Business Strategy, Planning and Execution

Dynamic Portfolio Management Process

The goal is Return Optimization.

Investment Success Is Hard

CREATING INVESTMENT SUCCESS STORIES
Our investment philosophy is based on some long-term observations:

1. Most capital markets are highly efficient. Outperforming them is difficult and means increasing risk and costs. Many investors rationally seek these returns, but caution is essential.
2. Risk matters. Risk control can avoid painful surprises and ensure that an investment program is maintained during difficult periods.
3. Costs matter. They matter so much that they can mean the difference between success or failure. In particular, if the portfolio pays taxes, tax efficiency is paramount.

The arithmetic of investing is unforgiving.
Costs are certain, volatility dampens growth, and returns are difficult to predict. This sobering reality means long-term investment success is very often the result of portfolio structure and attention to detail. 


http://www.parametricportfolio.com/

Personalized Wealth Management Solutions

Our approach is best reflected in our portfolio management principles:

• In partnership with our clients
• Big Picture fit
• Wealth preservation first
• Focus on absolute returns

http://www.bfi-wealth.com/index.php?id=24

Portfolio Management and Research

A multi-agent architecture to the problem of financial portfolio management.

The interface agent or portfolio manager interacts primarily with the human user as shown in the uppermost part of the diagram, while the set of analysis or task agents coordinate, decompose, and delegate tasks received from the interface agent or from other task agents. Information agents monitor stock and other financial sources. Data culled from the infosphere and stored locally by information agents are sent to one or more task agents upon request, and, following a process of data analysis and integration at the task agent level, are ultimately displayed to the user via the interface agent.

The user's portfolio manager displays a comprehensive summary of the user's portfolio. The interface also allows the user to buy and sell stocks and to request the preparation of a Financial Data Summary or fundamental analysis of the user's stock holdings. The other display available to the user is a price/news graph that dynamically integrates intra-day trading prices and news stories about a stock.

http://www.cs.cmu.edu/~softagents/warren.html

Options Usage in Equity Portfolio Management

Options are a financial instrument that can be considered whenever equity fund managers seek to:

•  Generate extra returns: by writing options and collecting premium income when your market view is that you are happy to cap upside
• Reduce risk: by buying put options as insurance, or by writing premium income which cushions downside price moves
• Reduce transactions costs: by gaining exposure to stocks or an index using options, rather than paying full stock transactions costs
• Reduce market impact costs of acquiring stock: by accumulating exposure via options, and then selling those options when the required stock weight has been reached. 
• Capital gains implications: because you can effectively sell stock by selling call options, capital gains implications can be managed.

The diagram bellow demonstrates how equity portfolio managers can expand the range of portfolio outcomes by using various options strategies. 

The yellow (centre) choices of neutral, long or short stock can be augmented by a range of strategies that enhance yield (blue circles) and that protect the portfolio (red circles).

http://www.asx.com.au/products/indices/types/buy_write/options_portfolio_mgmt.htm

A sound financial plan must address the insurance coverages you, your spouse and family members may require.

Risk Management
A sound financial plan must address the insurance coverages you, your spouse and family members may require.

• Life insurance is used to pay for funeral expenses, repay outstanding debts, make charitable donations and provide living expenses for surviving family members. It can also be used to cover estate taxes and probate fees to enable your estate to be liquidated in the most appropriate manner.
• Disability income insurance^§ is to help partially replace income of persons who are unable to work because of sickness or accident. In terms of its financial effect on the family, long-term disability can be just as severe as death. Disability income protection can come from several sources: social insurance programs, employer-provided benefits, and individually purchased policies.
• Long Term Care Insurance- Long Term Care Insurance is still a relatively new type of insurance product. Many people do not understand what long-term care insurance policies cover, how and when the policies pay benefits, and who should obtain coverage.

http://www.cspgllc.com/section2.cfm

Typical Portfolio Management Process

Your investment choice should focus on meeting your financial goals. During this process, you should consider current and future growth objectives, income needs, time horizon and risk tolerance. These considerations form the blueprint for developing a portfolio management strategy. The process involves, but is not limited to, the following important stages.

• Set investment objectives
• Develop an asset allocation strategy
• Evaluate/Select investment vehicle
• Portfolio review -- Ongoing portfolio monitoring

http://www.cspgllc.com/section2.cfm

Buffett's and Shiller's stock valuation methods agree

MONDAY, FEBRUARY 09, 2009

Buffett's and Shiller's stock valuation methods agree

Carol Loomis of Fortune has a new article out saying that Warren Buffett's valuation metric says it's time to buy stocks. I decided to compare Warren Buffett's stock valuation metric with Robert Shiller's. They both compare nicely.
Warren Buffett's stock valuation metric: Total stock market value as a percent of GNP.
Yale economist Robert Shiller's stock valuation metric, based on Benjamin Graham's advice in Security Analysis: S&P 500 10-year price/earnings ratios.

Robert Shiller doesn't compare the S&P 500 only to its current year earnings. Instead, he compares it to the average of the past ten years, adjusted for inflation. This way, he avoids getting fooled when single-year corporate earnings rise and fall with the business cycle.
Although Warren Buffett's and Robert Shiller's valuation methods are entirely different, they both seem to track each other fairly nicely. Knowing what happened in 1929, however, it looks like Robert Shiller's valuation method is slightly better than Warren Buffett's.

http://bubblemeter.blogspot.com/2009/02/buffetts-and-shillers-stock-valuation.html

Company Valuation Methods

http://www.cxoadvisory.com/fundamental-valuation/classic-paper-company-valuation-methods/

The Value Equation

Warrant Price = Intrinsic Value + Time Value

http://www.shareinvestor.com.my/?action=page&id=article3

Enterprise Value

Comparator analysis (sometimes called comparison company analysis) is a relative valuation approach. For $IBM we looked at four peer companies – Accenture ($ACN), HP ($HPQ), Microsoft ($MSFT) and Oracle ($ORCL). We calculated enterprise values – market capitalisation plus net debt (long-term borrowings less cash). Then we measured a range of metrics against the enterprise value for $IBM and the peer set.

We have used the last financial year (LFY) as the base set of metrics. $IBM has not yet released the 2008 LFY profitability (EBIT and EBITDA) and free cash flow results. For this analysis we have used the 2008 revenue numbers with the 2007 profitability and free cash flow margins. The highlighted column links our DCF valuation to the current market valuation.

$IBM is currently trading in the middle to the upper-end of the valuation metrics of the peer group. Our DCF valuation places a value on $IBM well above where the market is currently valuing the company and the peer group. Reviewing our assumptions we remain comfortable with our valuation. Using the DCF valuation approach we believe that $IBM is trading at a discount to intrinsic value. The market is definitely voting negative – but in the long-run we believe $IBM represents value at current prices.

http://blog.valuecruncher.com/2009/01/running-the-numbers-ibm-ibm-still-undervalued-after-strong-result/

Tabulating Quarterly and Annual Financial Figures for Easy Stock Analysis

Precision Auto Care is a network of franchised and company-owned auto repair and tuning shops. The company has over 380 service facilities in 8 different countries including China and the Middle East. Recently, Precision Auto Care recently “went dark” and stopped filing with the SEC in order to reduce the costs in complying with Sarbanes-Oxley. With the majority of stock held by company management, the lack of free floating stock and virtually no analyst coverage, Precision Auto Care has almost entirely disappeared off the investment radar.

Financial information for Precision Auto Care.

Historical share price of Precision Auto Care.

As you can clearly see, the market has rewarded the improving balance sheet, revenue and earnings of Precision Auto Care by cutting the company’s share price by over 80%. The price now suggests that the company not only is there no chance of growth, but also that there probably isn’t a future for Precision. Given the recession, large cash position, reasonable business prospects and solid revenue; it does seem that there is a degree of overreaction in the share price movement.

http://robertpiomolloy.com/blog/?p=49

Simple 10-Year DCF Valuation Model (Morningstar)

http://www.stock-picks-focus.com/intrinsic-value.html

The longer you have to wait and the less certain you are that you'll eventually receive a set of cash flows, the less they are worth to you today.

Cyclicality

Is the firm in a cyclical industry (such as commodities or automobiles) or a stable industry (such as breakfast cereal or beer)? Because the cash flows of cyclical firms are much tougher to forecast than stable firms, their level of risk increases.