The divergent styles of value investing

1.  Some of the value investors invest only in superior businesses that they intend to own for decades, if not forever.

2.  Others, are looking for damaged goods that have been thrown on a rubbish heap, even though the assets or businesses are still worth something.

3.  Some investors run portfolios with six or eight stocks, others will own more than a hundred companies at any one time.

4.  Some of them buy bonds of  companies headed for or already in bankruptcy, thinking that either the bonds will be redeemed for more than their cost or that they will end up owning equity in a reorganized company as it emerges from bankruptcy.

5.  Some seek to avoid the crowd by concentrating on small and tiny companies; others prefer the stability and predictability of established firms with good businesses.

6.  Some try to buy shares in companies that they feel will command a premium from an industrial purchaser who wants to own the whole firm.

7.  Others play that role themselves and purchase the entire company.


There are many dimensions along which value investors differ from one another in how they select their companies: size, quality, growth prospects, asset backing, location (domestic only or more international), and so on.  They also differ on how they assemble their portfolios:  broadly diversified, industry-weighted to take advantage of a circle of  competence, moderately concentrated, or tightly focused.

All put the most emphasis on the "quality of company" dimension.  The quality dimension entails preferences concerning valuation approaches (assets, earnings, growth), the breadth of the portfolio (better companies generally mean more concentration), and the expected time for holding the shares (for the deeply discounted stock, until they recover; for the great companies, forever).

Direct and active investing is a dangerous game, not a trick one can do casually at home.  The easy availability of real-time security prices and inexpensive trading has convinced many otherwise sensible people that investing on their own will provide both enjoyment and profit.

When Mr. Market creates opportunities for value investors by overreacting to information or otherwise plunging to an extreme, most participants are part of that herd, not the few standing to the side.  To recall a piece of wisdom Warren Buffett frequently cites, if you have been in the poker game for thirty minutes and still don't know who the patsy is, you can be pretty certain the patsy is you.

Ref:  Bruce Greenwald

The market prices reflect the sentiment of the investors. To protect oneself from the volatilities of the market prices, the smart investor needs to understand the value of the business he is investing into.

It is the nature of the market that prices of a stock can be pushed to very low level when the crowd is pessimistic.  On the other hand, the prices of these same stock can be pushed to very high level when the crowd is optimistic.  The reasons maybe fundamental or sentimental.

The market prices reflect thus the sentiment of the investors.  However, the value of a stock is unlikely to change very much during these short periods when the market prices may change drastically.

To protect oneself from the volatilities of the market prices, the smart investor needs to understand the value of the business he is investing into.

More investors lose money when they overpay for the stocks when the crowd is overoptimistic.  Many hold onto losses in unbelievable denial.  This is evident whenever the price of a stock falls.  Why does the price of a stock fall?  Often these investors blame many external factors for the fall, when in fact, the single most important reason is themselves, they overpaid for the stock during period of over-optimism.

Think Like the Great Investors: Make Better Decisions and Raise Your Investing to a New Level

From Wikipedia, the free encyclopedia

Risk aversion is a concept in psychology, economics, and finance, based on the behavior of humans (especially consumers and investors) while exposed to uncertainty to attempt to reduce that uncertainty.

Risk aversion is the reluctance of a person to accept a bargain with an uncertain payoff rather than another bargain with a more certain, but possibly lower, expected payoff. 

For example, a risk-averse investor might choose to put his or her money into a bank account with a low but guaranteed interest rate, rather than into a stock that may have high expected returns, but also involves a chance of losing value.

Summary:

Due to risk aversion:
1.  The "investor" did not invest into stocks for fear of short term losses, despite knowing that stocks provide better returns than cash or bonds in the long run..
2.  The "investor" sold his winners too early to avoid losses..
3.  The "investor" hung onto his losing stocks, in the hope that the prices will recover and thereby avoiding realising his losses.

In all the above ways, the motivation is fear, which results in poor decision making..

Early research by Daniel Kahneman and Amos Tversky found people place greater value on avoiding losses than on making gains.  

Not only that, but they prefer a small certain gain to a larger potential one.

Nicholson says investing should be managed like a business. 

Some decisions work out and some don't: if an investment doesn't work, sell; if it works, let it continue.

Unfortunately, most people do the reverse.

''The most valuable thing I have learnt over more than 30 years of investing in stocks is that great investors think differently. They understand that investing is about managing uncertainty,''


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Decision making in a sideways market

Date  July 31, 2013

Barbara Drury

Shakespeare wrote that life was a tale told by an idiot, full of sound and fury, signifying nothing. He could have been writing about the sharemarket - up one day, down the next, going nowhere. And that leaves investors in a quandary.

Most investors understand that shares provide better returns in the long run than cash or bonds, but the fear of short-term losses stops them acting on it. When markets are choppy with no clear direction, investors tend either to hesitate on the sidelines and miss opportunities, or sell too early to avoid a loss.

Either way, the motivation is fear, which results in poor decision making. ''The most valuable thing I have learnt over more than 30 years of investing in stocks is that great investors think differently. They understand that investing is about managing uncertainty,'' professional investor Colin Nicholson says. In his latest book, he discusses the common decision-making traps investors fall into and how to avoid them, drawing on the field of behavioural finance. Early research by Daniel Kahneman and Amos Tversky found people place greater value on avoiding losses than on making gains. Not only that, but they prefer a small certain gain to a larger potential one.

Further behavioural finance studies have found that an aversion to losses caused people to sell their winning stocks too early and hold their losers too long in the hope the share price would recover. Nicholson says investing should be managed like a business. Some decisions work out and some don't: if an investment doesn't work, sell; if it works, let it continue. Unfortunately, most people do the reverse.

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''We are in a sideways market at the moment, which is the most difficult of all to invest in,'' Nicholson says. ''Any fool can make money in a rising market. And if investors are half-smart they can avoid falling markets. But in a sideways market you need to be a stock picker and you need to preserve capital.''

A practical way to achieve this is to use stop losses. Nicholson says the key attributes of great investors are patience, discipline and perspective. ''People get caught up in the psychology of the crowd,'' he says. ''If you can step back and get some perspective it helps.''

Reading about market history is helpful, but before you invest you need a plan.

''One of the ways to deal with inertia and fear is to have a written investment plan that sets out how you select stocks and manage your investments, so no matter what the market throws at you, you know what to do,'' Nicholson says.

Think Like the Great Investors: Make Better Decisions and Raise Your Investing to a New Level, by Colin Nicholson, 2013, Wiley.

Read more: http://www.smh.com.au/money/decision-making-in-a-sideways-market-20130730-2qvhe.html#ixzz2ahFdpHNZ

How does Buffett make his picks? His 5 investment criteria.

How does Buffett make his picks? 

In short, he uses the following five investment criteria.

● Free cash flow of at least $250 million.

● Net profit margin of 15% or more.

● Return on equity of at least 15% for each of the past three years and the most recent quarter.

● One dollar’s worth of shareholder equity created for every dollar of retained earnings over the past five years.

● Market capitalization of at least $500 million.


One more criterion is added to eliminate overvalued stocks: comparing our five-year discounted cash flow estimate with the current price.

Ref:  http://www.thestockadvisors.com/Main-Section/SP-buys-that-pass-the-Buffett-test.html

"Many stock options in the corporate world have worked in exactly that fashion: they have gained in value simply because of management retained earnings, not because it did well with the capital in its hands. " ~ Warren Buffet

Warren Buffet once stated - "Unrestricted earnings should be retained only where there is a reasonable prospect - backed preferably by historical evidence or, when appropriate by a thoughtful analysis of the future - that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors." Hence for a booming business, the primary goal is to create 1$ in market for every 1$ of the retained earnings.

Read more at Buzzle: http://www.buzzle.com/articles/retained-earnings-calculation.html

The importance of understanding your own behaviours in relation to your actions in investing; once understood, you will be able to apply your preferred investing style consistently without emotional or psychological bias.

The  person capable of standing back may notice that change is the one constant.  

One might do well to stand back and consider whether a perceived truth is indeed so, or whether in fact the more things apparently change, the more some things do indeed remain the same.

Following the crowd and abandoning a commitment to a long-term approach in a business you bought into believing it to be sound could lead to a real loss, especially if, six months later, it turns out that the crowd consisted of ill-informed speculating lemmings and now the shares you sold have doubled in value as sanity returned to the market.

The importance of understanding your own behaviours in relation to your actions cannot be over-stated. 

Once understood, you will be able to apply your preferred investing style consistently without emotional or psychological bias.  Something which is easier said than done.  

"An optimist will tell you the glass is half-full;
the pessimist, half-empty; and
the engineer will tell you the glass is twice the size it needs to be."

Investing is NOT Speculation

There is a difference between speculation and investing.  

One distinction defined this by the length of time over which the investor expects to realise their investment; or to put it another way, how quickly one expects to make money.  

Speculation is high-risk-get-rich-quick territory.

Investing is managed risk over long periods of time where you can acquire wealth slowly.  

[  I am an investor by nature, not a speculator.
I am in it for the long haul, and having bought many good shares at fair or bargain prices in the past and presently, I intend to hang onto to them.
My view is that they will move yet higher over time.
Sometimes, the massive and largely unprecedented increase in the share price of my stocks over a short period was not anticipated by me or probably by many others.
So, did I get lucky?  Well, yes and no.
It was my view that the share price of these companies would rise further or eventually recover from recent corrections, whilst the past is no way of accurately predicting the future, I felt that it would rise to around a certain price in the medium term.
The difference between my expectations and what happened is that I would have been happy for it to return to that price within five years.  As it happened, it did so in less than a few months.  ]

Know-it-alls have a lot to learn. You never know as much as you think you do.

One of the biggest dangers with investing is over-confidence or the addictive nature of doing well.

This is hard-wired into human beings.

It is all about maintaining a sense of perspective, and sometimes we need to remind ourselves that we should guard against over-confidence as much as risk aversion.

You never know as much as you think you do.

Always try and see things from a new or different perspective.  It can be quite developmental.

How is market value of common stock determined?

Market value is basically determined by investor expectations of future earnings and dividend payments, although the value of assets is also important.

Prices may also be affected temporarily by large transactions creating bid-offer imbalances, by rumours of various sorts, and by public tender offers.

How to Invest Your MONEY: 30 Key Personal Investment Opportunities

1. Annuity
2. Bond, Corporate (Interest Bearing)
3. Closed-End Fund
4. Collectibles 
5. Common Stock
6. Convertible Security
7. Exchange-Traded Funds
8. Foreign Stocks and Bonds
9. Futures Contract on a Commodity
10. Futures Contract on an Interest Rate
11. Futures Contract on a Stock Index
12. Government Agency Security
13. Life Insurance (Cash Value)
14. Money Market Fund
15. Mortgage-Backed (Pass-Through) Security
16. Municipal Security
17. Mutual Funds (Open End)
18. Option Contract (Put or Call)
19. Option Contract on a Futures Contract (Future Option)
20. Option Contract on an Interest Rate (Debt Option)
21. Option Contract on a Stock Index
22. Option Contract or Futures Contract on a Currency
23. Precious Metals
24. Preferred Stock (Nonconvertible)
25. Real Estate Investment Trust (REIT and FREIT)
26. Real Estate, Physical
27. Savings Alternatives
28. Treasury Securities (Bills, Bonds and Notes)
29. Unit Investment Trust
30. Zero-Coupon Security

"Money makes Money". Money can snowball.

You have an investment which you are now also getting a dividend yield of at least 7%, paid in regular instalments.  What do you do with the money after your tax has been paid?

What you don't do is withdraw it from your account and spend it.  You could do that, but that would be stupid because you can use dividend payments over time to start to accrue your wealth.  Over time, this can create a snowball effect as your wealth compounds.  Imagine getting to the point at which your dividend payments alone are becoming enough to make it worthwhile re-investing them alone, aside from anything you can top it up with yourself.

When you get to that stage, you will be on the verge of creating a self-sustaining money machine.  It is what is meant by the old phrase "money makes money".  In fact, it does.

Getting your money to work for you is indeed possible if you adopt some of the core principles of investing and apply them consistently and patiently over time.  The more time, the more money will compound. 

WHY NOT have a 100-year plan that would ensure that your children and grandchildren grow into very wealth people indeed.  Investing is a relay marathon, not a sprint. 

The more debt you take on, the higher the risk

The higher the net gearing figure, the riskier the investment becomes.  This is basically because debt has to be paid back no matter what happens to your sales.  Costs are generally more fixed, whilst income for most businesses is variable and can fluctuate wildly.  

For example, the manufacturer of high-end electronic consumer goods that is very heavily geared is likely to face a potentially serious problem in the event of a sudden economic downturn.  The debt, however, as a fixed cost, would remain.  This is how large numbers of businesses go under.

A business in the same sector with little or no debt and a healthy bank balance is far more likely to weather the economic storm.  Recessions are nothing new, they have happened before and will do so again.

Does any business really have an excuse for not being prepared for them?  



[So the world will almost certainly face further financial shocks and economic events that will surprise us, and whilst we can't say when it will happen or how exactly it will play out next time around, sometimes it really can feel like a little bit of history repeating as the stock market will continue to behave in both a rational and irrational manner without warning. 

That is why it is so important to think about the business, and not the share price or even what the market is really doing at all.]

Owning Your Own Business is easier than You Imagine

When you buy a share in a business, you become part-owner of that business and whether you are aware of it or not, everyone in that business from the most junior staff to the most senior is now working for you.
It is your job to remember this and to exercise your judgement in regard to the quality of the job they are doing.

You should not be silent bystanders in a business.  You have after all, parted with your hard-earned cash and invested in the enterprise and therefore you are now part-owner of all of its assets, profits and its future.  Get involved.  It is your money and your business.

Dividends can help to mitigate risk. When buying a dividend stock, the quality of the company is the number one consideration.

Let's assume that the stock stays the same or, even worse, actually goes down a little in the short term.

• If you have invested in a business that does not pay any dividends, you have no compensation for what has happened, just less money than you had when you invested.
• However, if the business pays dividends and continues to honour that commitment (in the same way that companies like Coca Cola have historically done) then it mitigates some of your risk.  

Or to put it another way, you still get some income from the investment which could be seen to offset your loss in the share price, should that have happened.

As a general principle, I tend to invest only in businesses that have a sustained track record of paying dividends.

"When buying a dividend stock, the quality of the company is the number one consideration.  Given enough time, a quality company will always rise above lesser competition.  When your holding period is forever, it is inevitable that a superior stock will eventually out-perform second-tier players."  -  Warren Buffett

In an ideal situation, you will buy a share in a business which is undervalued, and over time the share will increase in value to the point at which you are very pleased with the capital gain you have seen in the share price.  Then guess what, you also receive a cash bonus in the form of a dividend payment!  Sounds like a great concept to me.  :-)

SONA PETROLEUM IPO

At 9.20 am today, the price of SONA was RM 0.395 and that of SONA-WA was RM 0.210.  The combined price of 1 SONA mother share and 1 SONA-WA share was RM 0.605.

The net asset per share of SONA at listing was RM  0.37.  At RM 0.605 for the combined 1 SONA mother and 1 SONA-WA shares, this was a premium of 63.5% above the net asset per share.

The Initial Investors and Promoters obtained their shares at RM 0.01 per share and upon listing, they own 20% of the enlarged company..

The IPO investors obtained theirs at RM 0.50 per share  and upon listing, they own 80% of the enlarged company..

Updated: Tuesday July 30, 2013 MYT 9:15:31 AM

Sona Petroleum’s warrants surge, shares flat (Update)

BY JOSEPH CHIN

KUALA LUMPUR: Sona Petroleum Bhd opened flat at 42.5 sen, which was the reference price when it made its debut on Bursa Malaysia on Tuesday.

However, the warrants saw stronger interest, surging to 23.5 sen from the reference price of 7.5 sen.

At 9am, Sona shares were down 1.5 sen to 41 sen with 118.3 million shares done. The warrant rose 16.5 sen to 24 sen with 35.87 million units done.

The FBM KLCI rose 1.11 points to 1,799.89. Turnover was 63.51 million shares valued at RM25.04mil. There were 87 gainers, 30 losers and 78 counters unchanged.

Below is the earlier story:

KUALA LUMPUR: Sona Petroleum Bhd, which is making its debut on Bursa Malaysia on Tuesday, saw bids at its reference price of 42.5 sen in pre-market trade.

At 8.33am, there were bids at 42.5 sen. However, the warrants saw stronger interest with bids at 20 sen, which was 12.5 sen above the reference price of 7.5 sen.

The initial public offer involved 141 million shares with up to 141 million warrants.

Sona Petroleum is Malaysia’s third special purpose acquisition company (SPAC) to list on Bursa Malaysia.

Sona Petroleum, which aims to eventually make the transition to an independent E&P company, had secured commitments from six institutions both local and foreign as cornerstone investors, making it the first SPAC to do so.

They are Hong Leong Asset Management Bhd, Hong Kong-based hedge fund Segantii Capital and Davidson Kempner European Partners, along with the fund management houses of the three banks backing the listing: CIMB-Principal Asset Management Bhd, Kenanga Investors Bhd and RHB Investment Management Sdn Bhd.

The cornerstones, who did not enjoy a discount to the 50 sen IPO price, were apportioned 275 million shares out of the 959 million shares for institutions.

http://www.thestar.com.my/Business/Business-News/2013/07/30/Sona-Petroleum-sees-bids-at-reference-price.aspx

Warren Buffett - The Long Term Investor

"All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."  Warren Buffett

Patience and pricing are once again your main allies.

Warren Buffett bought into Coca Cola when its share price was at one of its lowest points, well below the average, and still holds the stock to this day.

Be realistic and you will avoid disappointment

It is worth reflecting on what your objectives are in your investment journey.

Having a clear sense of what you REALISTICALLY expect to achieve will help you to focus on what types of shares you may wish to buy, and having already considered what type of investing personality you are, what behaviours to be aware of and what your risk tolerance is, you can start to search for your investments with a clear sense of why you are going down a particular road.

If you do not have a clear sense of what you wish to achieve, it will be much more likely that you will make a less than optimum choice of investments, and that you may become disillusioned with what you achieve.

Be modest in your ambitions and realistic about what can be achieved. 
-  Do not expect to be right 100% of the time.  Anything over 50% of the time and you are doing well.
-  One of the key skills to learn is a little about how to understand and appreciate a business, and not the share price.  This approach will serve you well.



You should be realistic about your goals.

"In this business if you're good, you're right six times out of ten.  You're never going to be right nine times out of ten."  Peter Lynch

"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."   George Soros

"If you took our top 15 decisions out, we'd have a pretty average record.  It wasn't hyperactivity, but a hell of a lot of patience.  You stuck to your principles and when opportunities came along, you pounced on them with vigor."  Charlie Munger.



Expect some of your share to go down, and some to go up.  The more you do your research and the more you learn over time, the relative proportion of the latter in relation to the former should increase.  If it does not, you may want to step back and reflect on what might be going wrong.  

A tolerance for ambiguity will serve you well as an investor, as will an inquiring mind.

Are the earnings of the business relatively predictable or highly volatile?

A couple of important points worth considering in understanding a potential investment is whether the earnings of the business are relatively predictable or likely to be highly volatile.  

It is relatively easier to invest in something where the projected earnings are likely to have a strong element of stability about them.  

Earnings should preferably be consistent, sustainable and predictable.  "The past is so much easier to predict."

Learn from the past and look to the future, as that is where we are all going

The key point is to learn from the past and whilst it is no prediction of future patterns and behaviour, it can help in working out whether something is likely to be over-priced in relation to wider trends and intelligence.

These are some of the initial key factors you may wish to look into in assessing a business, and represent just the tip of the iceberg.  The more you look into and research a business, the more you will understand where it has come from and get a feel for where you think it might be going.    

[For example, how long it will be before we see the re-emergence of sub-prime lending, albeit under a new badge and from a new breed of banks?  Who knows, but once again, when it happens, will you be investing?]

One of the biggest dangers with Investing is Overconfidence

Quote:   

Re: uyafr selection October 2010 batch
« Reply #45 on: October 27, 2010, 10:16:15 AM »
Reply with quoteQuote
Quote from: smartinvestor on October 27, 2010, 10:09:42 AM
Agree with Uyfar...
GenY...please tell the MANY company that also doing well too...
DIGI? KPJ? Genting?
Here is the place we share information and earn $$$ together

yep, do u know how much is DIGI, KPJ Gentings ? hehehe if suddenly those counter drop.. kena kaw kaw, if go up.. the most 5-10%

BUT LCTH, I dont see how it can drop much, but if go up... even if go up 100% it is still cheap and good. So think for yourself, is it worth risking on those counter already too high up or buy a counter which is still rock bottom and rock solid.

http://www.investlah.com/forum/index.php/topic,11510.msg195753.html#msg195753


The above was a post in October 2010 in a blog that I participate.

Here are the 5 Years charts of DIGI, KPJ, Gentings and LCTH performance.



Digi Share Price
Oct 2010  RM 2.50
July 2013  RM 4.70
Capital Gain 88%




KPJ  Share Price
Oct 2010  RM 3.80
July 2013  RM 6.50
Capital Gain 71%



Genting Share Price
Oct 2010  RM 10.50
July 2013 RM 10.50
Capital Gain 0%

versus



LCTH Share Price
Oct 2010  RM 0.28
July 2013  RM 0.18
Capital Loss  - 35.7%

From October 2010 to July 2013:
1.  The prices of the shares of Digi, KPJ have performed very well.
2.  Genting share price remained relatively unchanged over this period.
3.  The share price of LCTH has tanked significantly.


Questions I pose:
1.  Are higher priced stocks more risky than penny shares?
2.  Are higher priced stocks more risky because they have a longer way to drop?
3.  Are penny shares less risky because should their prices correct, the drop will be less?
4.  Why are higher priced stocks priced such, and why are penny stocks priced such?
5.  What are the fears that kept this "investor" away from Digi, KPJ and Genting?  Are these fears rational or irrational?
6.  What drives his enthusiasm to penny stocks?  Greed?  Ability?  Confidence?  Past gains?   Are these emotions rational or irrational?
7.  What single characteristic, if any, distinguishes the gains in Digi, KPJ and no loss in Genting, compared with LCTH?


What lessons can we derive from the above observations?
Please feel free to post your comments.

Investing in REITS

Investing in REITS

Value investors strive to identify investments trading at valuations below intrinsic value. 

The objective is to identify REITS with potential for significant appreciation relative to risk. 

Because REITS are generally regarded as hedges or defensive investments, they may be overlooked during bull markets.

Most recently, REITS in healthcare and industrial sectors have done well because they have both a real estate and a business component.

• Prologis, a REIT with worldwide logistics facility interests and a logistics business to go with it, is a good example.

And during weak economic times, REITS are fairly defensive and often hold up well because of the underlying stability of real estate prices and rent returns.

• That isn't to say they're immune, as has certainly been seen with mortgage REITS and some leveraged residential REITS recently.