soared to 350p. I added to my original purchase of Enterprise Inns at 69.75p with further purchases at 93.5p and 128.25p. Since then they have they have reached 160p.
One of the most satisfying moments came when Harvey Nash, a company that recruits staff particularly in Information Technology and outsources IT work, produced a good set of results last week. I have held a 'full weighting' in this company for many months now – that is to say a full ten per cent of all my financial assets. It seemed remarkable good value.
Now, finally, the stock market was reassured that yes, this company is getting through the recession in good shape. Its business model is working. The shares jumped by over a quarter in a single day. It was relief and the beginning of belief.
Frankly it has been a very exciting time and I think it will go further, albeit with relapses. The companies in which people lost almost all faith are still cheap on normal criteria. I am continuing to move out of 'safe' investments into more adventurous ones. Last Friday I bought a few shares in Carpathian at 22.75p. The company invests in Eastern European commercial property. It produced results and the conclusion of a strategic review that day.
The company announcement was one of the most impressive I have ever read. The managing director described the company's situation with clarity, addressing all the issues and details which investors and his bankers would want to understand. Yes, the company has endured a major loss in asset values.
Yes, it has been in breach of some of its banking covenants. There were details of each property and the loans attached. I reckoned that with such competent, articulate leadership the company will be able to keep the show on the road. Meanwhile the reduced net asset value is apparently 80p – more than three times the current share price. Worth a flutter, I thought.
To pay for this, I sold my recently purchased holding in index-linked government stock. The time will come for outright inflation hedges like index-linked stock. But perhaps that time has not arrived yet.
Right now it seems the turn of the shares which were heavily sold down to return to more sensible valuations. The fallen have become mighty. The rise of a share from a miserably unkind valuation to a fair one can mean a doubling and more.
http://www.telegraph.co.uk/finance/personalfinance/investing/5277843/Diary-of-a-private-investor-Dash-for-so-called-trash-shares-has-given-me-a-16pc-return-this-year.html
Tuesday 12 May 2009
'The risk of losing money in the short-term is high'
'The risk of losing money in the short-term is high'
The stock market, that maddening babble of millions of differing points of view, has done it again.
By Ian Cowie
Last Updated: 1:07PM BST 11 May 2009
Just when many people decided never to have anything to do with shares, prices took off.
This is good news for millions of people hoping endowments will repay mortgages, pensions will fund retirement and unit or investment trusts will prosper. Even if it is also rather galling for anyone who shunned their individual savings account (Isa) or annual pension allowances last month.
So the index of Britain's biggest shares soared by 25pc in two months. When you consider how many "experts" have produced books on economic meltdown in recent weeks, you would need a heart of stone not to laugh.
Perhaps the market will be higher still by the time the more ponderous pessimists have published. Nor is the Footsie's progress being driven by obscure stocks which few people hold. Barclays Bank, for example, has seen its share price rise more than six-fold this year from 47p, when doom-mongers feared bankruptcy, to 291p this week.
Nobody knows if this will last but I draw comfort from the fact that so many experts remain bearish. The same people were bullish before the crash.
It is human nature to assume that the future will be like the immediate past. But, as the bar chart on this page demonstrates, a longer term view is more encouraging. M&G looked at 20 years' returns from the British and global stock markets, measuring hundreds of periods starting at the beginning of each month.
What comes through loud and clear is that the risk of losing money in the short term is high. Where shares were held for only one year, losses were suffered a quarter of the time. However, where holdings were extended to five years, the risk of loss fell to one in five.
Most reassuringly, where shares were held for a decade, losses were suffered less than 1 per cent of the time. That illustrates what an extraordinarily dire decade we have lived through, since the FTSE peaked at 6,930 in December 1999.
It even suggests, dare I say it, that we may make further progress before that decade is complete. Most importantly, it illustrates that long-term investors are not taking the same risks as short-term speculators.
http://www.telegraph.co.uk/finance/personalfinance/comment/5305053/The-risk-of-losing-money-in-the-short-term-is-high.html
The stock market, that maddening babble of millions of differing points of view, has done it again.
By Ian Cowie
Last Updated: 1:07PM BST 11 May 2009
Just when many people decided never to have anything to do with shares, prices took off.
This is good news for millions of people hoping endowments will repay mortgages, pensions will fund retirement and unit or investment trusts will prosper. Even if it is also rather galling for anyone who shunned their individual savings account (Isa) or annual pension allowances last month.
So the index of Britain's biggest shares soared by 25pc in two months. When you consider how many "experts" have produced books on economic meltdown in recent weeks, you would need a heart of stone not to laugh.
Perhaps the market will be higher still by the time the more ponderous pessimists have published. Nor is the Footsie's progress being driven by obscure stocks which few people hold. Barclays Bank, for example, has seen its share price rise more than six-fold this year from 47p, when doom-mongers feared bankruptcy, to 291p this week.
Nobody knows if this will last but I draw comfort from the fact that so many experts remain bearish. The same people were bullish before the crash.
It is human nature to assume that the future will be like the immediate past. But, as the bar chart on this page demonstrates, a longer term view is more encouraging. M&G looked at 20 years' returns from the British and global stock markets, measuring hundreds of periods starting at the beginning of each month.
What comes through loud and clear is that the risk of losing money in the short term is high. Where shares were held for only one year, losses were suffered a quarter of the time. However, where holdings were extended to five years, the risk of loss fell to one in five.
Most reassuringly, where shares were held for a decade, losses were suffered less than 1 per cent of the time. That illustrates what an extraordinarily dire decade we have lived through, since the FTSE peaked at 6,930 in December 1999.
It even suggests, dare I say it, that we may make further progress before that decade is complete. Most importantly, it illustrates that long-term investors are not taking the same risks as short-term speculators.
http://www.telegraph.co.uk/finance/personalfinance/comment/5305053/The-risk-of-losing-money-in-the-short-term-is-high.html
Sustainable Growth
Sustainable Growth
Good growth continues over time. It has a sustainable trajectory. You are NOT looking for a quick spike upward in revenues, caused by cutting prices or by throwing substantial resources against a one-shot opportunity. The goal is to have the growth continue year after year.
For example, the growth of Southwest Airlines has been based on a consitent set of actions. New routes are carefully vetted - the goal is to have them be profitable in less than a year - and turnaround times (the period from when a plane pulls into a gate until it pushes back on another flight) are substantially faster than the industry average, allowing Southwest planes to fly more trips a day than its competitors.
If you look at one of the suppliers to the airline industry, you can see another example of sustainable growth. In this case, the move toward sustainability was prompted out of necessity.
When the airline industry declined in the early 1990s, it led to a decerease in the revenues of firms that sold aircraft engines. GE Aircraft Engines redefined the needs of its airline customers to include not just the engines themselves but also servicing them on a regular basis. Up to that point, a major airline would use the service shop of one company in, say, Chicago and that of completely different companies in its other locations around the world. Some also did the service themselves in their own shops.
GE's new value proposition was to provide total service around the globe. Through innovation, use of information technology, and managerial ability to provide better maintenance, the result would be less downtime for the airlines and lower costs.
For example, doing a major overhaul on its own might have required an airline to fly its plane back empty to its service facility. With service operations around the world, GE can do the work wherever a plane is, which gets the plane back in the air, generating revenues sooner. And because it specialises, GE can do the necessary service work faster, increasing productivity for the airlines once again. Scores of airlines took advantage of the chance to outsource the maintenance part of their business to a single supplier.
Before its chief competitor, Pratt & Whitney, woke up, GE Aircraft Engines captured 70% of the airplane-service market. And, of course, the service contracts tied customers more closely to GE, giving it a leg up in selling the core product -engines - and developing a sustained trajectory of growth by having a built-in-revenue stream, the money that comes in month in and month out from the service contracts.
In this case, the "single" and "double" of adding a service coponent to a product created a platform that is a home run in terms of a sustained, decades-long trajectory of growth. The recurring revenues from the service work are extremely reliable. Not only has GE Aircraft Engines otgrown the competition - its model of adding service to products became a best practice for other GE businesses, which are now adding high-margin service work into their product mix.
It is also an example of building both scale and scope and then learning how to leverage for growth. GE Aircraft's number-one position in the marketplace, combined with organic growth and simultaneous productivity, gave it the leverage to make acquisitions in the service area.
But the only way this growth is going to occur is if everyone in the organization believes it to be possible. It is up to the organization's leadership to create the right mind-set.
Good growth continues over time. It has a sustainable trajectory. You are NOT looking for a quick spike upward in revenues, caused by cutting prices or by throwing substantial resources against a one-shot opportunity. The goal is to have the growth continue year after year.
For example, the growth of Southwest Airlines has been based on a consitent set of actions. New routes are carefully vetted - the goal is to have them be profitable in less than a year - and turnaround times (the period from when a plane pulls into a gate until it pushes back on another flight) are substantially faster than the industry average, allowing Southwest planes to fly more trips a day than its competitors.
If you look at one of the suppliers to the airline industry, you can see another example of sustainable growth. In this case, the move toward sustainability was prompted out of necessity.
When the airline industry declined in the early 1990s, it led to a decerease in the revenues of firms that sold aircraft engines. GE Aircraft Engines redefined the needs of its airline customers to include not just the engines themselves but also servicing them on a regular basis. Up to that point, a major airline would use the service shop of one company in, say, Chicago and that of completely different companies in its other locations around the world. Some also did the service themselves in their own shops.
GE's new value proposition was to provide total service around the globe. Through innovation, use of information technology, and managerial ability to provide better maintenance, the result would be less downtime for the airlines and lower costs.
For example, doing a major overhaul on its own might have required an airline to fly its plane back empty to its service facility. With service operations around the world, GE can do the work wherever a plane is, which gets the plane back in the air, generating revenues sooner. And because it specialises, GE can do the necessary service work faster, increasing productivity for the airlines once again. Scores of airlines took advantage of the chance to outsource the maintenance part of their business to a single supplier.
Before its chief competitor, Pratt & Whitney, woke up, GE Aircraft Engines captured 70% of the airplane-service market. And, of course, the service contracts tied customers more closely to GE, giving it a leg up in selling the core product -engines - and developing a sustained trajectory of growth by having a built-in-revenue stream, the money that comes in month in and month out from the service contracts.
In this case, the "single" and "double" of adding a service coponent to a product created a platform that is a home run in terms of a sustained, decades-long trajectory of growth. The recurring revenues from the service work are extremely reliable. Not only has GE Aircraft Engines otgrown the competition - its model of adding service to products became a best practice for other GE businesses, which are now adding high-margin service work into their product mix.
It is also an example of building both scale and scope and then learning how to leverage for growth. GE Aircraft's number-one position in the marketplace, combined with organic growth and simultaneous productivity, gave it the leverage to make acquisitions in the service area.
But the only way this growth is going to occur is if everyone in the organization believes it to be possible. It is up to the organization's leadership to create the right mind-set.
Enjoy the rally while it lasts - but expect to take a sucker punch
Enjoy the rally while it lasts - but expect to take a sucker punch
Our delicious spring rally is nearing the limits. The 40pc rise on global bourses since March assumes that central banks have conjured away the debt overhang by slashing rates to zero and printing money. Nothing of the sort has occurred. Two thirds of the world economy will be in deflation by July.
By Ambrose Evans-Pritchard
Last Updated: 6:43AM BST 11 May 2009
Comments 20 Comment on this article
Bear market rallies can be explosive. Japan had four violent spikes during its Lost Decade (33pc, 55pc, 44pc, and 79pc). Wall Street had seven during the Great Depression, lasting 40 days on average. The spring of 1931 was a corker.
James Montier at Société Générale said that even hard-bitten bears are starting to throw in the towel, suspecting that we really are on the cusp of new boom. That is a tell-tale sign.
"Prolonged suckers' rallies tend to be especially vicious as they force everyone back into the market before cruelly dashing them on the rocks of despair yet again," he said. Genuine bottoms tend to be "quiet affairs", carved slowly in a fog of investor gloom.
Another sign of fakery – apart from the implausible 'V' shape – is the "dash for trash" in this rally. The mostly heavily shorted stocks are up 70pc: the least shorted are up 21pc. Stocks with bad fundamentals in SocGen's model (Anheuser-Busch, Cairn Energy, Ericsson) are up 60pc: the best are up 30pc.
Teun Draaisma, Morgan Stanley's stock guru, expects another shake-out. "We think the bear market rally will end sooner rather than later. None of our signposts of the next bull market has flashed green yet. We're not convinced the banking system has been fully fixed," he said
Mr Draaisma said US housing busts typically last nearly about 42 months. We are just 26 months into this one. The overhang of unsold properties on the US market is still near a record 11 months. He expects the new bull market to kick off later this year – perhaps in October – anticipating real recovery in 2010.
Keep an eye on the upward creep in yields on the 10-year US Treasury, the benchmark price of world credit. This alone threatens to short-circuit the rally. The yield reached 3.3pc last week, up over 1pc since January and above the level in March when the US Federal Reserve first launched its buying blitz to pull rates down. Bond vigilantes are taunting the Bank of England in much the same way, driving the 10-year gilt yield to 3.73pc.
The happy view is that this tightening of the bond markets is proof of recovery fever, but there is a dark side.
Governments need to raise $6 trillion (£4 trillion) this year to fund bail-outs and deficits, led by this abject isle with needs of 13.8pc of GDP (EU figures). China fired a warning shot last week, saying the West risks setting off "inflation for the whole world" by printing money. It hinted at a bond crisis.
Yes, the glass is half full. China's PMI optimism gauge has jumped back above the recession line. The global PMI has been rising for seven months. But this usually happens after a crash as companies rebuild battered inventories for a quarter or two.
Note that container volumes in Shanghai fell 17pc in January, 22pc in February, and 9pc in March. Rail freight volumes in the US were down 32pc in April on a year earlier.
The Economic Cycle Research Institute (ECRI) says the US recession will be over by summer, insisting that its leading indicators have never been wrong – except once, in the Great Depression. Quite.
SocGen's other bear, Albert Edwards, says the new element in this slump is that GDP is contracting in "nominal" terms, not just real terms. Money incomes are flat. It is a crucial difference.
"This is like drinking hemlock. The US is gradually slipping further towards outright deflation, just as Japan did," he said. As companies retrench en masse they risk tipping the whole economy into Irving Fisher's "debt deflation trap".
If we are spared – still a big if – we can thank a handful of central bank governors and policy-makers who tore up the rule book, defied tabloid opinion, and took revolutionary action in the nick of time.
We owe much to the Fed's Ben Bernanke (leaving aside past sins as Greenspan's cheerleader), to Britain's Mervyn King, and the Canadian, Japanese and Swiss governors. Hats off, too, to the Greek speakers at the European Central Bank who have just carried out a monetary putsch, outflanking German tank-traps on the Rhine. The hero is Athanasios Orphanides, the Cypriot governor who drafted the Fed's anti-deflation strategy during his 17-year stint in Washington.
The ECB's belated embrace of QE is a watershed moment, even if only a token purchase of €60bn of covered bonds. What poisoned the early 1930s was beggar-thy-neighbour monetary policies. Any country that tried to reflate alone was punished by currency flight (gold loss), yet the mediocrities in charge lacked the imagination to reflate together.
We can now test the Friedman-Bernanke hypothesis that the Fed could have halted the Depression by letting rip with bond purchases. Japan was not a proper test. It eked out a recovery of sorts earlier this decade by embracing QE, but only in the context of a global boom and a yen crash.
There is at least one more boil to lance before we put this debt debacle behind us. The IMF says eurozone banks have so far written down a fifth of likely losses ($750bn) compared to half for US banks. They must raise $375bn in fresh capital. Good luck.
Germany's BaFin regulator goes further, warning of $1.1 trillion of toxic assets on German bank books. Landesbanken are a calamity. If the IMF and BaFin are right, Europe has not yet had its crisis. When it does, we will see a second stress pulse through Eastern Europe and Club Med.
The echoes of 1931 are ominous. That year began with green shoots, until Austria's Credit-Anstalt buckled in the summer and took Central Europe with it. Continentals who still thought it was an American crisis learned otherwise. Plus ça change.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5301123/bEnjoy-the-rally-while-it-lasts---but-expect-to-take-a-sucker-punchb.html
Our delicious spring rally is nearing the limits. The 40pc rise on global bourses since March assumes that central banks have conjured away the debt overhang by slashing rates to zero and printing money. Nothing of the sort has occurred. Two thirds of the world economy will be in deflation by July.
By Ambrose Evans-Pritchard
Last Updated: 6:43AM BST 11 May 2009
Comments 20 Comment on this article
Bear market rallies can be explosive. Japan had four violent spikes during its Lost Decade (33pc, 55pc, 44pc, and 79pc). Wall Street had seven during the Great Depression, lasting 40 days on average. The spring of 1931 was a corker.
James Montier at Société Générale said that even hard-bitten bears are starting to throw in the towel, suspecting that we really are on the cusp of new boom. That is a tell-tale sign.
"Prolonged suckers' rallies tend to be especially vicious as they force everyone back into the market before cruelly dashing them on the rocks of despair yet again," he said. Genuine bottoms tend to be "quiet affairs", carved slowly in a fog of investor gloom.
Another sign of fakery – apart from the implausible 'V' shape – is the "dash for trash" in this rally. The mostly heavily shorted stocks are up 70pc: the least shorted are up 21pc. Stocks with bad fundamentals in SocGen's model (Anheuser-Busch, Cairn Energy, Ericsson) are up 60pc: the best are up 30pc.
Teun Draaisma, Morgan Stanley's stock guru, expects another shake-out. "We think the bear market rally will end sooner rather than later. None of our signposts of the next bull market has flashed green yet. We're not convinced the banking system has been fully fixed," he said
Mr Draaisma said US housing busts typically last nearly about 42 months. We are just 26 months into this one. The overhang of unsold properties on the US market is still near a record 11 months. He expects the new bull market to kick off later this year – perhaps in October – anticipating real recovery in 2010.
Keep an eye on the upward creep in yields on the 10-year US Treasury, the benchmark price of world credit. This alone threatens to short-circuit the rally. The yield reached 3.3pc last week, up over 1pc since January and above the level in March when the US Federal Reserve first launched its buying blitz to pull rates down. Bond vigilantes are taunting the Bank of England in much the same way, driving the 10-year gilt yield to 3.73pc.
The happy view is that this tightening of the bond markets is proof of recovery fever, but there is a dark side.
Governments need to raise $6 trillion (£4 trillion) this year to fund bail-outs and deficits, led by this abject isle with needs of 13.8pc of GDP (EU figures). China fired a warning shot last week, saying the West risks setting off "inflation for the whole world" by printing money. It hinted at a bond crisis.
Yes, the glass is half full. China's PMI optimism gauge has jumped back above the recession line. The global PMI has been rising for seven months. But this usually happens after a crash as companies rebuild battered inventories for a quarter or two.
Note that container volumes in Shanghai fell 17pc in January, 22pc in February, and 9pc in March. Rail freight volumes in the US were down 32pc in April on a year earlier.
The Economic Cycle Research Institute (ECRI) says the US recession will be over by summer, insisting that its leading indicators have never been wrong – except once, in the Great Depression. Quite.
SocGen's other bear, Albert Edwards, says the new element in this slump is that GDP is contracting in "nominal" terms, not just real terms. Money incomes are flat. It is a crucial difference.
"This is like drinking hemlock. The US is gradually slipping further towards outright deflation, just as Japan did," he said. As companies retrench en masse they risk tipping the whole economy into Irving Fisher's "debt deflation trap".
If we are spared – still a big if – we can thank a handful of central bank governors and policy-makers who tore up the rule book, defied tabloid opinion, and took revolutionary action in the nick of time.
We owe much to the Fed's Ben Bernanke (leaving aside past sins as Greenspan's cheerleader), to Britain's Mervyn King, and the Canadian, Japanese and Swiss governors. Hats off, too, to the Greek speakers at the European Central Bank who have just carried out a monetary putsch, outflanking German tank-traps on the Rhine. The hero is Athanasios Orphanides, the Cypriot governor who drafted the Fed's anti-deflation strategy during his 17-year stint in Washington.
The ECB's belated embrace of QE is a watershed moment, even if only a token purchase of €60bn of covered bonds. What poisoned the early 1930s was beggar-thy-neighbour monetary policies. Any country that tried to reflate alone was punished by currency flight (gold loss), yet the mediocrities in charge lacked the imagination to reflate together.
We can now test the Friedman-Bernanke hypothesis that the Fed could have halted the Depression by letting rip with bond purchases. Japan was not a proper test. It eked out a recovery of sorts earlier this decade by embracing QE, but only in the context of a global boom and a yen crash.
There is at least one more boil to lance before we put this debt debacle behind us. The IMF says eurozone banks have so far written down a fifth of likely losses ($750bn) compared to half for US banks. They must raise $375bn in fresh capital. Good luck.
Germany's BaFin regulator goes further, warning of $1.1 trillion of toxic assets on German bank books. Landesbanken are a calamity. If the IMF and BaFin are right, Europe has not yet had its crisis. When it does, we will see a second stress pulse through Eastern Europe and Club Med.
The echoes of 1931 are ominous. That year began with green shoots, until Austria's Credit-Anstalt buckled in the summer and took Central Europe with it. Continentals who still thought it was an American crisis learned otherwise. Plus ça change.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5301123/bEnjoy-the-rally-while-it-lasts---but-expect-to-take-a-sucker-punchb.html
Profitable Growth
Good growth has to be not only profitable but capital-efficient - that is, it needs to earn a return on its investment greater than the company could have received by putting its money in something ultra-safe, such as a Treasury bill. Colgate-Palmolive's growth is definitely profitable.
For more than a decade, Colgate has been on a sustained march to becoming number one in the oral-care consumer-products market, and, as mentioned, has edged out both Procter & Gamble and Unilever. As important as its growth in revenues has been Colgate's steady improvement in profitability. Its gross margin has increased from 39% in 1984 to close to 60% in 2003, an improvement of almost one point per year.
Gross margin - your revenue less what it costs to make the product to obtain those revenues - is an important indicator of a company's profitability and often not given the due it deserves. Increasing gross margin and at the same time growing revenues at a rate better than the overall market is what makes for a great growth company. It is here that you can directly see the relationship between improved productivity and profitable growth. Colgate for more than a decade has been able to find ways to consistently enhance its competitive position by making its operations more productive and streamlining its processes.
Again, it is an example of a top company recognizing that it must simultaneously improve productivity costs and grow.
Both processes resulted in Colgate's winning shelf space. It also meant lowering costs not only for Colgate but for retailers as well. Colgate reduced what it cost retailers to stock and sell its products while increasing retailers' inventory turns of Colgate products, thereby reducing the retailers' cost.
Colgate grew and grew more profitably than the competition, despite the huge lead that Procter & Gamble and Unilever had at the beginning of the race. It did so by continually focusing on the core business and findinng ways to make it better. It emphasized "singles and doubles." Colgate obsessed about what was happening to its brands in each retail outlet, focused on :
The growth path that Colgate chose has been good for shareholders and employees. The company's rapid growth has allowed it to attract the best managers in the industry - managers who are committed to growth.
For more than a decade, Colgate has been on a sustained march to becoming number one in the oral-care consumer-products market, and, as mentioned, has edged out both Procter & Gamble and Unilever. As important as its growth in revenues has been Colgate's steady improvement in profitability. Its gross margin has increased from 39% in 1984 to close to 60% in 2003, an improvement of almost one point per year.
Gross margin - your revenue less what it costs to make the product to obtain those revenues - is an important indicator of a company's profitability and often not given the due it deserves. Increasing gross margin and at the same time growing revenues at a rate better than the overall market is what makes for a great growth company. It is here that you can directly see the relationship between improved productivity and profitable growth. Colgate for more than a decade has been able to find ways to consistently enhance its competitive position by making its operations more productive and streamlining its processes.
The improvement of Colgate's gross margin also reflects its ability to innovate ahead of its two chief competitors. Colgate has created a corporate "growth group" with two major responsibilities.
- The first is to be continuously focused on developing new products, extending existing products, and improving packaging.
- The second, equally important, job is to concentrate on logistic, production, delivery, and speed and responsiveness to retailers through the effective use of data warehousing, information technology, and cost productivity.
Again, it is an example of a top company recognizing that it must simultaneously improve productivity costs and grow.
Both processes resulted in Colgate's winning shelf space. It also meant lowering costs not only for Colgate but for retailers as well. Colgate reduced what it cost retailers to stock and sell its products while increasing retailers' inventory turns of Colgate products, thereby reducing the retailers' cost.
Colgate grew and grew more profitably than the competition, despite the huge lead that Procter & Gamble and Unilever had at the beginning of the race. It did so by continually focusing on the core business and findinng ways to make it better. It emphasized "singles and doubles." Colgate obsessed about what was happening to its brands in each retail outlet, focused on :
- the needs of retailers,
- created consumer awareness,
- continued to improve its products, and
- persuaded the consumer to prefer its products.
The growth path that Colgate chose has been good for shareholders and employees. The company's rapid growth has allowed it to attract the best managers in the industry - managers who are committed to growth.
****Seek good growth and avoid bad growth
I love to invest in good quality long-term profitable growth businesses available at reasonable or bargain prices. Yet, growth can be good and can also be bad. Let's take a look.
A framework for distinguishing good from bad growth is a crucial element in generating revenue growth.
Good growth:
The ability to generate internal growth separates leaders who build their businesses on a solid foundation of long-term profitable growth from those who, through acquisitions and financial engineering, increase revenues like crazy but who create that growth on shaky footings that ultimately crumble.
Many acquisitions provide a one-shot improvement, as duplicative costs are removed from the combined companies. But few, if any, demonstrate any significant improvement in the RATE of growth of revenues.
A framework for distinguishing good from bad growth is a crucial element in generating revenue growth.
Good growth:
- not only increases revenues but improves profits,
- is sustainable over time, and
- does not use unacceptable levels of capital.
- is also primarily organic (internally generated) and
- based on differentiated products and services that fill new or unmet needs, creating value for customers.
The ability to generate internal growth separates leaders who build their businesses on a solid foundation of long-term profitable growth from those who, through acquisitions and financial engineering, increase revenues like crazy but who create that growth on shaky footings that ultimately crumble.
Many acquisitions provide a one-shot improvement, as duplicative costs are removed from the combined companies. But few, if any, demonstrate any significant improvement in the RATE of growth of revenues.
Monday 11 May 2009
Mistakes to Avoid - Trying to Time the Market
Trying to Time the Market
Market timing is one of the all-time great myths of investing.
There is no strategy that consistenly tells you when to be in the market and when to be out of it, and anyone who says otherwise usually has a market-timing service to sell you.
Consider an interesting study in the February 2001 issue of Financial Analysts Journal, which looked at the difference between buy-and-hold and market-timing strategies from 1926 through 1999 using a very elegant method.
They compared the results of a buy-and-hold strategy with all of the possible market-timing strategies to see what percentage of the timing combinations produced a return greater than simply buying and holding.
The answer? About one-third of the possible monthly market-timing combinations beat the buy-and-hold strategy. You may be thinking, "I have a 33% chance of beating the market if I try to time it. I'll take those odds!" But before you run out and subscribe to some timing service, consider three issues:
1. The results in the paper cited previously OVERSTATE the benefits of timing because they looked at each year as a discrete period - which means they ignore the benefits of compounding (as long as you assume that the market will generally rise over long periods of time, that is).
2. Stock market returns are highly skewed - that is, the bulk of the returns (positve and negative) from any given year comes from relatively few days in that year. This means that the risk of NOT being in the market is high for anyone looking to build wealth over a long period of time.
3. Not a single one of the thousands of funds Morningstar has tracked over the past two decades has been able to consistently time the market. Sure, some funds have made the occasional great call, but none have posted any kind of superior track record by jumping frequently in and out of the market based on the signals generated by the quantitative model.
That's pretty powerful evidence that market timing is not a viable strategy because running a mutual fund is a very profitable business - if someone had figured out a way to reliably time the market, you can bet your life they'd have started a fund to do so.
Ref: Richard J. Bauer Jr. and Julie R. Dahlquist, "Market Timing and Roulette Wheels," Financial Analysts Journal, 57(1), pp. 28-40
Market timing is one of the all-time great myths of investing.
There is no strategy that consistenly tells you when to be in the market and when to be out of it, and anyone who says otherwise usually has a market-timing service to sell you.
Consider an interesting study in the February 2001 issue of Financial Analysts Journal, which looked at the difference between buy-and-hold and market-timing strategies from 1926 through 1999 using a very elegant method.
They compared the results of a buy-and-hold strategy with all of the possible market-timing strategies to see what percentage of the timing combinations produced a return greater than simply buying and holding.
The answer? About one-third of the possible monthly market-timing combinations beat the buy-and-hold strategy. You may be thinking, "I have a 33% chance of beating the market if I try to time it. I'll take those odds!" But before you run out and subscribe to some timing service, consider three issues:
1. The results in the paper cited previously OVERSTATE the benefits of timing because they looked at each year as a discrete period - which means they ignore the benefits of compounding (as long as you assume that the market will generally rise over long periods of time, that is).
2. Stock market returns are highly skewed - that is, the bulk of the returns (positve and negative) from any given year comes from relatively few days in that year. This means that the risk of NOT being in the market is high for anyone looking to build wealth over a long period of time.
3. Not a single one of the thousands of funds Morningstar has tracked over the past two decades has been able to consistently time the market. Sure, some funds have made the occasional great call, but none have posted any kind of superior track record by jumping frequently in and out of the market based on the signals generated by the quantitative model.
That's pretty powerful evidence that market timing is not a viable strategy because running a mutual fund is a very profitable business - if someone had figured out a way to reliably time the market, you can bet your life they'd have started a fund to do so.
Ref: Richard J. Bauer Jr. and Julie R. Dahlquist, "Market Timing and Roulette Wheels," Financial Analysts Journal, 57(1), pp. 28-40
Mistakes to Avoid - Ignoring Valuation
Ignoring Valuation
Although it's certainly possible that another investor will pay you 50 times earnings down the road for the company you just bought for 30 times earnings, that's a very risky bet to make.
Sure, you could have made a ton of money in CMGI or Yahoo! during the Internet bubble, but only if you had gotten out in time. Can you honestly say to yourself that you would have?
The only reason you should EVER buy a stock is that you think the business is worth more than it's selling for - not because you think a greater fool will pay more for the shares a few months down the road.
The best way to mitigate your investing risk is to pay careful attention to valuation.
If the market's expectation are low, there's a much greater chance that the company you purchase will exceed them.
Buying a stock on the expectation of POSITIVE NEWS FLOW or STRONG RELATIVE STRENGTH is asking for trouble.
Ignoring valuation will come back to haunt many people in the subsequent years.
Although it's certainly possible that another investor will pay you 50 times earnings down the road for the company you just bought for 30 times earnings, that's a very risky bet to make.
Sure, you could have made a ton of money in CMGI or Yahoo! during the Internet bubble, but only if you had gotten out in time. Can you honestly say to yourself that you would have?
The only reason you should EVER buy a stock is that you think the business is worth more than it's selling for - not because you think a greater fool will pay more for the shares a few months down the road.
The best way to mitigate your investing risk is to pay careful attention to valuation.
If the market's expectation are low, there's a much greater chance that the company you purchase will exceed them.
Buying a stock on the expectation of POSITIVE NEWS FLOW or STRONG RELATIVE STRENGTH is asking for trouble.
Ignoring valuation will come back to haunt many people in the subsequent years.
Mistakes to Avoid - Swinging for the Fences
Swinging for the Fences
Loading up your portfolio with risky, all-or-nothing stocks, is a sure route to investment disaster. In other words, swing for the fences on every pitch.
For one thing, the insidious math of investing means that making up large losses is a very difficult proposition - a stock that drops 50% needs to double just to break even.
For another, finding the next Microsoft when it's still a tiny start-up is really, really difficult. You're much more likely to wind up with a company that fizzles than a truly world-changing company, because it's extremely difficult to discern which is which when the firm is just starting out.
In fact, small growth stocks are the worst-returning equity category over the long haul. Why?
First, the numbers: According to Professor Kenneth French at Dartmouth, small growth stocks have posted an average annual return of 9.3% since 1927, which is a good deal lower than the 10.7% return of the S&P 500 over the same time period. The 1.4% difference between the two returns, has an absolutely enormous effect on long-run asset returns - over 30 years, a 9.3% return on $1,000 would yield about $14,000, but a 10.7% return would yield more than $21,000.
Moreover, many smaller firms never do anything but muddle along as small firms - assuming they don't go belly up, which many do. For example, between 1997 and 2002, 8% of the firms on the Nasdaq were delisted each year. That's about 2,200 firms whose shareholders likely suffered huge losses before the stocks were kicked off the Nasdaq.
Also read:
Compounded Effects of Market Underperformance
Loading up your portfolio with risky, all-or-nothing stocks, is a sure route to investment disaster. In other words, swing for the fences on every pitch.
For one thing, the insidious math of investing means that making up large losses is a very difficult proposition - a stock that drops 50% needs to double just to break even.
For another, finding the next Microsoft when it's still a tiny start-up is really, really difficult. You're much more likely to wind up with a company that fizzles than a truly world-changing company, because it's extremely difficult to discern which is which when the firm is just starting out.
In fact, small growth stocks are the worst-returning equity category over the long haul. Why?
First, the numbers: According to Professor Kenneth French at Dartmouth, small growth stocks have posted an average annual return of 9.3% since 1927, which is a good deal lower than the 10.7% return of the S&P 500 over the same time period. The 1.4% difference between the two returns, has an absolutely enormous effect on long-run asset returns - over 30 years, a 9.3% return on $1,000 would yield about $14,000, but a 10.7% return would yield more than $21,000.
Moreover, many smaller firms never do anything but muddle along as small firms - assuming they don't go belly up, which many do. For example, between 1997 and 2002, 8% of the firms on the Nasdaq were delisted each year. That's about 2,200 firms whose shareholders likely suffered huge losses before the stocks were kicked off the Nasdaq.
Also read:
Compounded Effects of Market Underperformance
Mistakes to Avoid - Panicking When the Market Is Down
Panicking When the Market Is Down
Going against the grain takes courage but pays off.
Stocks are generally more attractive when no one else wants to buy them, not when barbers are giving stock tips. It's very tempting to look for VALIDATION - or other people doing the same thing - when you're investing, but history has shown repeatedly that assets are cheap when everyone else is avoiding them. (Sir John Templeton: "The time of maximum pessimism is the best time to buy.")
1979: Business Week cover story asked the question, "The Death of Equities?"
Not long after, it was the start of an 18 year bull market in stocks.
1999: Barron's featured Warren Buffett on its cover, asking, "What's Wrong, Warren?" and bemoaning Buffett's aversion to technology stocks.
Over the next three years, the Nasdaq tanked more than 60 percent, and Berkshire Hathaway shares appreciated 40%.
Morningstar has conducted every year for the past several years, in which the performance of unpopular funds were looked at. The asset classes that everyone hated outperformed the ones that everyone loved in all but one rolling three-year period over the past dozen years.
The difference can be striking. For example, investors who went where others feared to tread and bought the three least-popular fund categories at the beginning of 2000 would have had roughly flat investment returns over the subsequent three years. That was much better than the market's average annual loss of about 15% over the same time period and miles ahead of the performance of the popular fund categories, which declined an average of 26% during the three-year period.
Going against the grain takes courage, but that courage pays off. You'll do better as an investor is you think for yourself and seek out bargains in parts of the market that everyone else has forsaken, rather than buying the flavour of the month in the financial press.
Going against the grain takes courage but pays off.
Stocks are generally more attractive when no one else wants to buy them, not when barbers are giving stock tips. It's very tempting to look for VALIDATION - or other people doing the same thing - when you're investing, but history has shown repeatedly that assets are cheap when everyone else is avoiding them. (Sir John Templeton: "The time of maximum pessimism is the best time to buy.")
1979: Business Week cover story asked the question, "The Death of Equities?"
Not long after, it was the start of an 18 year bull market in stocks.
1999: Barron's featured Warren Buffett on its cover, asking, "What's Wrong, Warren?" and bemoaning Buffett's aversion to technology stocks.
Over the next three years, the Nasdaq tanked more than 60 percent, and Berkshire Hathaway shares appreciated 40%.
Morningstar has conducted every year for the past several years, in which the performance of unpopular funds were looked at. The asset classes that everyone hated outperformed the ones that everyone loved in all but one rolling three-year period over the past dozen years.
The difference can be striking. For example, investors who went where others feared to tread and bought the three least-popular fund categories at the beginning of 2000 would have had roughly flat investment returns over the subsequent three years. That was much better than the market's average annual loss of about 15% over the same time period and miles ahead of the performance of the popular fund categories, which declined an average of 26% during the three-year period.
Going against the grain takes courage, but that courage pays off. You'll do better as an investor is you think for yourself and seek out bargains in parts of the market that everyone else has forsaken, rather than buying the flavour of the month in the financial press.
Sunday 10 May 2009
Buffett firm loses 1.5 billion dollars
Agence France-Presse - 5/8/2009 10:18 PM GMT
Buffett firm loses 1.5 billion dollars
Billionaire Warren Buffett's investment firm Berkshire Hathaway said Friday it lost 1.5 billion dollars in the first quarter amid market turmoil as the value of its assets fell by 6.1 billion dollars.
The investment company controlled by Buffett, the world's second richest person, took a hit from its insurance holdings and a loss as it sold a big stake in oil giant ConocoPhillips.
Berkshire said it set aside a reserve of 3.7 billion dollars for potential losses from insurance firms that offer credit default swaps, which insure against a default of bonds or other investments.
The company has big stakes in General Re, a reinsurance firm, as well as US insurer GEICO.
It also has stakes in the energy sector and Washington Post newspaper.
In the past year, it acquired stakes in investment bank Goldman Sachs and conglomerate General Electric as well as gum maker Wrigley and the insurer Swiss Re.
Last month, ratings agency Moody's Investors Service downgraded the "AAA" rating the billionaire investor's Berkshire Hathaway, citing damage from falling stocks on its insurance business.
The firm posted a net profit of 4.99 billion dollars for 2008, despite a deepening US recession and a global economic and financial crisis.
Its assets, however, have lost nearly 10 percent of their value, a performance unusually weak for Buffett, known as the "Oracle of Omaha" for his astute investment decisions.
Buffett firm loses 1.5 billion dollars
Billionaire Warren Buffett's investment firm Berkshire Hathaway said Friday it lost 1.5 billion dollars in the first quarter amid market turmoil as the value of its assets fell by 6.1 billion dollars.
The investment company controlled by Buffett, the world's second richest person, took a hit from its insurance holdings and a loss as it sold a big stake in oil giant ConocoPhillips.
Berkshire said it set aside a reserve of 3.7 billion dollars for potential losses from insurance firms that offer credit default swaps, which insure against a default of bonds or other investments.
The company has big stakes in General Re, a reinsurance firm, as well as US insurer GEICO.
It also has stakes in the energy sector and Washington Post newspaper.
In the past year, it acquired stakes in investment bank Goldman Sachs and conglomerate General Electric as well as gum maker Wrigley and the insurer Swiss Re.
Last month, ratings agency Moody's Investors Service downgraded the "AAA" rating the billionaire investor's Berkshire Hathaway, citing damage from falling stocks on its insurance business.
The firm posted a net profit of 4.99 billion dollars for 2008, despite a deepening US recession and a global economic and financial crisis.
Its assets, however, have lost nearly 10 percent of their value, a performance unusually weak for Buffett, known as the "Oracle of Omaha" for his astute investment decisions.
Oil prices breach 58 dollars
Agence France-Presse - 5/8/2009 7:44 PM GMT
Oil prices breach 58 dollars
Oil prices breached 58 dollars per barrel Friday as better-than-expected jobs data in key energy consumer the United States signaled a possible easing of a severe economic slump.
New York's main futures contract, light sweet crude for delivery in June, rose 1.92 dollars from Thursday's closing price to end at 58.63 dollars a barrel, capping a more than 10 percent rise over the week.
It hit an intraday high of 58.69 dollars on Friday, a level unseen since mid-November.
Brent North Sea crude for June delivery climbed 1.67 dollars to close at 58.14 dollars a barrel, after touching 58.30 dollars.
Amid the rally, some worried the jumping prices could dampen the very prospects of recovery.
"Energy bears are stunned. They say it is impossible and there is no reason for it," said Phil Flynn of Alaron Trading. "Energy seems to be defying gravity.
"The bears and the rest of the world are waking up to the fact that something has changed in the energy complex," he said.
Flynn said oil demand was still tepid and the rising prices might dampen demand.
This week, oil has also won support from rising stock markets amid increasing signs of economic recovery in the recession-hit United States, traders said.
Crude oil was boosted Friday after official data showed that US labor market losses eased in April with 539,000 jobs axed, while the unemployment rate hit 8.9 percent, suggesting the economy may be stabilizing.
The jobless rate hit its highest level since September 1983 but the pace of job losses slowed appreciably, offering another possible sign of an easing of the severe economic slump.
The number of job losses was not nearly as bad as the consensus Wall Street estimate of 600,000 in the Labor Department monthly payrolls report, one of the best indicators of economic momentum.
Prices have posted solid gains this week on hopes of a recovery in energy demand, but they remain far below last July's record peaks above 147 dollars a barrel.
"Oil prices have been surging this week on titbits of information indicating that the economic crisis has reached its trough and that recovery could be around the corner," said analysts at JBC Energy.
The markets were also reassured by the release of "stress tests" on the US banking system, with major lenders seen as being able to cover capital shortfalls.
"US banks appear to be doing better than everybody thought according to the Fed's preliminary release on the stress test, while the rate of job losses in the country has slowed," JBC analysts said.
"In the wider picture there are also tentative signs that economic activity in China and India has been picking up with Chinese manufacturing having accelerated for the first time in nine months."
burs-pp/rl
Oil prices breach 58 dollars
Oil prices breached 58 dollars per barrel Friday as better-than-expected jobs data in key energy consumer the United States signaled a possible easing of a severe economic slump.
New York's main futures contract, light sweet crude for delivery in June, rose 1.92 dollars from Thursday's closing price to end at 58.63 dollars a barrel, capping a more than 10 percent rise over the week.
It hit an intraday high of 58.69 dollars on Friday, a level unseen since mid-November.
Brent North Sea crude for June delivery climbed 1.67 dollars to close at 58.14 dollars a barrel, after touching 58.30 dollars.
Amid the rally, some worried the jumping prices could dampen the very prospects of recovery.
"Energy bears are stunned. They say it is impossible and there is no reason for it," said Phil Flynn of Alaron Trading. "Energy seems to be defying gravity.
"The bears and the rest of the world are waking up to the fact that something has changed in the energy complex," he said.
Flynn said oil demand was still tepid and the rising prices might dampen demand.
This week, oil has also won support from rising stock markets amid increasing signs of economic recovery in the recession-hit United States, traders said.
Crude oil was boosted Friday after official data showed that US labor market losses eased in April with 539,000 jobs axed, while the unemployment rate hit 8.9 percent, suggesting the economy may be stabilizing.
The jobless rate hit its highest level since September 1983 but the pace of job losses slowed appreciably, offering another possible sign of an easing of the severe economic slump.
The number of job losses was not nearly as bad as the consensus Wall Street estimate of 600,000 in the Labor Department monthly payrolls report, one of the best indicators of economic momentum.
Prices have posted solid gains this week on hopes of a recovery in energy demand, but they remain far below last July's record peaks above 147 dollars a barrel.
"Oil prices have been surging this week on titbits of information indicating that the economic crisis has reached its trough and that recovery could be around the corner," said analysts at JBC Energy.
The markets were also reassured by the release of "stress tests" on the US banking system, with major lenders seen as being able to cover capital shortfalls.
"US banks appear to be doing better than everybody thought according to the Fed's preliminary release on the stress test, while the rate of job losses in the country has slowed," JBC analysts said.
"In the wider picture there are also tentative signs that economic activity in China and India has been picking up with Chinese manufacturing having accelerated for the first time in nine months."
burs-pp/rl
Commodity prices climb on economic recovery hopes
Agence France-Presse - 5/8/2009 5:14 PM GMT
Commodity prices climb on economic recovery hopes
Commodity prices rallied this week, with oil striking 2009 highs on growing optimism about an economic recovery, as traders also tracked the results of key "stress tests" on troubled US banks.
"Commodity index returns have rebounded over the past week," said Deutsche Bank analyst Michael Lewis in a research note to clients.
"In our view, this reflects the market's less pessimistic assessment towards the global growth outlook. However, in most instances index returns are still trading lower on a year to date basis."
Financial markets appeared unruffled by the stress tests, which found that 10 major US banks need to raise a total of 74.6 billion dollars (55.7 billion euros) in new funds to shield against the risk of a further economic downturn.
Official data showed Friday that the US unemployment rate rose to 8.9 percent in April with 539,000 jobs lost, according to a report which was not as bad as feared by private analysts for the recession-stricken economy.
The jobless rate hit its highest level since September 1983 but the pace of job losses slowed appreciably, offering another possible sign of an easing of the severe economic slump.
The unemployment rate was in line with forecasts but the number of job losses not nearly as bad as the consensus Wall Street estimate of 600,000.
Earlier this week, a survey by payrolls firm ADP data showed that the US private sector shed 491,000 jobs in April, which was much lower than analysts had forecast.
OIL: Prices rocketed to near six-month highs above 58 dollars per barrel as stock markets gained on increasing signs of economic recovery in the United States, the world's biggest energy consumer.
"Crude oil prices are being driven higher by a combination of building confidence of a faster economic recovery, increased funds flow into commodities, and higher utilisation at US refineries," said Lewis.
"However we believe the fundamental outlook remains weak and that inventories are set to remain high."
Prices have posted solid gains this week on hopes of a recovery in energy demand, but they remain far below last July's record peaks above 147 dollars a barrel.
"Oil prices have been surging this week on titbits of information indicating that the economic crisis has reached its trough and that recovery could be around the corner," said analysts at JBC Energy.
"US banks appear to be doing better than everybody thought according to the Fed's preliminary release on the stress test, while the rate of job losses in the country has slowed.
"In the wider picture there are also tentative signs that economic activity in China and India has been picking up with Chinese manufacturing having accelerated for the first time in nine months.
"The Baltic Dry Index also surged by 8.9 percent, day-on-day, and was last seen at over 2,000 points; the Index is a daily average of the costs of shipping raw materials to end customers and so can be seen as a good barometer of the health of the world economy," added the JBC analysts in a research note.
However Nimit Khamar at the Sucden brokerage in London warned that oil prices could head lower in coming weeks should investors begin to show less optimism regarding an economic recovery.
By Friday, on the New York Mercantile Exchange (NYMEX), light sweet crude for delivery in June surged to 57.60 dollars a barrel from 52.11 dollars a week earlier.
On London's InterContinental Exchange (ICE), Brent North Sea crude for June soared to 57.28 dollars a barrel from 51.63 dollars a week earlier.
PRECIOUS METALS: Precious metals sparkled, with gold hitting 925 dollars per ounce on Thursday, drawing strength from the weak US currency.
A struggling greenback makes dollar-priced commodities cheaper for foreign buyers using stronger currencies -- and therefore tends to stimulate demand.
By late Friday on the London Bullion Market, gold rose to 907 dollars an ounce from 884.50 dollars the previous week.
Silver advanced to 13.90 dollars an ounce from 12.15 dollars.
On the London Platinum and Palladium Market, platinum increased to 1,149 dollars an ounce at the late fixing on Friday from 1,076 dollars.
Palladium leapt to 242 dollars an ounce from 212 dollars.
BASE METALS: Base metals prices soared on hopes that a global economic recovery would boost demand.
"Prices strengthened across the complex... as sentiment was boosted by a higher than expected figure for US employment data offering further evidence that the macro outlook may be beginning to improve," said Barclays Capital analysts.
"Sentiment towards the broader global macro outlook has been turning more positive recently and this is being reflected in base metals prices."
By Friday on the London Metal Exchange, copper for delivery in three months climbed to 4,763 dollars a tonne from 4,515 dollars the previous week.
Three-month aluminium jumped to 1,564 dollars a tonne from 1,518 dollars.
Three-month lead rose to 1,484 dollars a tonne from 1,356 dollars.
Three-month tin surged to 14,214 dollars a tonne from 12,475 dollars.
Three-month zinc increased to 1,557 dollars a tonne from 1,475 dollars.
Three-month nickel rallied to 13,303 dollars a tonne from 11,725 dollars.
COCOA: Cocoa prices advanced on signs of strengthening demand.
By Friday on LIFFE, London's futures exchange, the price of cocoa for delivery in July rose to 1,751 pounds a tonne from 1,703 pounds the previous week.
On the New York Board of Trade (NYBOT), the July cocoa contract gained to 2,507 dollars a tonne from 2,388 dollars.
COFFEE: Coffee prices also climbed, hitting 125.80 US cents per pound in New York -- a level last seen on February 9.
By Friday on LIFFE, Robusta for delivery in July increased to 1,493 dollars a tonne from 1,475 dollars the previous week.
On the NYBOT, Arabica for July stood at 125.20 US cents a pound from 116.35 cents.
GRAINS AND SOYA: Prices gained ground amid production delays and higher crude oil prices. Corn, or maize, is used to produce ethanol -- a clean plant-based fuel which is cheaper than oil.
"Support for corn prices stems from delays in corn plantings especially in the eastern US corn belt, as well as the strong rise in crude oil prices," said Barclays Capital analysts.
By Friday on the Chicago Board of Trade, maize for delivery in July rose to 4.19 dollars a bushel from 4.13 dollars the previous week.
July-dated soyabean meal -- used in animal feed -- gained to 11.04 dollars from 10.91 dollars.
Wheat for July advanced to 5.80 dollars a bushel from 5.70 dollars.
SUGAR: Sugar prices surged close to a three-year peaks, stretching as high as 452.20 pounds in London and 15.60 cents in New York -- the highest points since July 2006.
"Sugar prices have shot higher on an anticipated tightening of stocks in India and on supportive developments in the biofuel industry in the United States," said Standard Chartered analysts.
Sugar is used to make ethanol, a cheaper alternative to gasoline used to power road vehicles.
By Friday on LIFFE, the price of a tonne of white sugar for delivery in August rose to 445.90 pounds from 431.80 pounds the previous week.
On NYBOT, the price of unrefined sugar for July increased to 15.37 US cents a pound from 14.47 cents.
RUBBER: Malaysian rubber prices tracked rising oil prices to close higher Friday.
Traders said the rubber price was also benefitting from tight supply. The price of natural rubber is linked with the cost of crude oil, which affects the price of synthetic rubber products.
The Malaysian Rubber Board's benchmark SMR20 was at 165.90 US cents per kilo, compared to 157.15 US cents on April 30.
burs-rfj/rlp
Commodity prices climb on economic recovery hopes
Commodity prices rallied this week, with oil striking 2009 highs on growing optimism about an economic recovery, as traders also tracked the results of key "stress tests" on troubled US banks.
"Commodity index returns have rebounded over the past week," said Deutsche Bank analyst Michael Lewis in a research note to clients.
"In our view, this reflects the market's less pessimistic assessment towards the global growth outlook. However, in most instances index returns are still trading lower on a year to date basis."
Financial markets appeared unruffled by the stress tests, which found that 10 major US banks need to raise a total of 74.6 billion dollars (55.7 billion euros) in new funds to shield against the risk of a further economic downturn.
Official data showed Friday that the US unemployment rate rose to 8.9 percent in April with 539,000 jobs lost, according to a report which was not as bad as feared by private analysts for the recession-stricken economy.
The jobless rate hit its highest level since September 1983 but the pace of job losses slowed appreciably, offering another possible sign of an easing of the severe economic slump.
The unemployment rate was in line with forecasts but the number of job losses not nearly as bad as the consensus Wall Street estimate of 600,000.
Earlier this week, a survey by payrolls firm ADP data showed that the US private sector shed 491,000 jobs in April, which was much lower than analysts had forecast.
OIL: Prices rocketed to near six-month highs above 58 dollars per barrel as stock markets gained on increasing signs of economic recovery in the United States, the world's biggest energy consumer.
"Crude oil prices are being driven higher by a combination of building confidence of a faster economic recovery, increased funds flow into commodities, and higher utilisation at US refineries," said Lewis.
"However we believe the fundamental outlook remains weak and that inventories are set to remain high."
Prices have posted solid gains this week on hopes of a recovery in energy demand, but they remain far below last July's record peaks above 147 dollars a barrel.
"Oil prices have been surging this week on titbits of information indicating that the economic crisis has reached its trough and that recovery could be around the corner," said analysts at JBC Energy.
"US banks appear to be doing better than everybody thought according to the Fed's preliminary release on the stress test, while the rate of job losses in the country has slowed.
"In the wider picture there are also tentative signs that economic activity in China and India has been picking up with Chinese manufacturing having accelerated for the first time in nine months.
"The Baltic Dry Index also surged by 8.9 percent, day-on-day, and was last seen at over 2,000 points; the Index is a daily average of the costs of shipping raw materials to end customers and so can be seen as a good barometer of the health of the world economy," added the JBC analysts in a research note.
However Nimit Khamar at the Sucden brokerage in London warned that oil prices could head lower in coming weeks should investors begin to show less optimism regarding an economic recovery.
By Friday, on the New York Mercantile Exchange (NYMEX), light sweet crude for delivery in June surged to 57.60 dollars a barrel from 52.11 dollars a week earlier.
On London's InterContinental Exchange (ICE), Brent North Sea crude for June soared to 57.28 dollars a barrel from 51.63 dollars a week earlier.
PRECIOUS METALS: Precious metals sparkled, with gold hitting 925 dollars per ounce on Thursday, drawing strength from the weak US currency.
A struggling greenback makes dollar-priced commodities cheaper for foreign buyers using stronger currencies -- and therefore tends to stimulate demand.
By late Friday on the London Bullion Market, gold rose to 907 dollars an ounce from 884.50 dollars the previous week.
Silver advanced to 13.90 dollars an ounce from 12.15 dollars.
On the London Platinum and Palladium Market, platinum increased to 1,149 dollars an ounce at the late fixing on Friday from 1,076 dollars.
Palladium leapt to 242 dollars an ounce from 212 dollars.
BASE METALS: Base metals prices soared on hopes that a global economic recovery would boost demand.
"Prices strengthened across the complex... as sentiment was boosted by a higher than expected figure for US employment data offering further evidence that the macro outlook may be beginning to improve," said Barclays Capital analysts.
"Sentiment towards the broader global macro outlook has been turning more positive recently and this is being reflected in base metals prices."
By Friday on the London Metal Exchange, copper for delivery in three months climbed to 4,763 dollars a tonne from 4,515 dollars the previous week.
Three-month aluminium jumped to 1,564 dollars a tonne from 1,518 dollars.
Three-month lead rose to 1,484 dollars a tonne from 1,356 dollars.
Three-month tin surged to 14,214 dollars a tonne from 12,475 dollars.
Three-month zinc increased to 1,557 dollars a tonne from 1,475 dollars.
Three-month nickel rallied to 13,303 dollars a tonne from 11,725 dollars.
COCOA: Cocoa prices advanced on signs of strengthening demand.
By Friday on LIFFE, London's futures exchange, the price of cocoa for delivery in July rose to 1,751 pounds a tonne from 1,703 pounds the previous week.
On the New York Board of Trade (NYBOT), the July cocoa contract gained to 2,507 dollars a tonne from 2,388 dollars.
COFFEE: Coffee prices also climbed, hitting 125.80 US cents per pound in New York -- a level last seen on February 9.
By Friday on LIFFE, Robusta for delivery in July increased to 1,493 dollars a tonne from 1,475 dollars the previous week.
On the NYBOT, Arabica for July stood at 125.20 US cents a pound from 116.35 cents.
GRAINS AND SOYA: Prices gained ground amid production delays and higher crude oil prices. Corn, or maize, is used to produce ethanol -- a clean plant-based fuel which is cheaper than oil.
"Support for corn prices stems from delays in corn plantings especially in the eastern US corn belt, as well as the strong rise in crude oil prices," said Barclays Capital analysts.
By Friday on the Chicago Board of Trade, maize for delivery in July rose to 4.19 dollars a bushel from 4.13 dollars the previous week.
July-dated soyabean meal -- used in animal feed -- gained to 11.04 dollars from 10.91 dollars.
Wheat for July advanced to 5.80 dollars a bushel from 5.70 dollars.
SUGAR: Sugar prices surged close to a three-year peaks, stretching as high as 452.20 pounds in London and 15.60 cents in New York -- the highest points since July 2006.
"Sugar prices have shot higher on an anticipated tightening of stocks in India and on supportive developments in the biofuel industry in the United States," said Standard Chartered analysts.
Sugar is used to make ethanol, a cheaper alternative to gasoline used to power road vehicles.
By Friday on LIFFE, the price of a tonne of white sugar for delivery in August rose to 445.90 pounds from 431.80 pounds the previous week.
On NYBOT, the price of unrefined sugar for July increased to 15.37 US cents a pound from 14.47 cents.
RUBBER: Malaysian rubber prices tracked rising oil prices to close higher Friday.
Traders said the rubber price was also benefitting from tight supply. The price of natural rubber is linked with the cost of crude oil, which affects the price of synthetic rubber products.
The Malaysian Rubber Board's benchmark SMR20 was at 165.90 US cents per kilo, compared to 157.15 US cents on April 30.
burs-rfj/rlp
Why dividends are important for investors' portfolios.
There are 2 paths of returns for the stock investors. These are:
1. Capital appreciation
2. Dividend yield.
Although every investors hope for capital appreciation, hope is not a really sound investment strategy.
We need something more concrete and more dependable, that is when dividend comes in.
Dividend being paid on a regular basis provides a more dependable return. You know you get a tangible return on your investment whenever the dividend is in your pocket, to either spend on your need or to be re-invested.
http://www.moneyshow.com/video/video.asp?wid=3508&t=3&scode=009393&th=1
Also read:
3 measures of a stock's value
1. Capital appreciation
2. Dividend yield.
Although every investors hope for capital appreciation, hope is not a really sound investment strategy.
We need something more concrete and more dependable, that is when dividend comes in.
Dividend being paid on a regular basis provides a more dependable return. You know you get a tangible return on your investment whenever the dividend is in your pocket, to either spend on your need or to be re-invested.
http://www.moneyshow.com/video/video.asp?wid=3508&t=3&scode=009393&th=1
Also read:
3 measures of a stock's value
3 measures of a stock's value
Value can be a subjective term depending on who is talking about it and how they measure values for themselves.
3 long-held fundamental measures of value are:
P/E
P/B
DY
Price: Price by itself without any other analytical factor is in fact worthless.
Earning: Earning can be a nebulous figure. Earnings can be modified and adjusted according to what the company's needs are. Sometimes if the company likes to have a different tax basis for one quarter, they may adjust their earnings up or earnings down. There are companies that depress earnings for one quarter and then lifted up earnings the next quarter to facilitate selling of stock options to important executives.
Earnings are what accountants say they are. P/E s are somewhat suspect, because earnings themselves can be suspects.
Book value: Book value also can be quite nebulous.
Often a company carries an asset at cost of 30 years to 40 years ago. Therefore, the book value does not give measure of true value of these assets of this company.
Dividend: Dividend tells us 3 things.
1. Dividend can only come as a result of earnings. In other words, company cannot pay what it doesn't have. In order for a company to pay dividend, it has to have earnings. This let us know that the company we are investing in, is a profitable concern.
2. Dividend represents income. It is a tangible return on your investment you receive every quarter. It is cash in your pocket. You can spend it on your needs, or you can reinvest that dividend into other dividend paying stocks and compound your returns.
3. Dividend helps us provide a basis for value. High quality stocks have some shared characteristics and repetitive patterns. These stocks tend to trade between 2 different bands of dividend yield. One band is when the price is low and the yield is high. The second band is when the price is high and the yield is low. Also, these stocks tend to trade in between these 2 bands over long period of time which gives us a good range to understand when to buy the stock and when to sell the stock.
To summarise: Dividend does 3 things.
1. It shows us our company is a profitable concern.
2. It puts income into our pocket.
3. It tells us when to buy and when to sell a stock.
http://articles.moneycentral.msn.com/learn-how-to-invest/new-investor-center-video-ap.aspx?cp-documentid=9d33155e-df9b-43b7-8535-9f2a8d87c769
Also read:
Why dividends are important for investors' portfolios.
3 long-held fundamental measures of value are:
P/E
P/B
DY
Price: Price by itself without any other analytical factor is in fact worthless.
Earning: Earning can be a nebulous figure. Earnings can be modified and adjusted according to what the company's needs are. Sometimes if the company likes to have a different tax basis for one quarter, they may adjust their earnings up or earnings down. There are companies that depress earnings for one quarter and then lifted up earnings the next quarter to facilitate selling of stock options to important executives.
Earnings are what accountants say they are. P/E s are somewhat suspect, because earnings themselves can be suspects.
Book value: Book value also can be quite nebulous.
Often a company carries an asset at cost of 30 years to 40 years ago. Therefore, the book value does not give measure of true value of these assets of this company.
Dividend: Dividend tells us 3 things.
1. Dividend can only come as a result of earnings. In other words, company cannot pay what it doesn't have. In order for a company to pay dividend, it has to have earnings. This let us know that the company we are investing in, is a profitable concern.
2. Dividend represents income. It is a tangible return on your investment you receive every quarter. It is cash in your pocket. You can spend it on your needs, or you can reinvest that dividend into other dividend paying stocks and compound your returns.
3. Dividend helps us provide a basis for value. High quality stocks have some shared characteristics and repetitive patterns. These stocks tend to trade between 2 different bands of dividend yield. One band is when the price is low and the yield is high. The second band is when the price is high and the yield is low. Also, these stocks tend to trade in between these 2 bands over long period of time which gives us a good range to understand when to buy the stock and when to sell the stock.
To summarise: Dividend does 3 things.
1. It shows us our company is a profitable concern.
2. It puts income into our pocket.
3. It tells us when to buy and when to sell a stock.
http://articles.moneycentral.msn.com/learn-how-to-invest/new-investor-center-video-ap.aspx?cp-documentid=9d33155e-df9b-43b7-8535-9f2a8d87c769
Also read:
Why dividends are important for investors' portfolios.
Investing for the long run
Stock Course
Stocks 103: Investing for the long run
Over time, the rewards of investing in stocks outweigh the risks.
[Related content: stocks, stock market, investing strategy, shorting, investments]
By Morningstar.com
In the lesson Stocks 102, we noticed that the difference of only a few percentage points in investment returns or interest rates can have a huge impact on your future wealth. Therefore, in the long run, the rewards of investing in stocks can outweigh the risks. We'll examine this risk/reward dynamic in this lesson.
Volatility of single stocks
Individual stocks tend to have highly volatile prices, and the returns you might receive on any single stock may vary wildly. If you invest in the right stock, you could make bundles of money. For instance, Eaton Vance EV, an investment-management company, has had the best-performing stock for the last 25 years. If you had invested $10,000 in 1979 in Eaton Vance, assuming you had reinvested all dividends, your investment would have been worth $10.6 million by December 2004.
On the downside, since the returns on stock investments are not guaranteed, you risk losing everything on any given investment. There are hundreds of recent examples of dot-com investments that went bankrupt or are trading for a fraction of their former highs. Even established, well-known companies such as Enron, WorldCom, and Kmart filed for bankruptcy, and investors in these companies lost everything.
Morningstar.com's Investing Classroom
Between these two extremes is the daily, weekly, monthly, and yearly fluctuation of any given company's stock price. Most stocks won't double in the coming year, nor will many go to zero. But do consider that the average difference between the yearly high and low stock prices of the typical stock on the New York Stock Exchange is nearly 40%.
More from MSN Money and Morningstar
Stocks 104: What matters and what doesn't
Stocks 105: The purpose of a company
Stocks 106: Gathering relevant information
Stocks 107: Introduction to financial statements
MSN Money's New Investor Center
In addition to volatility, there is the risk that a single company's stock price may not increase significantly over time. In 1965, you could have purchased General Motors (GM) stock for $50 per share (split adjusted). In the following decades, though, this investment has only spun its wheels. By June 2008, your shares of General Motors would be worth only about $18 each. Though dividends would have provided some ease to the pain, General Motors' return has been terrible. You would have been better off if you had invested your money in a bank savings account instead of General Motors stock.
Clearly, if you put all of your eggs in a single basket, sometimes that basket may fail, breaking all the eggs. Other times, that basket will hold the equivalent of a winning lottery ticket.
Volatility of the stock market
One way of reducing the risk of investing in individual stocks is by holding a larger number of stocks in a portfolio. However, even a portfolio of stocks containing a wide variety of companies can fluctuate wildly. You may experience large losses over short periods. Market dips, sometimes significant, are simply part of investing in stocks.
For example, consider the Dow Jones Industrials Index, a basket of 30 of the most popular, and some of the best, companies in America. If during the last 100 years you had held an investment tracking the Dow, there would have been 10 different occasions when that investment would have lost 40% or more of its value.
More investing courses from Morningstar
The yearly returns in the stock market also fluctuate dramatically. The highest one-year rate of return of 67% occurred in 1933, while the lowest one-year rate of return of negative 53% occurred in 1931. It should be obvious by now that stocks are volatile, and there is a significant risk if you cannot ride out market losses in the short term. But don't worry; there is a bright side to this story.
Over the long term, stocks are best
Despite all the short-term risks and volatility, stocks as a group have had the highest long-term returns of any investment type. This is an incredibly important fact! When the stock market has crashed, the market has always rebounded and gone on to new highs. Stocks have outperformed bonds on a total real return (after inflation) basis, on average. This holds true even after market peaks.
Continued: Best performers
Related content: stocks, stock market, investing strategy, shorting, investments]
If you had deplorable timing and invested $100 into the stock market during any of the seven major market peaks in the 20th century, that investment, over the next 10 years, would have been worth $125 after inflation, but it would have been worth only $107 had you invested in bonds, and $99 if you had purchased government Treasury bills. In other words, stocks have been the best-performing asset class over the long term, while government bonds, in these cases, have merely kept up with inflation.
This is the whole reason to go through the effort of investing in stocks. Again, even if you had invested in stocks at the highest peak in the market, your total after-inflation returns after 10 years would have been higher for stocks than either bonds or cash. Had you invested a little at a time, not just when stocks were expensive but also when they were cheap, your returns would have been much greater.
Time is on your side
Just as compound interest can dramatically grow your wealth over time, the longer you invest in stocks, the better off you will be. With time, your chances of making money increase, and the volatility of your returns decreases.
The average annual return for the S&P 500 stock index for a single year has ranged from negative 39% to positive 61%, while averaging 13.2%. Stocks held for five years have seen annualized returns ranging from negative 4% to positive 30% while averaging 11.9%.
These returns easily surpass those you can get from any of the other major types of investments. Again, as your holding period increases, the expected return variation decreases, and the likelihood for a positive return increases. This is why it is important to have a long-term investment horizon when you are getting started in stocks.
More from MSN Money and Morningstar
Stocks 104: What matters and what doesn't
Stocks 105: The purpose of a company
Stocks 106: Gathering relevant information
Stocks 107: Introduction to financial statements
MSN Money's New Investor Center
Why stocks perform the best
While historical results certainly offer insight into the types of returns to expect in the future, it is still important to ask the following questions: Why, exactly, have stocks been the best-performing asset class? And why should we expect those types of returns to continue? In other words, why should we expect history to repeat?
Quite simply, stocks allow investors to own companies that have the ability to create enormous economic value. Stock investors have full exposure to this upside. For instance, in 1985, would you have rather lent Microsoft money at a 6% interest rate, or would you have rather been an owner, seeing the value of your investment grow several-hundred fold?
Because of the risk, stock investors also require the largest return compared with other types of investors before they will give their money to companies to grow their businesses. More often than not, companies are able to generate enough value to cover this return demanded by their owners.
Meanwhile, bond investors do not reap the benefit of economic expansion to nearly as large a degree. When you buy a bond, the interest rate on the original investment will never increase. Your theoretical loan to Microsoft yielding 6% would have never yielded more than 6%, no matter how well the company did. Being an owner certainly exposes you to greater risk and volatility, but the sky is also the limit on the potential return.
The bottom line
While stocks make an attractive investment in the long run, stock returns are not guaranteed and tend to be volatile in the short term. Therefore, we do not recommend that you invest in stocks to achieve your short-term goals. For best results, you should invest in stocks only to meet long-term objectives that are at least five years away. And the longer you invest, the greater your chances of achieving the types of returns that make investing in stocks worthwhile.
Published Oct. 1, 2008
http://articles.moneycentral.msn.com/learn-how-to-invest/stocks-103-investing-for-the-long-run.aspx
Stocks 103: Investing for the long run
Over time, the rewards of investing in stocks outweigh the risks.
[Related content: stocks, stock market, investing strategy, shorting, investments]
By Morningstar.com
In the lesson Stocks 102, we noticed that the difference of only a few percentage points in investment returns or interest rates can have a huge impact on your future wealth. Therefore, in the long run, the rewards of investing in stocks can outweigh the risks. We'll examine this risk/reward dynamic in this lesson.
Volatility of single stocks
Individual stocks tend to have highly volatile prices, and the returns you might receive on any single stock may vary wildly. If you invest in the right stock, you could make bundles of money. For instance, Eaton Vance EV, an investment-management company, has had the best-performing stock for the last 25 years. If you had invested $10,000 in 1979 in Eaton Vance, assuming you had reinvested all dividends, your investment would have been worth $10.6 million by December 2004.
On the downside, since the returns on stock investments are not guaranteed, you risk losing everything on any given investment. There are hundreds of recent examples of dot-com investments that went bankrupt or are trading for a fraction of their former highs. Even established, well-known companies such as Enron, WorldCom, and Kmart filed for bankruptcy, and investors in these companies lost everything.
Morningstar.com's Investing Classroom
Between these two extremes is the daily, weekly, monthly, and yearly fluctuation of any given company's stock price. Most stocks won't double in the coming year, nor will many go to zero. But do consider that the average difference between the yearly high and low stock prices of the typical stock on the New York Stock Exchange is nearly 40%.
More from MSN Money and Morningstar
Stocks 104: What matters and what doesn't
Stocks 105: The purpose of a company
Stocks 106: Gathering relevant information
Stocks 107: Introduction to financial statements
MSN Money's New Investor Center
In addition to volatility, there is the risk that a single company's stock price may not increase significantly over time. In 1965, you could have purchased General Motors (GM) stock for $50 per share (split adjusted). In the following decades, though, this investment has only spun its wheels. By June 2008, your shares of General Motors would be worth only about $18 each. Though dividends would have provided some ease to the pain, General Motors' return has been terrible. You would have been better off if you had invested your money in a bank savings account instead of General Motors stock.
Clearly, if you put all of your eggs in a single basket, sometimes that basket may fail, breaking all the eggs. Other times, that basket will hold the equivalent of a winning lottery ticket.
Volatility of the stock market
One way of reducing the risk of investing in individual stocks is by holding a larger number of stocks in a portfolio. However, even a portfolio of stocks containing a wide variety of companies can fluctuate wildly. You may experience large losses over short periods. Market dips, sometimes significant, are simply part of investing in stocks.
For example, consider the Dow Jones Industrials Index, a basket of 30 of the most popular, and some of the best, companies in America. If during the last 100 years you had held an investment tracking the Dow, there would have been 10 different occasions when that investment would have lost 40% or more of its value.
More investing courses from Morningstar
The yearly returns in the stock market also fluctuate dramatically. The highest one-year rate of return of 67% occurred in 1933, while the lowest one-year rate of return of negative 53% occurred in 1931. It should be obvious by now that stocks are volatile, and there is a significant risk if you cannot ride out market losses in the short term. But don't worry; there is a bright side to this story.
Over the long term, stocks are best
Despite all the short-term risks and volatility, stocks as a group have had the highest long-term returns of any investment type. This is an incredibly important fact! When the stock market has crashed, the market has always rebounded and gone on to new highs. Stocks have outperformed bonds on a total real return (after inflation) basis, on average. This holds true even after market peaks.
Continued: Best performers
Related content: stocks, stock market, investing strategy, shorting, investments]
If you had deplorable timing and invested $100 into the stock market during any of the seven major market peaks in the 20th century, that investment, over the next 10 years, would have been worth $125 after inflation, but it would have been worth only $107 had you invested in bonds, and $99 if you had purchased government Treasury bills. In other words, stocks have been the best-performing asset class over the long term, while government bonds, in these cases, have merely kept up with inflation.
This is the whole reason to go through the effort of investing in stocks. Again, even if you had invested in stocks at the highest peak in the market, your total after-inflation returns after 10 years would have been higher for stocks than either bonds or cash. Had you invested a little at a time, not just when stocks were expensive but also when they were cheap, your returns would have been much greater.
Time is on your side
Just as compound interest can dramatically grow your wealth over time, the longer you invest in stocks, the better off you will be. With time, your chances of making money increase, and the volatility of your returns decreases.
The average annual return for the S&P 500 stock index for a single year has ranged from negative 39% to positive 61%, while averaging 13.2%. Stocks held for five years have seen annualized returns ranging from negative 4% to positive 30% while averaging 11.9%.
These returns easily surpass those you can get from any of the other major types of investments. Again, as your holding period increases, the expected return variation decreases, and the likelihood for a positive return increases. This is why it is important to have a long-term investment horizon when you are getting started in stocks.
More from MSN Money and Morningstar
Stocks 104: What matters and what doesn't
Stocks 105: The purpose of a company
Stocks 106: Gathering relevant information
Stocks 107: Introduction to financial statements
MSN Money's New Investor Center
Why stocks perform the best
While historical results certainly offer insight into the types of returns to expect in the future, it is still important to ask the following questions: Why, exactly, have stocks been the best-performing asset class? And why should we expect those types of returns to continue? In other words, why should we expect history to repeat?
Quite simply, stocks allow investors to own companies that have the ability to create enormous economic value. Stock investors have full exposure to this upside. For instance, in 1985, would you have rather lent Microsoft money at a 6% interest rate, or would you have rather been an owner, seeing the value of your investment grow several-hundred fold?
Because of the risk, stock investors also require the largest return compared with other types of investors before they will give their money to companies to grow their businesses. More often than not, companies are able to generate enough value to cover this return demanded by their owners.
Meanwhile, bond investors do not reap the benefit of economic expansion to nearly as large a degree. When you buy a bond, the interest rate on the original investment will never increase. Your theoretical loan to Microsoft yielding 6% would have never yielded more than 6%, no matter how well the company did. Being an owner certainly exposes you to greater risk and volatility, but the sky is also the limit on the potential return.
The bottom line
While stocks make an attractive investment in the long run, stock returns are not guaranteed and tend to be volatile in the short term. Therefore, we do not recommend that you invest in stocks to achieve your short-term goals. For best results, you should invest in stocks only to meet long-term objectives that are at least five years away. And the longer you invest, the greater your chances of achieving the types of returns that make investing in stocks worthwhile.
Published Oct. 1, 2008
http://articles.moneycentral.msn.com/learn-how-to-invest/stocks-103-investing-for-the-long-run.aspx
Introduction to financial statements
Learn about stocks
Stocks 107: Introduction to financial statements
You don't need to be a CPA to understand the basics of the three most fundamental and important financial statements: The income statement, the balance sheet, and the statement of cash flows.
[Related content: stocks, stock market, investments, investing strategy, bonds]
By Morningstar.com
Although the words "financial statements" and "accounting" send cold shivers down many people's backs, this is the language of business, a language investors need to know before buying stocks. The beauty is you don't need to be a CPA to understand the basics of the three most fundamental and important financial statements: the income statement, the balance sheet, and the statement of cash flows. All three of these statements are found in a firm's annual report, 10-K, and 10-Q filings.
The financial statements are windows into a company's performance and health. We'll provide a very basic overview of each financial statement in this lesson and go into much greater detail in Lessons 301-303.
Morningstar.com's Investing Classroom
The income statement
The income statement tells you how much money a company has brought in (its revenues), how much it has spent (its expenses), and the difference between the two (its profit or loss). It shows a company's revenues and expenses over a specific time frame such as three months or a year. This statement contains the information you'll most often see mentioned in the press or in financial reports -- figures such as total revenue, net income or earnings per share.
The income statement answers the question, "How well is the company's business performing?" Or in simpler terms, "Is it making money?" A company must be able to bring in more money than it spends or it won't be in business for very long. Companies with low expenses relative to revenues -- and thus, high profits relative to revenues -- are particularly desirable for investment because a bigger piece of each dollar the company brings in directly benefits you as a shareholder.
Each of the three main elements of the income statement is described below.
Revenues. The revenue section is typically the simplest part of the income statement. Often, there is just a single number that represents all the money a company brought in during a specific time period, although big companies sometimes break down revenues in ways that provide more information (for instance, segregated by geographic location or business segment). Revenues are also commonly known as sales.
More from MSN Money and Morningstar
Stocks 108: Learn the lingo – basic ratios
Stocks 101: Stocks versus other investments
Stocks 102: The magic of compounding
Stocks 103: Investing for the long run
MSN Money's New Investor Center
Expenses. Although there are many types of expenses, the two most common are the cost of sales and SG&A (selling, general and administrative) expenses. Cost of sales, which is also called cost of goods sold, is the expense most directly involved in creating revenue. For example, Gap (GPS, news, msgs) may pay $10 to make a shirt, which it sells for $15. When it is sold, the cost of sales for that shirt would be $10 -- what it cost Gap to produce the shirt for sale. Selling, general, and administrative expenses are also commonly known as operating expenses. This category includes most other costs in running a business, including marketing, management salaries, and technology expenses.
Profits. In its simplest form, profit is equal to total revenues minus total expenses. However, there are several commonly used profit subcategories investors should be aware of. Gross profit is calculated as revenues minus cost of sales. It basically shows how much money is left over to pay for operating expenses (and hopefully provide profit to stockholders) after a sale is made.
Using our example of the Gap shirt before, the gross profit from the sale of the shirt would have been $5 ($15 sales price - $10 cost of sales = $5 gross profit). Operating profit is equal to revenues minus the cost of sales and SG&A. This number represents the profit a company made from its actual operations, and excludes certain expenses and revenues that may not be related to its central operations. Net income generally represents the company's profit after all expenses, including financial expenses, have been paid. This number is often called the "bottom line" and is generally the figure people refer to when they use the word "profit" or "earnings."
The balance sheet
The balance sheet, also known as the statement of financial condition, basically tells you how much a company owns (its assets), and how much it owes (its liabilities). The difference between what it owns and what it owes is its equity, also commonly called "net assets," "stockholders' equity," or "net worth."
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The balance sheet provides investors with a snapshot of a company's health as of the date provided on the financial statement. Generally, if a company has lots of assets relative to liabilities, it's in good shape. Conversely, just as you would be cautious loaning money to a friend who is burdened with large debts, a company with a large amount of liabilities relative to assets should be scrutinized more carefully.
Each of the three primary elements of the balance sheet is described below.
Assets. There are two main types of assets: current assets and noncurrent assets. Within these two categories, there are numerous subcategories, many of which will be explained in Lesson 302. Current assets are likely to be used up or converted into cash within one business cycle -- usually defined as one year. For example, the groceries at your local supermarket would be classified as current assets because apples and bananas should be sold within the next year. Noncurrent assets are defined by our left-brained accountant friends as, you guessed it, anything not classified as a current asset. For example, the refrigerators at your supermarket would be classified as noncurrent assets because it's unlikely they will be "used up" or converted to cash within a year.
Liabilities. Similar to assets, there are two main categories of liabilities: current liabilities and noncurrent liabilities. Current liabilities are obligations the company must pay within a year. For example, your supermarket may have bought and received $1,000 worth of eggs from a local farm but won't pay for them until next month. Noncurrent liabilities are the flip side of noncurrent assets. These liabilities represent money the company owes one year or more in the future. For example, the grocer may borrow $1 million from a bank for a new store, which it must pay back in five years.
Equity. Equity represents the part of the company that is owned by shareholders; thus, it's commonly referred to as shareholders' equity. As described above, equity is equal to total assets minus total liabilities. Although there are several categories within equity, the two biggest are paid-in capital and retained earnings. Paid-in capital is the amount of money shareholders paid for their shares when the stock was first offered to the public. It basically represents how much money the firm received when it sold its shares. Retained earnings represent the total profits the company has earned since it began, minus whatever has been paid to shareholders as dividends. Because this is a cumulative number, if a company has lost money over time, retained earnings can be negative and would be renamed "accumulated deficit."
The statement of cash flows
The statement of cash flows tells you how much cash went into and out of a company during a specific time frame such as a quarter or a year. You may wonder why there's a need for such a statement because it sounds very similar to the income statement, which shows how much revenue came in and how many expenses went out.
The difference lies in a complex concept called accrual accounting. Accrual accounting requires companies to record revenues and expenses when transactions occur, not when cash is exchanged. While that explanation seems simple enough, it's a big mess in practice, and the statement of cash flows helps investors sort it out.
More from MSN Money and Morningstar
Stocks 108: Learn the lingo – basic ratios
Stocks 101: Stocks versus other investments
Stocks 102: The magic of compounding
Stocks 103: Investing for the long run
MSN Money's New Investor Center
The statement of cash flows is very important to investors because it shows how much actual cash a company has generated. The income statement, on the other hand, often includes noncash revenues or expenses, which the statement of cash flows excludes.
One of the most important traits you should seek in a potential investment is the company's ability to generate cash. Many companies have shown profits on the income statement but stumbled later because of insufficient cash flows. A good look at the statement of cash flows for those companies may have warned investors that rocky times were ahead.
Because companies can generate and use cash in several different ways, the statement of cash flows is separated into three sections: cash flows from operating activities, from investing activities and from financing activities.
The cash flows from operating activities section shows how much cash the company generated from its core business, as opposed to peripheral activities such as investing or borrowing. Investors should look closely at how much cash a company generates from its operating activities because it paints the best picture of how well the business is producing cash that will ultimately benefit shareholders.
The cash flows from investing activities section shows the amount of cash firms spent on investments. Investments are usually classified as either capital expenditures -- money spent on items such as new equipment or anything else needed to keep the business running -- or monetary investments such as the purchase or sale of money market funds.
The cash flows from financing activities section includes any activities involved in transactions with the company's owners or debtors. For example, cash proceeds from new debt, or dividends paid to investors would be found in this section.
Free cash flow is a term you will become very familiar with over the course of these lessons. In simple terms, it represents the amount of excess cash a company generated, which can be used to enrich shareholders or invest in new opportunities for the business without hurting the existing operations; thus, it's considered "free." Although there are many methods of determining free cash flow, the most common method is taking the net cash flows provided by operating activities and subtracting capital expenditures (as found in the "cash flows from investing activities" section).
Cash from Operations - Capital Expenditures = Free Cash Flow
The bottom line
Phew!!!
You made it through an entire lesson about financial statements. While we're the first to acknowledge that there are far more exciting aspects of investing in stocks than learning about accounting and financial statements, it's essential for investors to know the language of business. We also recommend you sharpen your newfound language skills by taking a good look at the more-detailed discussion on financial statements in Lessons 301-303.
Stocks 107: Introduction to financial statements
You don't need to be a CPA to understand the basics of the three most fundamental and important financial statements: The income statement, the balance sheet, and the statement of cash flows.
[Related content: stocks, stock market, investments, investing strategy, bonds]
By Morningstar.com
Although the words "financial statements" and "accounting" send cold shivers down many people's backs, this is the language of business, a language investors need to know before buying stocks. The beauty is you don't need to be a CPA to understand the basics of the three most fundamental and important financial statements: the income statement, the balance sheet, and the statement of cash flows. All three of these statements are found in a firm's annual report, 10-K, and 10-Q filings.
The financial statements are windows into a company's performance and health. We'll provide a very basic overview of each financial statement in this lesson and go into much greater detail in Lessons 301-303.
Morningstar.com's Investing Classroom
The income statement
The income statement tells you how much money a company has brought in (its revenues), how much it has spent (its expenses), and the difference between the two (its profit or loss). It shows a company's revenues and expenses over a specific time frame such as three months or a year. This statement contains the information you'll most often see mentioned in the press or in financial reports -- figures such as total revenue, net income or earnings per share.
The income statement answers the question, "How well is the company's business performing?" Or in simpler terms, "Is it making money?" A company must be able to bring in more money than it spends or it won't be in business for very long. Companies with low expenses relative to revenues -- and thus, high profits relative to revenues -- are particularly desirable for investment because a bigger piece of each dollar the company brings in directly benefits you as a shareholder.
Each of the three main elements of the income statement is described below.
Revenues. The revenue section is typically the simplest part of the income statement. Often, there is just a single number that represents all the money a company brought in during a specific time period, although big companies sometimes break down revenues in ways that provide more information (for instance, segregated by geographic location or business segment). Revenues are also commonly known as sales.
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Expenses. Although there are many types of expenses, the two most common are the cost of sales and SG&A (selling, general and administrative) expenses. Cost of sales, which is also called cost of goods sold, is the expense most directly involved in creating revenue. For example, Gap (GPS, news, msgs) may pay $10 to make a shirt, which it sells for $15. When it is sold, the cost of sales for that shirt would be $10 -- what it cost Gap to produce the shirt for sale. Selling, general, and administrative expenses are also commonly known as operating expenses. This category includes most other costs in running a business, including marketing, management salaries, and technology expenses.
Profits. In its simplest form, profit is equal to total revenues minus total expenses. However, there are several commonly used profit subcategories investors should be aware of. Gross profit is calculated as revenues minus cost of sales. It basically shows how much money is left over to pay for operating expenses (and hopefully provide profit to stockholders) after a sale is made.
Using our example of the Gap shirt before, the gross profit from the sale of the shirt would have been $5 ($15 sales price - $10 cost of sales = $5 gross profit). Operating profit is equal to revenues minus the cost of sales and SG&A. This number represents the profit a company made from its actual operations, and excludes certain expenses and revenues that may not be related to its central operations. Net income generally represents the company's profit after all expenses, including financial expenses, have been paid. This number is often called the "bottom line" and is generally the figure people refer to when they use the word "profit" or "earnings."
The balance sheet
The balance sheet, also known as the statement of financial condition, basically tells you how much a company owns (its assets), and how much it owes (its liabilities). The difference between what it owns and what it owes is its equity, also commonly called "net assets," "stockholders' equity," or "net worth."
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The balance sheet provides investors with a snapshot of a company's health as of the date provided on the financial statement. Generally, if a company has lots of assets relative to liabilities, it's in good shape. Conversely, just as you would be cautious loaning money to a friend who is burdened with large debts, a company with a large amount of liabilities relative to assets should be scrutinized more carefully.
Each of the three primary elements of the balance sheet is described below.
Assets. There are two main types of assets: current assets and noncurrent assets. Within these two categories, there are numerous subcategories, many of which will be explained in Lesson 302. Current assets are likely to be used up or converted into cash within one business cycle -- usually defined as one year. For example, the groceries at your local supermarket would be classified as current assets because apples and bananas should be sold within the next year. Noncurrent assets are defined by our left-brained accountant friends as, you guessed it, anything not classified as a current asset. For example, the refrigerators at your supermarket would be classified as noncurrent assets because it's unlikely they will be "used up" or converted to cash within a year.
Liabilities. Similar to assets, there are two main categories of liabilities: current liabilities and noncurrent liabilities. Current liabilities are obligations the company must pay within a year. For example, your supermarket may have bought and received $1,000 worth of eggs from a local farm but won't pay for them until next month. Noncurrent liabilities are the flip side of noncurrent assets. These liabilities represent money the company owes one year or more in the future. For example, the grocer may borrow $1 million from a bank for a new store, which it must pay back in five years.
Equity. Equity represents the part of the company that is owned by shareholders; thus, it's commonly referred to as shareholders' equity. As described above, equity is equal to total assets minus total liabilities. Although there are several categories within equity, the two biggest are paid-in capital and retained earnings. Paid-in capital is the amount of money shareholders paid for their shares when the stock was first offered to the public. It basically represents how much money the firm received when it sold its shares. Retained earnings represent the total profits the company has earned since it began, minus whatever has been paid to shareholders as dividends. Because this is a cumulative number, if a company has lost money over time, retained earnings can be negative and would be renamed "accumulated deficit."
The statement of cash flows
The statement of cash flows tells you how much cash went into and out of a company during a specific time frame such as a quarter or a year. You may wonder why there's a need for such a statement because it sounds very similar to the income statement, which shows how much revenue came in and how many expenses went out.
The difference lies in a complex concept called accrual accounting. Accrual accounting requires companies to record revenues and expenses when transactions occur, not when cash is exchanged. While that explanation seems simple enough, it's a big mess in practice, and the statement of cash flows helps investors sort it out.
More from MSN Money and Morningstar
Stocks 108: Learn the lingo – basic ratios
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The statement of cash flows is very important to investors because it shows how much actual cash a company has generated. The income statement, on the other hand, often includes noncash revenues or expenses, which the statement of cash flows excludes.
One of the most important traits you should seek in a potential investment is the company's ability to generate cash. Many companies have shown profits on the income statement but stumbled later because of insufficient cash flows. A good look at the statement of cash flows for those companies may have warned investors that rocky times were ahead.
Because companies can generate and use cash in several different ways, the statement of cash flows is separated into three sections: cash flows from operating activities, from investing activities and from financing activities.
The cash flows from operating activities section shows how much cash the company generated from its core business, as opposed to peripheral activities such as investing or borrowing. Investors should look closely at how much cash a company generates from its operating activities because it paints the best picture of how well the business is producing cash that will ultimately benefit shareholders.
The cash flows from investing activities section shows the amount of cash firms spent on investments. Investments are usually classified as either capital expenditures -- money spent on items such as new equipment or anything else needed to keep the business running -- or monetary investments such as the purchase or sale of money market funds.
The cash flows from financing activities section includes any activities involved in transactions with the company's owners or debtors. For example, cash proceeds from new debt, or dividends paid to investors would be found in this section.
Free cash flow is a term you will become very familiar with over the course of these lessons. In simple terms, it represents the amount of excess cash a company generated, which can be used to enrich shareholders or invest in new opportunities for the business without hurting the existing operations; thus, it's considered "free." Although there are many methods of determining free cash flow, the most common method is taking the net cash flows provided by operating activities and subtracting capital expenditures (as found in the "cash flows from investing activities" section).
Cash from Operations - Capital Expenditures = Free Cash Flow
The bottom line
Phew!!!
You made it through an entire lesson about financial statements. While we're the first to acknowledge that there are far more exciting aspects of investing in stocks than learning about accounting and financial statements, it's essential for investors to know the language of business. We also recommend you sharpen your newfound language skills by taking a good look at the more-detailed discussion on financial statements in Lessons 301-303.
Saturday 9 May 2009
One fund manager says it's time to buy when the chips are down - way down.
One fund manager says it's time to buy when the chips are down - way down.
NEW YORK (Fortune) -- Chris McHugh, manager of Turner Midcap Growth Fund, thinks it's time for investors to get back into buying mode and take on a longer-term view of the market.
"Historically you want to buy when things look absolutely at their worst," he says. "The traditional investor unfortunately always sells at the bottom and buys at the top."
While there are risks, he believes investors should accumulate during the dips if they don't want to miss out. For his fund, McHugh says that means buying high-quality growth names (like Kohl's (KSS, Fortune 500), its top holding), companies positioned to take market share, and early-cycle businesses that are the first to rally when the market bottoms.
"I think that's the right combination to be looking at to take advantage of very depressed valuation levels from a longer-term perspective in the marketplace," he says.
The Turner Midcap Growth Fund is up 14.94% year to date, beating out its category returns of 11.13% for the same period, according to Morningstar. The fund has dropped about 37% over a one-year period, but over five years it has fallen 0.53%, just beating out its category (-0.87%). Launched in 1996, the fund has about $840 million in assets.
McHugh places a special priority on earnings - both in their sustainability and quality. Crucial to him is that a company beats and exceeds expectations.
"At the end of the day, that's really the essence of the stock market," he says. "It all comes down to earnings, or lack thereof."
The fund's top holding in the "market-share gainer" category is McAfee (MFE), which provides computer security - one of the last tech items to get cut when a company is trimming costs, according to McHugh.
Another market-share gainer is Best Buy (BBY, Fortune 500), which he thinks is going to "take significant advantage of Circuit City's demise." McHugh believes the retailer can be stronger on its pricing strategy, which leads to better margins and earnings over time.
Early-cycle stocks, including housing, semiconductors, retailing, and certain industrials, will outperform when the economy improves, he says. In retail, McHugh likes Urban Outfitters (URBN) and Guess (GES), which he says have stayed on top of fashion trends and moved inventory, which means less discounting over the long run.
"There are some things that the consumer doesn't want to let go of," he says. "I think fashion and clothing are still high on the list as opposed to home furnishings or appliances."
McHugh's investment process involves three components - examining fundamentals, which included more than 1,000 meetings with management in 2008; technical analysis of stock charts to help with timing entry or exit points; and a quantitative component that examines 70 different factors considered predicative of future stock price performance.
Turner's 21 analysts divide the market into broad sectors and each specialize in one of five areas: healthcare, financial services, technology, consumer, and cyclical. While cyclical companies are not typically considered growth businesses, McHugh says one of the fund's strengths is being able to find growth stocks in what have not traditionally been considered growth sectors.
In the energy sector, which the fund categorizes as cyclical, McHugh likes natural gas companies, as he expects a price recovery in 2010 or 2011.
Southwestern Energy (SWN) and Range Resources (RRC), two of his long-time holdings, have grown production at more than four times the rate for the overall sector, he says. The two companies are big players in the U.S. oil shale industry, which he notes is the nation's fastest growing production area. Their production costs per barrel are also less than the industry average.
One of his fund's top holdings in tech - and one of its top 10 in the portfolio - is F5 Networks (FFIV), which produces software and hardware to make businesses' networks secure and more efficient. When its clients, which include Amazon, Microsoft, and Oracle, outgrow their networking needs, McHugh says, F5 allows them to expand without disrupting their operations.
http://money.cnn.com/2009/05/06/pf/growth_stocks_invest.fortune/index.htm
Turning $37.50 into $900,000.00+ ...
Turning $37.50 into $900,000.00+ ...
Sunday April 26, 2009
According to the most recent Fortune Magazine, which is dedicated to the annual Fortune 500, "If you'd bought a single share [of Johnson & Johnson] when the company went public in 1944 at its IPO price of $37.50 and had reinvested the dividends, you'd now have a bit over $900,000, a stunning annual return of 17.1%." On top of that, you'd be collecting somewhere around $34,200 per year in cash dividends!
The article goes on to say, "Even if you hadn't reinvested the dividends, that single share would now be 2,500 shares as a result of splits, and you'd be collecting dividends of $4,500 a year from that $37.50 investment. If only Grandpa had bought 100 shares."
Sunday April 26, 2009
According to the most recent Fortune Magazine, which is dedicated to the annual Fortune 500, "If you'd bought a single share [of Johnson & Johnson] when the company went public in 1944 at its IPO price of $37.50 and had reinvested the dividends, you'd now have a bit over $900,000, a stunning annual return of 17.1%." On top of that, you'd be collecting somewhere around $34,200 per year in cash dividends!
The article goes on to say, "Even if you hadn't reinvested the dividends, that single share would now be 2,500 shares as a result of splits, and you'd be collecting dividends of $4,500 a year from that $37.50 investment. If only Grandpa had bought 100 shares."
Investing in IPOs?
Investing in IPOs?
A question from Yahoo! Answers:
Investing in newly floated companies?
Just a thought…. I guess new companies floating on the stock market make an interesting investment. High risk and possibly great gain??. Does anyone have any opinions on this? How can you find out about new floatation? Does anyone know how many occur in a typical year?
Companies issuing stock during 1970-1990, whether in an initial public offering (IPO) or a seasoned equity offering (SEO), have been poor long run investments for investors.
During the five years after the issue, investors have received average returns of only 5% per year for companies going public and only 7% per year for companies conducting an SEO.
Book to market effects account for only a modest portion of the low returns. An investor would have had to invest 44% more money in the issuers than in non-issuers of the same size to have the same wealth five years after the offering date.
Source:
Loughran, Tim, and Jay R. Ritter, 1995, “The new issues puzzle,” Journal of Finance 50, 23-51.
http://www.myvirtualdisplay.com/2007/01/17/investing-in-ipos/
A question from Yahoo! Answers:
Investing in newly floated companies?
Just a thought…. I guess new companies floating on the stock market make an interesting investment. High risk and possibly great gain??. Does anyone have any opinions on this? How can you find out about new floatation? Does anyone know how many occur in a typical year?
Companies issuing stock during 1970-1990, whether in an initial public offering (IPO) or a seasoned equity offering (SEO), have been poor long run investments for investors.
During the five years after the issue, investors have received average returns of only 5% per year for companies going public and only 7% per year for companies conducting an SEO.
Book to market effects account for only a modest portion of the low returns. An investor would have had to invest 44% more money in the issuers than in non-issuers of the same size to have the same wealth five years after the offering date.
Source:
Loughran, Tim, and Jay R. Ritter, 1995, “The new issues puzzle,” Journal of Finance 50, 23-51.
http://www.myvirtualdisplay.com/2007/01/17/investing-in-ipos/
Warren Buffett: What does intrinsic value mean?
What does intrinsic value mean?
Why doesn't Mr. Buffett provide the shareholders with his estimate of Berkshire's intrinsic value?
"Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple.
As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover - and this would apply even to Charlie and me - will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of intrinsic value. What our annual reports do supply, though, are the facts that we ourselves use to calculate this value."
Source: Berkshire Hathaway's Owner's Manual
-----
BERKSHIRE HATHAWAY INC.
AN OWNER'S MANUAL*
A Message from Warren E. Buffett, Chairman and CEO
January 1999
INTRINSIC VALUE
Now let's focus on two terms that I mentioned earlier and that you will encounter in future annual reports.
Let's start with intrinsic value, an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.
The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover - and this would apply even to Charlie and me - will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of intrinsic value. What our annual reports do supply, though, are the facts that we ourselves use to calculate this value.
Meanwhile, we regularly report our per-share book value, an easily calculable number, though one of limited use. The limitations do not arise from our holdings of marketable securities, which are carried on our books at their current prices. Rather the inadequacies of book value have to do with the companies we control, whose values as stated on our books may be far different from their intrinsic values.
The disparity can go in either direction. For example, in 1964 we could state with certitude that Berkshire's per-share book value was $19.46. However, that figure considerably overstated the company's intrinsic value, since all of the company's resources were tied up in a sub-profitable textile business. Our textile assets had neither going- concern nor liquidation values equal to their carrying values. Today, however, Berkshire's situation is reversed: Now, our book value far understates Berkshire's intrinsic value, a point true because many of the businesses we control are worth much more than their carrying value.
Inadequate though they are in telling the story, we give you Berkshire's book-value figures because they today serve as a rough, albeit significantly understated, tracking measure for Berkshire's intrinsic value. In other words, the percentage change in book value in any given year is likely to be reasonably close to that year's change in intrinsic value.
You can gain some insight into the differences between book value and intrinsic value by looking at one form of investment, a college education. Think of the education's cost as its "book value." If this cost is to be accurate, it should include the earnings that were foregone by the student because he chose college rather than a job.
For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value. First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an appropriate interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education.
Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn't get his money's worth. In other cases, the intrinsic value of an education will far exceed its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as an indicator of intrinsic value.
http://www.berkshirehathaway.com/owners.html
http://www.focusinvestor.com/brkfaq.htm
Why doesn't Mr. Buffett provide the shareholders with his estimate of Berkshire's intrinsic value?
"Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple.
As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover - and this would apply even to Charlie and me - will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of intrinsic value. What our annual reports do supply, though, are the facts that we ourselves use to calculate this value."
Source: Berkshire Hathaway's Owner's Manual
-----
BERKSHIRE HATHAWAY INC.
AN OWNER'S MANUAL*
A Message from Warren E. Buffett, Chairman and CEO
January 1999
INTRINSIC VALUE
Now let's focus on two terms that I mentioned earlier and that you will encounter in future annual reports.
Let's start with intrinsic value, an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.
The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover - and this would apply even to Charlie and me - will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of intrinsic value. What our annual reports do supply, though, are the facts that we ourselves use to calculate this value.
Meanwhile, we regularly report our per-share book value, an easily calculable number, though one of limited use. The limitations do not arise from our holdings of marketable securities, which are carried on our books at their current prices. Rather the inadequacies of book value have to do with the companies we control, whose values as stated on our books may be far different from their intrinsic values.
The disparity can go in either direction. For example, in 1964 we could state with certitude that Berkshire's per-share book value was $19.46. However, that figure considerably overstated the company's intrinsic value, since all of the company's resources were tied up in a sub-profitable textile business. Our textile assets had neither going- concern nor liquidation values equal to their carrying values. Today, however, Berkshire's situation is reversed: Now, our book value far understates Berkshire's intrinsic value, a point true because many of the businesses we control are worth much more than their carrying value.
Inadequate though they are in telling the story, we give you Berkshire's book-value figures because they today serve as a rough, albeit significantly understated, tracking measure for Berkshire's intrinsic value. In other words, the percentage change in book value in any given year is likely to be reasonably close to that year's change in intrinsic value.
You can gain some insight into the differences between book value and intrinsic value by looking at one form of investment, a college education. Think of the education's cost as its "book value." If this cost is to be accurate, it should include the earnings that were foregone by the student because he chose college rather than a job.
For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value. First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an appropriate interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education.
Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn't get his money's worth. In other cases, the intrinsic value of an education will far exceed its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as an indicator of intrinsic value.
http://www.berkshirehathaway.com/owners.html
http://www.focusinvestor.com/brkfaq.htm
Friday 8 May 2009
It is the Business that Matters
IT IS THE BUSINESS THAT MATTERS
Analyst upgrades and chart patterns may be fine tools for traders who treat Wall Street like a casino, but they're of little use to investors who truly want to build wealth in the stock market. You have to get your hands dirty and understand the businesses of the stocks you own if you hope to be a successful long-term investor.
Over the long haul, stock prices tend to track the value of the business. When firms do well, so do their shares, and when business suffers, the stock will as well. Always focus on the company's fundamental financial performance.
Wal-Mart, for example, hit a speed bump in the mid-1990s when its growth rate slowed down a bit - and its share price was essentially flat during the same period. On the other hand, Colgate-Palmolive posted great results during the late 1990s as it cut fat from its supply chain and launched an innovative toothpaste that stole market share - and the company's stock saw dramatic gains at the same time. The message is clear: COMPANY FUNDAMENTALS HAVE A DIRECT EFFECT ON SHARE PRICES.
This principle applies only over a long time period - in the short term, stock prices can (and do) move around for a whole host of reasons that have nothing whatsoever to do with the underlying value of the company. We firmly advocate focussing on the LONG-TERM PERFORMANCE of businesses because the SHORT-TERM PRICE MOVEMENT of a stock is COMPLETELY UNPREDICTABLE. (Benjamin Graham: In the short term, the market is like a voting machine, however, in the long term it works like a weighing machine.)
Think back to the Internet mania of the late 1990s. Wonderful (but boring) businesses such as insurance companies, banks, and real estate stocks traded at incredibly low valuations, even though the intrinsic worth of these businesses hadn't really changed. At the same time, companies that had not a prayer of turning a profit wer being accorded billion-dollar valuations.
Analyst upgrades and chart patterns may be fine tools for traders who treat Wall Street like a casino, but they're of little use to investors who truly want to build wealth in the stock market. You have to get your hands dirty and understand the businesses of the stocks you own if you hope to be a successful long-term investor.
Over the long haul, stock prices tend to track the value of the business. When firms do well, so do their shares, and when business suffers, the stock will as well. Always focus on the company's fundamental financial performance.
Wal-Mart, for example, hit a speed bump in the mid-1990s when its growth rate slowed down a bit - and its share price was essentially flat during the same period. On the other hand, Colgate-Palmolive posted great results during the late 1990s as it cut fat from its supply chain and launched an innovative toothpaste that stole market share - and the company's stock saw dramatic gains at the same time. The message is clear: COMPANY FUNDAMENTALS HAVE A DIRECT EFFECT ON SHARE PRICES.
This principle applies only over a long time period - in the short term, stock prices can (and do) move around for a whole host of reasons that have nothing whatsoever to do with the underlying value of the company. We firmly advocate focussing on the LONG-TERM PERFORMANCE of businesses because the SHORT-TERM PRICE MOVEMENT of a stock is COMPLETELY UNPREDICTABLE. (Benjamin Graham: In the short term, the market is like a voting machine, however, in the long term it works like a weighing machine.)
Think back to the Internet mania of the late 1990s. Wonderful (but boring) businesses such as insurance companies, banks, and real estate stocks traded at incredibly low valuations, even though the intrinsic worth of these businesses hadn't really changed. At the same time, companies that had not a prayer of turning a profit wer being accorded billion-dollar valuations.
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