Buffett (1994): Investing can be done successfully even without making an attempt to figure out the unknowables.

Staying within one's circle of competence and investing in simple businesses were some of the key points that were discussed in Warren Buffett's 1993 letter to shareholders. Now let us fast forward to the year 1994 and see what investment wisdom the master has to offer in this letter.

Are you one of those guys who are quite keen on learning the nitty-gritty of the stock market but the sheer size of literature that is on offer on the topic makes you nervous? Further, with the kind of resources that the institutions, the ones that you would compete against, have at their disposal, it is quite normal for you to give up the thought without even having tried. Indeed, things like coming out with quaint economic theories, crunching a mountain of numbers and working on sophisticated spread sheets should be best left to professionals. While it is definitely good to be wary of the competition, in investing, one can still comfortably beat the competition without the aid of the sophisticated tools mentioned above. All it needs is loads of discipline and patience.

Thus, for those of you, who in an attempt to invest successfully, are trying to predict the next move of the Fed chief or trying to outguess fellow investors on which party will come to power in the next national elections, you are well advised to stop in your tracks because investing can be done successfully even without making an attempt to figure out these unknowables. Some words of wisdom along similar lines come straight from the master's 1994 letter to shareholders and this is what he has to say on the topic.

"We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.

But, surprise - none of these blockbuster events made the slightest dent in Ben Graham's investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.

A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results."

Infact, the master is not alone in his thinking on the subject but has an equally successful supporter who goes by the name of 'Peter Lynch', one of the most revered fund managers ever. He had once famously quipped, "If you spend 13 minutes per year trying to predict the economy, you have wasted 10 minutes".

Indeed, if these guys in their extremely long investment career could continue to ignore political and economic factors and focus just on the strength of the underlying business on hand and still come out triumphant, we do not see any reason as to why the same methodology cannot be copied here with equally good results.

http://www.equitymaster.com/detail.asp?date=2/1/2008&story=8

Buffett (1993): Staying within one's circle of competence and investing in simple businesses

A key mistake of investors was they never tried to fathom the relationship between the stock and the underlying business.
One should stick with the ones that can be easily understood and not subject to frequent changes.
"Why search for a needle buried in a haystack when one is sitting in plain sight?"

---

In the darkest days in the stock market history, there is no better time than this to imbibe the lessons being imparted by the master in value investing, a discipline or a form of investing that we think is one of the safest around.

One of the key mistakes the investors who suffered the most in the recent decline made was they never tried to fathom the relationship between the stock and the underlying business. Instead, they bought what was popular and hoping that there will still be a greater fool out there who would in turn buy from them. We believe that no matter how good the underlying business is, there is always an intrinsic value attached to it and one should not pay even a dime more for the same. Alas, this was not to be the case in the stock markets in recent times for many 'investors', where no effort was being made to evaluate the business model and the sustainability or longevity of the business.

In his 1993 letter to shareholders, the master has a very important point to say on why it is important to know the company or the industry that one invests in. This is what he has to offer on the topic.

"In many industries, of course, Charlie and I can't determine whether we are dealing with a "pet rock" or a "Barbie." We couldn't solve this problem, moreover, even if we were to spend years intensely studying those industries. Sometimes our own intellectual shortcomings would stand in the way of understanding, and in other cases the nature of the industry would be the roadblock. For example, a business that must deal with fast-moving technology is not going to lend itself to reliable evaluations of its long-term economics. Did we foresee thirty years ago what would transpire in the television-manufacturing or computer industries? Of course not. (Nor did most of the investors and corporate managers who enthusiastically entered those industries.) Why, then, should Charlie and I now think we can predict the future of other rapidly evolving businesses? We'll stick instead with the easy cases. Why search for a needle buried in a haystack when one is sitting in plain sight?"

As is evident from the above paragraph, an investor does himself no good in the long-run if he keeps on investing without understanding the economics of the underlying business. Infact, even when one is close to cracking the industry economics, some industries are best left alone because they are so dynamic that rapid technological changes might put their very existence at risk. Instead, one should stick with the ones that can be easily understood and not subject to frequent changes.

http://www.equitymaster.com/detail.asp?date=1/24/2008&story=3

Buffett (1993): His views on real risk and how 'beta" fails to spot competitive strengths inherent in certain companies

Concentration over excessive diversification and the futility of using a stock's beta were the two key concepts that were discussed in Warren Buffett's 1993 letters to shareholders. However, the master does not stop here and, in the follow up paragraphs, puts forth his views on what is the real risk that an investor should evaluate and how the 'beta' as defined by the academicians fails to spot competitive strengths inherent in certain companies.

First up, the master explains what is the real risk that an investor should assess and goes on to suggest that the first thing that needs to be looked at is whether the aggregate after tax returns from an investment over the holding period keeps the purchasing power of the investor intact and gives him a modest rate of interest on that initial stake. He is of the opinion that though this risk cannot be measured with engineering precision, in a few cases it can be judged with a degree of accuracy. The master then lists out a few primary factors for evaluation. These would be:

• 
  
  The certainty with which the long-term economic characteristics of the business can be evaluated;

  ---

• 
  
  The certainty with which management can be evaluated, both as to its ability to realise the full potential of the business and to wisely employ its cash flows;

  ---

• 
  
  The certainty with which management can be counted on to channel the rewards from the business to the shareholders rather than to itself;

  ---

• 
  
  The purchase price of the business; and

  ---

• 
  
  The levels of taxation and inflation that will be experienced and that will determine the degree by which an investor's purchasing-power return is reduced from his gross return.

Indeed, the above qualitative parameters are not likely to go down well with analysts who are married to their spreadsheets and sophisticated models. But this in no way reduces their importance. These parameters, the master says, may go a long way in helping an investor see the risks inherent in certain investments without reference to complex equations or price histories.

Buffett further goes on to add that for a person who is brought up on the concept of beta will have difficulties in separating companies with strong competitive advantages from the ones with mundane businesses and this he believes is one of the most ridiculous things to do in stock investing. This is what he has to say in his own inimitable style.

"The competitive strengths of a Coke or Gillette are obvious to even the casual observer of business. Yet the beta of their stocks is similar to that of a great many run-of-the-mill companies who possess little or no competitive advantage. 

• Should we conclude from this similarity that the competitive strength of Coke and Gillette gains them nothing when business risk is being measured? 
• Or should we conclude that the risk in owning a piece of a company - its stock - is somehow divorced from the long-term risk inherent in its business operations? 

We believe neither conclusion makes sense and that equating beta with investment risk also makes no sense."

He further states, "The theoretician bred on beta has no mechanism for differentiating the risk inherent in, say, a single-product toy company-selling pet rocks or hula hoops from that of another toy company whose sole product is Monopoly or Barbie. But it is quite possible for ordinary investors to make such distinctions if they have a reasonable understanding of consumer behavior and the factors that create long-term competitive strength or weakness. Obviously, every investor will make mistakes. But by confining himself to a relatively few, easy-to-understand cases, a reasonably intelligent, informed and diligent person can judge investment risks with a useful degree of accuracy."

http://www.equitymaster.com/detail.asp?date=1/17/2008&story=2

Buffett (1993): He believes in making infrequent large bets. "We'll now settle for one good idea a year."

Warren Buffett's 1992 letter to shareholders shared his views on healthcare accounting and ESOPs. Let us now see what insight the master has to offer in his 1993 letter to shareholders.

Ardent followers of the master might not be immune to the fact that whenever an extremely attractive opportunity has presented itself, Buffett has not hesitated to put huge sums in it. In sharp contrast to the current lot of fund manager who use fancy statistical tools to justify diversification, the master has been a believer in making infrequent bets but at the same time making large bets. In other words, he believes that a concentrated portfolio is much better than a diversified portfolio. This is what he has to say on the issue.

"Charlie and I decided long ago that in an investment lifetime it's just too hard to make hundreds of smart decisions. That judgment became ever more compelling as Berkshire's capital mushroomed and the universe of investments that could significantly affect our results shrank dramatically. Therefore, we adopted a strategy that required our being smart - and not too smart at that - only a very few times. Indeed, we'll now settle for one good idea a year. (Charlie says it's my turn.)

The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as "the possibility of loss or injury."

The master does not stop here. Like his previous letters, he once again takes potshots at academicians who define risk as the relative volatility of a stock price with respect to the market or what is now widely known as 'beta'. He very rightly contests that a stock which has been battered by the markets should as per the conventional wisdom bought in ever larger quantities because lower the price, higher the returns in the future. However, followers of beta are very likely to shun the stock for its perceived higher volatility. This is what he has to say on the issue.

"In assessing risk, a beta purist will disdain examining what a company produces, what its competitors are doing, or how much borrowed money the business employs. He may even prefer not to know the company's name. What he treasures is the price history of its stock. In contrast, we'll happily forgo knowing the price history and instead will seek whatever information will further our understanding of the company's business. After we buy a stock, consequently, we would not be disturbed if markets closed for a year or two. We don't need a daily quote on our 100% position in See's or H. H. Brown to validate our well-being. Why, then, should we need a quote on our 7% interest in Coke?"

http://www.equitymaster.com/detail.asp?date=1/10/2008&story=5

Buffett (1992): "How many legs does a dog have if you call his tail a leg?"

The master has taken potshots at every accounting convention that understates liabilities and overstates profits and asks investors to guard against such measures. Things like ESOPs and post retirement health benefits should be appropriately accounted for and considered as costs.



In his 1992 letter to shareholders, Warren Buffett's discoursed on valuations and intrinsic value.  In the same letter, let us see what he has to speak on employee compensation accounting and stock options.

In the year 1992, two new accounting rules came into being out of which one mandated companies to create a liability on the balance sheet to account for present value of employees' post retirement health benefits. The master used the occasion to turn the tables on managers and chieftains who under the pretext of the old method avoided huge dents on their P&Ls and balance sheets. The earlier method required accounting for such benefits only when they are cashed but did not take into account the future liabilities that would arise thus overstating the net worth as well as profits by way of inadequate provisioning. This is what the master had to say on the issue.

"Managers thinking about accounting issues should never forget one of Abraham Lincoln's favorite riddles: "How many legs does a dog have if you call his tail a leg?" The answer: "Four, because calling a tail a leg does not make it a leg." It behooves managers to remember that Abe's right even if an auditor is willing to certify that the tail is a leg."

By quoting the above statements, the master has taken potshots at every accounting convention that understates liabilities and overstates profits and asks investors to guard against such measures. Next he criticizes accounting standard for ESOPs prevailing in the US at that time and this is what he has to say on the topic.

"Typically, executives have argued that options are hard to value and that therefore their costs should be ignored. At other times, managers have said that assigning a cost to options would injure small start-up businesses. Sometimes they have even solemnly declared that "out-of-the-money" options (those with an exercise price equal to or above the current market price) have no value when they are issued.

Oddly, the Council of Institutional Investors has chimed in with a variation on that theme, opining that options should not be viewed as a cost because they "aren't dollars out of a company's coffers." I see this line of reasoning as offering exciting possibilities to American corporations for instantly improving their reported profits. For example, they could eliminate the cost of insurance by paying for it with options. So if you're a CEO and subscribe to this "no cash-no cost" theory of accounting, I'll make you an offer you can't refuse: Give us a call at Berkshire and we will happily sell you insurance in exchange for a bundle of long-term options on your company's stock."

The master has hit the nail on the head when he has further gone on to mention that something of value that is delivered to another party always has costs associated with it and these costs come out of the shareholders' pockets. Thus, things like ESOPs and post retirement health benefits should be appropriately accounted for and should not be hidden under the garb of fuzzy accounting standards and ingenious rationales.

Before we round off the 1992 letter, let us see how the master in a way that he only can so strongly puts up the case for ESOPs to be considered as costs.

• "If options aren't a form of compensation, what are they? 

• If compensation isn't an expense, what is it? 

• And, if expenses shouldn't go into the calculation of earnings, where in the world should they go?"

http://www.equitymaster.com/detail.asp?date=12/27/2007&story=4

Low P/E stocks: Are they trash or are they treasure?

Some Lowest P/E Stocks

LTKM 3.02
KUMPULAN FIMA 4.06
MEASAT GLOBAL 4.54
COASTAL 5.31
AJIYA 5.40
KLCC PROP 5.76
PANTECH 5.87
DXN 6.15
POH KONG 6.22

The above was posted on 25th January 2010.


There are reasons that stocks sink to a discount. 

Low PE stocks may have:

• 
  
  high risk earnings or
• 
  
  low growth.

Buying discounted shares doesn't always end happily, but it often does.

Nevertheless, if earnings gains keep improving, so should the P/E.


LOW P/E stocks don't just do more on the upside; they behave better when the market is falling.


Low PE stocks have little anticipation or expectation built into their price. Therefore, any improvement in performance is likely to boost the attention they get, while they suffer little if their results don't meet the Market's already low expectation.


The investor's call now is to decide 

• whether these groups can stage yet another comeback, or 
• whether they are on the slow train to oblivion.

The challenge of course, is separating the stocks 

• that are unfairly being beaten down because of overreaction 
• from those that deserve their low prices.

The graph below depicts the KLCI index.  The KLCI has risen since January 2010, lifting the prices of many stocks with it.




It should be interesting to see what have happened to these above counters since.





Wright Quality Rating: LBD8 Rating Explanations




Wright Quality Rating: LAB1 Rating Explanations




Wright Quality Rating: DBL1 Rating Explanations




Wright Quality Rating: LAA2 Rating Explanations




Wright Quality Rating: LAB1 Rating Explanations




Wright Quality Rating: CCB0 Rating Explanations





Wright Quality Rating: DANN Rating Explanations





Wright Quality Rating: LBC0 Rating Explanations





Wright Quality Rating: LBC6 Rating Explanations


The last 3 months and 5 years charts were shown for each of the above stocks.


Looking at the last 3 months price action:


Prices trending upwards:  LTKM, KFima, Measat, Coastal and Ajiya  (That's not a bad bet for investors willing to wait for multiple expansion)
Prices moving sideways:  KLCCP, Pantech, DXN
Prices trending downwards:  Pohkong


A rising tide (market) lifts all boats (stocks).  Also, there are always a lot of casualties after a bull market.  Knowing that the bull market is a more dangerous period than a bear market, what can we learn, if any, from these price behaviours?


John Neff wrote, "Indifferent financial performance by low PE companies seldom exacts a penalty. Hints of improved prospects trigger fresh interest. If you buy stocks when they are out of favour and unloved, and sell them into strength when other investors recognize their merits, you'll often go home with handsome gains."


If you have any last doubts about low P/E investing, consider this:The history of low P/E investing makes it clear that you stand to make money twice. 

• First, you win when companies start to earn bigger profits and share them with you by way of fatter dividends and rising share prices. 
• This will wake up all those investors who've been sleeping on the sidelines. They'll start buying, the multiple will increase, and presto!--you've won again. 

Related posts:

Low PE stocks may have high-risk earnings or low growth.

Low Price-Earnings Investor

Finding great values in low P/E stocks that are set to rise

Are you investing or speculating? Have a look at the investment policies of Benjamin Graham.

Investment Policies (Based on Benjamin Graham)

Summary of Investment Policies

A. INVESTMENT FOR FIXED INCOME:
US Savings Bonds (FDs or Amanah Sahams for Malaysians)

B. INVESTMENT FOR INCOME, MODERATE LONG-TERM APPRECIATION AND PROTECTION AGAINST INFLATION:
(1) INVESTMENT FUNDS bought at reasonable price.
(2) Diversified list of primary common stocks (BLUE CHIPS) bought at reasonable price. 

C. INVESTMENT CHIEFLY FOR PROFIT:
5 approaches are opened to both the small and the large investors:
(1) Representative common stocks bought when the MARKET level is clearly LOW.
(2) GROWTH STOCKS, when these can be obtained at reasonable prices in relation to actual accomplishment – GROWTH INVESTING.
(3) Purchase of securities selling well BELOW INTRINSIC VALUE – VALUE INVESTING.
(4) Purchase of WELL-SECURED PRIVILEGED SENIOR ISSUES (bonds and preferred shares).
(5) SPECIAL SITUATIONS: Mergers, arbitrages, cash pay-outs.


D. SPECULATION:
(1) Buying stock in new or virtually new ventures (IPOs) .
(2) TRADING in the market.
(3) Purchase of "GROWTH STOCKS" at GENEROUS PRICES.

.... brought to you by Bullbear :-)

When to Sell? The QVM approach to Selling Stocks

QUALITY:  First and foremost, investors should sell when they conclude that they have made a mistake.  Buffett sells his stock holdings infrequently because he buys only after he is convinced of their long-term value.

VALUE:  You should sell when the stock price is high in relation to its intrinsic value.  One reason to sell is the price of the stock in relation to alternatives available, including holding cash.  Buffett sold PetroChina for this reason.

MANAGEMENT:  He sold the Disney holding because he did not seem to have as much confidence in the new management as he had in the old management.  Once again, this shows that quality of management is very important to hi.

Finally, I liked the cockroach theory of earnings manipulation or management behaviour that Buffett described.

"When you see any sign of improper management behaviour or questionable numbers that make you uncomfortable with the company, you should sell the stock because if you are picking up on one problem from the outside, there is likely more wrong with the company on the inside.  There is rarely just one cockroach in the kitchen."


Read also:

The QVM approach to finding promising Growth Stocks

Warren Buffett interview on how to read stocks (Petrochina)

My strategies for buying and selling (KISS version)

Should you invest in companies that repurchase their own shares?

Summary:

• When a company buys its own shares and you have confidence in the quality of that company's management, chances are that the stock is undervalued, and you should expect the stock price to rise over time.
• On the other hand, if the repurchase of stocks seems to be motivated by a desire to reduce the number of shares and, hence, increase earnings per share, you should avoid investing in the company.

Share repurchasing is good news.

When a publicly traded company buys its own shares, the outcome is a smaller number of shareholders owning the business.  Through repurchases, the company may signal that its shares are undervalued.  The academic literature supports the view that companies repurchasing their own shares are frequently undervalued.

"Firms repurchase stock to take advantage of potential undervaluation."

Investors can infer that a company that repurchases its shares frequently is unlikely to waste free cash flow in unproductive acquisitions.

"Corporate acquisition programs almost never do as well and, in a discouragingly large number of cases, fail to get anything close to $1 of value of each $1 expended."  

Coca-Cola decided to invest its cash flows in itself by purchasing some of the shares back.  From 1989 to 1999, the number of the company's common shares outstanding decreased from 2.79 billion to 2.49 billion - a drop of 11 percent, or about 1 percent per year.  At current prices in 2009, this amounts to about $1 billion annually.

Buffett writes:
Companies in which we have our largest investments have all engaged in significant stock repurchases at times when wide discrepancies existed between price and value.


By making repurchases, when a company's market value is well below its business value, management clearly demonstrates that it is given to actions that enhance the wealth of shareholders, rather than to actions that expand management's domain but that do nothing for (or even harm) shareholders.

He continues:
Investors should pay more for a business that is lodged in the hand of a manager with demonstrated pro-shareholder leanings than for one in the hands of a self-interested manager marching to a different drummer.

Sometimes, share repurchases can boost reported earnings because the number of shares go down due to repurchasing.  Before investing in a company that is repurchasing its own shares, you should investigate the company fundamentals and its management quality.

The annual letter to Berkshire shareholders on March 11, 2000 further clarified Buffett's thinking on share repurchases:
"There is only one combination of facts that makes it advisable for a company to repurchase its shares:  

• First, the company has available funds - cash plus sensible borrowing capacity - beyond the near-term needs of the business, and, 
• second, finds its stocks selling in the market below its intrinsic values, conservatively-calculated."

If profitable investment opportunities exist, then management should not repurchase the company shares even when the price is attractive.  This is probably one reason Buffett did not choose to repurchase Berkshire shares.  

Investors should also consider the potential value added.  Buffett continues,
"A purchase of, say, 2% of a company's shares at a 25% discount from per-share intrinsic value produces only a 1/2 % gain in that value at most."

Thus, when management reputation is well established, as in Buffett's case, the advantage in repurchasing may not be substantial.

Buffett further emphasizes his interest in shareholder wealth:
"Please be clear about one point:  We will NEVER make purchases with the intention of stemming a decline in Berkshire's price.  Rather we will make them if and when we believe that they represent an attractive use of the Company's money."

Overall, if a company purchases its own shares on a regular basis and its fundamentals appear sound, you should consider buying shares in the company.

TAN TENG BOO: Top fund manager expects 30-40% gain next year

TAN TENG BOO: Top fund manager expects 30-40% gain next year

Written by Leong Chan Teik
Thursday, 12 November 2009

IF YOU have not heard of Tan Teng Boo before, you will find that he quickly shines through in an article in the current edition of The Edge newsweekly.

He is 55, and a Malaysian fund manager. His iCapital Global Fund has gained 64% this year as at end-September, resoundingly beating most global equity funds and the 22.5% return achieved by the MSCI World Index.

He has three funds operating in three countries investing in 42 countries.

My search on Google found a May 2009 article in the Malaysian newspaper, The Star, which quoted him saying (this may take your breath away!):

“I’m pretty damn good at what I do. I would say I am one of the top five fund managers in the world. It is a pity that people don’t really recognise that.”

Among the top 5? If true, we should pay close attention to what he says ......

Some highlights of The Edge’s article are summarized below. For the full-blown story, which we can't reproduce anyway, please go buy the magazine today (only $3.80).

* A bull market really? 

Mr Tan has no time for doubters who think the market could fall again on a double-dip recession.

“People are still seeing the rebound as a bear-market rally. In my view, it’s definitely a bull market. In fact, it’s a good old-fashioned bull rally and certainly a V-shaped recovery,” he said.

* Explain! 

Mr Tan said economic growth and corporate earnings are recovering and will become ‘self-enforcing’. He believes that global stocks could jump 30-40% next year.

And, of course, there’s China’s economic growth which will support a long market boom.

* What stocks are you betting on? 

He said his fund owns UK supermarket chain Tesco, UK engine manufacturer Rolls Royce, and German car maker Porsche.

As for Chinese companies, it owns shares in bank group Bank of East Asia, cigarette paper packaging firm Shanghai Asia Holdings and Beijing Capital Land. These are examples.

For his recently launched Australia-registered iCaptial International Value Fund, he has added Australia-listed Mermaid Marine, a diversified marine services provider, and Singapore-listed Mermaid Maritime,a drilling and sub-engineering service provider operating in the oil and gas industry.

”Mermaid Marine currently operates a fleet of oil supply vessels in the northern part of Western Australia, where Chevron has discovered the Gorgon oil fields. It is a huge project.”

Mermaid Maritime was bought at S$0.70 a share. The company was incorporated in Thailand and was listed on the Singapore bourse in 2007.

Its operations are mainly in Southeast Asia, including Thailand and Malaysia.

* How are you rewarded? 

His answer is surprising. According to the article, he does not pay himself a salary or take a director’s fee from the funds he manages. He lives on the investment gains generated by his personal investment portfolio.


http://www.nextinsight.net/content/view/1686/60/


Related:
Riding on the Coattail of Tan Teng Boo

Tan Teng Boo on investing in the Australian market

http://in.bgvip.tv/play.php?vid=27081931

The QVM approach to finding promising Growth Stocks

QUALITY:  I recommend that you start by examining earnings for several years because companies that have grown strongly for several years, on average, are sound candidates to generate good earnings in the future.

VALUE:  Before you buy a growth stock, you should consider the possibility that the price may already be reflecting a high growth potential.  Evaluate its P/E ratio or, preferably, compute its intrinsic value.

MANAGEMENT:  You will need to examine the qualitative variables, such as the quality of management and company culture, as they are the true underpinnings of future growth.

Overall, success in growth investing requires you to have 

• a very good knowledge of the company's business and 
• an ability to forecast its earnings well.

These most important determinants of your success in investing can be abbreviated as the QVM approach

Q = Quality - the quality of the company you own
V = Value - the price you paid for your stock
M = Management - the integrity of its management

Growth Investing: The importance of track record of Sales and Earnings

The most important driver of growth in stock price is growth in earnings.  Future earnings growth frequently depends on past earnings growth.

To convince yourself that you must look at the track record, companies that have had positive results for a while are likely to exhibit that kind of performance for years to come, especially when the management team remains in place.  Once in a while, this may not work, but on average you will come out a winner if you play the game by emphasizing a company's track record of earnings.

A short record of, say, less than five years is probably a dangerous way to identify the future growth of a company.  It is important to focus on a longer time span.  Great growth companies remain outstanding for many years after their initial spurt in growth.

Unless you know a lot about the company, it is best to avoid initial public offerings (IPOs).  The average three-year post-IPO performance is 20 percent below the corresponding market returns.  While IPOs are often marketed as growth stocks, their long-run performance has been dismal.  Generally speaking, IPOs are anything but growth stocks.

Growth in earnings does, however, depend on growth in sales, especially in the long run.  The customer is the main driver for growth in sales.  In general, it is best to keep both sales and earnings in mind when thinking about growth investing, not just one or the other.

One good approach to finding growth stocks is to identify some great products and services, as Peter Lynch has often emphasized.  Still, you must ask several questions before you actually buy stock in such companies.

Here are some qualitative questions that you should take time to ask and answer before you decide to invest in a growth stock.

Is there potential to grow sales and earnings for several years?
How are relations with employees?
Is research and development important?
How does the company respond to challenges?
Is management quality excellent?
How important are profit margins?
What is the company's Achilles' heel?

You can afford to take your time.  Great companies will give you returns of several hundred percent, and if you miss some of it in the beginning, you should still do well.

Getting private investment flowing again

Thursday April 15, 2010

Getting private investment flowing again

Making a Point - By Jagdev Singh Sidhu

ENGINEERING a structural change in any economy is difficult but is asking the private sector that has lost its desire to drive economic growth to reprise its previous role any easier?

No, if one considers the alarming drop in private investment to around 10% of gross domestic product (GDP) compared with over 30% prior to the Asian financial crisis.

There are many reasons why private investment in Malaysia has dried up. Inhibitive policies, favouritism towards government-linked companies or even better prospects in neighbouring countries are cited among the causes for the private sector taking its foot off the accelerator.

While these may be true, maybe the fault also lies in just how high the dividend rates in Malaysia are.

With the initial public offering gravy train now a dust bowl for the country’s large funds, it’s not inconceivable that such funds, namely Permodalan Nasional Bhd and the Employees Provident Fund, have now resorted to asking the large companies they own stakes in to declare a hefty percentage of their net profit as dividends.

Prior to the crisis, the concept of dividend policy was virtually unheard of. Companies routinely spoke of how large and grand their investment plans were.

In the past, such profit would have gone into re-investment, pursuing new business areas but with large chunks of profit now being channelled into the pockets of shareholders instead of being spent on new factories, products or research, it’s no wonder that private investment numbers have dropped.

Today, talk is on how much of such companies’ net profit is being distributed to shareholders.

There is no reason why companies in Malaysia should be more conservative in investing compared with their regional counterparts.

If there are problems causing this, then policy needs to be changed to accommodate private businesses seeking to invest their profit in the country.

That’s why when the Prime Minister announced that Khazanah Nasional Bhd was to divest of its 32% stake in Pos Malaysia Bhd, an immediate reaction was that such a move would get private investment flowing again.

By allowing the private sector to take control of and drive a company that has an extensive distribution channel and is an essential provider of mail services, the new owners would now be tasked to drive innovation and grow the business.

More of such stake divestments need to happen. If government-owned companies have shown lethargy in investing and growing their business, maybe it’s time that control of those businesses fall in the hands of the private sector. The one caveat is that the change of ownership must be accompanied with a fresh impetus towards investment and growth.

The other thing that needs to happen is allowing more competition in the economy.

As we have seen with the cellular phone segment, competition breeds innovation, growth and profit. If other areas where monopolies are entrenched and have proved to be an impediment, the onus is on the Government to free up competition in these sectors.

Deputy news editor Jagdev Singh Sidhu wonders what would be worth watching after the season finale of the addictive series Spartacus: Blood and Sand this weekend.

http://biz.thestar.com.my/news/story.asp?file=/2010/4/15/business/6057524&sec=business

Valuation of KNM and Sustainable Growth Companies

In the absence of clarity in future earnings, very low NTA and significant debt, how does one value KNM?

? 10 sen / share

A quick look at KNM
http://spreadsheets.google.com/pub?key=tnYPvXKu8my2Fsri8qR60oA&output=html


A related story:

One-time events that help grow companies for a short period usually affect prices significantly, but such changes are often temporary.

In the mid-1970s, again in the mid-1990s, and once again in the mid-2000s when oil prices went up quickly, many companies supplying oil-drilling services became high-growth companies.  However, they could not sustain their growth.

For example, Global Marine, an otherwise well-managed company, was trading at around $35 per share in late 1997, but oil prices went down in 1998, and Global Marine's stock price quickly retreated to less than $8 per share.  

A careful investor looking for an outstanding long-term growth company would have avoided Global Marine because the growth was from a one-time event.

It was and can be difficult to know which companies would have sustainable growth.

On the other side, note that at the time of going public, even Microsoft was not an outstanding growth stock because it was not clear that the company could sustain its growth.  However, over time, it became clear that Microsoft's products were immensely successful.  Microsoft was a near monopoly, and the number of customers for those products would increase for many years to come.  At that point, it was a good growth stock worth investing in.