Desperate homeowners and a dangerous bridge too far

By Ian Cowie Your Money Last updated: February 3rd, 2012

Bridging loans are a dangerous alternative to ordinary mortgages

Homeowners who want to move but cannot sell and others stumped by banks’ and building societies’ tighter lending criteria since the credit crunch began are turning to a dangerous alternative; bridging loans.

These can enable a second property to be bought before the existing home is sold and they can beat the mortgage famine by raising finance for buy-to-let landlords to refurbish properties at loan to value (LTV) ratios far higher than high street lenders will now allow.

Duncan Kreeger, chairman of specialist mortgage provider West One Loans, claimed: “Bridging loans net lending increased by 56pc last year, which makes the mainstream market look turgid by comparison. Borrowers are finding traditional longer-term funding harder to come by, which is making bridging finance a more attractive option.

“With high street lenders retreating even further into their shells, they won’t be able to cater for the demand for mortgage finance, particularly from buy-to-let investors, who will turn to bridging to finance their projects.”

Similarly, Ray Boulger, a director of John Charcol mortgage brokers said: “It is certainly true that the amount of bridging has expanded by a large margin over the last couple of years, filling a gap left by the banks.

“Where bridging is particularly useful in the buy-to-let market is for investors who want to refurbish a property after purchase and before letting it. The value is generally increased by well in excess of the refurbishment cost.”

But, while this form of housing finance may seem like a quick and flexible solution to the mortgage famine, it can prove ruinously expensive if a short-term fix turns into a long-term commitment.

Compound interest can prove a cruel taskmaster. With bridging loans costing at least 0.75pc of the sum advanced per month – or as much as double that rate – it can be a struggle to feed the interest meter for more than a few weeks.

David Hollingworth of London & Country Mortgages commented: “We are not a player in the bridging sector but this form of finance is useful as a short term funding option that can be arranged quickly to plug the gap between the purchase of property and later restructure to a longer term, traditional financing.

“While bridging can be used to secure the purchase of a new home before completing the sale of an old  one, it will often be used by landlords looking for quick access to funds.

“In any event it is vital to understand the limitations and cost of bridging in the longer term and important to have a viable exit route. Borrowers must have a strategy for refinancing in the longer run.”

But, as the poet Robert Burns pointed out, the best-laid schemes gang aft agley. Plans for profits can be overtaken by events and borrowing to invest is always risky because gearing not only increases gains but also boosts losses.

If that sounds somewhat theoretical, then consider the experience of a senior colleague more than 20 years ago whose wife fell in love with a property they couldn’t quite afford. Rather than waiting until they sold their existing home, they allowed her heart to rule his head and took out a bridging loan.

You can guess the rest. After several months of paying two mortgages, my former colleague put both properties up for sale in a desperate bid to bring the financial misery to an end. It nearly ruined them before they got rid of one. The resurgence of bridging loans now shows how little we have learned from the credit crunch and how quickly people forget the dangers of excessive debt.

Tags: banks, borrowers, bridge too far, bridging finance, briding loans, building societies, compound interest, dangerous, debt, homeowners, John Charcol,loan to value, London & Country Mortgages, LTV, mortgages, poet, Robert Burns, West One Loans

http://blogs.telegraph.co.uk/finance/ianmcowie/100014604/desperate-homeowners-and-a-dangerous-bridge-too-far/

The investment fund that is guaranteed to lose you money

Pension savers who hold money in cash are being charged more in fees than their money earns in interest.

Clerical Medical's Cash Pension fund pays interest at 0.5pc while charging a 1pc annual management fee Photo: chris brignell / Alamy

By Richard Evans

11:39AM GMT 03 Feb 2012

Comment

As a result, their investments are guaranteed to fall in value.

Savers often make use of cash funds within their pension plans to shelter from volatile markets or while they are deciding where to invest. But Clerical Medical's Cash Pension fund pays interest at 0.5pc while charging a 1pc annual management fee, resulting in a fall in value.

The practice came to light when a Telegraph reader wrote to our troubleshooter, Jessica Gorst-Williams, to complain about the fund.

The reader, HG from Surrey, wrote: "This fund can only result in investors losing money, as the cash fund is invested in Bank Rate securities producing 0.5pc but Clerical Medical makes a charge of 1pc.

"The fund is used to park funds when switching investments. I feel investors should be warned of this pitfall or better Clerical Medical should change its charges while the Bank Rate is so low."

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Jessica replied: "This is a phenomenon that needs to be watched out for by anyone with money in a cash, or similar, fund. With interest rates as low as they are, skimming profits off such sums in the form of management charges or whatever has become much more transparent than it used to be.

"So, not only is such money being whittled away by inflation, but a higher percentage is being creamed off by some financial providers than the underlying sum is able to generate itself."

She said Clerical Medical – now under the umbrella of Scottish Widows, which is in turn owned by state-backed Lloyds Banking Group – had admitted that the returns on such cash investments had not been enough to fully offset the 1pc annual management fee. This has resulted in the unit price falling slightly.

"I cannot change things for you," Jessica said, "but at least I can fulfil your request to make others aware of this."

http://www.telegraph.co.uk/finance/personalfinance/investing/9059020/The-investment-fund-that-is-guaranteed-to-lose-you-money.html

115 Profitable Investing Ideas by Greg Speicher

Written by Greg Speicher on January 31, 2012 

"My new eBook comprises a collection of ideas culled from the last two and one-half years of my investing blogs here at GregSpeicher.com. These ideas have helped me to become a better investor, and I believe they will help you too. Read them, study them, and let them inform your investing philosophy and process. And please share them with others who may benefit from them. Also, I’d love your feedback on the eBook."

http://gregspeicher.com/wp-content/uploads/2012/02/115-Profitable-Investing-Ideas.3.pdf

A growth maverick shares his ideas.

Chuck Akre on the Search for Compounding Machines

A growth maverick shares his ideas.

Kinnel: You've said you look for "compounding machines." Would you explain what that means?

Akre: When I started in the investment business a good while ago, I was not trained for it in a traditional sense. I had been a pre-med major, and then I was an English major. So, I quite naturally had all kinds of questions about the investment business, and among them were the questions of what makes a good investor and what makes a good investment, and taking a look and studying different asset classes using data from what is now your subsidiary Ibbotson and other places. I came across the well-known piece of information that over the last roughly 90 years common stocks in the United States have had an annualized return that's in the neighborhood of 10%.

So, my question naturally was, well, what's important about 10%? What I concluded was that it had a correlation with what I believe was the real return on the owners' capital of all those businesses across all those years, all kinds of different balance sheets and business models--i.e., that the real return on owners' capital was a number that was probably in the low teens and therefore that kind of 10%-ish return correlated with that, and it caused me to posit that my return in an asset would approximate the ROE of a business given the absence of any distributions and given constant valuation. So, then, we say, well, if our goal is to have returns which are better than average, while assuming what we believe is the below-average level of risk, then the obvious way to get there is to have businesses that have returns on the owners' capital which are above that.

Early in the 1970s, I came across a book written by a Boston investment counselor, whose name was Thomas Phelps. And the book he wrote was called 100 to 1 in the Market. You probably know from the history books that Peter Lynch was around Boston in those days, and he was talking about things like "10-Baggers." But here was Thomas Phelps, who was talking about "100 to 1." He documented characteristics of these businesses that caused one to have an experience, where they could make 100 times their investment. The answer is, of course, it's an issue at the rate at which they compounded the shareholders' capital on a per unit of ownership basis and those that compounded the shareholders' equity at a higher rate had higher returns over long period of years. And so that's what comes into play is this issue of compounding compound machines, and we're often identified with this thing in our process that we call the three-legged stool. The legs of the stool have to do with the business models that are likely to compound the shareholders' capital at above-average rates, combined with leg two, people who run the business who are not only killers at running the business but also see to it that what happens at the company level also happens at the per share level--and then number three, where because of the nature of the business and the skill of the manager there is both history as well as an opportunity to reinvest all the excess capital they generate to reinvest that in places where they earn these above-average rates of return.

The most critical piece of that is the last leg, that reinvestment leg. Can you take all the extra capital you generate and reinvest it in ways that you can get continued earnings above-average rates of return? And that's at the core of what we're after in our investments.

Kinnel: On the sell-side, deterioration on those key fundamentals may lead you to sell, but do you also sell on valuation?

Akre: So, in response to your first observation, deterioration to any one of those three will certainly cause us to re-evaluate it. It won't automatically cause us to sell, but it will certainly cause us to re-evaluate it. Our notion is that if we don't get those three legs right where there develop differently in the future than they have in the past, theoretically our loss is the time value of money that it hasn't always been the case. But the deterioration of one of those legs or more than one of those legs diminishes the value of that compounding and, indeed, is likely to cause us to change our view. That's number one.

Number two, the issue of selling on valuation is way more difficult for us. And what we've said is that from a matter of life experience, if I have a stock that's at $40 and I think it's way too richly valued and I sell it with a goal of buying it back at $25, my life experience is it trades to $25.01 or trades through $25 and back up and it trades 200 shares there.   The next time I look at it, it's $300, and I've missed the opportunity. It's my way of saying that the really good ones are too hard to find.  

If I have one of these great compounders, I'm likely to continue to own it through thick and thin knowing that periodically, it's likely to be undervalued and periodically likely to be overvalued. The things that cause us to sell when one or more of the legs of the stool deteriorates. Occasionally, on a valuation basis, maybe we'll take some money off the table.

Lastly, if we're trying to continue to maintain a very focused portfolio, if we run across things that we think are simply better choices, then we may make changes based on that.


http://news.morningstar.com/articlenet/article.aspx?id=534635

Warren Buffett Buys High Quality Companies

Warren Buffett loves high quality companies. He buys high quality business and holds them forever. Why? Because high quality companies do well in both good markets and bad markets.

GuruFocus' monthly Buffett-Munger Newsletter features the best Buffett-Munger bargains for today. These are companies of high quality, but that trade at far below their fair values.

Research shows that even in the "lost" decade from 2000 to 2009, high quality company stocks outperformed by more than 10% a year. GuruFocus' Buffett-Munger Screener is for high quality companies at reasonable prices.

In a recent interview Warren Buffett mentioned three companies that he finds attractive. Out of the three companies he mentioned, two of them are listed in GuruFocus' Buffett-Munger screener. Fortune magazine called this an "unintentional endorsement" from Warren Buffett.

http://www.gurufocus.com/membership/?ref=nl2

Tesco: Consistent Earnings Growth at Attractive Price

This is an old article on Tesco.
Click here to read the full article:
http://marclangefeldsinvestmentideas.blogspot.com/2009/09/tesco-consistent-earnings-growth-at.html


SATURDAY, SEPTEMBER 5, 2009

Tesco: Consistent Earnings Growth at Attractive Price
Tesco (ADR stock ticker: TSCDY) should be considered for potential purchase based on its leading position in the UK retail market, its expansion opportunities in international markets, its ability to improve operating margins and its attractive dividend yield of 3.6%.

Tesco’s ADR stock price target is $21.30 based on applying a 13x multiple to its earnings next year. Tesco deserves to trade at a premium multiple to its high single digits / low teens long-term earnings growth rate based on its consistent earnings execution, its focus on maximizing shareholder value, its best in class EBIT margins and its strong return on equity.

Can You Sum Up Your Investing Philosophy in 10 Words?

By Jason Zweig

Associated Press

Abraham Lincoln in 1858

In a speech to the Wisconsin State Agricultural Society in Milwaukee on Sept. 30, 1859, Abraham Lincoln told this anecdote:

“It is said an Eastern monarch once charged his wise men to invent him a sentence, to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: ‘And this, too, shall pass away.’ How much it expresses! How chastening in the hour of pride!—how consoling in the depths of affliction! ‘And this, too, shall pass away.’  And yet let us hope it is not quite true.”

I was recently reminded of Lincoln’s wonderful speech when someone asked me if I could summarize my investing beliefs in no more than 10 words. I laughed and said, “Of course not!”

But right afterward, I realized to my surprise that I could. I banged this out almost instantly:

Anything is possible, and the unexpected is inevitable. Proceed accordingly.

I asked some leading investors and financial thinkers for their own contributions.  Here are a few:

Determine value.  Then buy low, sell high.  ;-)

—David Herro, chief investment officer for international equities, Harris Associates, and manager of Oakmark International Fund

If everybody wants it, I don’t. Avoid crowds.

—Gus Sauter, chief investment officer, the Vanguard Group

Other people are smarter than you think they are.  Index.

—Laurence B. Siegel, research director, Research Foundation of the CFA Institute

Risk means more things can happen than will happen.

—Elroy Dimson, expert on long-term stock returns, London Business School, and co-author, “Triumph of the Optimists”

Invest for the long term and ignore interim aggravation.

– Charles D. Ellis, director, Greenwich Associates, and author, “Winning the Loser’s Game”

100% of business value depends on the future.

—Bill Miller, chairman and chief investment officer, Legg Mason Capital Management

Plan for the worst. Hope for the best.

—Robert Rodriguez, managing partner, First Pacific Advisors

Control what you can: your savings rate, costs, and taxes.

– Don Phillips, president, fund research, Morningstar

In the end, you cannot take your investments with you.

– Meir Statman, finance professor, Santa Clara University, and author, “What Investors Really Want”

The less portfolio management costs, the more you earn.

—Burton Malkiel, professor of economics emeritus, Princeton University, and author of “A Random Walk on Wall Street”

Own competently managed, competitively advantaged businesses at discounted prices.

—O. Mason Hawkins, chairman and chief executive officer, Southeastern Asset Management

Do the math. Expect catastrophes. Whatever happens, stay the course.

– William J. Bernstein, Efficient Frontier Advisors, and author, “The Four Pillars of Investing”

Fallible, emotional people determine price; cold, hard cash determines value.

—Christopher C. Davis, chairman, Davis Advisors and co-manager, Davis New York Venture Fund

New submissions are also coming in:

Save. Invest long-term. Compounding returns builds. Compounding costs destroys. Courage!

–John C. Bogle, founder, the Vanguard Group

Are you smarter than the average professional investor? Probably not.

– William F. Sharpe, emeritus professor of finance, Stanford University, and Nobel Laureate in economics

Finally, it’s worth remembering that the great investing analyst Benjamin Graham engaged in a similar exercise (also evoking Lincoln’s tale) but came in seven words under our maximum:

In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, ‘This too will pass.” Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.”

—Benjamin Graham, “The Intelligent Investor,” Chapter 20.

In the spirit of Lincoln’s classic anecdote, can you sum up your investing philosophy in no more than 10 words that you believe will be “true and appropriate in all times and situations”?

http://blogs.wsj.com/totalreturn/2012/01/27/can-you-sum-up-your-investing-philosophy-in-10-words/?mod=WSJBlog&mod=totalreturn

3 Investing Traps -- And How To Avoid Them

These tips should help you sidestep some common accounting pitfalls.

Alcoholics have 12 steps. Grievers have five stages. Investors have their phases, too, with the biggest leap coming when a fledgling shareholder begins tossing accounting ratios around. I've calculated ratios for years myself, both as a hedge-fund analyst and in making share recommendations for The Motley Fool, and I'll say this: ratios are both powerful and open to misuse by novices. I'd like to share a few tricks with you to help you avoid some common pitfalls.

Trap 1: Focusing too much on return on equity (ROE)

The much-vaunted ROE seems pure: take net profits, divide by shareholders' equity, and you see how efficient a business is with investors' money. ROE is Warren Buffet's favourite ratio, and executive pay is sometimes tied to it.

When it's a trap: When it's enhanced by debt. Borrowing funds to make more money for shareholders isn't necessarily evil, and is sometimes beneficial. But investors strictly watching ROE will miss the additional risk taken by a management team 'gearing up' to meet performance targets.

Protect yourself: Add return on invested capital (ROIC) to your arsenal. Using the same principle as ROE, ROIC essentially compares after-tax operating profits to both debt and equity capital, and thus provides a better measure of operational success that can't be inflated by a financing decision. Moreover, research by American equity strategist Michael Mauboussin of Legg Mason shows that companies whose ROICs either rise or remain consistently high tend to outperform others. Search online to find the precise formula, or drop me a comment in the box below.

Using Standard & Poor's Capital IQ database, I screened for companies with returns on capital (a near-identical cousin of ROIC) above 20% that have seen an improvement in return on capital during the past five years. These shares are not recommendations, but rather screen results that may be of interest given the discussion.

Company	Market cap (£m)	Return on capital
		Last fiscal year	Five years ago
Croda International (LSE: CRDA)	2,638	26.3%	22.8%
Renishaw (LSE: RSW)	1,053	25.1%	16.9%
Burberry (LSE: BRBY)	6,172	24.4%	20.0%

Trap 2: Taking turnover growth at face value

A sale is a sale, right? Wrong. Turnover is a prime line for accounts manipulation.

When it's a trap: Intricate shenanigans with turnover figures can be tough to uncover, but a simple rule of thumb is to become suspicious if growth in trade receivables (for instance, the amounts customers owe) meaningfully exceeds growth in revenues. This could indicate 'channel stuffing', whereby a company extends overly generous terms to customers simply to gain a short-term turnover boost.

Protect yourself: Using a screening tool or your own sums, compute the relative growth of both sales and trade receivables, particularly for companies whose growing turnover forms a major part of your investing thesis.

Again using Capital IQ, I noticed retailer Dunelm (LSE: DNLM) reported attractive 9% growth in sales last year (especially in this consumer market) -- albeit accompanied by a troubling 22% increase in trade receivables. While not a red flag outright, it's something to investigate further.

Trap 3: Using accounting profits to compute dividend cover

I've done this myself, and feel it's probably acceptable with stable companies clearly able to pay shareholders.

When it's a trap: The first thing a budding investor learns is that for accounting reasons, profits don't always match cash flow -- from which dividends are paid. Though cash flows and profits should theoretically match over time, profits are skewed by 'accrual' calculations, such as spreading the cost of equipment purchases over the life of the equipment, versus charging the costs in the year they occurred.

Protect yourself: Experienced analysts use free cash flow instead of reported earnings to produce a more reliable measure of dividend safety. Read this old-school Fool article for a moredetailed discussion on free cash flow. Swapping cash flow for accounting profits in your dividend cover calculation should increase its reliability.

Capital IQ turned up these companies as having cash flows materially exceeding accounting profits.

Company	Net profits (£m)	Free cash flow (£m)
Marks & Spencer (LSE: MKS)	603	701
Sage Group (LSE: SGE)	189	283
Rexam (LSE: REX)	154	265

There you have it. You're now three traps wiser, which is a step ahead of most investors. Indeed, while spotting numerical chicanery may be best for sidestepping share-price stinkers, avoiding losers is more than half the battle to building a winning portfolio.

http://www.fool.co.uk/news/investing/2012/02/02/3-investing-traps-and-how-to-avoid-them.aspx?source=ufwflwlnk0000001