Keep INVESTING Simple and Safe (KISS)
****Investment Philosophy, Strategy and various Valuation Methods****
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
Alternative investments to equities both illustrate the universality of value investing principles and reinforce the key element of relating price to value. Below summarizes some alternatives to equities and their price-value relationship. Straight Bonds: Duration and coupon drive valuation and price.
Convertible Bonds: Equity component drives variability, some price-value divide.
Real Estate: Buyers intuit a price-value divide when seeking ":good deals".
Other Collectibles: Personal attachments drive price-value divide
Value investors habitually relate price to value. This attitude applies not only to equities, but also to all other investments. The habit of relating price and value comes more naturally for certain assets than others.
Real estate is a good example. People seem intuitively able to understand that they might be getting a "good deal" on real estate, but many exhibit less intuition when thinking about common stock investments. They do likewise with consumption goods such as cares and loans or leases taken to finance their purchase.
Markets for some alternatives show how price-value differences are less likely to appear. Bonds are a good example. These instruments have features such as duration and interest rate that common stocks lack. This makes it easier for investors to agree on their value and produces prices more reflective of value. The absence of these features on common stocks suggests reasons to believe that price-value differences are likely to occur on common stocks.
in·tu·i·tion
Noun
The ability to understand something immediately, without the need for conscious reasoning.
A thing that one knows or considers likely from instinctive feeling rather than conscious reasoning.
1. Dividend reinvestment plans (DRIPs) are often programs run commission-free by individual companies, enabling investors to regularly reinvest dividend payments in new shares and to increase holdings.
2. DRIPs are useful to impose self-discipline for those otherwise easily distracted from adding principal to their investment resources - not a value investing trait but DRIPs can be attractive to value investors for their convenience.
3. Dividends paid on account shares are automatically reinvested when declared, rather than paid to the holder.
4. For regular dividend-paying companies, this can mean steady additions to equity securities.
5. DRIPs also typically offer holders the chance to have funds automatically taken from bank accounts at designated times to buy additional shares.
6. Investors can set dates to follow paydays, creating additional discipline that yields substantial sums.
7. A key benefit of the steadiness of DRIP funding is that dollars are invested at regular intervals, when price is below value and when above.
8. If maintained over a long period, these discrepancies result in owning shares purchased at an average cost lower than the average of the prices on each purchase date. Hence the term "dollar cost averaging."
9. While certainly not pure value investing, DRIP's dollar-cost-averaging can produce impressive investing gains.
10. And there are value investing attributes of using DRIPs.
11. DRIPs and dollar cost averaging reduce the number of decisions an investor must make.
12. They are also attractive because few stocks meet properly defined value investing criteria.
13. Value investors monitor the fundamentals of the businesses and only take action to stop buying or to sell when preset fundamental factors have deteriorated to preset levels.
Kuala Lumpur: Malayan Banking Bhd (Maybank), the country’s biggest lender, said yesterday second-quarter profit rose nine per cent, driven by higher lending and broking income.
Net income climbed to a record RM1.57 billion in the three months ended June 30 from RM1.44 billion a year earlier.
Maybank’s revenue for the period was up 9.5 per cent to RM8.68 billion against RM7.93 billion a year earlier, while earnings per share was 18.23 sen compared with 18.65 sen before.
For the six-month period, Maybank posted a 10.4 per cent net profit to RM3.07 billion while revenue grew to RM16.91 billion against RM15.8 billion a year earlier.
“Our results have been strong due to our well-diversified portfolio and focus to improve performance despite the challenging external environment,” Maybank chairman Tan Sri Megat Zaharuddin Megat Mohd Nor said at a press conference, here, yesterday.
“We are confident of further solidifying this position.”
Maybank declared an interim dividend of 22.5 sen a share, of which 6.5 sen is payable by cash and 16 sen can be reinvested in new ordinary shares. This represents a total payout of 63.7 per cent of group Patami (profit after tax and minority interest) for the period.
The bank’s net fund-based income in the first half rose 8.2 per cent to RM5.75 billion, supported by robust growth in global banking division (20.2 per cent) and community financial services (10.1 per cent).
Amid subdued operating environment, the group’s loan growth in the first half expanded to 9.1 per cent, thanks to the huge improvement in the local market. Second-quarter loan growth rose to 13.4 per cent against 5.3 per cent in the preceding quarter, exceeding industry’s benchmark of 10.1 per cent.
Fund-based income surged eight per cent from a year earlier, boosted by investment portfolio’s gains, higher trading income, especially record brokerage revenue in Thailand, coupled with rising commission, service charges and fees.
Helmed by new chief executive officer Datuk Abdul Farid Alias, Maybank is set to continue to accelerate regional expansion to enhance its portfolio.
With this in mind, Maybank will consider the setting up of a commercial bank in Thailand, Abdul Farid said.
"We are not rushing to make a decision until the deal makes sense to our shareholders," he said.
The bank has presence in Thailand via Maybank Kim Eng, the largest brokerage firm there.
It also holds a controlling stake in PT Bank Internasional Indonesia and Singapore brokerage Kim Eng Holdings.
Maybank is seeking a higher overseas operations profit contribution of 40 per cent from 31.5 per cent currently.
The bank is also on track to meet its two headline key performance indicators of return on equity of 15 per cent and 12 per cent loan growth in financial year 2013.
KUALA LUMPUR: Petronas Dagangan Bhd (PDB) says its revenue surged by RM440.6 million, or 5.8 per cent, to RM7.92 billion in the second quarter ended June 30, compared to the corresponding quarter last year.
In a statement yesterday, the company said the growth was a result of an increase in sales volume, which grew by 9.7 per cent.
Retail business continued to be the main contributor to revenue growth, recording an increase of 4.3 per cent for overall sales volume compared with the same quarter last year.
In the same quarter, PDB recorded a net profit of RM197 million compared with RM171 million in the corresponding period last year, while earnings per share increased to 19.8 sen from 17.3 sen.
Managing director and chief executive officer Aminul Rashid Mohd Zamzam said the strong growth is in spite of volatility of the global crude oil price, which continues to impact the industry.
"We have performed better than last year through continuous marketing and promotion exercises, as well as cost optimisation efforts," he said.
Aminul Rashid said PDB's financial position remains strong with shareholders' fund at RM4.84 billion as at June 30, compared with RM4.81 billion recorded at the end of last year. Cash balances also saw an increase to RM1.05 billion compared with RM251.3 million previously.
"The board has declared an interim dividend of 16.3 sen per ordinary share less tax at 25 per cent, amounting to RM121.4 million.
"There is also an interim dividend using single tier of 1.2 sen per ordinary share amounting to RM11.92 million in the second quarter ended June 30 this year," he added.
1. It is just appalling the nerve strain people put themselves under trying to buy something today and sell it tomorrow.2. It's a small-win proposition. 3. If you are a truly long-range investor, of which I am practically a vanishing breed, the profits are so tremendously greater.
1. Someone made a remark that, while it is factually correct, is completely unrealistic when he said, "Nobody ever went broke taking a profit." 2. Well, it is true that you don't go broke taking a profit, but that ASSUMES you will make a profit on EVERYTHING you do.3. It doesn't allow for the mistakes you're bound to make in the investment business.
1. Funny thing is, I know plenty of guys who consider themselves to be long-term investors but who are still perfectly happy to trade in and out and back into their favourite stocks. 2. Then when their stock got up to a higher price, the pressure to sell got so strong. 3. "Well, why don't we sell half of it, so as to get our bait back?" 4. That is a totally ridiculous argument. 5. Either this is a better investment than another one or a worse one. 6. Getting your bait back is just a question of psychological comfort.7. It doesn't have anything to do with whether it is the right move or not.
Asia's role as the world's growth engine is waning as economies across the region weaken and investors pull out billions of dollars.
The Indian rupee fell to a record low this week, Thailand is in recession and Indonesia's widest current account deficit pushed the rupiah to its lowest since 2009. Chinese banks' bad loans are rising and economists forecast Malaysia will post its second straight quarter of sub-5 per cent growth this week.
The clouds forming in Asia as liquidity tightens and China slows down are fuelling a sell-off of emerging market stocks, reversing a flow of money into the region in favour of nascent recoveries in the US and Europe. Emerging markets from Brazil to Indonesia have raised borrowing costs this year to try to help their currencies as the prospect of reduced US monetary stimulus curbs demand for assets in developing nations.
''The eye of the storm is directly above emerging markets now, two years after it hovered over Europe and four years after it hit the US,'' said Stephen Jen, co-founder of hedge fund SLJ Macro Partners in London and former head of foreign exchange strategy at Morgan Stanley. ''This could be serious for Asia.''
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Almost $US95 billion ($105 billion) was poured into exchange-traded funds of American shares this year, while developing-nation ETFs got withdrawals of $US8.4 billion. Signs of a stronger US economy may prompt the Federal Reserve to begin paring back its $US85 billion in monthly bond purchases as soon as next month.
''The pendulum is swinging back in favour of the advanced countries,'' said Shane Oliver, head of investment strategy at AMP Capital Investors.
Indian policy makers are battling to stem the rupee's plunge, attract capital to bridge a record current account deficit and revive growth.
The currency has weakened about 28 per cent against the US dollar in two years, reviving memories of the early 1990s crisis, when the government received an International Monetary Fund loan as foreign reserves waned.
''It seems now the pain is going to be in the emerging markets,'' said Nitin Mathur, an analyst in Mumbai at Espirito Santo Investment Bank. ''The problems in India are not temporary blips. The problems are much more serious, which will take a lot of effort to get resolved.''
In Thailand, the economy entered recession last quarter for the first time since the global financial crisis. Toyota said car sales in Thailand would fall 9.5 per cent this year. The government cut its 2013 growth forecast as exports cooled and local demand weakened. Higher household debt restricts scope for monetary easing.
Last week, Taiwan cut its 2013 growth and exports forecasts and said the global outlook for the second half was worsening.
''We are seeing a turning point,'' said Freya Beamish, an economist with Lombard Street Research, who says China's competitiveness has been hurt by labour costs that are 30 per cent too high.
Sentiment is also being subdued by the prospect of a decline in US stimulus, which often finds its way to export-based countries.
Investors will be looking for clues on how quickly the US Federal Reserve will trim its monthly asset purchases when the federal open market committee's July meeting minutes come out on Wednesday.
The $US3.9 trillion of cash that flowed into emerging markets over the past four years has started to reverse since Fed chairman Ben Bernanke talked about a tapering in quantitative easing this year.
''The emerging Asia story is crumbling and dollar is once again the king,'' said Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai.
India's moves to tighten cash supply, restrict currency derivatives and curb gold imports since July failed to arrest the rupee's slump to a record low of 63.23 against the US dollar. The deficit has widened to 4.8 per cent of gross domestic product. The government plans to narrow the gap to 3.7 per cent, or $US70 billion, this year.
India's slump is worse than elsewhere because the country has failed to carry out long-overdue structural changes to the economy.
''We have great policies on paper but the gap between the what's on paper and the implementation is unduly large,'' said R.C. Bhargava, chairman of Maruti Suzuki India, the nation's biggest carmaker. ''If we just implement what's already there, we can get back on track in the next two to three years.''
One bright spot is Japan, where the economy has bounced back on Prime Minister Shinzo Abe's fiscal and monetary stimulus.
The Topix stocks index has risen 34 per cent this year. Abe has yet to show he can sustain the recovery by restructuring company and labour laws and taming the nation's debt, which topped 1 quadrillion yen ($11 trillion) in June.
''Some Asian countries, especially India, have their own significant domestic challenges,'' said economist Jim O'Neill. ''But China is slowing primarily to improve its growth model and, at 7 to 7.5 per cent annual growth, is still delivering $US1 trillion nominal GDP. And Japan … is looking better than it has done for a very long time.''
The slowdown in Indonesia and Thailand was part of global weakness, World Bank chief economist Kaushik Basu said. The US recovery ''was so slow that even the slightest pick-up is looking like a pick-up'', he said. ''I don't think the Asian situation is any worse. In fact, if anything, Asia is probably better off than the rest of the world.''
But that may not help markets in Asia, as money continues to flow back to Europe and the US.
1. A vexing question facing investors during market sell-offs is whether to join the pack.
2. For value investors, the answer is no, but the more pertinent question is when to sell.
3. Value investors set selling criteria at the time of purchase.
4. Their attitude in buying is to select stocks that are least likely ever to trigger the criteria for selling.
5. But businesses change, and when they deteriorate, their shares should be sold, just as the owner of a business sometimes must decide to close down.
6. When selecting stocks, value investors specify what deterioration means for purposes of selling.
7. The logic is simple: The same factors used to select and avoid stocks are used to decide which stocks to sell and when. #
8. Value investors avoid selling when bad news is temporary.
9. Single quarter profit margin slippage should provoke questions, but not sales orders.
10. If investigation shows deeper problems, then the condition might be permanent and selling indicated.
11. Permanent deterioration requires more evidence.
12. When in doubt concerning whether the deterioration is temporary or permanent, value investing might include a hedging strategy.
13. This would call for selling some but less than all shares held.
14. Value investors never sell solely due to falling prices.
15. They require some evidence related to the declining intrinsic value of the business to warrant a revision in the hold-or-sell calculus.
16. Stock price fluctuations are far too ficle to influence such an important decision.
17. In the case of a preset policy to sell when price reaches a certain high level, many value investors follow the same mixed strategy adhered to when unsure whether a development is permanent or temporary: selling some, but not all.
# Sales are indicated when the key factors supporting an original buy are gone. Here is a summary of such factors:
Internal:
dubious management behaviour,
vague disclosure or complex accounting,
aggressively increased merger activity,
dizzying executive compensation packages.
External:
intensifying new competition,
disruptive technological onslaughts,
deregulation,
declining inventory and receivables turns.
Economic:
shrunken profit margins,
declining returns on equity, assets, and investments,
earnings erosion,
debt increased aggressively in relation to equity,
For every transaction, there is a buyer and a seller.
For today, foreign funds are net sellers and, the local retail investors and local institutions are the net buyers.
1. Depressed investors cause depressed stock market prices.
2. Selling pressure mounts and drives prices down.
3. Investors possessing even MODEST degrees of aversion to loss capitulate quickly, and the LESS FEARSOME succumb soon after.
4. A downward market spiral ensures.
5. Value investors avoid these scenarios by forming a clear assessment of their averseness to loss.
6. Only having assessed this characteristic honestly do they brave the choppy waters of stock picking.
7. One way to grasp one's own loss aversion is to recognize that most people experience the pain of loss as a multiple compared to the joy of gain.
8. The average person greets losses with aversion on the order of about 2.5 times their reception of winnings.
9. The greater one's loss aversion, the greater value investing's appeal.
10. For the most acutely loss-averse investors, pure value investing is most suitable.
The most quoted metric in discussing common stocks is their ratio of price-to-earnings (P/E). This states the relationship between what a stock costs and what benefit it produces.
Many people wrongly believe that value investing involves finding companies boasting low P/E multiples.
But not all low P/E stocks are good investments, and not all high P/E stocks are bad investments.
Nor do value investors consider the P/E ratio as an insightful measure for valuation purposes, though it might be useful as a check against overpaying.
Value investors resist the temptation to use P/E ratios as supplements to a traditional valuation analysis.
Value investors consider the income statement and the balance sheet as sources of information concerning business value.
These are superior to market-oriented tools such as the P/E ratio for two reasons.
1. First, return on equity captures the full accounting picture, including debt and equity, whereas P/E severs earnings from the balance sheet. 2. Second, return on equity is an intrinsic or internal valuation methodology, whereas P/E ratios are products of market or external or valuation processes.
Market metrics tell value investors more than Graham's Mr. Market than about intrinsic value.
KUALA LUMPUR: Fund selling of key bank stocks including Maybank and CIMB weighed on the market sentiment on Tuesday, pushing the 30-stock FBM KLCI down nearly 15 points.
At 10.51am, the KLCI was down 14.76 points to 1,763.60. Turnover was 983.32 million shares valued at RM804.39mil. Losers thrashed gainers 614 to 71 while 219 counters were unchanged.
At Bursa Malaysia, Maybank fell 34 sen to RM10.10 with 15.45 million shares done, HL Bank lost 28 sen to RM13.90 and CIMB 21 sen lower at RM7.69.
Bloomberg reported Asian stocks fell for a fourth day, with the regional benchmark equities gauge trading near a two- week low, as metals prices declined for the first time in five days and profit at QBE Insurance Group Ltd slumped.
The wire report said speculation that the Federal Reserve will curb bond buying spurred investors to sell risk assets across Asia and emerging markets. The Federal Open Market Committee's July meeting minutes are scheduled to be released on Wednesday.
KUALA LUMPUR: Malaysian equities closed lower on Monday in very volatile trade, tracking the weaker regional markets, while volume surged past the three billion units traded and the ringgit weakened to the lowest since June 2010.
At 5pm, the FBM KLCI was down 9.88 points or 0.55% to 1,778.36. Turnover was 3.16 billion shares valued at RM2.44bil. The broader market weakened to see decliners beating advancers 515 to 339 while 279 counters were unchanged.
Reuters reported rising expectations the Federal Reserve will soon scale back its stimulus drove German and US bond yields to multi-month highs on Monday and dealt a blow to emerging markets, with India's rupee cartwheeling to historic lows.
It reported Wednesday's minutes from the last Fed meeting could offer hints on when the U.S. central bank will taper its bond-buying and up-to-date sentiment indicators will help track momentum in the reviving euro zone.
Inter-Pacific Research Sdn Bhd research head Pong Teng Siew said rise in government bond yield, the weakeness in ringgit and the Fitch negative rating resulted in the weaker performance of the Malaysian market.
He said it was a rather serious drop across the region where Indonesia and India are experiencing a balance of payment problem.
"Indonesia spooked the market as foreign investors are afraid Malaysia might go down the same path.
"This negative data has been chipping away investors confidence and they are withdrawing," he told StarBiz, adding that he was concerned that the ringgit would weaken further. The ringgit was at 3.2872 against the US dollar from the previous day's 3.2770.
The Indian rupee slid as far as 62.50 per dollar, emphatically breaching the previous low of 62.03. The share market lost 1.4%, on top of a 4% drubbing last Friday.
Reports said Indonesia's rupiah shed 0.9% to four-year lows at 10,475 per dollar, with share and bond markets weakening in the wake of data showing a sharp widening in the country's current account deficit. The Jakarta Composite fell 5.58% to 4,313.52.
The weakening ringgit weighed on banking stocks on Bursa Malaysia. CIMB fell 14 sen to RM7.90 and erased 2.43 points off the KLCI. Hong Leong Bank and HLFG fell 18 sen each to RM14.18 and RM14.50 while RHB Cap was down 14 sen to RM7.91 but Public Bank gained six sen to RM17.30.
Genting Malaysia fell nine sen to RM4.21 and wiped out 0.95 of a point from the KLCI.
BAT fell the most, down 48 sen to RM62. Petronas Dagangan lost 32 sen to RM27.98 and Lafarge 18 sen to RM10.
Crude palm oil futures for third month delivery rose RM23 to RM2,332. Kluang rose 20 sen to RM3.50 and KL Kepong 14 sen to RM21.34. However, PPB lost 30 sen to RM14.36 and Genting Plantations 15 sen to RM9.53. However,
MAS was the most active with the largest trading volume ever of 744.25 million units done. It rose 3.5 sen to 36.5 but off the day's best of 40 sen.
Among the key regional markets:
Japan's Nikkei 225 rose 0.79% to 13,758.13;
Hong Kong's Hang Seng Index fell 0.24% to 22,463.70;
Shanghai's Composite Index rose 0.83% to 2,085.60;
Taiwan's Taiex fell 0.31% to 7,900.21;
South Korea's Kospi fell 0.13% to 1,917.64 and
Singapore's Straits Times Index fell 0.76% to 3,173.33.
US light crude oil fell 21 cents to US$107.25 but Brent rose 13 cents to US$110.53.
At the core of most investment approaches lies the practice of valuations, the techniques by which the real or intrinsic value of a company can be estimated.
Most investors want to buy securities whose true worth is not reflected in the current market price of the shares.
There is general agreement that the value of a company is the sum of the cash flows it will produce for the investors over the life of the company, discounted back to the present.
In many cases, however, this approach depends on estimating cash flows far into the future, well beyond the horizon of event he most pro-phetic analyst.
Value investors since Graham have always preferred a bird in the hand - cash in the bank or some close equivalent - to the rosiest projection of future riches.
Therefore, instead of relying on techniques that must make assumptions about events and conditions far into the future, value investors prefer to estimate the intrinsic value of a company by looking: 1. first at the assetsand 2. then at the current earnings power of a company. Only in exceptional cases are they willing to factor in the value of potential growth.
Psychological research in behavioural finance dispute the idea that investors act as dispassionate calculating machines.
It turns out that like everyone else, investors respond to events in the world with certain powerful biases.
New information is interpreted, not simply digested, and not all of that interpretation is rational.
One powerful set of biases tends to give more significance to the most recent news, good or bad, than is actually warranted. The stocks of companies that report high rates of growth are driven to extremes, as are stocks of companies that disappoint. (Recency bias).
These findings about excessive reactions confirm a belief that value investors have held since Graham: Over the long run, performance of both companies and share prices generally reverts to a mean.
"Many shall be restored that now are fallen and many shall fall that now are in honor."
"The value investor seeks to purchase a security at a bargain price, the proverbial dollar for 50 cents."
Of course, there is considerably more to it than that. However, this is a good starting point.
History of the Teaching of Value Investing in Columbia University
1928: Benjamin Graham began to teach a course on security analysis at Columbia University.
1978: Roger Murray, an author of the fifth edition of Security Analysis retired, and the course and the tradition disappeared from the formal academic curriculum.
1992: Mario Gabelli, who had taken the course with Roger Murray, prevailed on Murray to offer a series of lectures on value investing to Gabelli's own analysts, who had found nothing like this in their formal MBA courses. Bruce Greenwald, the newly appointed Heilbrunn Professor of Asset Management and Finance, attended those lectures out of curiosity.
1993: Bruce Greenwald dragooned Roger Murray into joining him in offering a revived and revised version of the value course in Columbia University.
1. On the way up, investors become too confident about their anticipated returns.
2. Money floods in - part of the definition of a bubble - and prices rise to even more unrealistic levels.
3. At some point, air starts to come out of the bubble.
4. Share prices drop and some investors, including pension plans and other institutional holders, lose a lot of money.
5. Many equity investors feel burned and move out of the stock market for good, and it takes years for new ones to take their place.
6. The consequence of a bubble for markets, then, is to reward winners and punish losers with a savage intensity.
The influence of a bubble market on the broader economy maybe even more long lasting and more perverse. Here are some of the more important consequences of the technology bubble of 2000 in the U.S.:
1. Excessive investment in telecommunications and related industries, thanks to the funds available from stock offerings and borrowings that the bubble market made possible.
2. Expansion to the point of collapse, or near-collapse, by companies that were profitable but used the high price of their shares to make foolish acquisitions or increase capacity beyond what a sensible view of the future would have allowed.
3. Incompetent, dishonest, and fraudulent behaviour by corporate executives, boards of directors, auditors, investment bankers, security analysts, and other market participants.
Conclusion:
Competitive market economies have always been subject to business cycles.
Like all cycles, they are painful on the way down.
A wider acceptance of the principles of value investing may ease some of that pain the next time the mania sets in.
They treat prospects for profitable growth with skepticism.
Do not confuse productivity with profitability. Productivity is not the same as profitability.
[The Internet can be both the friend of productivity and the scourge of profitability. Airline travelers, for instance, can search more easily for lower fares, more convenient routes, and more generous rewards. Intensified competition almost always lowers prices.]
It is profits that ultimately determine stock prices.
Only firm with unique abilities, companies that enjoy a competitive advantage will reap extraordinary profits.
The power of process will be essential for unemotional investing in this age of turbulence. Investors will learn about profit opportunities in 2013 and the power of dividends.
