Value Investing: Keep Emotions Out of It

As you evolve your value investing style, keep this in your mind always.


Keep Emotions Out of It


    

The wisdom shared is about avoiding emotional attachments to stocks and the businesses they represent.

If you LOVE Dutch Lady#   , don't invest in it until you like the numbers.  And if the numbers look good and you invest, but they start to look bad later, be able to recognize that.  

Value investors continuously look for the good and the bad and keep their RATIONAL wits about them as they decide to buy and keep their investments.  The purpose of an investment is to achieve a greater financial goal and not to become a "member of the family".

DON'T HESITATE TO ADMIT YOUR MISTAKES.  Value investors admit their mistakes and learn from them.  They take the time to understand what changed (or was overlooked in the first place), and they move on.  

They have a RATIONAL "sell" model and aren't afraid to sell a business when underlying reasons to own it have changed or if the price is way out of line with value.  



# Dutch Lady is a stock in the KLSE.

Ten Signs of Value

Here are ten "core" signs of value to guide your value investing process.  When all or most signs are present, the business is on the right track.

1. Steady or Increasing Return on Equity (ROE)
2. Strong and Growing Profitability
3. Improving Productivity
4. Producer, NOT Consumer of Capital
5. The Right Valuation Ratios
6. A Franchise
7. Price Control
8. Market Leadership
9. Candid Management
10. Customer Care

Let's look at reasons to invest in warrants and how to go about it.

Why invest in warrants?

Gearing effect
A hedging tool


As with any instrument, money can be made and lost when trading warrants.

Mr. X, 37, would know. Three weeks ago, he lost about $25,000 in just two weeks after trading in some Straits Times Index warrants.  'Greed made me lose a lot. I was hoping my initial losses could be recovered, but this didn't happen,' he said.

Investors should also be disciplined about taking profits and cutting losses. Investors are advised to monitor their positions closely as warrants tend to move in greater percentage terms than shares.

Mr. P, 32, started trading warrants this year with a principal sum of $15,000.  He made a 25 per cent return in just three days, after he bought DBS Group Holdings and CapitaLand warrants in September. But he lost about $20,000 in two weeks when the stock market nosedived recently. 'I wasn't careful, so I didn't cut my losses fast enough,' he said.


You also need to factor in the timeframe - and be confident that the underlying asset price is set to reach your price target at the same time that the warrant matures.

'If you believe the market is going to have a sharp correction soon, you should choose a short-term out-of-the- money put warrant.'

'If you expect a stock to move up gradually in one to two months' time, you should choose a mid-term at-the- money or a 1 to 5 per cent out-of-the- money call warrant.'


What are the five variables and how do they affect an option's value or premium?

Options values or premiums on puts and calls are function of five variables.  The five variables are:
1.  the underlying asset value,
2.  the risk-free rate,
3.  the standard deviation of the return of the asset,
4.  the option's time to maturity, and
5.  the option's exercise price.

A call option's value will increase with increases in the underlying asset value, risk-free rate, time to maturity, and standard deviation of returns.  However, a call's premium will decrease as the striking price increases.

A put's value will increase with increases in the exercise price, the time to maturity and standard deviation of returns, and decrease with increases in the underlying asset value and risk-free rate.

If dividends are considered, a call's value will decrease with dividends while a put's value will increase.

Warrants trading: What you need to know

Cheap investment tools were virtually non-existent in Singapore a few years ago, but a recent growth spurt has sent their popularity soaring.  Gabriel Chen Sun, Dec 02, 2007 The Sunday Times These cheap investment tools were virtually non-existent in Singapore a few years ago, but a recent growth spurt has sent their popularity soaring. Let's look at reasons to invest in warrants and how to go about it. IF THE experts are right, the current boom in this investment tool is far from petering out. They say more and more market traders are jumping in, as well as investors looking beyond stocks and bonds to bolster their portfolios. To get an idea of just how popular they have become, consider this: Warrants turnover on the Singapore Exchange has grown from zero in 2003 to about $3 billion a month now. The number of active warrant accounts has also shot up more than tenfold, to 20,154 this June from 12 months earlier. A key attraction of warrants is that they are cheap. Warrants trade around 20 cents to 30 cents, so the minimum investment for one lot - 1,000 shares - could be as low as $200 to $300. As with any instrument, money can be made and lost when trading warrants. For example, say an investor bought a call warrant on stock X for 30 cents with an exercise price of $5. Also, assume the conversion ratio is one to one, which means one warrant can be converted into one share. The current share price is $5.25. If the investor holds the warrant to maturity and exercises it, he is effectively paying $5.30 apiece for the shares (30 cents warrant cost plus $5 exercise price). If the price of stock X stays at $5.25, he will get back 25 cents, so effectively, he will lose five cents ($5.30 minus $5.25). If the share price falls to $5 or below, he will lose just his investment capital of 30 cents, but no more, even if the share price falls drastically. On the other hand, if the stock's market price shoots up to $5.35, converting the warrant into a share would mean a five cent profit. Consultant Peter Ang, 32, started trading warrants this year with a principal sum of $15,000. He made a 25 per cent return in just three days, after he bought DBS Group Holdings and CapitaLand warrants in September. But he lost about $20,000 in two weeks when the stock market nosedived recently. 'I wasn't careful, so I didn't cut my losses fast enough,' he said. Despite the spectacular growth in the Singapore warrants market, Hong Kong is still well ahead because of a flood of China listings there. Previous attempts to launch warrants trading here in 1995, and again in 1999, tanked for various reasons - including overly stringent listing rules and inadequate investor education. But three years ago, warrant issuers - some of the biggest players include Deutsche Bank, Macquarie Bank, Societe Generale and BNP Paribas - started to double as market makers. This means these banks provided buy and sell prices on warrants to ensure that investors had the chance to enter or exit the market. They also embarked on investor education seminars and dedicated websites featuring trading tools. How to pick a suitable warrant? Directional view Without getting bogged down in technical terms such as 'implied volatility', you should consider one factor when picking a warrant: whether you think the underlying asset is likely to go up or down in value. Your view will determine whether you select a call warrant or a put warrant. For example, suppose the Government has announced a new project and the likelihood of CapitaLand securing the project is high. If you think this is good news for CapitaLand, you could consider buying call warrants on the stock - since you would expect the stock price to rise. But if you think CapitaLand's share price is more likely to fall, you might want to buy a put warrant. 'Theoretically, if one has a neutral view on a stock, it would not be advisable to invest in warrants,' Deutsche vice-president Sandra Lee cautioned. Timing You also need to factor in the timeframe - and be confident that the underlying asset price is set to reach your price target at the same time that the warrant matures. Take a call warrant, for example. The longer the time to expiry, the more time there is for the underlying asset to appreciate, which in turn will increase the price of the call warrant. A call warrant that is far 'out-of-the money' with very little time to expiry is considered highly risky. This is because it has an exercise price that is much higher than its underlying price and yet has little time to appreciate. In contrast, when the call warrant's exercise price is lower than its underlying price, the warrant is regarded as 'in-the-money'. For both call warrants and put warrants, if the exercise price is equal to the underlying price, the warrants are said to be 'at-the-money'. 'If you believe the market is going to have a sharp correction soon, you should choose a short-term out-of-the- money put warrant,' said Mr Simon Yung, BNP's head of retail listed products sales for Singapore and Hong Kong. 'If you expect a stock to move up gradually in one to two months' time, you should choose a mid-term at-the- money or a 1 to 5 per cent out-of-the- money call warrant.' Why invest in warrants? Gearing effect The biggest advantage warrants trading has over stocks trading is the gearing effect, which means that you can make huge gains from a modest investment outlay. For example, it can cost nearly $20,000 to buy one lot of DBS shares (assuming a market price of $20 a share). An increase of 1 per cent in the DBS share price will give you a return of $200. But if you buy a DBS warrant with an effective gearing of 10 times, it should roughly return the same profit of $200. The effective gearing indicates roughly how many per cent a warrant price will move if the underlying stock changes by 1 per cent. In this case, trading in the DBS warrant costs just $2,000 but reaps the same $200 return. 'If the share price moves in your favour, you will get higher returns with a higher level of gearing. But if you get your view wrong, losses will also be greater,' said Mr Barnaby Matthews, Macquarie's head of warrants sales. Since warrants are typically cheaper than underlying shares, this potentially frees up investors' cash for other purposes. A hedging tool Buying a put warrant - which gives you the right to sell the underlying asset later - is like buying an insurance policy for your portfolio, as it protects you from falls in the market. 'If the underlying asset declines, then put warrants will appreciate in price to offset losses suffered by the underlying asset,' said Mr Ooi Lid Seng, Societe Generale's vice-president of structured products for Asia ex-Japan. For example, one can hold OCBC Bank shares and buy OCBC put warrants. If the OCBC share price keeps falling, losses will be partially offset by the gain in the put warrant price. As warrants can be used to capture both the upside (call warrants) and the downside (put warrants), they can be used as a tool for risk management in a stock portfolio. Mr Yung said that warrants can be a perfect instrument for balancing a portfolio's risk profile. 'A portfolio with only bonds, property and stock may not be able to optimise the risk-taking capability of the investor,' he said. Tips on investing FIRST, investors should never invest all their investment capital in warrants. 'Generally, we do not advise them to invest more than 10 per cent of their total investment capital in warrants due to the high-risk and high-return nature of warrants,' Mr Ooi said. Retirees should also not use retirement funds needed to maintain their lifestyle to invest in warrants, as they generally have a lower risk tolerance, he added. Investors should also be disciplined about taking profits and cutting losses. Mr Matthews advised investors to monitor their positions closely as warrants tend to move in greater percentage terms than shares. Customer service manager Jason Kua, 37, would know. Three weeks ago, he lost about $25,000 in just two weeks after trading in some Straits Times Index warrants. 'Greed made me lose a lot. I was hoping my initial losses could be recovered, but this didn't happen,' he said. Finally, investors should attend a seminar or do some reading to ensure that they understand the product before investing. 'Asking the expert before you invest is always a good idea,' Mr Yung said. -------------------------------------------------------------------------------- What is a warrant? WARRANTS are 'derivative' investment products - that is, they derive their value from an underlying asset such as a stock or a market index such as the Straits Times Index. They give the investor the right to buy or sell the underlying asset from the issuer by paying a specific 'strike' or exercise price within a certain timeframe. A call warrant gives the holder the option to buy, while a put warrant gives the option to sell. Take a Keppel Corp call warrant for example. If the price of the underlying Keppel stock rises above the exercise price before the expiry of the warrant, it will clearly be to your advantage to exercise the right to buy Keppel shares. If you plan to exercise the Keppel warrant - that is, convert it into a Keppel share - you must do so before the expiration date. Of course, if Keppel's price stays below the exercise price, the warrants will expire worthless. But investors often do not have to hold warrants to maturity. Normally, they simply buy and sell warrants on the stock market as they move in line with movements in the underlying share price. 'Warrants, unlike shares, have a finite lifespan,' said Deutsche Bank vice-president Sandra Lee. 'For each day the investor holds on to the warrant, the warrant loses some time value.' Warrants usually have three- to six-month expiry dates.

http://www.asiaone.com/Business/My%2BMoney/Building%2BYour%2BNest%2BEgg/Investments%2BAnd%2BSavings/Story/A1Story20071205-39670.html

http://forum.lowyat.net/topic/1039913/all  (Good notes on warrants)

Warrants Basics

A

At-the-money (ATM) 
A warrant whose strike is near or equal to the underlying security's price.

B

Break-even point
That implies the price level at which the investor will break-even on warrant expiry; for instant, the investor will make profit if the closing price is higher than strike price.

Broad Lot
The minimum number of warrants that can be traded on the Singapore Stock Exchange.

C

Call
A call warrant provides the holder with a right, but not an obligation, to buy a stock/index at a pre-determined strike price on maturity date. However, currently most of the warrants are cash settled.

Conversion ratio
It indicates the number of warrants related to one share of the underlying that the holder is entitled to buy or sell.

D

Delta
Delta measures "how much the warrant price will move for a one dollar move in the underlying security". The delta of a call warrant has an upper bound of 1.00 (decimal format) or 100% (percent format) and a lower bound of zero. A call warrant with a delta of 1.00 will move up or down one full point for each full point move up or down in the price of the underlying security. A call warrant with a delta of zero should move negligibly, even if the underlying security makes a relatively large move. Warrants that are at-the-money have a delta of approximately 0.50.

For put warrants, the delta lies between -1.00 (or -100%) and zero. A rise in the underlying security will bring about a drop in the price of a put warrant.

E

Effective Gearing
A warrant's effective gearing is the relative percent change in a warrant's value for a given percent change in the price of the underlying security. A warrant's effective gearing is not constant and is higher for warrants which are out-of-the-money and/or close to expiry.

Expressed mathematically:

Effective gearing = gearing x delta

G

Gamma*
It is the rate of change of the portfolio's delta with respect to the price of the underlying asset.

Gearing
The ratio of the share price to the warrant price (multiplied by the conversion ratio, if applicable).

Gearing =	___________share price__________
	warrant price x conversion ratio

H

Hedging
A trade designed to reduce risk, for instance, a put warrant may act as hedge for a current holding in the underlying asset.

I

Implied Volatility
Implied volatility is the volatility anticipated by the financial markets. The higher the implied volatility, the higher the value of the warrant.

Implied volatility is also the volatility implicit in the market price of the warrant. For warrants of similar terms, the higher the implied volatility, the more expensive a warrant is.

In-the-money (ITM)
A warrant with the strike below (for a call warrant) or above (for a put warrant) the price of the underlying security.

Intrinsic Value
For a call warrant, the amount that equals to the market value of the underlying security less the strike. For a put warrant, the amount that equals to the strike less the market value of the underlying security. The intrinsic value corresponds to the amount by which a warrant is in-the-money.

L

Last trading Day
The last trading day of a structured warrant is the fifth trading day prior to the maturity date. After the last trading day, investors will not be able to buy or sell the structured warrant in the market.

M

Maturity Date
It is the expiry date of a warrant.

O

Out-of-the-money (OTM)
A warrant with the strike above (for a call warrant) or below (for a put warrant) the price of the underlying security.

P

Premium
The percentage by which the underlying share price needs to have moved at maturity for the investor to break even.

Premium for a call warrant (%) = [strike + (warrant price x conversion ratio)] - share price x 100%                                           share price Premium for a put warrant (%) = share price - [(strike - (warrant price x conversion ratio)] x 100%                                           share price

Put
A put warrant provides the holder with a right, but not an obligation, to sell a stock/index at a pre-determined strike price on maturity date. However, currently most of the warrants are cash settled.

S

Strike Price
It is the price at which the warrant-holder to buy (a call) or to sell (a put) the underlying asset. However, currently most of the warrants are cash settled.

T

Theta*
It is the rate of change of the value of the portfolio with respect to the passage of time with all else remaining the same. Theta is sometimes referred to as the time decay of the portfolio.

Time Value
The portion of a warrant's price that is not accounted for by the intrinsic value.

U

Underlying Asset
The listed company or stock index that the warrant is issued on.

V

Vega*It is the rate of change of the value of the portfolio with respect to the volatility of the underlying asset.

Volatility*
A measure of the uncertainty of the return realized on an asset.

*Source: Options, Futures, and other derivatives (Fifth edition), John C. Hull

http://sg.warrants.com/singapore/home4/basic/glossary01.html

Are you amazed at what goes on without the public knowing?

Come and see ‘land grab’ plots, Tee Yong told

By Ida Lim

December 05, 2012

Chua was challenged to pursue reparations for Selangor if it can be shown that BN parties had profited from the 24 plots of land involved. — File pic

KUALA LUMPUR, Dec 5 ― DAP’s Tony Pua today invited MCA’s Datuk Chua Tee Yong to visit the 24 plots of land in Selangor that were allegedly sold to the Barisan Nasional (BN) coalition in a suspected multi-million land grab scandal.

http://themalaysianinsider.com/malaysia/article/come-and-see-land-grab-plots-tee-yong-told/

The Verdict on Market Timing

Many professional investors move money from cash to equities or to long term bonds on the basis of their forecasts of fundamental economic conditions.  This is one reason many brokers give to support their belief in professional money management.

John Bogle, founder of the Vanguard Group of Investment Companies said, "In 30 years in this business, I do not know anybody who has done it successfully and consistently, not anybody who knows anybody who has done it successfully and consistently.  Indeed, my impression is that trying to do market timing is likely, not only not to add value to your investment program, but to be counterproductive."

Over a fifty-four year period, the market has risen in 36 years, been even in 3 years and declined in only 15 years.  Thus, the odds of being successful when you are in cash rather than stocks are almost 3 to 1 against you.

An academic study by Professors Richard Woodward and Jess Chua of the University of Calgary shows that holding on to your stocks as long-term investments works better than market timing because your gains from being in stocks during bull markets far outweigh the losses in bear markets.  The professors conclude that a market timer would have to make correct decisions 70 percent of the time to outperform a buy-and-hold investor.  Have you met anyone who can bat 0.700 in calling market turns?


An examination of how mutual funds have varied their cash positions in response to their changing views about the relative attractiveness of equities.

Mutual fund managers have been incorrect in their allocation of assets into cash in essentially every recent market cycle.

Caution on the part of mutual-fund managers (as represented by a very high cash allocation) coincides almost perfectly with troughs in the stock market.

• Peaks in mutual funds' cash positions have coincided with market troughs during 1970, 1974, 1982, and the end of 1987 after the great stock-market crash. 
• Another peak in cash positions occurred in late 1990, just before the market rallied during 1991, and in 1994, just before the greatest six-year rise in stock prices in market history.
• Cash positions were also high in late 2002 and in March 2009, at the trough of the market.

Conversely, the allocation to cash of mutual-fund managers was almost invariably at a low during peak periods in the market.

• For example, the cash position of mutual funds was near an all-time low in March 2000, just before the market began its sharp decline.  

The ability of mutual-fund managers to time the market has been egregiously poor.  

Ref: A Random Walk Down Wall Street by Burton G. Malkiel

Two ways to profit from the market swings: Timing or Pricing

Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings. There are two possible ways by which  he may try to do this:

• the way of timing and 
• the way of  pricing.

By timing we mean the endeavour to anticipate the action of the stock market—

• to buy or hold when the future course is deemed to be upward, 
• to sell or refrain from buying when the course is downward. 

By pricing we mean the endeavour

• to buy stocks when they are quoted below their fair value and 
• to sell them when they rise above such value. 

A less ambitious form of pricing is  the simple effort

• to make sure that when you buy you do not  pay too much for your stocks. 
• This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as  such it represents an essential minimum of attention to market levels.

We are convinced that the intelligent investor can derive satisfactory results from pricing of either type. 

We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator’s financial results. 

8 Buffett Secrets for Investing in Banks

By Matt Koppenheffer
November 29, 2012

Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) Warren Buffett is seen by many as one of the best investors of our time. But he's also often seen as particularly insightful when it comes to investing in banks.

Certainly Berkshire shareholders should hope that the latter is the case as the company owns 8% of banking giant Wells Fargo  (NYSE: WFC  ) along with $5 billion in Goldman Sachs  (NYSE: GS  ) , nearly $2 billion of US Bancorp  (NYSE: USB  ) stock, and roughly another $1 billion between M&T Bank  (NYSE: MTB  ) and Bank of New York Mellon  (NYSE: BK  ) . Not to mention $5 billion in preferred shares of Bank of America (NYSE: BAC  ) .

So what does Warren know that makes him so prescient when it comes to banks?

1. Owning a bank can be a long-term endeavor.
The banking business is a cyclical one, but bank ownership for Buffett typically isn't. In 1969, Berkshire acquired Illinois National Bank and Trust Company and held onto it until it was forced by regulators to sell the bank in 1980. The company's ownership position in Wells Fargo goes back to 1989, while the stake in M&T Bank dates back to at least 1999.

2. Management matters.
We've seen from the financial crisis how reckless management can lead to outright disaster. When Buffett talks about the banks he's owned, he's generally taking time to praise management. Here's what he had to say in Berkshire's 1990 shareholder letter when praising Wells Fargo's management:

[The team at Wells Fargo pays] able people well, but abhor having a bigger head count than is needed... attack costs as vigorously when profits are at record levels as when they are under pressure. Finally, [they] stick with what they understand and let their abilities, not their egos, determine what they attempt.

3. Leverage kills.
Again from the 1990 shareholder letter:

When assets are twenty times equity-a common ratio in this industry-mistakes that involve only a small portion of assets can destroy a major portion of equity. ... Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly managed bank at a "cheap" price. Instead, our only interest is in buying into well-managed banks at fair prices.

4. Panic? Not a chance.
Rather than panic during banking downturns, Buffett has used them to build his ownership stakes. The original stake in Wells Fargo was purchased between late 1989 and early 1990 -- when banks were faltering during the previous banking crisis. During the latest meltdown, Buffett upped Berkshire's ownership in Wells Fargo and US Bancorp, maintained the company's position in M&T Bank, and famously provided preferred-share financing to Goldman. Just last year he sunk $5 billion into Bank of America when it was facing a market freak-out.

The fact that Wells Fargo's price fell after Berkshire initially bought didn't phase Buffett one bit:

Even though we had bought some shares at the prices prevailing before the fall, we welcomed the decline because it allowed us to pick up many more shares at the new, panic prices. Investors who expect to be ongoing buyers of investments throughout their lifetimes should adopt a similar attitude toward market fluctuations; instead many illogically become euphoric when stock prices rise and unhappy when they fall. 

In case you're wondering, yes, this is that classic Buffett "be greedy when others are fearful" sentiment.

5. Know where to look for performance.
As Marty Whitman puts it: "Rarely do more than three or four variables really count. Everything else is noise." 

Three things that Buffett has highlighted when it comes to evaluating a bank are: return on assets, risk (leverage ratio), and expenses (efficiency ratio).

6. Remember to own for a long time.
There's no reason to not mention this one twice, because it's an important one. To have a year where an attractive bank he owned made no profit "would not distress us." Instead, "at Berkshire we would love to acquire businesses or invest in capital projects that produced no return for a year, but that could then be expected to earn 20% on growing equity."

7. Pick your spots to go outside the box.
With all of this in mind (especially the risk part), Goldman Sachs may not seem like a very Buffett-esque bank to invest in. And it's really not. However, when we think about the investment banks that Berkshire could have invested in -- Bear Stearns, Lehman Brothers, Morgan Stanley  (NYSE: MS  ) , etc. -- Goldman stands out as head and shoulders above the rest.

Not to mention that Buffett was no stranger to Goldman. In Berkshire's 2003 shareholder letter, you can find Buffett singing the praises of -- believe it or not -- a Goldman Sachs investment banker:

I should add that Byron [Trott] has now been instrumental in three Berkshire acquisitions. He understands Berkshire far better than any investment banker with whom we have talked and – it hurts me to say this – earns his fee.

8. Don't get all mushy over the whole thing.
It's certainly possible to find great banks to invest in and Buffett has found his fair share for Berkshire. But banking ain't an easy slog, and even Buffett will admit he's not going out of his way for a bank unless it's really worthwhile. As he put it: "The banking business is no favorite of ours."

Buffett picks 'em, and you benefit

You can, of course, take the above points and use them to help you find great banks to invest in. Or, you could leave the picking to Warren and simply invest in Berkshire Hathaway. But is now the best time to be buying Berkshire?

http://www.fool.com/investing/general/2012/11/29/8-buffett-secrets-for-investing-in-banks.aspx

What are the risks in buying call warrants?

Wednesday August 11, 2010

Personal Investing - By Ooi Kok Hwa

Prices are influenced by intrinsic value and time value

Besides, a lot of investors have been complaining that they are unable to make money from the call warrants that they have bought.LATELY, we notice that there are growing numbers of call warrants getting listed on Bursa Malaysia. Even though there are many call warrants issued and traded in the market, the trading volumes of these call warrants are relatively low compared with the normal warrants.

Many investors cannot differentiate between a warrant and a call warrant.

A warrant is a transferable option certificate issued by a company which entitles the holder to buy a specific number of shares in that company at a specific price (or exercise price) at a specific time in the future. It is normally issued by a listed company.

A call warrant (like a call option) also gives investors a right to buy stocks in a company within a fixed period of time. However, warrants are issued by listed companies whereas call warrants are issued by investment banks.

An investor monitoring share prices at a private stock market gallery in Kuala Lumpur. Many investors have been complaining that they are unable to make money from the call warrants that they have bought.

If investors exercise the rights in warrants, they will receive the listed companies’ shares.

Meanwhile, upon maturity of call warrants, investment banks will only pay investors in cash if the closing price of the listed companies is higher than the exercise price of the call warrants. Investors will get nothing if the closing price of the listed companies is lower than the exercise price.

There are many risks in buying into call warrants. Call warrants have shorter maturity period as compared to warrants. Normally, warrants have maturity period of five years or more whereas call warrants have very short maturity period of less than a year.

In many instances, investors who have bought into these call warrants do not realise that their call warrants have expired. Nevertheless, call warrants will be automatically exercised upon the maturity date if the settlement price is higher than the exercise price.

As mentioned earlier, a lot of call warrants are not actively traded in the market. In fact, a majority of them do not have trading volume on a daily basis. We believe one of the possible reasons is that some of these call warrants are getting nearer to maturity date.

The prices of call warrants are influenced by their intrinsic value and time value.

If the call warrants are getting nearer to their maturity date, the time value will be closer to zero. In addition, if the mother price of the listed companies is being traded at a lower price than the exercise price plus the premium that the investors have paid for the call warrant, the market price of these call warrants will fall below their original issue price.

For those who have subscribed into these call warrants, rather than cutting losses and selling them into the market, they will likely hold on to the call warrants and hope that the mother price will recover one day. Unfortunately, in many instances, investors get nothing upon maturity of these call warrants.

Given that the gap between the buying and selling prices is quite big for some call warrants, many investors find it difficult to buy or sell the call warrants. Hence the fact that call warrants usually have low trading volume implies that this is an instrument with very high liquidity risks.

The main reason for a lot of investors to purchase call warrants is the hope of getting payments from investment banks. However, investors need to understand that the majority of the call warrants are European-styled, which means investors cannot exercise them before the maturity date.

The majority of call warrants are settled in cash for the difference between closing price and exercise price. The formula for cash settlement amount is equal to the number of call warrants x (closing price – exercise price) x 1/exercise ratio. Hence, investors need to pay attention to the exercise price, exercise ratio and premium that they have paid.

For example, the exercise price on Call Warrant Company A (Company A CA) is RM10, the exercise ratio is 10 Company A CA to 1 Company A share and the premium investors need to pay is 10 sen for each Company A CA. To the call warrant holders, in order to breakeven, the mother share price of Company A needs to go higher than RM11 or RM10 plus RM1 (10x10 sen, which is the total premium that they have paid).

Lastly, investors need to pay attention to the fundamentals of the mother companies and check the potential price appreciations for these companies.

Companies with good prospects will have higher possibilities of price appreciation and therefore lower risk of buying into the call warrants.

Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?sec=business&file=/2010/8/11/business/6832498

The Technique of Fundamental Analysis

Fundamental analysts believe that the market is 90% logical and only 10% psychological.  Value is related to a company's assets, its expected growth rate of earnings and dividends, interest rates, and risk.  By studying these factors, the fundamentalist arrives at an estimate of a security's intrinsic value or firm foundation of value.

Fundamentalists believe that eventually the market will reflect the security's real worth.

The fundamentalist strives to be relatively immune to the optimism and pessimism of the crowd and makes a sharp distinction between a stock's current price and its true value.

In estimating the firm-foundation value of a stock, the fundamentalist's most important job is to estimate the firm's future stream of earnings and dividends.  The worth of a share is taken to be the present or discounted value of all the cash flows the investor is expected to receive.  The analyst must estimate the firm's sales level, operating costs, tax rates, depreciation, and the sources and costs of its capital requirements.

The fundamentalist uses four basic determinants to help estimate the proper value for any stock.

1.  The expected growth rate.
Rule:  A rational investor should be willing to pay a higher price for a share the larger the growth rate of dividends and earnings.
Rule:  A rational investor should be willing to pay a higher price for a share the longer an extraordinary growth rate is expected to last.

2.  The expected dividend payout.
Rule:  A rational investor should be willing to pay a higher price for a share, other things being equal, the larger the proportion of a company;s earnings that is paid out in cash dividends.

3.  The degree of risk.
Rule:  A rational (and risk averse) investor should be willing to pay a higher price for a share, other things being equal, the less risky the company's stock.

4.  The level of market interest rates.
Rule:  A rational investor should be willing to pay a higher price for a share, other things being equal, the lower the interest rates.


The above valuation rules imply that a security's firm-foundation value (and its price-earnings multiple) will be higher 

• the larger the company's growth rate and the longer its duration;
• the larger the dividend payout for the firm; 
• the less risky the company's stocks; and 
• the lower the general level of interest rates.

In principle, such rules are very useful in suggesting a rational basis for stock prices and in giving investors some standard of value.  But before using these rules, bear in mind the following caveats.

1.  Expectations about the future cannot be proven in the present.

Predicting future earnings and dividends is a most hazardous occupation.  It is extremely difficult to be objective; wild optimism and extreme pessimism constantly battle for top place. "Forecasts are difficult to make - particularly those about the future."

2.  Precise figures cannot be calculated from undetermined data.

There is always some combination of growth rate and growth period that will produce any specific price.  In this sense, it is intrinsically impossible, given human nature, to calculate the intrinsic value of a share.  

The point to remember is that the mathematical precision of fundamental value formulas is based on treacherous ground: forecasting the future.  "God Almighty does not know the proper price-earnings multiple for a common stock."

3.  What's growth for the goose is not always growth for the gander.

It is always true that the market values growth, and that higher growth rates and larger multiples go hand in hand.  But the crucial question is:  How much more should you pay for higher growth?  

There is no consistent answer.  In some periods, the market was willing to pay an enormous price for stocks exhibiting high growth rates.  At other times, high growth stocks commanded only a modest premium over the multiples of common stocks in general.   Growth can be as fashionable as tulip bulbs, as investors in growth stocks painfully learned. 

From a practical standpoint, the rapid changes in market valuations that have occurred suggest that it would be very dangerous to use any one year's valuation relationships as an indication of market norms.  However, by comparing how growth stocks are currently valued with historical precedent, the investor should at least be able to isolate those periods when a touch of the tulip bug has smitten investors.

Why might fundamental analysis fail to work?

There are three potential flaws in this type of analysis.
1.  The information and analysis may be incorrect.
2.  The security analyst's estimate of "value" maybe faulty.
3.  The market may not correct its "mistakes", and the stock price may not converge to its value estimate.

Pavilion REIT Chairman Lim reported to be worth RM3bil

Friday November 23, 2012

KUALA LUMPUR: Desmond Lim Siew Choon became a billionaire developing a high-end retail mall and an office tower in Kuala Lumpur, wooing Middle Eastern investors and listing the properties as a real estate investment trust.

The 52-year-old chairman of Pavilion Real Estate Investment Trust, Malaysia's second-biggest property trust by market value, is worth at least US$1bil (RM3.06bil), according to the Bloomberg Billionaires Index. Lim and his wife, Tan Kewi Yong, own 38% of the Kuala Lumpur-based trust, whose shares have outpaced other companies that raised at least US$50mil in an initial public offering (IPO) in Malaysia in the past 12 months.

Rising consumption and increased tourism in Malaysia have bolstered Pavilion REIT, which has surged almost 60% since trading on Dec 7. Malaysia's gross domestic product exceeded 5% for at least a fifth quarter as the Government raised spending and unveiled infrastructure projects before a general election that must be held by early 2013.

“While the general masses have benefited from this wealth effect, I would say that the upper crust would have seen the largest gains from the recent run up,” said William Chan, chief executive officer of Singapore-based family office Stamford Privee. “Connections matter, both locally and globally.”

Lim, who has never appeared on an international wealth ranking, declined to be interviewed as he was travelling for business, said Philip Ho, chief executive officer of Pavilion REIT Management Sdn, which manages the property trust.

Lim majored in finance at the University of Central Oklahoma, and started building houses, condominiums and office towers with developerKhuan Choo Group in the 1980s. As Malaysia prodded banks to merge, Lim took over the listing status of Gadek Capital Bhd after the latter sold its finance business to Hong Leong Bank Bhd in 2000. Lim injected Khuan Choo into Gadek, renamed it Malton Bhd and relisted it in 2002.

The billionaire made the bulk of his fortune from developing the mixed-use Pavilion project a mall, two luxury apartment towers and an office building on the former site of a girls' school in Kuala Lumpur, one of the last pieces of prime real estate in the capital.

Malton was the contractor of the Pavilion, located in the main shopping street of Jalan Bukit Bintang, Kuala Lumpur's version of Fifth Avenue in New York and Orchard Road in Singapore. In the heart of the city's Golden Triangle entertainment and commercial district, the mall, which drives the property trust's earnings, is surrounded by hotels including the Westin Kuala Lumpur and JW Marriott Hotel. Tourists account for more than 30% of Pavilion's shoppers. Malaysia attracted 24.7 million tourists last year, almost double the 12.7 million in 2001.

The mall, which has total net lettable retail area of more than 1.3 million sq ft, houses boutiques including Prada and Hermes alongside luxury-car showrooms offering the latest Jaguar and Bentley models. Other tenants include The Loaf, a Japanese-style gourmet bakery and bistro part-owned by former Malaysian prime minister Mahathir Mohamad, as well as an art gallery promoting the works of American pop artist Robert Indiana and contemporary painters.

According to a newsreport, when Lim embarked on the project around 2002, his entry cost was low with commercial and residential properties in downtown Kuala Lumpur transacting at less than RM500 per sq ft. Prices had risen more than three times to about RM1,800 per sq ft by the time it was completed in 2008.

There is an “increasing scarcity of prime land” in the capital's city centre, particularly in the Golden Triangle area, the research unit of Kuala Lumpur-based Alliance Investment Bank Bhd said in a report dated July 25.

Kuwait Finance House, the Persian Gulf state's biggest Islamic lender, helped to finance the development cost when it took a 49% stake in the Pavilion project in 2006 and bought both the residential towers. Qatar Investment Authority has since bought the stake from Kuwait Finance House and owns about 36% of Pavilion REIT.

Lim and his wife received about RM703mil in cash from selling their stakes in the Pavilion Kuala Lumpur Mall and the office tower to the trust before its initial share sale, according to Bloomberg calculations. They were also paid in equity and are the biggest shareholders in Pavilion REIT, along with Qatar's sovereign wealth fund.

“The turning point for him is through this development project,” said Ang Kok Heng, chief investment officer at Phillip Capital Management Sdn in Kuala Lumpur. “He's been keeping a very low profile; not many people know much about him.”- Bloomberg

Mergers and Acquisitions: Why They Can Fail

It's no secret that plenty of mergers don't work. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry.

Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. The motivations that drive mergers can be flawed and efficiencies from economies of scale may prove elusive. In many cases, the problems associated with trying to make merged companies work are all too concrete.

Flawed Intentions
For starters, a booming stock market encourages mergers, which can spell trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also, mergers are often attempt to imitate: somebody else has done a big merger, which prompts other top executives to follow suit.

A merger may often have more to do with glory-seeking than business strategy. The executive ego, which is boosted by buying the competition, is a major force in M&A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. Most CEOs get to where they are because they want to be the biggest and the best, and many top executives get a big bonus for merger deals, no matter what happens to the share price later.

On the other side of the coin, mergers can be driven by generalized fear. Globalization, the arrival of new technological developments or a fast-changing economic landscape that makes the outlook uncertain are all factors that can create a strong incentive for defensive mergers. Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world.

The Obstacles to Making it Work
Coping with a merger can make top managers spread their time too thinly and neglect their core business, spelling doom. Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal.

The chances for success are further hampered if the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It's a mistake to assume that personnel issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity. More insight into the failure of mergers is found in the highly acclaimed study from McKinsey, a global consultancy. The study concludes that companies often focus too intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer. Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders.

But remember, not all mergers fail. Size and global reach can be advantageous, and strong managers can often squeeze greater efficiency out of badly run rivals. Nevertheless, the promises made by deal makers demand the careful scrutiny of investors. The success of mergers depends on how realistic the deal makers are and how well they can integrate two companies while maintaining day-to-day operations.


Read more: http://www.investopedia.com/university/mergers/mergers5.asp#ixzz2CuCDdkQf


Mergers and Acquisitions: Conclusion


One size doesn't fit all. Many companies find that the best way to get ahead is to expand ownership boundaries through mergers and acquisitions. For others, separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, mergers create synergies and economies of scale, expanding operations and cutting costs. Investors can take comfort in the idea that a merger will deliver enhanced market power.

By contrast, de-merged companies often enjoy improved operating performance thanks to redesigned management incentives. Additional capital can fund growth organically or through acquisition. Meanwhile, investors benefit from the improved information flow from de-merged companies.

M&A comes in all shapes and sizes, and investors need to consider the complex issues involved in M&A. The most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals.

Let's recap what we learned in this tutorial:
A merger can happen when two companies decide to combine into one entity or when one company buys another. An acquisition always involves the purchase of one company by another.
The functions of synergy allow for the enhanced cost efficiency of a new entity made from two smaller ones - synergy is the logic behind mergers and acquisitions.
Acquiring companies use various methods to value their targets. Some of these methods are based on comparative ratios - such as the P/E and P/S ratios - replacement cost or discounted cash flow analysis.
An M&A deal can be executed by means of a cash transaction, stock-for-stock transaction or a combination of both. A transaction struck with stock is not taxable.
Break up or de-merger strategies can provide companies with opportunities to raise additional equity funds, unlock hidden shareholder value and sharpen management focus. De-mergers can occur by means of divestitures, carve-outs spinoffs or tracking stocks.
Mergers can fail for many reasons including a lack of management foresight, the inability to overcome practical challenges and loss of revenue momentum from a neglect of day-to-day operations.


Read more: http://www.investopedia.com/university/mergers/mergers6.asp#ixzz2CuCU4UdQ