The Value Investor's Handbook

March 20 2011 

Value investing, and any type of investing for that matter, varies in execution with each person. There are, however, some general principles that are shared by all value investors. These principles have been spelled out by famed investors like Peter Lynch, Kenneth Fisher, Warren Buffet, John Templeton and many others. In this article, we will look at these principles in the form of a value investor's handbook.

Tutorial: The World's Greatest Investors

Buy BusinessesIf there is one thing that all value investors can agree on, it's that investors should buy businesses, not stocks. This means ignoring trends in stock prices and other market noise. Instead, investors should look at the fundamentals of the company that the stock represents. Investors can make money following trending stocks, but it involves a lot more activity than value investing. Searching for good businesses selling at a good price based on probable future performance requires a larger time commitment for research, but the payoffs include less time spent buying and selling and fewer commission payments. (False signals can drown out underlying trends. Find out how to tone them down and tune them out in Trading Without Noise.)

Love the Business You BuyYou wouldn't pick a spouse based solely on his or her shoes, and you shouldn't pick a stock based on cursory research. You have to love the business you are buying, and that means being passionate about knowing everything about that company. You need to strip the attractive covering from a company's financials and get down to the naked truth. Many companies look far better when you judge them on basic price to earnings (P/E), price to book (P/B) and earnings per share (EPS) ratios than they do when you look into the quality of the numbers that make up those figures.

If you keep your standards high and make sure the company's financials look as good naked as they do dressed up, you're much more likely to keep it in your portfolio for a long time. If things change, you'll notice it early. If you like the business you buy, paying attention to its ongoing trials and successes becomes more of a hobby than a chore.

Simple Is BestIf you don't understand what a company does or how, then you probably shouldn't be buying shares. Critics of value investing like to focus on this main limitation. You are stuck looking for businesses that you can easily understand because you have to be able to make an educated guess about the future earnings of the business. The more complex a business is, the more uncertain your projections will necessarily be. This moves the emphasis from "educated" to "guess."

You can buy businesses you like but don't completely understand, but you have to factor in uncertainty as added risk. Any time a value investor has to factor in more risk, he has to look for a larger margin of safety - that is, more of a discount from the calculated true value of the company. There can be no margin of safety if the company is already trading at many multiples of its earnings, which is a strong sign that, however exciting and new the idea is, the business is not a value play. Simple businesses also have an advantage, as it's harder for incompetent management to hurt the company. (For a complete guide to reading the financial reports, check out our Financial Statements Tutorial.)

Look for Owners, Not Managers

Management can make a huge difference in a company. Good management adds value beyond a company's hard assets. Bad management can destroy even the most solid financials. There have been investors who have based their entire investing strategies on finding managers that are honest and able. To quote Buffett, "look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you." You can get a sense of management's honesty through reading several years' worth of financials. How well did they deliver on past promises? If they failed, did they take responsibility, or gloss it over? (Find out more about Buffett's investing in Warren Buffett: How He Does It.)

Value investors want managers who act like owners. The best managers ignore the market value of the company and focus on growing the business, thus creating long-term shareholder value. Managers who act like employees often focus on short-term earnings in order to secure a bonus or other performance perk, sometimes to the long-term detriment of the company. Again, there are many ways to judge this, but the size and reporting of compensation is often a dead give away. If you're thinking like an owner, you pay yourself a reasonable wage and depend on gains in your stock holdings for a bonus. At the very least, you want a company that expenses its stock options. (Still wondering how to investigate the top brass? Check out Evaluating A Company's Management.)

When You Find a Good Thing, Buy a LotOne of the areas where value investing runs contrary to commonly accepted investing principles is on the issue of diversification. There are long stretches where a value investor will be idle. This is because of the exacting standards of value investing as well as overall market forces. Toward the end of a bull market, everything gets expensive, even the dogs, so a value investor may have to sit on the sidelines waiting for the inevitable correction. Time, an important factor in compounding, is lost while waiting, so when you do find undervalued stocks, you should buy as much as you can. Be warned, this will lead to a portfolio that is high-risk according to traditional measures like beta. Investors are encouraged to avoid concentrating on only a few stocks, but value investors generally feel that they can only keep proper track of a few stocks at a time.

One obvious exception is Peter Lynch, who kept almost all of his funds in stocks at all times. Lynch broke stocks into categories and then cycled his funds through companies in each category. He also spent upwards of 12 hours every day checking and rechecking the many stocks held by his fund. As an individual value investor with a different day job, however, it's better to go with a few stocks for which you've done the homework and feel good about holding long term. (Learn the basic tenets that helped this famous investor earn his fortune in Pick Stocks Like Peter Lynch.)

Measure Against Your Best InvestmentAnytime you have more investment capital, your aim for investing should not be diversity, but finding an investment that is better than the ones you already own. If the opportunities don't beat what you already have in your portfolio, you may as well buy more of the companies you know and love, or simply wait for better times. During idle times, a value investor can identify the stocks he or she wants and the price at which they'll be worth buying. By keeping a wish list like this, you'll be able to make decisions quickly in a correction.

Ignore the Market 99% of the TimeThe market only matters when you enter or exit a position; the rest of the time, it should be ignored. If you approach buying stocks like buying a business, you'll want to hold onto them as long as the fundamentals are strong. During the time you hold an investment, there will be spots where you could sell for a large profit and others were you're holding an unrealized loss. This is the nature of marketvolatility.

The reasons for selling a stock are numerous, but a value investor should be as slow to sell as he or she is to buy. When you sell an investment, you expose your portfolio to capital gains and usually have to sell a loser to balance it out. Both of these sales come with transaction costs that make the loss deeper and the gain smaller. By holding investments with unrealized gains for a long time, you forestall capital gains on your portfolio. The longer you avoid capital gains and transaction costs, the more you benefit from compounding. (Find out how your profits are taxed and what to consider when making investment decisions in Tax Effects On Capital Gains.)

The Bottom LineValue investing is a strange mix of common sense and contrarian thinking. While most investors can agree that a detailed examination of a company is important, the idea of sitting out on a bull market goes against the grain. It's undeniable that funds held constantly in the market have outperformed cash held outside the market, waiting for a down market. This is a fact, but a deceiving one. The data is derived from following the performance of indexes like the S&P 500 over a number of years. This is where passive investing and value investing get confused.

In both types of investing, the investor avoids unnecessary trading and has a long-term holding period. The difference is that passive investing relies on average returns from an index fund or other diversified instrument. A value investor seeks out above-average companies and invests in them. Therefore, the probable range of return for value investing is much higher. In other words, if you want the average performance of the market, you're better off buying an index fund right now and piling money into it over time. If you want to outperform the market, however, you need a concentrated portfolio of outstanding companies. When you find them, the superior compounding will make up for the time you spent waiting in a cash position. Value investing demands a lot of discipline on the part of the investor, but in return offers a large potential payoff. (Looking for a little more information on index investing, see the Index Investing Tutorial.) 

http://www.investopedia.com/articles/fundamental-analysis/09/value-investing.asp

83 Reasons We Love Warren Buffett

By Anand Chokkavelu, CFA 

August 30, 2013 

Today is Warren Buffett's 83rd birthday. Each year, I celebrate the Babe Ruth of Investing's birthday by adding another reason we love our hero.

1. Intricate, occasionally contradictory complexity hides beneath the "Aw, shucks" folksy charm. As a Forbes writer once put it, "Buffett is not a simple person, but he has simple tastes."

2. Many people talk about avoiding the madding crowd, but Buffett actually does it by living 1,250 miles away from Wall Street.

3. He has a fortress-like internal scorecard on all things investing, yet a vulnerable, endearing external scorecard on many aspects of his personal life. See his penchant for seeking mother figures.

4. His perspective: "In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."

5. He is that guy in school who tells you he may have failed the test -- only to bust the top of the curve.

6. His time frame for the long run consistently exceeds his life span.

7. He says it better: "Someone's sitting in the shade today because someone planted a tree a long time ago."

8. He's human. He fears nuclear war and his own mortality. He's frequently more adept at business relationships than personal ones. He can hold a grudge. His hero is his daddy.

9. Classic line: "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."

10. Once branded a stingy miser (rightly or wrongly), Buffett has evolved (assuming it wasn't his intention from the start) into one of the most effective philanthropists I know. After growing his potential givings at a 20% compounded rate per year, he set a plan to give most of it away.

11. Perhaps as importantly, he put ego aside and outsourced his charitable decision-making to the Bill & Melinda Gates Foundation. Circle of competence at its finest.

12. "I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." Contrast that with computer algorithm-based trading, day trading, and some of the moves you've made in your own account.

13. Buffett's smarter than you and I, but he's kind enough to let us feel otherwise.

14. David Sokol was once an heir apparent and arguably Buffett's most trusted operations guy. But when Sokolgate emerged, Buffett stayed true to his word: "We can afford to lose money -- even a lot of money. But we can't afford to lose reputation -- even a shred of reputation."

15. "Derivatives are financial weapons of mass destruction." He said it early, and we are reminded of it often.

16. In a glimpse of the nuance that some commentators call hypocrisy, Buffett uses derivatives himself. But he does so in a way that doesn't threaten the entire financial system and explains exactly why in his annual shareholder letters.

17. He doomed himself from ever holding public office: "A public-opinion poll is no substitute for thought."

18. I like juxtaposing these two quotes: 1) "It's better to hang out with people better than you. Pick out associates whose behavior is better than yours and you'll drift in that direction." 2) "Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway."

19. "You only have to do a very few things right in your life so long as you don't do too many things wrong."

20. He has the ability to resist the allure of the quick fix or quick buck when longer-term dynamics are at play.

21. Not sure if this quote came before or after the Internet: "Let blockheads read what blockheads wrote."

22. For those hoping to become famous and respected, he's a testament that the challenges and doubts keep coming regardless of the length of the track record. He has publicly prevailed so far.

23. An investing truism: "Price is what you pay. Value is what you get."

24. The business side of that investing truism: "Your premium brand had better be delivering something special, or it's not going to get the business."

25. He uses colorful language and analogies when drab jargon could do the trick.

26. Boring example: moat vs. competitive advantage.

27. Not-so-boring example: sex.

28. "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."

29. Classic line: "Only when the tide goes out do you discover who's been swimming naked."

30. He backs up his saying, "Our favorite holding period is forever," by keeping past-their-prime subsidiaries that others would "spin off to unlock value."

31. His Robin (Charlie Munger) can kick your Batman's butt.

32. He makes loophole-free handshake deals.

33. "Risk comes from not knowing what you're doing."

34. Quote No. 1 on keeping it simple, stupid: "The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective."

35. Quote No. 2 on keeping it simple, stupid: "There seems to be some perverse human characteristic that likes to make easy things difficult."

36. The Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  )  annual meeting is an unrivaled spectacle in investing, truly living up to its billing as the Woodstock for Capitalists.

37. One of the most concise summations of why America is great: "There are 309 million people out there that are trying to improve their lot in life. And we've got a system that allows them to do it."

38. Trash-bin-diving caution No. 1: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

39. Trash-bin-diving caution No. 2: "Time is the friend of the wonderful company, the enemy of the mediocre."

40. He's an eternal optimist in a sound-bite culture that often rewards pessimists.

41. His shareholder letters reveal an artisan-like craftsmanship only seen when the proprietor cares deeply about his creation.

42. The contrarian credo: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

43. He recognizes that genius fails: "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

44. Like so many great thinkers, Buffett is able to ignore noise and whittle a decision down to its core variables. After he explains those variables, the decision sounds elementary.

45. Why banking can be dangerous: "When you combine ignorance and leverage, you get some pretty interesting results."

46. He allows me to see the name Buffett without thinking of Jimmy.

47. Buffett maintains a high thought-to-speech ratio.

48. Buffett's librarian fantasy: "If past history was all there was to the game, the richest people would be librarians."

49. He converts a deadly sin into a virtue: "You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing."

50. Averaging 20% returns for almost half a century results in beating the S&P 500 78-to-1!

51. Even though he has fewer and fewer meaningful investing options because of the size of Berkshire Hathaway, he continues to wow us.

52. On a chili-dog-and-onion-ring-flavored note, Berkshire Hathaway owns Dairy Queen, my favorite fast-food chain.

53. Many of Buffett's managers were wildly successful entrepreneurs before selling out to Berkshire. Convincing successful, headstrong, boss-less superstars to subjugate themselves,and keeping those people motivated and happy, is quite a feat.

54. On a related note, Buffett doesn't micromanage -- good thing, with an empire this large.

55. He gets doubted again and again and again and proves the doubters wrong most of the time. Yet you never hear him say, "I told you so."

56. Well, maybe sometimes he gloats. Harvard Business School rejected him, which led him to study under his mentors Benjamin Graham and David Dodd at Columbia. His "How do you like me now?" statement: "Harvard did me a big favor by turning me down. But I haven't made any contributions to them in thanks for that."

57. He has become America's de facto investing teacher. And he has done so willingly.

58. Perhaps my favorite Buffett line: "We like things that you don't have to carry out to three decimal places. If you have to carry them out to three decimal places, they're not good ideas."

59. Not that he can't be ruthless, but Buffett tends to look for win-win situations where possible. Contrast that with the Wall Street art of "ripping the face off" of clients.

60. He's often described as a "learning machine," extending his natural abilities and allowing him to make behemoth investing decisions over the span of just hours.

61. He added to Ben Graham's teachings with the help of that learning ability and Munger's counsel.

62. Now is a good time to point out that companies' annual reports, which are available to all, are the primary fuel in his learning machine. He reads them voraciously to compare and contrast companies and build his business knowledge base. See the next point.

63. When asked what the most important key to his success was, Buffett answered, "focus." His biographer Alice Schroeder elaborates: He has "focus like you have never seen on anybody else." For good or ill, Buffett's entire life has been dedicated to investing. It's much harder than he lets on.

64. There are plenty of business fish in the sea: "There are all kinds of businesses that I don't understand, but that doesn't cause me to stay up at night. It just means I go on to the next one, and that's what the individual investor should do."

65. How many people can pull off being a contrarian by buying shares of Coca-Cola?

66. Even in an investing world full of Buffett students and imitators, he manages to surprise.

67. He takes every legal, ethical advantage available in the current system, but he lobbies for a better system. For example, he supports higher taxes for the rich, more severe estate taxes, and a level playing field. As he puts it, "I don't like anything where the bottom 20% keep getting a poorer and poorer deal."

68. He is grateful for the advantages he has had in life -- like many of us, he won the "ovarian lottery."

69. When he talks, E. F. Hutton listens.

70. Like many geniuses, he is frequently the confounding exception to the rule. For example, Berkshire Hathaway has never paid a dividend and only started share repurchases recently. It also doesn't split the chairman and CEO roles. And we shareholders thank him for it.

71. Buffett buys what he knows (and frequently loves), but he doesn't overpay out of affection. He has the discipline to wait decades for the right opportunity.

72. He gives credit to his direct reports.

73. Not only is Buffett a great investor and manager, but he's one hell of a writer. My jealousy grows.

74. He once picked up a date in a hearse he co-owned.

75. Before making his money work for him, he worked for his money early on with a series of jobs, schemes, and ventures. These included a paper route, selling chewing gum door to door, a pinball business, a sales job at J.C. Penney's, caddying, marking up refurbished golf balls, and founding a horse-racing tip sheet.

76. He's a permabull -- on women.

77. It's very possible that the house you live in is worth more than the house Buffett lives in -- the house in Omaha he bought in 1958.

78. Over the years, he has relied on a similar set of answers to oft-asked questions. That his philosophy has stayed stable throughout that time is remarkable.

79. His wealth has bought him the ultimate trophy: He does whatever he wants to do just about every single day.

80. He's the outsized calming influence a lot of us need. From his biography Snowball: "If a tornado were barreling straight toward Kiewit Plaza [where his office is], Buffett would say that things were 'never better' before mentioning the twister."

81. Anyone who can make the hyper-opinionated Charlie Munger regularly utter "I have nothing to add" must be saying something impressive.

82. When his time to step down finally comes, it will take a village (a CEO, a chairman, and multiple portfolio investors) to perform his current responsibilities.

83. That said, he fully expects this list to one day reach well into the triple digits. And I look forward to adding those lines. Happy birthday, Mr. Buffett!

http://www.fool.com/investing/general/2013/08/30/83-reasons-we-love-warren-buffett.aspx

What Is Warren Buffett's Investing Style?

May 23 2011

If you want to emulate a classic value style, Warren Buffett is a great role model. Early in his career, Buffett said, "I'm 85% Benjamin Graham." Graham is the godfather of value investing and introduced the idea of intrinsic value - the underlying fair value of a stock based on its future earnings power. But there are a few things worth noting about Buffett's interpretation of value investing that may surprise you. (For more on Warren Buffett and his current holdings, check out Coattail Investor.)

TUTORIAL: Stock Picking Strategies

First, like many successful formulas, Buffett's looks simple. But simple does not mean easy. To guide him in his decisions, Buffett uses 12 investing tenets, or key considerations, which are categorized in the areas of business, management, financial measures and value (see detailed explanations below). Buffett's tenets may sound cliché and easy to understand, but they can be very difficult to execute. For example, one tenet asks if management is candid with shareholders. This is simple to ask and simple to understand, but it is not easy to answer. Conversely, there are interesting examples of the reverse: concepts that appear complex yet are easy to execute, such as economic value added (EVA). The full calculation of EVA is not easy to comprehend, and the explanation of EVA tends to be complex. But once you understand that EVA is a laundry list of adjustments - and once armed with the formula - it is fairly easy to calculate EVA for any company.

Second, the Buffett "way" can be viewed as a core, traditional style of investing that is open to adaptation. Even Hagstrom, who is a practicing Buffett disciple, or "Buffettologist," modified his own approach along the way to include technology stocks, a category Buffett conspicuously continues to avoid. One of the compelling aspects of Buffettology is its flexibility alongside its phenomenal success. If it were a religion, it would not be dogmatic but instead self-reflective and adaptive to the times. This is a good thing. Day traders may require rigid discipline and adherence to a formula (for example, as a means of controlling emotions), but it can be argued that successful investors ought to be willing to adapt their mental models to current environments. (It's not always bad to copy someone, especially when it's one of the greatest investors ever. Check out Emulate Buffett For Fun And Profit - Mostly Profit.)

Business
Buffett adamantly restricts himself to his "circle of competence" - businesses he can understand and analyze. As Hagstrom writes, investment success is not a matter of how much you know but rather how realistically you define what you don't know. Buffett considers this deep understanding of the operating business to be a prerequisite for a viable forecast of future business performance. After all, if you don't understand the business, how can you project performance? Buffett's business tenets each support the goal of producing a robust projection. First, analyze the business, not the market or the economy or investor sentiment. Next, look for a consistent operating history. Finally, use that data to ascertain whether the business has favorable long-term prospects.

Management
Buffett's three management tenets help evaluate management quality. This is perhaps the most difficult analytical task for an investor. Buffett asks, "Is management rational?" Specifically, is management wise when it comes to reinvesting (retaining) earnings or returning profits to shareholders as dividends? This is a profound question, because most research suggests that historically, as a group and on average, management tends to be greedy and retain a bit too much (profits), as it is naturally inclined to build empires and seek scale rather than utilize cash flow in a manner that would maximize shareholder value. Another tenet examines management's honesty with shareholders. That is, does it admit mistakes? Lastly, does management resist the institutional imperative? This tenet seeks out management teams that resist a "lust for activity" and the lemming-like duplication of competitor strategies and tactics. It is particularly worth savoring because it requires you to draw a fine line between many parameters (for example, between blind duplication of competitor strategy and outmaneuvering a company that is first to market).

Financial Measures 

Buffett focuses on return on equity (ROE) rather than on earnings per share. Most finance students understand that ROE can be distorted by leverage (a debt-to-equity ratio) and therefore is theoretically inferior to some degree to the return-on-capital metric. Here, return-on-capital is more like return on assets (ROA) or return on capital employed (ROCE), where the numerator equals earnings produced for all capital providers and the denominator includes debt and equity contributed to the business. Buffett understands this, of course, but instead examines leverage separately, preferring low-leverage companies. He also looks for high profit margins.

His final two financial tenets share a theoretical foundation with EVA. First, Buffett looks at what he calls "owner's earnings," which is essentially cash flow available to shareholders, or technically, free cash flow to equity (FCFE). Buffett defines it as net income plus depreciation and amortization (for example, adding back non-cash charges) minus capital expenditures (CAPX) minus additional working capital (W/C) needs. In summary, net income + D&A - CAPX - (change in W/C). Purists will argue the specific adjustments, but this equation is close enough to EVA before you deduct an equity charge for shareholders. Ultimately, with owners' earnings, Buffett looks at a company's ability to generate cash for shareholders, who are the residual owners.

Buffett also has a "one-dollar premise," which is based on the question: What is the market value of a dollar assigned to each dollar of retained earnings? This measure bears a strong resemblance tomarket value added (MVA), the ratio of market value to invested capital.

Value
Here, Buffett seeks to estimate a company's intrinsic value. A colleague summarized this well-regarded process as "bond math." Buffett projects the future owner's earnings, then discounts them back to the present. Keep in mind that if you've applied Buffett's other tenets, the projection of future earnings is, by definition, easier to do, because consistent historical earnings are easier to forecast.

Buffett also coined the term "moat," which has subsequently resurfaced in Morningstar's successful habit of favoring companies with a "wide economic moat." The moat is the "something that gives a company a clear advantage over others and protects it against incursions from the competition." In a bit of theoretical heresy perhaps available only to Buffett himself, he discounts projected earnings at the risk-free rate, claiming that the "margin of safety" in carefully applying his other tenets presupposes the minimization, if not the virtual elimination, of risk.

The Bottom Line
In essence, Buffett's tenets constitute a foundation in value investing, which may be open to adaptation and reinterpretation going forward. It is an open question as to the extent to which these tenets require modification in light of a future where consistent operating histories are harder to find, intangibles play a greater role in franchise value and the blurring of industries' boundaries makes deep business analysis more difficult. (If you appreciate the fundamentals of value investing, you'll want to study this: The Value Investor's Handbook.)

http://www.investopedia.com/articles/05/012705.asp

What factors drive the housing prices?

What factors drive the housing prices?

Among the factors are:
1.  A dropping interest rate
2.  Increasing liquidity in the banking system
3.  A growing economy

All the above factors drive the demand for residential and other real estate.  This causes the prices of these real estate properties to rise.

Property prices in Malaysia have been rising since 2005. At present, the real estate prices have not softened in the Klang Valley, though property transactions have dropped compared to the previous years.

Will property prices in the Klang Valley soften?  Will interest rates rise and adversely affect the demand from the end-users or end-buyers?   Is there a rise in the inventory of unsold property in the real estate sector?  Are builders able to meet their loan repayment liability as well as complete their already started projects?  Are builders turning prudent through cutting prices to sell their units and to generate cash?

Tesco Plc: Buy, Sell Or Hold?

Published in Investing on 22 August 2013

What are the long-term prospects for Tesco Plc (LON: TSCO)?

I'm always searching for shares that can help ordinary investors like you make money from the stock market.

Right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today's uncertain market, as well as highlight those shares I feel you should hold... and those I feel you should sell!

I'm assessing every share on five different measures. Here's what I'm looking for in each company:

1. Financial strength: low levels of debt and other liabilities;

2. Profitability: consistent earnings and high profit margins; 

3. Management: competent executives creating shareholder value;

4. Long-term prospects: a solid competitive position and respectable growth prospects, and;

5. Valuation: an under-rated share price.

A look at Tesco

Today I'm evaluating Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US)], a British multinational retailer, which currently trades at 363p. Here are my thoughts:

1. Financial strength: Tesco is in solid financial position.  Net debt/operating cash flow is less than 2 times; net gearing is 50%; interest cover is an adequate 7.5 times; and free cash flow has averaged nearly £2bn per year over the last 3 years.

2. Profitability: Tesco has delivered outstanding growth for nearly two decades. However, with the continuing weakness in Europe and facing stiff competition at home, the company has struggled of late. In the last fiscal year, underlying profit before tax declined by 15% while underlying earnings per share fell by 14%. Forced to compete in price, the company's margins have contracted from to 3.4% from 5.6% the previous year.

Also, international trading profit declined by 22%, due to the impact of regulatory changes in South Korea and impairment of businesses in Turkey, Poland and the Czech Republic.

3. Management: I believe the company's new direction under Philip Clarke, which focuses on developing its "multichannel" footprint, strengthening its core UK business, and adopting a more prudent international growth strategy,  places the company in a better position moving forward.    

4. Long-term prospects: Tesco has fallen out of favour with investors recently after a rough 18 months where it was rocked by the horsemeat scandal, several quarters of declining market share and like-for-like sales, and write-offs of its Fresh and Easy US business and several UK properties of more than £1bn  and £804m, respectively.

However, despite the grim outlook, I believe Tesco's competitive position remains solid. It is still the largest UK grocer with a market share of 30% --almost doubling that of its closest rival Wal-Mart's ASDA. It also owns the UK's widest store network with around 3,000 stores and the world's largest and most profitable online supermarket, which reached a record-high revenue of over £3bn last year. In addition, it is the number one or two retailer for general merchandise in 8 out of 9 of its international markets.

Furthermore, to adapt to the rapidly changing retail environment, the company has announced new strategic objectives which include: a shift from traditional large-store formats to building its "multichannel" retail capabilities such as convenience and online retailing; focusing on its core UK operations to maintain its leading position -- the company has invested around £1bn to overhaul its superstores; and adopting a more disciplined approach to international expansion, concentrating only on markets that could deliver strong investment returns. 

5. Valuation: With a market cap of £30bn, Tesco trades at a forward price-to-earnings (P/E) ratio of 11 -slightly below its 10-year median P/E of 13 and the industry average of 12-- and a prospective dividend yield of 4%, twice covered.

My verdict on Tesco

Although recent results have been disappointing and with competition in the UK likely to remain competitive, I think the company still owns a distinct advantage with its scale and size. Also, its profitable international business --29% of the company's profits come from outside the UK--  and established online presence could be a source of future growth opportunities.

Moreover, the company intends to tighten capital spending during the next few years --around 3.5% to 4% of revenue-- which will add to its already strong cash flow. What's more, shares are trading at an undemanding P/E of 12, a discount compared to its peers Wal-Mart andCarreouflour.        

So overall, I believe Tesco at 363p looks like a buy.

http://www.fool.co.uk/news/investing/2013/08/22/tesco-plc-buy-sell-or-hold.aspx?source=uptyholnk3030001

Real Estate and Value Investing

1.  Most people purchasing real estate seem to believe it is possible to get a "good deal."

2.  By this they embrace the possibility that price and value are different things, suggesting that when it comes to home ownership, people intuit the core quality of value investors.

3.  By staking a modest down payment (often 10 to 20 percent), much of the population exploits the leverage afforded by putting more assets to work for them.

4.  Except for speculative fever in select times and places, real property values rise reliably, making such an investment a reasonable vehicle to increase net worth.

5.  Owners have been able to tap the increased equity value in primary residences in recent decades by using home equity vehicles dotting the market.

6.  Low-interest-rate-environments spur refinancing transactions that, by lowering debt service obligations, free up cash flow as well.

7.  Buying secondary homes for use as vacation getaways or rental properties has also become more attractive to many families, no longer the preserve of the upper echelons.

8.  Particularly in periods of low interest rates and sagging stock market returns, these markets offer attractive value investments.

9. Apart from the additional concerns of family needs and psychic rewards, the basic principles of valuation apply to these vehicles.

10.  Paying a price reasonably below estimated value remains important.

11.  Avoiding excessive leverage is akin to avoiding margin trading on equities.

12.  Patience is likewise valuable.

13.  Another advantage to home ownership is that the owner is the manager - he runs the home, maintains it, determines required reinvestment to maintain and improve its value, and so on.

14.  Value-minded investors are sure they can do these tasks, or else turn the reigns over to someone who can.

15.  These points go doubly for vacation or rental properties that might present logistical problems.

Alternative Investments and Price-Value Relationships

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".

Precious Metals:  Supply-demand imbalances drive price-value divide

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.

Synonyms insight - instinct

Dividend Reinvestment Plans (DRIPs) and the Value Investor

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.  

Zeti says Malaysia current account deficit unlikely to sink into deficit

http://www.theedgemalaysia.com/business-news/251001--update-zeti-says-malaysia-current-account-unlikely-to-sink-into-deficit.html

Maybank Q2 net profit soars to RM1.57b

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.

Read more: Maybank Q2 net profit soars to RM1.57b http://www.btimes.com.my/Current_News/BTIMES/articles/20130822002210/Article/index_html#ixzz2cgQy8X3E

Petronas Dagangan Bhd (PDB) Q2 revenue surges to RM7.92b

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.

Read more: PDB Q2 revenue surges to RM7.92b http://www.btimes.com.my/Current_News/BTIMES/articles/petrodag/Article/#ixzz2cgQKJnip

2 most frequent questions

2 most frequent questions in these days by subscribers.

1. Are we missing the bus?

2. To invest or wait for some more time?

Philip Fisher: Why staying long-term in your investments makes a lot of sense.

Why staying long-term makes a lot of sense?    


Quoting Phillip Fisher:

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. 

Investors exit Asian economies as US builds up steam

August 21, 2013

Shamim Adam

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.

Bloomberg

Read more: http://www.smh.com.au/business/world-business/investors-exit-asian-economies-as-us-builds-up-steam-20130820-2s9a1.html#ixzz2cYvjWmvb

The Anxiety of Selling. Value Investors select stocks that are least likely ever to trigger the criteria for selling.

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,
• deterioration in current and quick ratios.