Financial literacy is a lifelong endeavor.

Are These Investors Getting Dumber?

Alexander Green, Chief Investment Strategist, The Oxford Club


I've long lamented that basic financial literacy is not a routine part of a high-school education in this country. Students routinely graduate without understanding compound interest, IRAs, mortgages or why we even have a stock market.

And so they trundle out into the real world, saving little, investing poorly (or not at all) and - typically - paying 18.6% annual interest on their credit cards. Within a few years, they are deep in a hole, trying to dig themselves out, and telling anyone who will listen of the essential inequity of the capitalist system.

It can take the average person years, if not decades, to learn (if ever) how to save, invest, minimize taxes and enjoy a measure of financial independence.

Yet in a new study out of Texas Tech University, Dr. Michael Finke and his colleagues reveal that financial literacy actually worsens as we get older. The study shows that knowledge of basic concepts essential to effective money management declines by about 2% each year after age 60.

However, confidence in financial decision-making abilities does not fall. That means folks who live to age 90 are, on average, only half as smart about money as they were at age 60, but they are no less confident about investing it.

Made for Calamity

Talk about a recipe for disaster. After all, nowhere is overconfidence more soundly punished than in the financial markets, where outsized optimism and big egos routinely get taken down like the Berlin Wall.

Look at just a sampling of the questions many older Americans flunked:

Net worth is equal to:
A. Total assets
B. Total assets plus liabilities
C. Total assets minus liabilities

Which bank account is likely to pay the highest interest rate on money saved?
A. Savings account
B. Six-month CD or certificate of deposit
C. Three-year CD

The main advantage of a 401(k) plan is that it:
A. Provides a high rate of return with little risk.
B. Allows you to shelter retirement savings from taxation.
C. Provides a well-diversified mix of investment assets.

People who cannot answer these basic questions should not be managing their own money.

And they definitely shouldn't be buying variable annuities, whole life insurance and long-term care insurance.

Those products are generally so complicated - so full of caveats, drawbacks, and hidden fees and penalties - that even people in the industry, including the majority of those who sell them, don't fully understand them.

Knowledge is indeed power. And financial literacy is a lifelong endeavor.

That means you should do everything you can - from reading the handful of classic investment books to learning the essential money-management principles we talk about here each day - to make sure you know as much as you can about how to boost your savings, reduce your federal and state taxes, minimize your investment costs, and achieve your financial goals with as little risk as possible.

And if you have an older relative who is losing his or her investment competence - and is therefore increasingly vulnerable to smooth-talking brokers, life insurance agents and self-styled "financial planners" - get together with close family members and intervene.

Their financial well-being - not to mention any potential inheritance - may well depend on it.

Good investing,

Alex


http://www.investmentu.com/2013/November/are-these-investors-getting-dumber.html?src=email#comment

UMW O&G to tap into regional energy demand

Posted on October 28, 2013, Monday

KUCHING: UMW Oil & Gas Corporation Bhd (UMW O&G) hopes to continue tapping into the region’s growing energy demand.

Currently, Asia accounts for 39 per cent of global energy consumption, which Douglas Westwood expects to rise incrementally over the next twenty years from 2011 to 2030, says non-independent executive director and president Rohaizad Darus.

“This clearly places us in a favourable environment,” he told The Borneo Post via email.

“We are proud to potentially be the biggest initial public offering (IPO) in Malaysia this year and we hope this reflects the great trust and commitment that is placed in us by not only the investment community, but the business community and industry as a whole.”

UMW O&G is due to be admitted to the Official List of the Main Market of Bursa Malaysia Securities Bhd on November 1, 2013 and will have a market capitalisation of approximately RM6.1 billion upon listing.

“As a listed company, we are looking forward to taking all opportunities presented to us to increase our value to our shareholders, customers and partners,” he added.

With regards to Sarawak in particular, Rohaizad said currently the group does not have any operations, but added that, “We are always interested in new regions and opportunities subject to close evaluation and will of course monitor the region as part of our post-IPO expansion plans.”

The group currently hold a seven per cent and 11 per cent market share in Southeast Asia in offshore drilling and workover services respectively.

“In Malaysia we have 21 per cent and 36 per cent of the market share in offshore drilling and workover services respectively.

“We have a strong backlog which, as of June 30, 2013, totalled approximately RM1,471.3 million.”

The firm also has plans to establish the UMW Drilling Academy, which is expected to be in operation by early next year to train more people to ensure a continuous supply of skilled personnel to feed into the group’s expansion plans.

On October 18, UMW O&G’ IPO to the Malaysian public comprising 43.24 million issue shares has been oversubscribed and the balloting of successful applications was conducted.

Subsequent to the close of the institutional offering to Malaysian and foreign institutional and selected investors (institutional investors), including Bumiputera investors approved by the Ministry of International Trade and Industry, the institutional price has been fixed at RM2.80 per share on October 18, 2013.

Accordingly, the final retail price for the IPO shares under the retail offering was also fixed at RM2.80 per share.

As the Final Retail Price equals the retail price as set out in the Prospectus dated October 3, 2013 issued by UMW Oil & Gas Corporation Bhd, there will be no refund to be made to the successful retail applicants.

Based on RM2.80 per share, UMW O&G’s IPO will be the largest IPO in Malaysia thus far this year, with its RM2.36 billion offering attracting substantial interest from international and Malaysian investors alike, evidenced by its institutional book being oversubscribed by approximately 55 times.

Commenting on the progress of the IPO process thus far, Rohaizad said, “We are extremely pleased and honoured that the investment community has been so supportive of our IPO plans and I truly feel that this represents the great confidence investors have in UMW O&G.

“Upon achieving our plans to list, we will strive to live up to investors’ expectations and continue to provide value and growth to our stakeholders and new shareholders as a listed entity.”

UMW O&G’s proposed listing has attracted a strong network of cornerstone investors, 21 of which who have agreed to purchase an aggregate of 399,000,000 shares, representing 18.5 per cent of the enlarged issued and paid-up share capital of UMW O&G.


Read more: http://www.theborneopost.com/2013/10/28/umw-og-to-tap-into-regional-energy-demand/#ixzz2jyI61ORY

Listing to solidify Karex’s position as market leader

by Ronnie Teo, ronnieteo@theborneopost.com. Posted on October 23, 2013, Wednesday

KUCHING: The upcoming listing of Karex Bhd (Karex) on the main bourse of Bursa Malaysia will see the group garnering an approximate market capitalisation of RM635 million, based on RM2.35 per share.

According to analyst Kevin Wong from HwangDBS Vickers Research Sdn Bhd (HwangDBS Research), this was on the back of the group already coveting about 10 per cent of global market share.

“Karex is expanding production capacity from three billion to six billion pieces by the end of 2015,” Wong outlined in HwangDBS Research’s initiation coverage report. “This could boost the group’s earnings, supported by a large global market for condoms (circa 23 billion pieces in 2012), with global demand expected to increase annually and reach 30.4 billion pieces by 2016.”

Owned by the Goh family, Karex has been running the condom manufacturing business since late 1980’s. Condom sales contribute about 90 per cent of group revenues, which is derived from three principal markets: commercial (60 per cent of FY13 condom sales), tender (36 per cent) and own brand manufacturing (four per cent).

Currently, it has three plants in Klang, Pontian and Hat Yai (Thailand) with a total manufacturing capacity of three billion pieces per annum, or 10.5 per cent of global condom output in 2012.

Goh noted that the higher consumption of condoms will largely be driven by ongoing efforts and procurement by governments or non-government organisations (NGOs) to curb sexually transmitted diseases and support family planning initiatives in tandem with steady global population growth.

“Condoms are generally demand inelastic, and have little correlation with GDP growth or consumer purchasing power because they are considered an essential and are small ticket items. We forecast 2-year net profit CAGR of 29 per cent premised on rising output from 2.4 billion pieces in FY13 to 3.6 billion pieces in FY15.”

Meanwhile, RHB Research Institute Sdn Bhd (RHB Research) said the listing will solidify Karex’s position as the world’s largest condom maker, as well as widen the gap between the company and its closest global competitor, Thai Nippon Rubber Industry Co Ltd, by two billion pieces.

“There will also be more growth opportunities in tender market. Due to limited government funding for family planning in some developing countries, organisations such as the United Nations Population Fund (UNFPA) and United States Agency for Development (USAID) have started programmes to distribute condoms free of charge or at subsidised cost,” RHB Research outlined.

“This would likely benefit Karex as UNFPA and USAID are established customers. We also expect more potential contracts in the pipeline.”

RHB Research estimated core earnings for financial years 2013 (FY13) to FY15 forecasts compound annual growth rate (CAGR) earnings of 28.3 per cent, with revenue forecasted to reach RM289 million in FY14F from RM339 million in FY15F.

“Given the better economies of scale and an improving customer mix, we expect the company’s net margin to widen to 13.6 per cent in FY14F from 12.5 per cent in FY13,” it added. “We forecast core earnings of RM39.5 million and RM47.8 million for FY14F and FY15F respectively.”

After initiating coverage, RHB Research valued Karex at RM2.59 per share, based on a target 16 times of the price to earnings ratio (P/E) for calendar year 2014 (CY14).

Meanwhile, HwangDBS Research pegged a fair value of RM2.35 per share for Karex, based on a 0.5 times CY14 P/E to growth ratio, which is the firm’s preferred valuation method to capture Karex’s robust future growth potential.


Read more: http://www.theborneopost.com/2013/10/23/listing-to-solidify-karexs-position-as-market-leader/#ixzz2jyDEtdwa

Higher throughput volume to propel Integrax earnings

Posted on October 31, 2013, Thursday
KUCHING: Port operator Integrax Bhd’s (Integrax) earnings is expected to grow by seven per cent in financial year 2014 due to more throughput handling capacity from both Lekir Bulk Terminal (LBT) and Lumut Maritime Terminal (LMT).

RHB Research Sdn Bhd (RHB Research) said the company’s net profit is on an upward trajectory as a result of improved margins given its economies of scale.

The research firm projected for the company to register double-digit earnings growth from 2015 to 2018, driven by surge in volume from LBT following the commencement of Tenaga Nasional Bhd’s (TNB) new power plants, M4, on March 31, 2015 and M5, on October 1, 2017.

The research firm added that each power plants will assist the company to boost annual volume of coal imports by an additional 3 million tonnes.

It noted that from 2012 to 2018, Integrax’s earnings could register a compound annual growth rate (CAGR) of 12.5 per cent.

Besides that, RHB Research observed that Integrax is also going to gain from stable throughput volume for TNB’s power plants’ feedstock, potential trans-shipment hub for dry bulk shipping and increasing client base.

It noted that Integrax has been in ongoing discussion with several parties.

The research firm pointed out that there are interests from other parties especially from industries such as fertilisers, bio mass pellets and ship-to-ship transfers to utilise the facilities of Integrax’s port.

Apart from that, RHB Research revealed that negotiations are being held with other parties to secure new customers for LBT and LMT, with some notable industries to boost volume are the minerals, limestone, palm oil and palm fibre industries.

Citing a case, the research firm said rising steel production in limestone-deficient India is spurring demand for imported limestone, which is used as feedstock in blast furnace-based steel production.

The company observed that limestone from Perak and Kelantan may be well-positioned to meet the huge steel demand on India’s east coast.

Therefore, RHB Research believed that those potential new clients could boost Integrax’s earnings as throughput handling volume increases.

Financially, for the second quarter of financial year 2013, Integrax’s bottom line suffered a dip of 12 per cent to RM9.66 million year-on-year from RM10.98 million in the second quarter of 2012 due to higher operating cost, lower profits from associate company, Lumut Maritime Terminal Sdn Bhd and lower land sales.

Nonetheless, the company’s turnover rose 6.2 per cent to RM23.65 million in the second quarter of 2013 compared with RM22.28 million in the same corresponding period last year.

Moreover, RHB Research noted that Integrax remains cash-rich with RM118 million in cash as at June 2013.

With a steady business and strong clientele, RHB Research estimated that Integrax’s cash pile is expected to soar to RM353 million by 2018.

Using a discounted cashflow valuation, the research firm believes that the company’s share price is worth RM2.32 per share.


Read more: http://www.theborneopost.com/2013/10/31/higher-throughput-volume-to-propel-integrax-earnings/#ixzz2jy9sPyaI

Nestle M’sia included in DJSI emerging markets index

Posted on October 31, 2013, Thursday

KUALA LUMPUR: Nestlé Malaysia has been included in the 2013 Dow Jones Sustainability Emerging Markets Index (DJSI Emerging Markets), for its commitment to transparency and sustainability practices.
Nestlé Malaysia managing director and region head for Malaysia/Singapore, Alois Hofbauer, said the company’s inclusion in the index is testimony to its continuous efforts to be more transparent and sustainable, and demonstrates to Nestle’s stakeholders that it is moving in the right direction.

“In 2013, Nestlé Malaysia ranked higher than the industry average in four specific areas including Codes of Conduct/Compliance/Corruption and Bribery; Environmental Policy/Management System; Environmental Reporting, Genetically Modified Organisms; and Human Capital Development, Social Reporting.

“More importantly, the index provides us with a perspective on where we stand in terms of transparency and sustainability with respect to international benchmarks, and provides us with insights in the areas that we need to further improve,” Hofbauer added.

The DJSI Emerging Markets is designed for investors seeking an emerging-markets index that exhibits a sustainable tilt while minimising country, industry and size biases relative to traditional emerging-markets benchmarks.

A total of 81 companies participated in the index, which was first calculated in February 2013 by investment specialsit RobecoSam and covers the top 10 per cent of the largest 800 companies in 20 emerging markets, with Nestlé Malaysia being one of only five Malaysian companies qualified to be included.

It is also the only Malaysian representative among three companies globally in the Food Products category. — Bernama


Read more: http://www.theborneopost.com/2013/10/31/nestle-msia-included-in-djsi-emerging-markets-index/#ixzz2jy91Vjsc

Petronas Dagangan hit by sharp drop in MOPS prices

Petronas Dagangan hit by sharp drop in MOPS prices
Posted on November 2, 2013, Saturday

KUCHING: Petronas Dagangan Bhd (Petronas Dagangan) saw softer third quarter (3Q) earnings growth at RM226.2 million, driven by lagged losses amid volatile Means of Platts Singapore (MOPS) prices especially in September.

However, according to HwangDBS Vickers Research Sdn Bhd (HwangDBS Research), the company is poised to see a better 4Q due to margin recovery as MOPS prices have stabilised in October.

To recap, Petronas Dagangan 3Q results showed a drop by seven per cent year-on-year (y-o-y) and an increase of 15 per cent quarter-on-quarter (q-o-q), bringing its nine months for 2013 (9M13) earnings to RM660.4 million (compared with RM660.3 million in 9M12).

“3Q13 bottomline was dragged (on a y-o-y basis) mainly by weaker margins (2.7 per cent versus 3Q12’s 3.2 per cent), hit by lagged losses amid volatile MOPS prices especially in September.

“At the topline, turnover grew to RM8.4 billionn in 3Q13 (12 per cent y-o-y and six per cent q-o-q) and RM24 billion (10 per cent y-o-y) in 9M13 as overall volumes sold rose 10.5 per cent year to date to 12.3 billion litres,” the research firm explained.

In terms of key segmental contributions, Petronas Dagangan’s retail business recorded revenue at RM3.8 billion, an increase of 11 per cent y-o-y and three per cent q-o-q.

HwangDBS Research noted that this is mainly due to sales volume growth of 9.7 per cent y-o-y and profit before tax (PBT) of RM174.5 million (a decrease of 23 per cent y-o-y and an increase of 103 per cent q-o-q) while the commercial division posted revenue of RM4.7 billion, which was an increase of 15 per cent y-o-y and five per cent q-o-q. Sales volume grew 12.6 per cent y-o-y with a PBT of RM88.1 million (an increase of 25 per cent y-o-y; a drop of 32 per cent q-o-q).

Petronas Dagangan declared an interim single-tier dividend per share (DPS) of 17.5 sen in 3Q13, bringing total net DPS to 44.1 sen for 9M13 (66 per cent payout).

“This is on track to meet our financial year 2013 forecast (FY13F) net DPS of 75 sen, assuming a further net DPS of 31 sen to be declared in 4Q13 (full year payout of 74 per cent).

“Meanwhile, we are keeping our FY13F net profit intact at RM1002.5 million (20 per cent y-o-y) as we penciled in a stronger 4Q13 due to margin recovery (as MOPS prices have stabilised in October),” HwangDBS Research opined.

It retained its target price of Petronas Dagangan at RM19.70 per share, based on 18-folds FY14F earnings per share (EPS), pegged to one standard deviation of mean.

“Although we like Petronas Dagangan’s resilient business model, its current valuations remain expensive at 28-folds FY14F EPS, more than two standard deviation above its historical mean,” the research firm commented.


Read more: http://www.theborneopost.com/2013/11/02/petronas-dagangan-hit-by-sharp-drop-in-mops-prices/#ixzz2jy72gNRP

Petronas Gas is expected to be the biggest beneficiary of rising gas demand.

Petronas Gas boosted by robust regasification segment

by Jonathan Wong jonathanwong@theborneopost.com. 

Posted on November 2, 2013, Saturday

KUCHING: Petronas Gas Bhd (Petronas Gas) saw a boost in its earnings driven by the recognition of deferred tax assets arising from an investment tax allowance granted for its liquefied natural gas  (LNG) regasification terminal in Melaka.

In addition, the company is expected to be the biggest beneficiary of rising gas demand as the additional gas volume will pass through its Peninsular Gas Utilisation (PGU) pipeline.

Analyst June Ng from HwangDBS Vickers Research Sdn Bhd (HwangDBS Research) said that the earnings boost from Melaka regasification plant was driven by higher gas transportation revenue and contribution.

Ng added that second quarter 2013 (2Q13) net profit was boosted by RM592 million tax allowance granted to its LNG regasification terminal. Excluding the tax allowance, nine month core earnings of RM1.1 billion for 2013 was within the research firm and market’s expectations

“Gas production growth in Malaysia has lagged demand growth due to low subsidised gas prices at just one third of market rates. We expect a gradual increase in subsidised gas price under the ongoing move towards fiscal consolidation. Higher gas prices would encourage higher capital expenditure by Petronas and LNG imports.

“Petronas Gas will be the biggest beneficiary of rising gas demand as the additional gas volume will pass through its PGU pipeline. The outlook for Petronas Gas is promising with Petronas’ plan to invest RM15 billion to find new gas to meet rising demand in Peninsular Malaysia. It is also poised to secure overseas ventures given its strong balance sheet,” Ng explained.

The research division of MIDF Amanah Investment Bank Bhd (MIDF Research), however, noted that Petronas Gas’ normalised 9M13 earnings of RM1,175.1 million barely kept pace with estimates and represented a moderate growth of 5.9 per cent year-on-year (y-o-y).

According to MIDF Research, 9M13 revenue slumped marginally 0.3 per cent y-o-y to RM1,135.6 million as performance-based structure income were lower from decreased butane and ethane productions.

Higher income from propane helped offset the decline in the former.

However, operating profit climbed 5.8 per cent y-o-y resulting from accounting treatments – lower depreciation expense of property, plant & equipment (PPE) from reclassification of components and useful lives. Operating margins expanded three percentage points to 53.4 per cent.

“Segment revenue for 9M13 increased by RM47.9 million to RM885.6 million. This was caused by higher capacity booked by customers. In-line with the increase in revenue, segment operating profit grew 7.9 per cent y-o-y, supported by margin expansion of 1.5 percentage points to 78.6 per cent,” noted the research house.

Nevertheless, it expects Petronas Gas’ we are regasification segment to contribute around RM135 million and RM150 million to FY14 and FY15’s bottomline.

It increased its FY14 forecast earnings of the company, upwards by 12.1 per cent, assuming better ontributions from the LNG regasification segment.

HwangDBS Research retained a positive view on Petronas Gas and said, “We like Petronas Gas for its resilient earnings with no fuel risk, strong parental support, solid balance sheet, and promising growth prospects supported by Petronas’ larger O&G capital expenditure.

“It will also enjoy stronger earnings from the Melaka LNG plant, and Sabah power plant from FY14.”

Read more: http://www.theborneopost.com/2013/11/02/petronas-gas-boosted-by-robust-regasification-segment/#ixzz2jy4afYqq

Why even experts must rely on intuition and often get it wrong

There have been many good books on human rationality and irrationality, but only one masterpiece. That masterpiece is Daniel Kahneman’s Thinking, Fast and Slow.

Kahneman, a winner of the Nobel Prize for economics, distils a lifetime of research into an encyclopedic coverage of both the surprising miracles and the equally surprising mistakes of our conscious and unconscious thinking. He achieves an even greater miracle by weaving his insights into an engaging narrative that is compulsively readable from beginning to end. 

Thinking, Fast and Slow, by Daniel Kahneman

Kahneman presents our thinking process as consisting of two systems. System 1 (Thinking Fast) is unconscious, intuitive and effort-free. System 2 (Thinking Slow) is conscious, uses deductive reasoning and is an awful lot of work. System 2 likes to think it is in charge but it’s really the irrepressible System 1 that runs the show. There is simply too much going on in our lives for System 2 to analyse everything. System 2 has to pick its moments with care; it is “lazy” out of necessity.

Books on this subject tend to emphasise the failings of System 1 intuition, creating an impression of vast human irrationality. Kahneman dislikes the word “irrationality” and one of the signal strengths of Thinking, Fast and Slow is to combine the positive and negative views of intuition into one coherent story. In Kahneman’s words, System 1 is “indeed the origin of much that we do wrong” but it is critical to understand that “it is also the origin of most of what we do right – which is most of what we do”.

http://www.ft.com/cms/s/2/15bb6522-04ac-11e1-91d9-00144feabdc0.html#axzz2jwvK7LJC

The value of patience

Price-value gap

Theoretically, with higher trading volumes, the price-value gap should narrow due to better price discovery.   Yet, in reality, this is not the case.

The increase in trading activity actually widen the price-value gap; often increasing the noise in the system and leading to spikes in volatility that we see often in the stock market.

An explanation, which is not surprising, is the majority of market participants are speculators and not investors.  

Rather than narrowing the price-value gap through better price discovery, the exact opposite is the result.


What can you do as an investor?

In this world, an investor who is hostage to short-term performance pressures will feel nothing but discontent.

The only requirement for successful play is the willingness to adopt a different set of rules.  

Of these, none is more important than the value of patience.


Let's learn from Buffett:  Having a patient attitude to investing

Time and patience, two sides of the same coin - that is the essence of Buffett.

His success lies in the patient attitude he quietly maintains toward both Berkshire's wholly owned business es and the common stocks held in the portfolio.

In this high-paced world of constant activity, Buffett purposefully operates at a slower speed.



Learning points

A detached observer might think this sloth-like attitude means forgoing easy profits, but those who have come to appreciate the process are accumulating mountains of wealth.  

The speculator has no patience.

The investors lives for it.

The best thing about time is its length.

Intelligence alone is not enough to ensure investment success.

The counterpart of emotion is rationality.

The size of the investor's brain is less important than the ability to detach the brain from the emotions.

"Rationality is essential when others are making decisions based on short-term greed or fear.  That's where the money is made," says Buffett.

Buffett tells us that successful investing does not require having a high IQ or taking the formal courses taught at most business schools.

What matters most is temperament.  And when Buffett talks about temperament he means rationality.

The cornerstone to rationality is the ability to see past the present and analyze several possible scenarios, eventually making a deliberate choice.  That, in a nutshell, is Warren Buffett.

Those  who know Buffett agree it is rationality that sets him apart from the rest.

Roger Lowenstein, the author of Buffett:  The Making of an American Capitalist, says, "Buffett's genius is largely a genius of character - of patience, discipline and rationality."

A proposed initial personal financial plan for a young graduate.

A proposed initial personal financial plan for a young graduate.

1.  Get a job that you enjoy and are passionate in..

2.  Grow in your chosen career.

3.  Save as much as you possibly can.

4.  Start investing in your financial education early.

5.  Start investing early once you know how to and safely.

6.  Compound your investments at > 15% per year.

7.  Buy a small car initially.

8.  Stay with parents or rent initially; even for those who are married.

9.  Build and grow a big initial investment capital first.

10. Acquire your first home once you have reached this level.
11. Continue to invest and acquire more assets subsequently.

12. Periodically, reassess your career, business and financial situation.

Buffett's confession

Buffett's advice and investment principles have proven, time and again, to be a safe  for millions of investors.

Occasionally misaligned investors will yell out, "But it's different this time!" and occasionally they will be right.

Change is constant, but these investment principles have endured.

"That is why they are called principles,"  Buffett once quipped.

From the 1996 annual report of Berrkshire Hathaway:  
"Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now.  Over time, you will find only a few companies that meet those standards - so when you see one that qualifies, you should buy a meaningful amount of stock."  

You cannot find a better touchstone than that.

Buffett's confessed that "what I do is not beyond anybody else's competence."   

Yet, it is extraordinary how resistant some people are to learning anything, even when it is in their self-interest to learn!.



Additional notes:

Buffett invariably follows the same strategy.

He looks for companies:
1.  he understands.
2.  with favourable long-term prospects,
3.  that are operated by honest and competent people, and,
4.  that are, importantly, available at attractive prices.

Four steps to prepare for a crash

But for the sake of argument, let’s pretend that Time’s cover is wildly bullish and did send a legitimate bear signal to the world. Or maybe tapering will sink stocks.

What would be the proper course of action for investors in a bear market?


1. Understand your time horizon

If you invested 10 years ago for an event this year, you might seriously consider selling your stocks and converting them to cash — but that’s regardless of where you think the market is going. If you need the money in the short term, it doesn’t belong in the market. If you have longer than a few years to invest, don’t worry about a crash as long as you…

2. Make sure your stops are in place

The Oxford Club recommends a 25% trailing stop loss. The stops protect gains as stocks rise and ensure that no single position results in a devastating loss. Since stocks are up so much over the past four years, even if you do get stopped out, you should get out with a profit. This strategy also ensures that you have plenty of cash to get back into the market at lower prices. During the financial crisis, Oxford Club Members were stopped out of positions in 2008 and took profits on many stocks that had risen during the previous bull. That freed up capital to get back in during the lows of 2008 and 2009, resulting in some huge winners, including Discovery Communications (Nasdaq: DISCA), up 255%, and Diageo (NYSE: DEO), up 171%.

3. Review your portfolio

If you haven’t done so in a while, take a look at the stocks in your portfolio. Make sure the companies are still operating at a high level. If you own Perpetual Dividend Raisers — stocks that raise their dividend every year — examine when the company last raised its dividend. If the company is continuing its streak of annual dividend raises, generally speaking, you should be fine for the long term.

4. Be ready to buy when things are bleak

It takes a lot of guts to buy stocks when it feels like the market is falling apart, but that’s how the biggest gains are made. Whether you’ve raised capital by selling stocks whose stops were hit, or you have money set aside, buy stocks after a market slide. You might not catch the bottom, but since stocks go up over the long haul, getting them at a discount will add significantly to your returns. Regardless of the predictability of the magazine cover theory or any other signal, long-term investors should not get caught up in the day-to-day market noise. You will make money as long as you don’t panic in the face of a sell-off.

Marc Lichtenfeld is a senior analyst at Investment U. See more articles by Marc here. - See more at: http://www.hcplive.com/physicians-money-digest/personal-finance/Four-Steps-to-Prepare-for-a-Market-Crash-IU#sthash.jGTxbsF7.dpuf

Equity Risk Premium: Stock bubble? No way, says Alan Greenspan

Stock bubble? No way, says Alan Greenspan

Former Federal Reserve chairman Alan Greenspan says the stock market has room to rise from record levels.

“In a sense, we are actually at relatively low stock prices,” Mr Greenspan, who guided the central bank for more than 18 years, told Bloomberg Television overnight. “So-called equity premiums are still at a very high level, and that means that the momentum of the market is still ultimately up.”

The Standard & Poor’s 500 Index advanced 23 per cent this year through yesterday, pulling within a percentage point of its 23.5 per cent surge in 2009, amid speculation the Fed will delay cuts to its monthly bond purchases until the labour market improves.

Mr Greenspan said the stock market was “just barely above 2007” and the average annual increase in stock prices “throughout the postwar period” was 7 per cent, which leaves room for a rise.

“Price-earnings ratios are not hugely up,” he said. The market has “gone up a huge amount, but it’s not bubbly,” according to Mr Greenspan.

Mr Greenspan, 87, served at the Fed during an era dubbed the “Great Moderation” for its economic stability. In a December 1996 speech, after seven straight quarters of gains in the S&P 500, Mr Greenspan posed a question about how the Fed can know “when irrational exuberance has unduly escalated asset values.”

In the final years of Greenspan’s term, which lasted from 1987 to 2006, a massive housing bubble developed as home prices more than doubled between 2000 and 2006, according to the S&P/Case-Shiller home price index.
Mr Greenspan said today’s housing market doesn’t show the same conditions as it exhibited leading up to the housing crash, and is lending stability to the US economy.

“The level of construction has come up quite substantially, but it’s still only a third of where we were at the previous top,” Mr Greenspan said. “While housing has been a major contributor to what stability we have in the economy, it has not moved considerably.”

Purchases of new US homes rose in August, capping the weakest two months this year, showing the fallout from mortgage rates at a two-year high is cooling the real-estate rebound. Sales increased 7.9 per cent to a 421,000 annualised pace following a 390,000 rate in the prior month that was less than previously estimated, Commerce Department data showed September 25.


Mr Greenspan also praised Fed vice-chairman Janet Yellen, whom President Barack Obama has nominated as the next head of the central bank, both in the Bloomberg interview and in an earlier interview on CNBC.

“She’s a very bright lady,” Mr Greenspan said of Ms Yellen on CNBC. “I think she will surprise everybody, I mean in a positive way.”

Bloomberg


Read more: http://www.smh.com.au/business/markets/stock-bubble-no-way-says-alan-greenspan-20131024-2w2ky.html#ixzz2ih57UwLr


Related:

Equity valuations relative to bond market
http://myinvestingnotes.blogspot.com/2010/07/equity-valuation-s-500-relative-to-bond.html

When is the market over-valued?
http://myinvestingnotes.blogspot.com/2009/07/when-is-market-over-valued.html

Warren Buffett: Why stocks beat gold and bonds

February 9, 2012:

In an adaptation from his upcoming shareholder letter, the Oracle of Omaha explains why equities almost always beat the alternatives over time.

By Warren Buffett

FORTUNE -- Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire Hathaway (BRKA) we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power -- after taxes have been paid on nominal gains -- in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.

From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability -- the reasoned probability -- of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk.

Investment possibilities are both many and varied. There are three major categories, however, and it's important to understand the characteristics of each. So let's survey the field.

Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as "safe." In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.

Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as "income."

For taxpaying investors like you and me, the picture has been far worse. During the same 47-year period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory. But if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would have yielded nothing in the way of real income. This investor's visible income tax would have stripped him of 1.4 points of the stated yield, and the invisible inflation tax would have devoured the remaining 4.3 points. It's noteworthy that the implicit inflation "tax" was more than triple the explicit income tax that our investor probably thought of as his main burden. "In God We Trust" may be imprinted on our currency, but the hand that activates our government's printing press has been all too human.

High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments -- and indeed, rates in the early 1980s did that job nicely. Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.

Warren Buffett: Your pick for Businessperson of the Year

Under today's conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be. Accommodating this need, we primarily hold U.S. Treasury bills, the only investment that can be counted on for liquidity under the most chaotic of economic conditions. Our working level for liquidity is $20 billion; $10 billion is our absolute minimum.

Beyond the requirements that liquidity and regulators impose on us, we will purchase currency-related securities only if they offer the possibility of unusual gain -- either because a particular credit is mispriced, as can occur in periodic junk-bond debacles, or because rates rise to a level that offers the possibility of realizing substantial capital gains on high-grade bonds when rates fall. Though we've exploited both opportunities in the past -- and may do so again -- we are now 180 degrees removed from such prospects. Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: "Bonds promoted as offering risk-free returns are now priced to deliver return-free risk."

The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer's hope that someone else -- who also knows that the assets will be forever unproductive -- will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce -- it will remain lifeless forever -- but rather by the belief that others will desire it even more avidly in the future.

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth -- for a while.

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the "proof " delivered by the market, and the pool of buyers -- for a time -- expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: "What the wise man does in the beginning, the fool does in the end."

Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube pile A.

Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today's annual production of gold command about $160 billion. Buyers -- whether jewelry and industrial users, frightened individuals, or speculators -- must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Admittedly, when people a century from now are fearful, it's likely many will still rush to gold. I'm confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

Our first two categories enjoy maximum popularity at peaks of fear: Terror over economic collapse drives individuals to currency-based assets, most particularly U.S. obligations, and fear of currency collapse fosters movement to sterile assets such as gold. We heard "cash is king" in late 2008, just when cash should have been deployed rather than held. Similarly, we heard "cash is trash" in the early 1980s just when fixed-dollar investments were at their most attractive level in memory. On those occasions, investors who required a supportive crowd paid dearly for that comfort.

My own preference -- and you knew this was coming -- is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola (KO), IBM (IBM), and our own See's Candy meet that double-barreled test. Certain other companies -- think of our regulated utilities, for example -- fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.

Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.

Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well).

Berkshire's goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety -- but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we've examined. More important, it will be by far the safest.

This article is from the February 27, 2012 issue of Fortune.

http://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-letter/

http://warrenbuffettresource.wordpress.com/2012/02/14/warren-buffett-why-stocks-beat-gold-and-bonds-fortune/

Confessions of a bargain hunter, Seth Klarman

June 23, 2012

By Nathan Bell

In the offices of an unmarked high-rise building in Boston sits Seth Klarman, surrounded by stacks of papers and books, which, by his own admission, are at risk of toppling over and crushing him at any instant.

Klarman is the founder and president of the phenomenally successful Baupost Group, a $29 billion ”deep value” hedge fund. It has produced 19 per cent annual returns, and every $10,000 given to Klarman at inception in 1982 is worth about $1.85 million today – and this was achieved while carrying extremely high levels of cash (more than 50 per cent at times) and using minimal leverage.

So how did he do it?

Know your seller

The financial markets are fiercely competitive, with millions of investors, traders and speculators around the world trying to outwit one another. Klarman concluded that since prices are set by the forces of supply and demand, rather than buy something and wait for someone to demand it at a higher price, why not wait for an irrational supplier to sell it to you for any price? Hence, Klarman looks for assets that people are being forced to sell or avoid, often as a result of fear or institutional constraints.

You can apply this principle by looking at heavily sold or avoided opportunities closer to home.

For example, stocks at the bottom of the S&P/ASX 200 are kicked out and replaced on a regular basis and, since index funds can hold stocks only over a certain size, newly removed stocks from the S&P/ASX 200 are sometimes driven down in price because of the selling pressure from such funds.

To make matters better, owing to regulation many super funds often cannot invest in smaller companies and such stocks are rarely followed by analysts. Servcorp resides on Intelligent Investor’s buy list and falls into this category.

Some institutions are also forced to ignore debt instruments unless they achieve a certain credit rating, even though they might offer an attractive risk-reward profile. You can take advantage of this by investing in income securities in a downturn, when large price falls create great opportunities such as those in 2009, for example, the Goodman PLUS, Dexus RENTS and Southern Cross SKIES hybrid securities.

Tax-loss selling (in Australia, this tends to occur in June, at the end of the financial year) can cause irrational mispricing in already beaten-down stocks. Cheap blue chips that could be this group next week include Computershare, QBE Insurance and Macquarie Group.

Competitive advantage

The difference between great investors and mediocre ones is only a few percentage points in terms of judging things correctly. Klarman realised he would have to bring something different to the game to win: a ”competitive advantage”.

”I will buy what other people are selling,” Klarman says. ”What is out of favour, what is loathed and despised, where there is financial distress, litigation – basically, where there is trouble.”

An inexperienced individual will have little success using such a tactic. After all, how many of us have four years to spend analysing Enron’s accounts? Instead, look for inefficiencies you can exploit.

Most market participants have a narrow, short-term view and are driven by fear and greed. So your edge is having a longer-term perspective and controlling your emotions. These two advantages will help you pile on the performance points over the professionals. Both have been invaluable to Klarman.

Cash is a weapon

Holding cash is perhaps Klarman’s most famed characteristic.

However, contrary to what you might expect, Klarman holds cash so it can be used in a concentrated manner when the right opportunity arises. This is because while value investing outperforms in the long run, Klarman quips that ”you have to be around for the long run … [you have to make sure] you don’t get out and you are a buyer”.

Despite the complexity of some of his investments, Klarman’s underlying approach is not complicated, although that is far from saying it is easy.

He says Baupost has outperformed ”by always buying at a significant discount to underlying business value, by replacing current holdings as better bargains come along, by selling when the market value comes to reflect its underlying value, and by holding cash … until other attractive investments become available”.

Nathan Bell is the research director at Intelligent Investor, intelligent investor.com.au. 

Read more:
http://www.smh.com.au/money/confessions-of-a-bargain-hunter-20120622-20tap.html#ixzz1ypcBDriW

http://investinginknowledge.com/info/tag/seth-klarman/

http://valuestockplus.wordpress.com/seth-klarman/

Nine lessons to learn from Seth Klarman

So what do we know about how Klarman invests? Here are some insights into his approach.

What’s your advantage over others? 

The investment markets are crowded. Thousands of professional investors spend their days trying to find the next big thing, but they can’t all win. In order to get ahead you need to do something or know something that others don’t. This is not easy. Are you really smarter than the crowd?

Buy what others are selling

Going against the crowd can be profitable. People often sell assets due to temporary, short-term factors. This offers opportunities for investors who can take a longer view. Examples of such situations are litigation, fraud, financial distress and ejection from an index.

Go where others don’t

Following on from the above two points, it makes logical sense that you are unlikely to make a lot of money buying FTSE 100 shares, as professional investors follow them too closely. Look at lots of different asset classes. For example:

• Opportunities often exist in ‘spin offs’ – smaller businesses sold by bigger companies. Professional investors often sell holdings in these companies because they are too small and this temporarily depresses their value, spelling a buying opportunity.

• Research bonds in bankrupt companies: often these bonds sell for a fraction of what they are worth. If the company is turned around, investors can make massive gains. There are often similar opportunities in distressed property.

• Don’t confine yourself to domestic markets. Foreign markets are often less crowded and can be subject to levels of political and regulatory uncertainty that present opportunities. In the preface to the sixth edition of Benjamin Graham and David Dodd’s book, Security Analysis’, Klarman uses the example of South Korea in the early 2000s where investor pessimism saw multinational companies selling for as low as one or two times their annual cash flow. Smart investors made a killing buying these stocks.

Focus on risk before you start thinking about returns 

Research shows the pain of losing 50% of your money far outweighs the pleasure to be had from making a 50% return. To be successful as an investor you must focus your research on the risks of a company’s business model and its industry. Remember that the first rule of investment is not to lose money. Also remember – and this is particularly pertinent to technology companies – that today’s good business may not be tomorrow’s winner (see my colleague Tim Bennett’s points on the importance of economic moats for more on this).

You are buying a stake in a business, not a piece of paper 

Investment success comes from buying the cash flows of businesses for less than they are worth. These cash flows come from the real world, not punting numbers on a computer screen. So focus on free cash flow rather than profits. And look at balance sheets to see risks like too much debt or big pension fund liabilities.

Know when to sell

Value investors start selling when assets are 10-20% below what they think they are worth. Owning fully valued assets is a form of speculation – you are betting on someone paying more than they are worth, not on the market recognising the true value of the assets.

Don’t invest with borrowed money 

The ability to sleep well at night is more important than a few more percentage gains.

Don’t rely on the market to provide your investment returns 

If bond coupons or stock dividends (paid out by companies) can provide a large chunk of your returns, you are less reliant on fickle and volatile markets for capital gains. Buying bonds below their redemption value is another good strategy.

Don’t be afraid to do nothing

Always hold cash when cheap assets are scarce. Be prepared to wait.

http://moneyweek.com/seth-klarman-value-investing-strategies-20600/

Bruce Greenwald Interview (Full Version)

Margin of Safety - The Three Most Important Words in Investing (Benjamin Graham)

Margin of Safety

1.  Knowing how to compute intrinsic value is just the beginning of valuing a company.

2.  You will be able to appreciate intrinsic value more accurately only when it is deducted from the market price to determine its margin of safety.

3.  Having a margin of safety does not guarantee a successful investment, but it takes care of downside to minimize errors.

4.  It helps to eliminate capital losses or reduce investment risks.

5.  When you have a margin of safety, it will serve as a buffer for any investment and leave room for errors in the event that wrong assumptions were made during the period of valuing a stock.

6.  Capital preservation is the first rule in investing.

7.  We invest only when the risk is reduced to its minimum.

8.  In investing, we need to have good protection (insurance) for our investments - a margin of safety.

9.  The wider the margin, the more protection we will have.

10.  With a margin of safety, the success in investing is not dependent on the exact intrinsic value; the margin of safety serves as better protection against wrong assumptions.

11.  A margin of safety is affected by intrinsic value and the market price.

12.  When the intrinsic value and share price of a company change, the margin of safety will change.

13.  These are three most important terms when using margin of safety:  Undervalued, Fair Value, and Overvalued.

14.  Undervalued:  Intrinsic value $1.  Market price $0.50

15.  Fair value:  Intrinsic value $1.  Market price $1.

16.  Overvalued:  Intrinsic value $1.  Market price $1.50.

17.  There is no hard-and-fast rule regarding how much margin of safety needs to be in place in order for you to become a prudent investor.

18.  Obviously, a 50% margin of safety will generally be better than paying a fair price (0% margin of safety) for the same company.

19.  The wider the margin of safety, the better you will be protected should a financial crisis hit, or when you make a wrong assumption.

20.  However, there are companies, like blue-chip companies that are unlikely to sell at a bargain price with a margin of safety of more than 50%.

21.  Since most blue-chip companies are not growth companies, they will normally trade at a fair price or even be overvalued, rather than being priced at a bargain price, even during times of crisis.

22.  Warren Buffett's statements about quality companies:  "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

23.  The best time to have a great margin of safety is when the market is depressed or when a company is heavily punished by the market due to bad news.

24.  Remember Ben Graham, the market is there to serve us and not to guide us.

25.  You should take such period of market sell-down or stock sell-down as an opportunity to scoop up bargain stocks.

26.  During this period, average investors would not dare to enter the stock market, for fear that prices would continue to drop.

27.  Be greedy when others are fearful!

28.  Understandably, it can be very difficult to make a purchase when the investment mood and environment are shrouded with negativity.

29.  Investors who can overcome this and take action regardless of market pessimism will definitely become very successful.

30.  Teach and prepare yourself to buy growth companies at a low price (undervalued) and sell them ( if you intend to ) when the price is higher or overvalued.

31.  Teach and prepare yourself to avoid buying a stock when it is overvalued (e.g. negative margin of safety).

32.  Warren Buffett once said, "It is better to be approximately right than precisely wrong."

34.  Caution:  Calculating the intrinsic value should be used only to determine WHEN investors want to enter or exit the stock market.  It should not be used to determine the QUALITY of the stock.

35.  The price is mainly determined on market sentiments and not the quality of the stock.

36.  During the 2008-2009 crisis, some growth companies did not continue to grow after the price correction, owing to the respective growth factors of companies.

37.  On the other hand, there are growth companies that continue to grow consistently even in a bear market.



Margin of Safety (Intrinsic value / Market Price)

Positive
>50%         ACTION: BUY (undervalued)
50% - 0%  ACTION:  BUY/HOLD (fair value)

Negative
> -10%      ACTION:  SELL/HOLD (fair value-overvalued)
> - 50%     ACTION:  SELL (grossly overvalued)

Reality check on debt mountain of Malaysian households

Saturday October 12, 2013 

Reality check on debt mountain

BY ALAN TONG KOK MAU

A YOUNGSTER came to me recently to seek views about his financial stress. He says the first thing he does when he gets his pay cheque is to repay loans, including a car loan, credit card payments and personal loan. Owning a house is on his wish list, but it is yet to be realised.

His case mirrors many similar situations faced by Malaysians nowadays, not only confined to the younger generation. It has become a concern to the authorities as our household debt ratio against the GDP (gross domestic product) has reached an all-time high of 83% as of March this year, the highest for a developing country in the region. In comparison, Indonesia’s household debt ratio stands at 15.8%, Hong Kong at 58%, and Singapore at 67%, according to Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz’s comment recently.

While we are concerned about the high debt level, we should also take a closer look at the root cause. What is underneath the “debt mountain” and how can we address the issue?

The major components of household debt are housing, car, personal and credit card loans. According to Bank Negara statistics, as at April 2013, the total residential housing loans taken by Malaysians is RM316.2bil, passenger car loans amounts to RM145bil, personal loans stand at RM55.8bil, and credit card loans at RM32.3bil.

In terms of debt ratio for the four components mentioned above, housing loans account for 57.5% of the total debt, with car, personal and credit card loans accounting for 26.5%, 10% and 6% respectively (see chart).

As housing loans seem to be the biggest contributor to household debt, there are already several measures being put in place to cool the housing sector and to curb mortgage growth.

However, if we take further steps to scrutinise the breakdown of the loans, and study the interest incurred in absolute terms, and the appreciation or depreciation in value of the underlying assets, we will soon discover the source of the real burden.

Property is truly an asset, compared with a car, personal loan or credit card spending in which the value of the purchases depreciates over time.

According to the Malaysian House Price Index by the National Property Information Centre, the overall housing price in Malaysia has increased by an average of 5% every year since 2000. Thus, servicing a housing loan is like paying for “good debt” as the asset will gain in value in the long term and eventually protect us against the inflation.

On the other hand, based on car insurance calculations and accounting practice, the value of cars depreciates about 10% to 20% per year. This means that the car loan and interest is paid for item that is contracting in value every year, it is a liability instead of an asset.

In addition, based on our current structure, the average interest rate for housing loan is 4.2%. If we apply this rate across the board, the absolute interest incurred for RM316.2bil housing loan will be about RM13.3bil a year, which is only 43% in terms of absolute interest paid compared with its loan amount component of 57.5%. Whereas, personal loans which account for only 10% of the total household debt, would incur absolute interest of 22% of overall household debt due to its high interest rate of 12%.

As mentioned in some of my previous articles, the younger generation is advised to purchase a house instead of a car first. Let’s visualise this via the following scenarios.

Let’s assume a young couple which has a household income of RM6,000. The ideal mortgage (housing loan) repayment is always one third of the income, i.e. RM2,000.

After deducting RM2,000 from their income, they will still have RM4,000 household income available.

If the couple decides to own a car, the loan repayment, petrol, parking and maintenance fees are most likely to come up to RM1,000 to RM1,500 depending on the types of car they are getting.

This leaves the family with a household income of only RM2,500 to RM3,000 provided they are just owning one car instead of two.

With the same household income, if the couple decides to utilise public transport, the monthly transport expenses may be in the range of RM300 to RM400 for two persons. They will still have a household income of RM3,600 every month after paying for house loan interest and transportation cost.

To help lessen the debt burden of the rakyat, the authorities must accelerate the effort of providing comprehensive public transportation network including MRT, buses, mini buses and taxis, to reduce public dependency on private vehicles.

A total review on the cost of car and motorcycle ownership in Malaysia would also help reduce this debt burden.

For households that wish to reduce their debt level, they should avoid the temptation of instant gratification, and instead should place importance to assets that grow in value.

When we look in detail at the household debt level of the nation, it provides more insights than the headline number at first glance. Sometimes, it is as simple as to differentiate the “healthy” debt from the rest to make a significant difference in our financial position.

FIABCI Asia-Pacific Regional secretariat chairman Datuk Alan Tong has over 50 years of experience in property development. He is also the group chairman ofBukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com.