Learn Value Investing

Investing Myths:
Investing is risky, "like gambling".
It is time consuming..
It is too complicated, "like rocket science".

Yes, investing is risky, complicated, and time consuming, if you don't know what you're doing.


What is value investing?
Value investing is buying quality stocks when they are undervalued.


How do you know the stock is quality stock?
How do you know when the stock is undervalued?


















Summary


Buy quality companies when they are undervalued.


Dividends are key, especially increasing dividends, as that is going to increase the amount of money you receive year after year.


Investing is not risky if you know what you are doing.  


You can minimize this risk by investing into recession proof companies that provide solid services and products that are going to be around for 20 years or more.


You can minimize this risk by investing into companies that has history of increasing dividends year after year.

TM undergoes cosmetic and customer-centric changes

Saturday January 14, 2012

STARBIZWEEK held a question and answer session with Telekom Malaysia Bhd group chief executive officer Datuk Seri Zamzamzairani Md Isa recently. Below are excerpts:

Zamzamzairani: All these changes are necessary because we are not just in the wholesale service but also at the retail level.

SBW: Did you expect the monthly run rate of new additions to be 20,000?

Zamzamzairani: It was beyond our expectations. Achieving 220,000 as at the end of last year was fantastic too.

What contributed to the take-up?

The Internet, broadband and the lifestyle change. We also have Hypp.TV, entertainment and voice to offer. It is more of the customer experience. With UniFi, people don't talk about doing speed checks, they just tell their friends about their (surfing) experience and the (fast) speed. So, word of mouth was also a way of getting new subscribers.

What is the customer rating of Unifi?

We use an index, the TRI*M to monitor, measurement and manage customer service levels and expectations. It is internationally recognised. The customer can tell us if they are satisfied or not. In fact, for our headline KPI for 2010, apart from the revenue EBIDTA, we had the customer element as KPI. This year there is a lot of focus on customer experience and we have embarked on the transformation journey and the focus now is on the revamping of our outlets.

Is this just cosmetic or bold change?

Both. Our staff now wear T-shirts instead of jackets, we started with our Kelana Jaya outlet. It is not implemented at all outlets, but the change is taking place. We also have our staff at the shop floor to attend to customers, and we now have payment kiosks at the outlet.

There is an average waiting time so that customers are not kept waiting, and all this is to improve the waiting experience. We also have a rating system at the counters, so that after they have been served they can rate the service of the individual.

We have introduced parking bays for customers at our Kelana Jaya branch so that people need not worry about parking their cars. All this is intended to reduce the waiting period so that more can be attended to.

All these changes are necessary because we are not just in the wholesale service but we also have to compete at the retail level, so customer service will be the differentiating factor since the technology platform for all is about the same. We have recognised that and we are making all the necessary changes. We also use the Kelana Jaya outlet as a model for others to emulate. We bring managers from all over the country to tell them what we need. It (boils) to managing people's expectations.

We are modelling the transformation programme based on the “cool'' concept where customer-centricity, one company mindset, company operational excellence and leadership are addressed.

If we do not focus on the first (customer-centricity), the others will not make sense.

How is your Streamyx service fairing?

It still has the strong appeal even though many of the existing subscribers have migrated to UniFi. About 53% of Streamyx users are on 1Mbps. Streamyx has 1.7 million users, and when combined with Unifi's 220,000, we have 1.9 million broadband users.

What is the priority, grow UniFi or Streamyx?

It is about growing broadband. There is an impact of migration especially in UniFi areas but that is alright as we can now offer an enhanced system.

The percentage of subscribers loss?

Quite surprising, the migration is 40% from Streamyx and 60% are new users plus those who had left Streamyx are coming back to UnFi. We cannot consider those who migrate from Streamyx to UniFi as a loss to Streamyx ... it is about rolling out a new service.

Any new player buying wholesale HSBB from you apart from Maxis Bhd, Packet One and Celcom Axiata Bhd?

We welcome anyone ... it is not an issue to us. For us it is about getting returns.

Which is better, wholesale versus retail business?

Where wholesale is concerned, we enter into long-term agreements with those who want to lease our HSBB and we cannot compare that with retail. It is not about which is better or worse, it is about two difference businesses.

What is the differentiator for both?

Retail business and the product itself. Whereas in wholesale we can offer higher speed, its up to them to proceed as they have the flexibility.

Maxis is riding on HSBB to offer about the same services, will it affect your retail business?

Of course, it is competition for the retail side and we have to do it better.

When you are packaging WiFi with UniFi, are you making money on WiFi? We will package it with UniFi but we will also offer prepaid. The good thing about our WiFi is that our backhaul is on fibre and we are able to offer high capacity. But a lot of users get locked out (if there is no strong backhaul) and that puts a strain on cellular networks. We have a strong backhaul.

What is your capex requirements for 2012?

Our yearly capex is normally less than RM3bil and since we have built a sizeable broadband infrastructure and reached up to 1.17 million premises, the cost will taper down and a lot of cost will now go to access to homes.

We have to continue to build but we have to move from a supply driven model to a demand driven one.

We are looking at a RM2.7bil and RM3bil will be the maximum but it should be about RM2.7bil.

What was the capex for 2011?

What we can say is that up to September 2011, it was RM1.4bil, and the full-year capex will be announced during our 4th quarter results.

TM managed to bring down the cost of rolling out HSBB by RM1bil, how difficult was it to do that?

It was really about choice of network architecture and our strict procurement process, besides, we also speed up the installations.

The voice business is on a declining trend, any way of re-igniting the interest?

The decline has slowed down and we are going to re-package our voice business again. Today voice is one element of our fixed line business, the other is data. As at the end of September 2011, our voice business contribution towards revenue was 42%, Internet 22%, data 20%, and Enterprise 16%. A year earlier it was 45%, 19%, 19% and 17% respectively. All the growth is led by Internet and data.

When are you going to implement the cap on usage and force through the fair usage policy?

We have been educating the market, we have not put the cap even though we have the right to do so. We will implement it at some point because 20% of the users are hogging 80% of the capacity.

Are there plans to get back into the cellular business?

We are always looking to enhance our fixed line broadband offering. MNVO is one arrangement that can complete our suite of services. We are open to having arrangements with mobile players to offer services.

How soon will you do that?

Soon, but it has to be market driven commercial arrangements, and one that makes sense. Today we are still pushing UniFi and that will carry on.

What are the challenges for TM going forward?

Increased competition and it is getting harder by the day. We are strong in our wholesale business and weak in retail. Technology-wise, a lot more can be done but it is about timing, investments and returns. And again, there is execution how well we can do it all this will be key for our business.

http://biz.thestar.com.my/news/story.asp?file=/2012/1/14/business/10261074&sec=business

Rights issues by REITs a tough sell?

Rights issues by REITs a tough sell?  
Written by Chua Sue-Ann     
Monday, 12 December 2011 11:26  

KUALA LUMPUR: It remains to see whether investors will warm up to recent proposals by Malaysian real estate investment trusts (REITs) to embark on rights issues for fundraising.

This comes as Hektar REIT and AmFirst REIT separately proposed rights issues in recent months. The former is doing so to fund new asset acquisition while the latter is seeking to reduce its bank borrowings. CapitaMalls Malaysia Trust (CMT)  also recently told The Edge Financial Daily that it is considering a rights issue to raise fresh capital.

Analysts and market observers said it is generally undesirable for REITs to embark on rights issues as investors expect dividends from REITs instead of having to plough in more capital.

“Effectively, they are asking investors to spend more on their stock in these uncertain market conditions,” said a property analyst.

However, judging from the price performance of both Hektar REIT and AmFirst REIT, investors have not reacted negatively to the news. This, surprisingly, is in contrast to investors’ harsh treatment of Singapore-listed REITs that embarked on rights issues.

According to analysts, the reason why Malaysian REITs are now turning to rights issues to raise funds, instead of the usual way of borrowing or unit placement, could be because their gearing is already near the 50% threshold (of total asset value) permitted for a REIT to borrow, or that the capital they seek to raise is larger than what can be achieved with a placement exercise.

In Hektar REIT’s case, its gearing ratio is 43.4%, just below the 50% limit, based on its total debt of RM347 million and total assets of RM799.47 million as at Sept 30. AmFirst’s REIT’s gearing as at Sept 30 was 39.8% based on total borrowings of RM419.6 million and total assets of RM1.053 billion.

On Dec 8, Hektar REIT proposed a renounceable rights issue to raise gross proceeds of about RM98.4 million. Proceeds from the rights issue will be used to partially fund the acquisition of two shopping malls in Kedah for RM181 million cash.

Hektar REIT added that it would also obtain bank borrowings of up to RM87.1 million to purchase the assets. Note that it held cash and cash equivalents of RM21.3 million as at Sept 30.

The REIT has yet to finalise the actual number of rights units and entitlement basis will be determined later based on the final issue price of the rights unit. 

Hektar REIT added that it will procure a written irrevocable undertaking from its substantial unitholders to fully subscribe for their entitlements, failing which underwriting arrangements would be made.

AmFirst REIT’s proposed rights issue, set on a three-for-five basis, is expected to raise gross proceeds of about RM218.8 million, based on an illustrative issue price of 85 sen per unit. The proceeds are to be used to pare down borrowings.
 
CapitalMalls Malaysia Trust, which also manages The Mines shopping mall, recently said it is also considering a rights issue to raise fresh capital. 

AmFirst said the rights unit issue price is expected to be fixed at a discount of no more than 20% to the theoretical ex-rights price of the unit. “The discount on the issue price of the rights unit is intended to reward unitholders for their continuous support of the fund,” AmFirst said.

Thus far, investors have not reacted negatively to the REITs proposal to conduct rights issues. The unit prices of both Hektar REIT and AmFirst REIT are still traded near their peaks.

“It could be because the unit prices are currently near historical highs, and more interestingly, at the current high prices they still offer rather good yields as well [Hektar REIT at 7.6% and AmFirst at 8.6% historical yield], so unitholders are happy,” said a market observer.

Other than that, he explained that there is still strong demand for REITS in times of market volatility, especially among institutional shareholders. 

“Pavilion REIT has gained 13.6% since last week’s IPO to RM1, and the yield is now only 5.7%. So, the management of REITs thought maybe a rights issue is a good idea,” he said.

The scenario is different in Singapore.

K-REIT Asia, a unit of the Keppel Land group, saw its unit priced plunge 9.7% to S$0.857 sen on Oct 18 after it announced plans to raise S$976.3 million (RM2.4 billion) through a 17-for-20 rights issue. Most of the funds raised by the REIT will be used to buy a 87.5% stake in Ocean Financial Centre (OFC) from its parent Keppel Land Ltd.

It was reported that investors didn’t like the pricing for the OFC deal, and the fact that it was a related party deal. It wasn’t entirely because K-REIT Asia had proposed to acquire it via rights issue funding.

“At the end of the day, REIT managements have to justify why they have to do a rights issue to ask for more money from the unitholders. While institutional shareholders are okay with a rights issue, it could be a turn-off for minority shareholders,” said a market observer.

P/E Ratio

What is P/E?

P/E is the price/earnings ratio. In essence, the P/E compares the share price of the company to its earnings per share.

How is P/E calculated?

P/E is calculated using the following formula:

(Market value per share) / (Earnings per share)

What are different types of P/E?

There are three main types of P/E, trailing, rolling, and forward. Trailing P/E is the price/earnings ratio for the past four quarters, or one year. Rolling P/E is the price/earnings ratio for the past two quarters as well as the projected next two quarters. Forward P/E is the price/earnings ratio for the projected next four quarters, or one year. Rolling and Forward P/E are less accurate than trailing P/E because they utilize projected figures.

Why is P/E important?

P/E is important because it helps you look at a company's growth. A higher P/E suggests that the public expects the company to grow more in the future than a company with a lower P/E. For example, high-technology companies like Google can have an astronomical P/E of around 70, whereas very established consumables companies like Wal-Mart usually have a lower P/E of around 20. P/E essentially tells you how many years of earnings it would take for a company to equal its present value. Wal-Mart would need about 20 years, and Google 70. The reason for this disparity is that Google's earnings are expected to grow much more rapidly, and because of this it will eventually take much less than 70. That is why the forward P/E is so important.

Average S&P P/E

As you can see in this P/E chart for 60 years, average P/E can fluctuate widely, but in the past decades it is rapidly increasing and tends to be in between 10 and 25.

Watch out for...

Although P/E is a very good metric to use, there are various ways that it can be manipulated to represent something that the companies want you to see. P/E is based upon the earnings of the company, and the accounting process could come up with numbers that don't accurately reflect the true state of the company. In addition, inflation and deflation can affect the P/E, so it is important to look at P/E over a period of time instead of just one to determine the trends.

http://www.stanford.edu/~mikefan/metrics/peratio.html

Recent Stock Scams

What are stock scams?

Over the past few years there have been many stock scams taking place that cheated investors out of millions of dollars. Some companies have put millions of dollars on the books as revenue that was really fictitious. Other companies like Enron used misleading accounting tactics to trick their investors into thinking that their company was worth much more than it really was. As a result, it turned a stock worth more than $100 per share to one worth mere pennies. These large-scale scams fooled even the most seasoned investors and policing agencies, so there's not too much you can do to personally investigate the companies. However, there are other smaller-scale scams that you can catch and be way of.

Penny stocks

Generally, a penny stock is a stock that is trading for less than $1 per share and is trading over the counter, as opposed to one of the major exchanges like the NASDAQ. The price does not matter as much as the facts that the companies are generally very small and highly volatile. Within a space of a few hours, a stock costing $1 can easily turn in a one cent stock or a ten dollar one. Because the volume of trades for the stocks are so low, even a few people selling all their shares or buying a large number shares can dramatically affect the stock price. The following picture depicts a penny stock certificate, and a description of a common scam is below it.

Picture from Wikipedia, May 2006

Pump and Dump

In a pump and dump scam, somebody will release either great news for the company or terrible news. As investors rush to buy or sell stock, the person is strategically placed to reap great financial benefit. For example, a person who owns 10,000 shares of a stock worth $1 could mass email a fake news story about the company's earnings and get the price to $10, at which point he or she could sell. The best way to avoid this scam is to avoid penny stocks altogether. Although you could possibly make money, most of the time investors lose out.

Stock Buybacks

What is a stock buyback?

A stock buyback occurs when a company repurchases outstanding shares from the marketplace, reducing the total number of shares that it has out. It helps indicate that a company thinks that its shares are undervalued, and the removal of shares from the marketplace increases the value of the remaining shares.

Why is this important?

The share repurchase increases the Earnings per Share (EPS) because the number of shares has been reduced. In addition, one important thing to note is that companies have a pool of savings that they utilize. They can choose to invest in research and development, build a new factory, etc. Since they choose to reinvest in their company by buying back shares, they show confidence that their company will do well, which is definitely a good sign for investors.

Example

Let's say that company A did not grow this year, but the management still wants to provide value to shareholders. They have one million outstanding shares at a price of $100 a share, so their market capitalization is $100 million. In addition, this year they made a profit of $10 million, which is the same as last year, so there is no profit growth. If a stock buyback is approved, they could use the $10 million to buy back shares in their own company and take them off the market, so that the number of oustanding shares are reduced. The $10 million dollars can buy 100,000 shares, so now there are 900,000 outstanding shares worth $100 million. Under this simple analysis, that means that each share is now worth $111. If you were a lucky shareholder in this company, you would have made $11 even though the company did not grow at all from last year!

When does it Occur?

Since buybacks are generally a good thing, it would be nice to know which companies are starting to buy back stock soon so that you could purchase a stock position in the company. Although they are relatively unpredictable, when a company's stockpile of savings keeps on increasing even after paying their R&D and operating costs, it is more likely they will buy back stock. For example, in the following picture from the Seattle Post-Intelligencer in 2004, you can see that Microsoft's cash reserves were rapidly increasing, and soon after they instituted a stock buyback and a special dividend for shareholders.

 

 http://www.stanford.edu/~mikefan/stocks/stockbuybacks.html

What is EBITDA?

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Although it sounds intimidating upon first glance, it is nowhere near as complicated as it looks. Essentially, it is a good indicator of a company's financial performance.

How do you calculate EBITDA?

EBITDA is calculated as shown by the formula below:

EBITDA = Revenues - Expenses

The expenses obviously do not include interest, taxes, depreciation, and amortization.

What is the significance of EBITDA?

EBITDA is used to analyze and compare profitability between industries and companies. One of its most important traits is that it eliminates the effects of accounting and financing decisions, which can greatly skew a company's earnings from quarter to quarter. However, this does allow the company more leeway in choosing the data to use in this calculation.

Watch out for...

EBITDA is commonly quoted by many companies, especially in the tech sector, to hide something in their finances. The companies have discretion as to what goes in EBITDA, so make sure to look at other metrics to make sure that the company you are researching really is a solid buy.

Changes in Stock Price

Overview

As we all know, stock prices definitely change over the course of time. Some can increase rapidly and make investors a fortune, whereas others can lose a lot of value quickly and bankrupt investors. Stock prices change because of the economics of market forces, and the supply and demand for the stock. This is all based on personal perception. If people think that a company will do better in the future, this will raise the demand and price of the stock, and if they think a company will do worse, this will lower the demand and price of the stock.

Earnings

Probably the most important factor that determines the price of a stock is its earnings. In essence, earnings are the profit that a company makes, and no matter how good a company is, if it does not make positive earnings at some point it can't survive. Companies that are traded on the stock market report their earnings four times a year, or once each quarter. Another important factor is the analyst reports. Analysts at major banks like Goldman Sachs or Merrill Lynch write analyses of various stocks based on their earnings or other factors, and their opinions carry a lot of weight in the public perception.

Sample Stock Charts

The following is a chart of Google's share price for a year after its IPO. As shown on the graph, it rapidly increased from around a hundred dollars to three hundred dollars in a short period of time. Google was reporting solid earnings and good news, and analysts were giving it good recommendations. (From Comstock in 2002)

On the other hand, the graph below shows Enron's stock price over the course of only about a month. From an initial price of $38, it dropped to a low price of only 61 cents. The series of scandals that plagued the company reduced investor confidence, and the demand for the stock dropped precipitously. (Reuters, 2005)

 

http://www.stanford.edu/~mikefan/stocks/changes.html

The World According to "Poor Charlie"

The World According to "Poor Charlie"
Charlie Munger, Warren Buffet's number two speaks to Kiplinger's about investing, Berkshire and more.

December 2005

Charlie Munger has been Warren Buffett's partner and alter ego for more than 45 years. The pair has produced one of the best investing records in history. Shares of Berkshire Hathaway, of which Munger is vice chairman, have gained an annualized 24% over the past 40 years. The conglomerate, which the stock market values at $130 billion, owns and operates more than 65 businesses and invests in many others. Buffett's annual reports are studied by money managers. But Munger, 81, has always been media shy. That changed when Peter Kaufman compiled Munger's writing and speeches in a new book, Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger ($49.00, PCA Publications). Here Munger speaks with Kiplinger's Steven Goldberg.

Why has Berkshire done so well?
Just remember that we had a long run and an early start, particularly in Warren's case. It's much easier for me to talk about Warren than myself, so let's talk about Warren. Not only did he have a long run from an early start, but he got very smart very young -- then continuously improved over 50 years.

Buffett was a student of Ben Graham, the father of security analysis. He was buying deep value stocks -- "cigar butts" -- until you got involved.
If I'd never lived, Warren would have morphed into liking the better businesses better and being less interested in deep-value cigar butts. The supply of cigar butts was running out. And the tax code gives you an enormous advantage if you can find some things you can just sit with.

There are a whole lot of reasons, and Warren was a natural for always just getting smarter. The natural drift was going that way without Charlie Munger. But he'd been brainwashed a little by worshiping Ben Graham and making so much money following traditional Graham methods that I may have pushed him along a little faster in the direction that he was already going.

How do you work together?
Well, it's mostly the telephone and as the years have gone on, and I've passed 80 and Warren is 75, there's less contact on the phone. Warren is a lot busier now than he was when he was younger. Warren has an enormous amount of contact with the operating businesses compared to what he had early in his career. And, again, he does almost all of that by phone, although he does fly around some.

What are your work styles like?
We have certain things in common. We both hate to have too many forward commitments in our schedules. We both insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business. We do that because we like that kind of a life. But we've turned that quirk into a positive outcome for ourselves.

How much of your success is from investing and how much from managing businesses?
Understanding how to be a good investor makes you a better business manager and vice versa.

Warren's way of managing businesses does not take a lot of time. I would bet that something like half of our business operations have never had the foot of Warren Buffet in them. It's not a very burdensome type of business management.

The business management record of Warren is pretty damn good, and I think it's frequently underestimated. He is a better business executive for spending no time engaged in micromanagement.

Your book takes a very multi-disciplinary approach. Why?
It's very useful to have a good grasp of all the big ideas in hard and soft science. A, it gives perspective. B, it gives a way for you to organize and file away experience in your head, so to speak.

How important is temperament in investing?
A lot of people with high IQs are terrible investors because they've got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success.

How should most individual investors invest?
Our standard prescription for the know-nothing investor with a long-term time horizon is a no-load index fund. I think that works better than relying on your stock broker. The people who are telling you to do something else are all being paid by commissions or fees. The result is that while index fund investing is becoming more and more popular, by and large it's not the individual investors that are doing it. It's the institutions.

What about people who want to pick stocks?
You're back to basic Ben Graham, with a few modifications. You really have to know a lot about business. You have to know a lot about competitive advantage. You have to know a lot about the maintainability of competitive advantage. You have to have a mind that quantifies things in terms of value. And you have to be able to compare those values with other values available in the stock market. So you're talking about a pretty complex body of knowledge.

What do you think of the efficient market theory, which holds that at any one time all knowledge by everyone about a stock is reflected in the price?
I think it is roughly right that the market is efficient, which makes it very hard to beat merely by being an intelligent investor. But I don't think it's totally efficient at all. And the difference between being totally efficient and somewhat efficient leaves an enormous opportunity for people like us to get these unusual records. It's efficient enough, so it's hard to have a great investment record. But it's by no means impossible. Nor is it something that only a very few people can do. The top three or four percent of the investment management world will do fine.

What would a good investor's portfolio look like? Would it look like the average mutual fund with 2% positions?
Not if they were doing it Munger style. The Berkshire-style investors tend to be less diversified than other people. The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasizes feeling good about not having your investment results depart very much from average investment results. But why would you get on the bandwagon like that if somebody didn't make you with a whip and a gun?

Is finding bargains difficult in today's market?
We wouldn't have $45 billion lying around if you could always find things to do in any volume you wanted. Being rational in the investment world at a time when other people are losing their minds -- usually all it does is keep you out of something that causes a lot of trouble for other people. If you stayed away from the mania in the high-tech stocks at its peak, you were saved from disaster later, but you didn't make any money.

Should people be investing more abroad, particularly in emerging markets?
Different foreign cultures have very different friendliness to the passive shareholder from abroad. Some would be as reliable as the United States to invest in, and others would be way less reliable. Because it's hard to quantify which ones are reliable and why, most people don't think about it at all. That's crazy. It's a very important subject. Assuming China grows like crazy, how much of the proceeds of that growth are going to flow through to the passive foreign owners of Chinese stock? That is a very intelligent question that practically nobody asks.

What do you think of the U.S. trade and budget deficits -- and their impact on the dollar, which Berkshire is still betting against?
It's not at all clear exactly from some objective bunch of economic data just where the dollar ought to trade compared to the Euro. Who in the hell knows? It's clear that you can't run twin deficits on the scale that the U.S. has forever. As [economist] Herb Stein said, "If something can't go on forever, it will eventually stop." But knowing just when it's going to stop is a very difficult matter.

Is there a bubble in the real estate?
When I see people going to some old flea-bitten old condo and the list price is $1.8 million, and they decide to put it on the market for $2.2 million, and five people start bidding for it, and they sell it for $2.7 million, I say that's a bubble. So there are some bubbly places in the economy. I am amazed at the price of real estate in Manhattan.

So there is some bubble in the game. Is it going to go back to really cheap houses in good neighborhoods in good cities? I don't think so. So I think there will be huge collapses in some places, but, on average, I think that good houses in good places are going to be plenty expensive in future years.

Is there a bubble in energy stocks?
When it gets into these spikes, with shortages and uproar and so forth, people go bananas, but that's capitalism. If the price of automobiles were going up 40% a year, you'd have a boom in auto stocks. But if you stop to think about it, of the companies that you could have bought in, say, 1911, to hold for a long time, one of the very best stocks would have been Rockefeller's Standard Oil Trust. It became almost all of today's integrated oil companies.

How do you feel most corporate citizens behave in the U.S.?
Well, I disapprove of the way most executive compensation is arranged in America. I think it goes to gross excess. And I certainly don't like phony accounting that takes part of the real cost of running the business and doesn't run it through the income account as a charge against the reported earnings. I don't like dishonorable, lying accounting.

Do you think the stock market will return its long-term annualized 10% in the next decade?
A good figure for rational expectation would be no higher than 6%. I think it's unreasonable to assume that the world is going to try to arrange itself so that the inactive, asset-owning class is going to get a much higher share of the GDP than it normally gets. When you start thinking that way, you get into these modest figures. The reason the return has been so good in the past is that the price-earnings ratio went way up.

Ibbotson finds 10% average returns back to 1926, and Jeremy Siegel has found roughly the same back to 1802.
Jeremy Siegel's numbers are total balderdash. When you go back that long ago, you've got a different bunch of companies. You've got a bunch of railroads. It's a different world. I think it's like extrapolating human development by looking at the evolution of life from the worm on up. He's a nut case. There wasn't enough common stock investment for the ordinary person in 1880 to put in your eye.

What do you see for bonds?
The bond market has fewer opportunities now. The short-term rates are the same as the long-term rates, and the premium interest rate you get for taking risk is lower than it ought to be, given the risk. By definition, that's a world in which bond investment is much tougher to do with great advantage.

What do you expect in terms of returns for Berkshire Hathaway?
We have solemnly promised our shareholders that our future returns will be considerably below our previous returns.

But annual reports have been saying that year after year after year.
But lately we've been better at doing what we have long predicted.

What happens to Berkshire after the two of you?
Well, the world will go on and, in my opinion, Berkshire will still be a strong, rich place and with a central culture that will be shrewd and risk-averse. But do I think that we will get another person better than Warren to come in and replace Warren? I think the odds are against it.

What's the best way to invest $1million? Peter Lynch

By Peter Lynch   


What's the best way to invest $1million?

Tip one: Don't buy stocks on tips alone. 

If your only reason for picking a stock is that an expert likes it, then what you really need is paid professional help. Mutual funds are a great idea (I ran one once) for folks who want this sort of assistance at a reasonable price. Still, I'm not convinced that having 4,000 equity funds in this country is an entirely positive development. True, most of the cash flooding into these funds comes from retirement and pension contributions, where people can't pick their own stocks. But some of it also has to be pouring in from former stock pickers who failed to invest wisely on their own account and have given up trying. 

One of the oldest sayings on Wall Street is "Let your winners run, and cut your losers." 

When people find a profitable activity -- collecting stamps or rugs, buying old houses and fixing them up -- they tend to keep doing it. Had more individuals succeeded at individual investing, my guess is they'd still be doing it. We wouldn't see so many converts to managed investment care, especially not in the greatest bull market in U.S. history. Halley's comet may return times before we get another market like this. If I'm right, then large numbers of investors must have lost money outright or badly trailed a market that's up eightfold since 1982. How did so many do so poorly? Maybe they traded a new stock every week. Maybe they bought stocks in companies they knew little about, companies with shaky prospects and bad balance sheets. Maybe they didn't follow these companies closely enough to get out when the news got worse. Maybe they    stuck with their losers through thin and thinner, without checking the story. Maybe they bought stock options. Whatever the case, they failed at navigating their own course.

Amateurs can beat the Streat because, well, they're amateurs.

At the risk of repeating myself, I'm convinced that this type of failure is unnecessary -- that amateurs can not only succeed on their own but beat the Street by (a) taking advantage of the fact that they are amateurs and (b) taking advantage of their personal edge. Almost everyone has an edge. It's just a matter of identifying it.

While a fund manager is more or less forced into owning a long list of stocks, an individual has the luxury of owning just a few. That means you can afford to be choosy and invest only in outfits that you understand and that have a superior product or franchise with clear opportunities for expansion. You can wait until the company repeats its successful formula in several places or markets (same-store sales on the rise, earnings on the rise) before you buy the first share.

If you put together a portfolio of five to ten of these high achievers, there's a decent chance one of them will turn out to be a 10-, a 20-, or even a 50-bagger, where you can make 10, 20, or 50 times your investment. With your stake divided among a handful of issues, all it takes is a couple of gains of this magnitude in a lifetime to produce superior returns.

One of the oldest sayings on Wall Street is "Let your winners run, and cut your losers." It's easy to make a mistake and do the opposite, pulling out the flowers and watering the weeds. Warren Buffett quoted me on this point in one of his famous annual reports (as thrilling to me as getting invited to the White House). If you're lucky enough to have one golden egg in your portfolio, it may not matter if you have a couple of rotten ones in there with it. Let's say you have a portfolio of six stocks. Two of them are average, two of them are below average, and one is a real loser. But you also have one stellar performer. Your [Image]Coca-Cola, your [Image]Gillette. A stock that reminds you why you invested in the first place. In other words, you don't have to be right all the time to do well in stocks. If you find one great growth company and own it long enough to let the profits run, the gains should more than offset mediocre results from other stocks in your portfolio.

Look around you for good stocks. Down the road, you won't regret it.

A lot of people mistakenly think they must search far and wide to find a company with this sort of potential. In fact, many such companies are hard to ignore. They show up down the block or inside the house. They stare us in the face.

This is where it helps to have identified your personal investor's edge. What is it that you know a lot about? Maybe your edge comes from your profession or a hobby. Maybe it comes just from being a parent. An entire generation of Americans grew up on [Image]Gerber's baby food, and Gerber's stock was a 100-bagger. If you put your money where your baby's mouth was, you turned $10,000 into $1 million. Fifty-baggers like [Image]Home Depot, [Image]Wal-Mart, and Dunkin' Donuts were obvious success stories to large crowds of do-it-yourselfers, shoppers, and policemen. Mention any of these at a party, though, and you're likely to get the predictable reaction: "Chances like that don't come along anymore."

Ah, but they do. Take Microsoft -- I wish I had.

You didn't need a Ph.D. to figure out that Microsoft was going to be powerful.
I avoided buying technology stocks if I didn't understand the technology, but I've begun to rethink that rule. You didn't need a Ph.D. in programming to recognize the way computers were becoming a bigger and bigger part of our lives, or to figure out that Microsoft owned the rights to MS-DOS, the operating system used in a vast majority of the world's PCs.

It's hard to believe the almighty Microsoft has been a public company for only 11 years. If you bought it during the initial public offering, at 78 cents a share (adjusted for splits), you've made 100 times your money. But Apple was the dominant company at the time, so maybe you waited until 1988, when Microsoft had had a chance to prove itself.

By then, you would have realized that [Image]IBM and all its clones were using Microsoft's operating system, MS-DOS. IBM and the clones could fight it out for market share, but Microsoft would prosper regardless of who won. This is the old combat theory of investing: When there's a war going on, don't buy the companies that are doing the fighting; buy the companies that sell the bullets. In this case, Microsoft was selling the bullets. The stock has risen 25-fold since 1988.

The next time Microsoft might have got your attention was 1992, when Windows 3.1 made its debut. Three million copies were sold in six weeks. If you bought the stock on the strength of that product, you've quadrupled your money to date. Then, at the end of 1995, Windows 95 was released, with more than 7 million copies sold in three months and 40 million copies as of this writing. If you bought the stock on the Windows 95 debut, you've doubled your money.

If you missed the boat on Microsoft, there are still other technology stocks you can buy into.

Many parents with children in college or high school (I'm one of them) have had to step around the wiring crews as they installed the newfangled campuswide computer networks. Much of this work is being done by Cisco Systems, a company that recently wired two campuses my daughters have attended. Cisco is another opportunity a lot of people had a chance to notice. Its earnings have been growing at a rapid rate, and the stock is a 100-bagger already. No matter who ends up winning the battle of the Internet, Cisco is selling its bullets to various combatants.

Computer buyers who can't tell a microchip from a potato chip still could have spotted the intel inside label on every machine being carried out of the computer stores. Not surprisingly, [Image]Intel has been a 25-bagger to date: The company makes the dominant product in the industry.

Early on, it was obvious Intel had a huge lead on its competitors. The Pentium scare of 1994 gave you a chance to pick up a bargain. If you bought at the low in 1994, you've more than quintupled your investment, and if you bought at the high, you've more than quadrupled it.

Physicians, nurses, candy stripers, patients with heart problems -- a huge potential audience could have noticed the brisk business done by medical-device manufacturers Medtronics, a 20-bagger, and Saint Jude Medical, a 30-bagger.

There are ways you can keep yourself from gaining on the good growth companies.
There are two ways investors can fake themselves out of the big returns that come from great growth companies.

The first is waiting to buy the stock when it looks cheap. Throughout its 27-year rise from a split-adjusted 1.6 cents to $23, Wal-Mart never looked cheap compared with the overall market. Its price-to-earnings ratio rarely dropped below 20, but Wal-Mart's earnings were growing at 25 to 30 percent a year. A key point to remember is that a p/e of 20 is not too much to pay for a company that's growing at 25 percent. Any business that can manage to keep up a 20 to 25 percent growth rate for 20 years will reward shareholders with a massive return even if the stock market overall is lower after 20 years.

The second mistake is underestimating how long a great growth company can keep up the pace. In the 1970s I got interested in [Image]McDonald's. A chorus of colleagues said golden arches were everywhere and McDonald's had seen its best days. I checked for myself and found that even in California, where McDonald's originated, there were fewer McDonald's outlets than there were branches of the Bank of America. McDonald's has been a 50-bagger since.

These "nowhere to grow" stories come up quite often and should be viewed skeptically. Don't believe them until you check for yourself. Look carefully at where the company does business and at how much growing room is left. I can't predict the future of Cisco Systems, but it doesn't suffer from a lack of potential customers: Only 10 to 20 percent of the schools have been wired into networks, and don't forget about office buildings, hospitals, and government agencies nationwide. [Image]Petsmart is hardly at the end of its rope -- its 320 stores are in only 34 states.

Whether or not a company has growing room may have nothing to do with its age. A good example is [Image]Consolidated Products, the parent of the Steak & Shake chain that's been flipping burgers since 1934. Steak & Shake has 210 outlets in only 12 states; 78 of the outlets are in St. Louis and Indianapolis. Obviously, the company has a lot of expansion ahead of it. With 160 continuous quarters of increased earnings over 40 years, Consolidated has been a steady grower and a terrific investment, even in a lousy market for fast food in general.

Sometimes depressed industries can produce high returns.

The best companies often thrive even as their competitors struggle to survive. Until recently, the airline sector has been a terrible place to put money, but if you had invested $1,000 in [Image]Southwest Airlines in 1973, you would have had $460,000 after 20 years. Big Steel has disappointed investors for years, but [Image]Nucor has generated terrific returns. [Image]Circuit City has done well as other electronics retailers have suffered. While the Baby Bells have toddled, a new competitor, [Image]WorldCom, has been a 20-bagger in seven years.

Depressed industries, such as broadcasting and cable television, telecommunications, retail, and restaurants, are likely places to start a research list of potential bargains. If business improves from lousy to mediocre, investors are often rewarded, and they're rewarded again when mediocre turns to good and good turns to excellent. Oil drillers are in the middle of such a recovery, with some stocks delivering tenfold returns in the past 18 months. Yet it took a decade of lousy before they even got to mediocre. Readers of my column in Worth learned of the potential in this long-suffering sector in February 1995.

Retail and restaurants haven't been performing well -- but they're two of Lynch's favorite areas.
Retail and restaurants are two of the worst-performing industries in recent memory, and both are among my favorite research areas. I've taken a beating in a number of retail stocks (some of which I still like and have continued to buy), but the general decline hasn't stopped Staples, [Image]Borders, Petsmart, [Image]Finish Line, and [Image]Pier 1 Imports from rewarding shareholders. Two of my daughters and my wife, Carolyn, have continued to shop at Pier 1, reminding me of its popularity. The stock has doubled in the past 18 months.

A glut in casual-dining outlets didn't hurt [Image]Outback Steakhouse, and a surplus of pizza parlors didn't bother [Image]Papa John's, whose stock was a double last year. [Image]CKE Restaurants -- whose operations include the Carl's Jr. restaurants -- has been a profitable turnaround play in California.

You can even find bargain stocks in this market that have been overlooked.

So far, we've been talking about growth companies on the move, but even in this so-called extravagant market, there are plenty of bargains among the laggards. Of the nearly 4,000 IPOs in the past five years, several hundred have missed the rally on Wall Street. From the class of 1995, 37 percent, or 202 companies, are selling below their IPO price. From the class of 1996, 33 percent, or 285, now trade below their offering price. So much for the average investor's never having a chance to profit from an offering. In more than half the cases, you can wait a few months and buy these stocks cheaper than the institutions that were cut in on the original deals.

As the Dow has hit new records week after week, many small companies have been ignored. In 1995 and 1996, the Standard & Poor's 500 Stock Index was up 69 percent, but the Russell 2000 index of smaller issues was up only 44 percent. And while the Nasdaq market rose 25 percent in 1996, a lot of this gain can be attributed to just three stocks: Intel, Microsoft, and Oracle. Half the stocks on the Nasdaq were up less than 6.9 percent during 1996.

That's not to say owning these laggards will protect you if the bottom drops out of the market. If that happens, the stocks that didn't go up will go down just as hard and fast as the stocks that did. I learned that lesson in the 1971Ð73 bear market. Before the selling was over, companies that looked cheap by any measure got much cheaper. McDonald's dropped from $15 a share to $4. I thought Kaiser Industries was a steal at $13, but it also fell to $4. At that point, this asset-rich conglomerate, with holdings in aluminum, steel, real estate, cement, fiberglass, and broadcasting, was trading at a market value equal to the price of four airplanes.

Wondering when you should exit the market? Use Lynch's rule of thumb.

Should we all exit the market to avoid the correction? Some people did that when the Dow hit 3000, 4000, 5000, and 6000. A confirmed stock picker sticks with stocks until he or she can't find a single issue worth buying. The only time I took a big position in bonds was in 1982, when inflation was running at double digits and long-term U.S. Treasurys were yielding 13 to 14 percent. I didn't buy bonds for defensive purposes. I bought them because 13 to 14 percent was a better return than the 10 to 11 percent stocks have returned historically. I have since followed this rule: When yields on long-term government bonds exceed the dividend yield on the S&P 500 by 6 percent or more, sell stocks and buy bonds. As I write this, the yield on the S&P is about 2 percent and long-term government bonds pay 6.8 percent, so we're only 1.2 percent away from the danger zone. Stay tuned.

So, what advice would I give to someone with $1 million to invest? The same I'd give to any investor: Find your edge and put it to work by adhering to the following rules:
With every stock you own, keep track of its story in a logbook. Note any new developments and pay close attention to earnings. Is this a growth play, a cyclical play, or a value play? Stocks do well for a reason and do poorly for a reason. Make sure you know the reasons.

Stocks do well for a reason, and poorly for a reason.

1. *Pay attention to facts, not forecasts.
2. *Ask yourself: What will I make if I'm right, and what could I lose if I'm wrong? Look for a risk-reward ratio of three to one or better.
3. *Before you invest, check the balance sheet to see if the company is financially sound.
4. *Don't buy options, and don't invest on margin. With options, time works against you, and if you're on margin, a drop in the market can wipe you out.
5. *When several insiders are buying the company's stock at the same time, it's a positive.
6. *Average investors should be able to monitor five to ten companies at a time, but nobody is forcing you to own any of them. If you like seven, buy seven. If you like three, buy three. If you like zero, buy zero.
7. *Be patient. The stocks that have been most rewarding to me have made their greatest gains in the third or fourth year I owned them. A few took ten years.
8. *Enter early -- but not too early. I often think of investing in growth companies in terms of baseball. Try to join the game in the third inning, because a company has proved itself by then. If you buy before the lineup is announced, you're taking an unnecessary risk. There's plenty of time (10 to 15 years in some cases) between the third and the seventh innings, which is where the 10- to 50-baggers are made. If you buy in the late innings, you may be too late.
9. *Don't buy "cheap" stocks just because they're cheap. Buy them because the fundamentals are improving.
10. *Buy small companies after they've had a chance to prove they can make a profit.
11. *Long shots usually backfire or become "no shots."
12. *If you buy a stock for the dividend, make sure the company can comfortably afford to pay the dividend out of its earnings, even in an economic slump.
13. *Investigate ten companies and you're likely to find one with bright prospects that aren't reflected in the price. Investigate 50 and you're likely to find 5.

An investor in a company has 3 sources of potential returns: Value versus Growth Investing

An investor in a company has 3 sources of potential returns:
1. dividends,
2. exploiting the disparity between stock price and intrinsic value, and
3. long-term growth in intrinsic value.

Benjamin Graham said that the stock market is a voting machine in the short run and a weighing machine in the long run.

Implicit in this statement is the idea that the price of the stock and the intrinsic value of the company will tend to coincide over the long term.


Value Investing


An investor in a value (no growth) company has 2 sources of potential returns:
1. dividends,
2. exploiting the disparity between stock price and intrinsic value.

However, it is possible that the stock price may remain well below the intrinsic value for a long period.

If a major component of the expected return from a stock is the narrowing of the disparity between the stock price and the intrinsic value, a lengthy delay in closing that disparity would diminish the return from that stock.



Growth Investing

An investor in a growth company has 3 sources of potential returns:
1. dividends,
2. exploiting the disparity between stock price and intrinsic value, and
3. long-term growth in intrinsic value.

Far too often, growth companies choose not to pay a current dividend. This practice reflects management's opinion that retained earnings are better invested in growing the business.

For those fortunate growth companies that can concurrently grow and generate free cash flow, a dividend can be an important source of return for investors.

Eventually, all growth companies become mature. If the management has developed the business properly so that the company has a significant and sustainable free cash flow, a substantial dividend payout can, in come cases, exceed the original purchase price of the stock.

A careful investor in growth companies should always seek to exploit any disparities between stock price and intrinsic value, especially at the time of purchase. 




Growth Investing versus Value Investing


"Its better to buy a wonderful company at fair price than a fair company at wonderful price."

While a value company investor must pay below intrinsic value in order to achieve a reasonable return, a growth company investor must seek to purchase the stock at a price of fair value or less.

If you buy stock in a growth company with an intrinsic value of $10 a share and the intrinsic value grows by 15% per year, in 5 years the stock will be worth $20; in 10 years, it will be worth $40; and in 15 years, it will be worth $80 in intrinsic value.

Even at a 10 percent annual growth rate, after 7 years, the company's intrinsic value would have grown from $10 per share to $20. After 14 years, it would have grown to $40; and after 21 years, it would have grown to $80.