Let us summarize our practical suggestions in the matter of security switches as follows:
The investor who begins with a list of standard, first-grade common stocks can expect some of them to lose quality through the years.
His aim should be to replace these, with a minimum sacrifice of dividend return and with a fair chance of recouping any loss of principal value resulting from their sale.
The best means of accomplishing this is by seeking out attractive issues in the secondary group. A competent security analyst is usually in a position to recommend a number of such issues which by objective tests appear to be worth substantially above their selling price.
The fundamental principle of every security replacement should be the following:
Each dollar paid for the issue bought should appear to obtain more intrinsic value than was represented by a dollar's worth of the issue sold.
We believe, in sum, that quality may be approached soundly by way of value. If the value is abundant, the quality may be deemed sufficient.
Benjamin Graham
Thursday 15 January 2015
Behaviour of Growth Stocks
A growth stock is identified as such because it has an especially satisfactory past record coupled with the expectation that this will continue.
It is the inherent nature of corporate growth eventually to taper off or to cease entirely.
Thus, if the stock market possessed the penetrating qualities popularly accorded to it, many growth stocks would begin to lose their high price level some time BEFORE any decline in their earning power had become apparent.
What seems to happen, rather, is that the price remains high UNTIL the earnings ACTUALLY show a definite falling off - which invariably seems to take the followers of the issue by surprise.
Then we have the market decline usually associated with a disappointing development - a decline perhaps intensified by the fact that the price level of the growth stock had been dangerously high.
Sometimes, either because of a certain stubbornness or a real insight into the long term future on the part of the investors, the price of such a deteriorated growth stock remains higher than its current performance would justify.
The growth stock principle of investment carries with it a real danger of miscalculations. The average investor is likely to be most enthusiastic about such companies at the wrong time.
Past trends are generally an unsound basis for investment decision.
Benjamin Graham
It is the inherent nature of corporate growth eventually to taper off or to cease entirely.
Thus, if the stock market possessed the penetrating qualities popularly accorded to it, many growth stocks would begin to lose their high price level some time BEFORE any decline in their earning power had become apparent.
What seems to happen, rather, is that the price remains high UNTIL the earnings ACTUALLY show a definite falling off - which invariably seems to take the followers of the issue by surprise.
Then we have the market decline usually associated with a disappointing development - a decline perhaps intensified by the fact that the price level of the growth stock had been dangerously high.
Sometimes, either because of a certain stubbornness or a real insight into the long term future on the part of the investors, the price of such a deteriorated growth stock remains higher than its current performance would justify.
The growth stock principle of investment carries with it a real danger of miscalculations. The average investor is likely to be most enthusiastic about such companies at the wrong time.
Past trends are generally an unsound basis for investment decision.
Benjamin Graham
Extreme vicissitudes
Undoubtedly, the largest theoretical gains in the stock market are to be made not out of the continuously prosperous companies but out of those which experience wide vicissitudes - by buying their stocks at their depths and selling at their heights.
Profits of such amplitude are realized only in the paper calculations of hindsight. Yet these examples have practical significance for the intelligent investor.
They should confirm his conviction that outstanding characteristic of stock market is its tendency to react EXCESSIVELY to favourable and unfavorable influences.
The word "excessive" applied to the stock market's reactions indicates that they create many sound counter-opportunities for the investor with sense and courage.
Benjamin Graham
Profits of such amplitude are realized only in the paper calculations of hindsight. Yet these examples have practical significance for the intelligent investor.
They should confirm his conviction that outstanding characteristic of stock market is its tendency to react EXCESSIVELY to favourable and unfavorable influences.
The word "excessive" applied to the stock market's reactions indicates that they create many sound counter-opportunities for the investor with sense and courage.
Benjamin Graham
Price Changes of common stocks with highly stable earnings.
The stability of annual earnings per share of a selected common stock is extraordinary.
Record of earnings and dividends of S.H. Kress for 1924 - 45 and the more extreme price variations during that period.
It may properly be concluded that this record at no point showed any definite indications of permanent change for either the better or the worse in the company's affairs or prospects.
Hence the variation in market price must have been entirely psychological in their origin. They offer a fairly accurate measurement of the breadth of price change a scribble to the mere vagaries of the stock market - while the "article valued" changed its character not at all.
Under the circumstances, the range of price changes must be considered extraordinary.
It's price rose from 12 to 62, a fall to 9, a rise to 48, a fall to 20, and a rise to 49. For the 5 years 1933 - 37 the earnings varied between $2.11 and $2.31 per share, whereas the price ranged from 13 1/2 to 47 1/2. In the 6 years 1939- 45 the earnings varied between $1.93 and $2.25, but the price ranged from 19 1/2 to 40 1/2.
Reference
The Intelligent Investor, by Benjamin Graham
Record of earnings and dividends of S.H. Kress for 1924 - 45 and the more extreme price variations during that period.
In 16 out of 22 years, the earnings per share varied only between $1.93 and $2.32. In the other 6, including the boom and deepest depression years, the range widened only to $1.38 - $2.88.
It may properly be concluded that this record at no point showed any definite indications of permanent change for either the better or the worse in the company's affairs or prospects.
Hence the variation in market price must have been entirely psychological in their origin. They offer a fairly accurate measurement of the breadth of price change a scribble to the mere vagaries of the stock market - while the "article valued" changed its character not at all.
Under the circumstances, the range of price changes must be considered extraordinary.
It's price rose from 12 to 62, a fall to 9, a rise to 48, a fall to 20, and a rise to 49. For the 5 years 1933 - 37 the earnings varied between $2.11 and $2.31 per share, whereas the price ranged from 13 1/2 to 47 1/2. In the 6 years 1939- 45 the earnings varied between $1.93 and $2.25, but the price ranged from 19 1/2 to 40 1/2.
Reference
The Intelligent Investor, by Benjamin Graham
Sunday 4 January 2015
Either you ignore market fluctuations or you buy and sell based on value.
It is people generally who make high and low markets, because they are optimistic (and greedy) in high markets and pessimistic (and disgusted) in low markets.
How can you - a member representing the public at large - be expected to act otherwise than the public acts?
Does not this mean that you are doomed, by some law of logic, to buy when you should be selling and to sell when you should be buying?
This point is vital. The investor cannot enter the arena of the stock market with any real hope of success unless he is armed with mental weapons that distinguish him in kind - not in a fancied superior degree - from the trading public.
(1) One possible weapon is indifference to market fluctuations; such an investor buys carefully when he has money to place and then lets prices take care of themselves.
(2) But, if the investor intends to buy and sell recurrently, his weapons must be a frame of mind and a principle of action which are basically different from those of the trader and speculator. He must deal in values, not in price movements. He must be relatively immune to optimism or pessimism and impervious to business or stock-market forecasts.
In a word, he must be psychologically prepared to be a true investor and not a speculator masquerading as an investor. If he can meet this test, he will be a member not of the public at large but of a specialized and self-disciplined group.
Returning to the matter of the market's cyclical swings,we must point out that the duration or frequency of these swings has changed considerably since 1921. This is an added obstacle to the pleasing project of investing regularly in low markets and selling out in high ones. Between 1899 and 1921 the industrial average made five well defined highs and five definite lows, an average cycle of about four years. Since then there have been only two clean-cut swings and the intervals between low points have been eleven years and ten years, respectively.
An investor nowadays is likely to grow uneasy and impatient while waiting for his cyclical buying opportunity to reappear. In the meantime, also, his funds will bring him no interest in the bank and only a negligible rate if placed in short-term securities. Thus he can lose more in dividends foregone than he can ever gain from buying at eventual low levels.
Summary
Either buy carefully and then ignore the market fluctuations or if you intends to buy and sell recurrently, deal in values.
Should you patiently wait for your cyclical buying opportunity to reappear? The low-points of the market maybe 10 or 11 years apart. While waiting for these hoping to buy at eventual low levels, you can lose more in dividends foregone; earning little income from your cash holdings.
How can you - a member representing the public at large - be expected to act otherwise than the public acts?
Does not this mean that you are doomed, by some law of logic, to buy when you should be selling and to sell when you should be buying?
This point is vital. The investor cannot enter the arena of the stock market with any real hope of success unless he is armed with mental weapons that distinguish him in kind - not in a fancied superior degree - from the trading public.
(1) One possible weapon is indifference to market fluctuations; such an investor buys carefully when he has money to place and then lets prices take care of themselves.
(2) But, if the investor intends to buy and sell recurrently, his weapons must be a frame of mind and a principle of action which are basically different from those of the trader and speculator. He must deal in values, not in price movements. He must be relatively immune to optimism or pessimism and impervious to business or stock-market forecasts.
In a word, he must be psychologically prepared to be a true investor and not a speculator masquerading as an investor. If he can meet this test, he will be a member not of the public at large but of a specialized and self-disciplined group.
Returning to the matter of the market's cyclical swings,we must point out that the duration or frequency of these swings has changed considerably since 1921. This is an added obstacle to the pleasing project of investing regularly in low markets and selling out in high ones. Between 1899 and 1921 the industrial average made five well defined highs and five definite lows, an average cycle of about four years. Since then there have been only two clean-cut swings and the intervals between low points have been eleven years and ten years, respectively.
An investor nowadays is likely to grow uneasy and impatient while waiting for his cyclical buying opportunity to reappear. In the meantime, also, his funds will bring him no interest in the bank and only a negligible rate if placed in short-term securities. Thus he can lose more in dividends foregone than he can ever gain from buying at eventual low levels.
Summary
Either buy carefully and then ignore the market fluctuations or if you intends to buy and sell recurrently, deal in values.
Should you patiently wait for your cyclical buying opportunity to reappear? The low-points of the market maybe 10 or 11 years apart. While waiting for these hoping to buy at eventual low levels, you can lose more in dividends foregone; earning little income from your cash holdings.
The case of the market declines and unsuccessful stock investments.
There is a vital difference here between temporary and permanent influences.
A price decline is of no real importance to the bona fide investor unless it is either very substantial - say, more than a third from cost - or unless it reflects a known deterioration of consequence in the company's position.
In a well defined bear market many sound common stocks sell temporarily at extraordinarily low prices.
A significant price decline is of importance to the investor.
A price decline is of no real importance to the bona fide investor unless it is either very substantial - say, more than a third from cost - or unless it reflects a known deterioration of consequence in the company's position.
In a well defined bear market many sound common stocks sell temporarily at extraordinarily low prices.
- It is possible that the investor may then have a paper loss of fully 50 per cent on some of his holdings, without any convincing indication that the underlying values have been permanently affected.
A significant price decline is of importance to the investor.
- He would have been well advised to scrutinize the picture with some care, to see whether he had made any miscalculations.
- But if the results of his study were reassuring - as they should have been - he was entitled then to disregard the market decline as a temporary vagary of finance, unless he had the funds and the courage to take advantage of it by buying more on the bargain basis offered.
Price Changes as Measuring Investment Results
When the general market declines or advances substantially ....
.... nearly all investors will have somewhat similar changes in their portfolio values.
Benjamin Graham, in his book Intelligent Investor, wrote that the investor should not pay serious attention to such price developments unless they fit into a previously established program of buying at low levels and selling at high levels.
The investor is neither a smart investor nor a richer one when he buys in an advancing market and the market continues to rise.
That is true even when the investor cashes in a goodly profit, unless either
(a) he is definitely through with buying stocks - an unlikely story - or
(b) he is determined to reinvest only at considerably lower levels.
In a continuous program no market profit is fully realized until the later reinvestment has actually taken place, and the true measure of the trading profit is the difference between the previous selling level and the new buying level.
The INVESTMENT SUCCESS of the investor may be judged by a long-term or secular rise in market price, without the necessity of sale.
The proof of that achievement lies in the price advances made between successive points of equality in the general market level.
In most cases this favourable price performance will be accompanied by a well-defined improvement in the average earnings, in the dividend, and the balance-sheet position.
Thus in the long run the market test and the ordinary business test of a successful equity commitment tend to be largely identical.
SUMMARY
Most of us are invested for the long run.
Even if you manage to sell your investment for a profit from your previous buying price, no market profit is fully realized until you have reinvested this amount back into the market.
Your trading profit is the difference between the previous selling level and the new buying level.
.... nearly all investors will have somewhat similar changes in their portfolio values.
Benjamin Graham, in his book Intelligent Investor, wrote that the investor should not pay serious attention to such price developments unless they fit into a previously established program of buying at low levels and selling at high levels.
The investor is neither a smart investor nor a richer one when he buys in an advancing market and the market continues to rise.
That is true even when the investor cashes in a goodly profit, unless either
(a) he is definitely through with buying stocks - an unlikely story - or
(b) he is determined to reinvest only at considerably lower levels.
In a continuous program no market profit is fully realized until the later reinvestment has actually taken place, and the true measure of the trading profit is the difference between the previous selling level and the new buying level.
The INVESTMENT SUCCESS of the investor may be judged by a long-term or secular rise in market price, without the necessity of sale.
The proof of that achievement lies in the price advances made between successive points of equality in the general market level.
In most cases this favourable price performance will be accompanied by a well-defined improvement in the average earnings, in the dividend, and the balance-sheet position.
Thus in the long run the market test and the ordinary business test of a successful equity commitment tend to be largely identical.
SUMMARY
Most of us are invested for the long run.
Even if you manage to sell your investment for a profit from your previous buying price, no market profit is fully realized until you have reinvested this amount back into the market.
Your trading profit is the difference between the previous selling level and the new buying level.
My investing philosophy revisited
Happy New Year 2015.
I thought it would be nice to recall how my investing philosophy comes about.
Being a non-financial chap, it was difficult to understand investing in my early years. Tried as I did, I found the acquisition of this knowledge to be challenging. I started with various books and often find them useful but still lacking. Many were written for financial planning, understanding businesses, economics and accounts.
My early years in investing were much guided by my friend. A kind chap indeed who is obviously very knowledgeable was willing to share his recommendations and I bought his recommendations. That was in 1993 and the shares that he recommended remain in my portfolio till today and have done extremely well, despite the volatility and turmoil associated with the Asian Financial Crisis, the Sars crisis and the 2008/2009 US subprime global financial crisis. Yes, buy and hold for the long term works beautifully for selected stocks.
Of course, my pursuit of financial and investing knowledge continues till today. Post 2000, value investing became fashionable again. Books on value investing started to appear in our local bookshops. The internet was a great help. One could read numerous articles on value investing, on the gurus the like of Benjamin Graham, Warren Buffett, Philip Fisher, Peter Lynch, John Templeton and many others. Synopsis and articles on the classical books were readily available in the internet allowing one to continue to build up this financial and investing knowledge. The classic must read books would include Intelligent Investor and Security Analysis by Benjamin Graham, Common Stocks and Uncommon Profits by Philip Fisher, One Up on Wall Street by Peter Lynch, Five Rules for Successful Investing by Pat Dorsey and many others. All these readings, carefully and critically sorted, allow one to formulate a philosophy to suit your own investing objectives, your own investing risk tolerance, investing time horizon and your investing financial capacity.
Guided by a sound philosophy, how can I put this into practice? How can I approach investing without taking too much effort or time, and yet be productive in my investing? Here lies the next challenge. Again, being not so good in computing, I had to learn simple computing and microsoft excel to aid my analysis of stocks. I searched for various programs that are available online and adopted these to my own self designed program. Over time, through a bit of effort, some semblance of a simple program to guide and help my investing is realised. This helps to cut a lot of laborious analysis of past historical data and allow one to see the big picture of the company that you wish to analyse for your investing.
Yes, essentially, you should choose your own investing philosophy. I have recently met up with my good friend. He has invested into index funds in his country. That is intelligent investing too, as I realised he did not have the time nor the initiative to analyse stocks on his own. He wished to be relatively free from doing all these for his investing; more importantly he wouldn't know how. Yet, he was wise enough to invest in an index linked fund, knowing over the long term, his investment will be safe and with promise of a reasonable return after taking into consideration the low cost. That is intelligent investing of the defensive type according to Benjamin Graham.
For those who are more enterprising, well, investing can be fun and exciting. Embarking on my journey in investing has shown this to be true. It is easy to get market return, but trying to better the market return can be more challenging than it seems. But sometimes you are "lucky". But luck should really not be a big element in your investing should you choose to invest on your own in an enterprising manner. Learning from Benjamin Graham's Intelligent Investor will put you on the right track, allowing you to formulate a sound investing policy for the long term.
Best wishes and may your investing be productive always.
http://myinvestingnotes.blogspot.com/2008/08/strategies-for-buying-and-selling-kiss.html
http://myinvestingnotes.blogspot.com/p/philosophy.html
I thought it would be nice to recall how my investing philosophy comes about.
Being a non-financial chap, it was difficult to understand investing in my early years. Tried as I did, I found the acquisition of this knowledge to be challenging. I started with various books and often find them useful but still lacking. Many were written for financial planning, understanding businesses, economics and accounts.
My early years in investing were much guided by my friend. A kind chap indeed who is obviously very knowledgeable was willing to share his recommendations and I bought his recommendations. That was in 1993 and the shares that he recommended remain in my portfolio till today and have done extremely well, despite the volatility and turmoil associated with the Asian Financial Crisis, the Sars crisis and the 2008/2009 US subprime global financial crisis. Yes, buy and hold for the long term works beautifully for selected stocks.
Of course, my pursuit of financial and investing knowledge continues till today. Post 2000, value investing became fashionable again. Books on value investing started to appear in our local bookshops. The internet was a great help. One could read numerous articles on value investing, on the gurus the like of Benjamin Graham, Warren Buffett, Philip Fisher, Peter Lynch, John Templeton and many others. Synopsis and articles on the classical books were readily available in the internet allowing one to continue to build up this financial and investing knowledge. The classic must read books would include Intelligent Investor and Security Analysis by Benjamin Graham, Common Stocks and Uncommon Profits by Philip Fisher, One Up on Wall Street by Peter Lynch, Five Rules for Successful Investing by Pat Dorsey and many others. All these readings, carefully and critically sorted, allow one to formulate a philosophy to suit your own investing objectives, your own investing risk tolerance, investing time horizon and your investing financial capacity.
Guided by a sound philosophy, how can I put this into practice? How can I approach investing without taking too much effort or time, and yet be productive in my investing? Here lies the next challenge. Again, being not so good in computing, I had to learn simple computing and microsoft excel to aid my analysis of stocks. I searched for various programs that are available online and adopted these to my own self designed program. Over time, through a bit of effort, some semblance of a simple program to guide and help my investing is realised. This helps to cut a lot of laborious analysis of past historical data and allow one to see the big picture of the company that you wish to analyse for your investing.
Yes, essentially, you should choose your own investing philosophy. I have recently met up with my good friend. He has invested into index funds in his country. That is intelligent investing too, as I realised he did not have the time nor the initiative to analyse stocks on his own. He wished to be relatively free from doing all these for his investing; more importantly he wouldn't know how. Yet, he was wise enough to invest in an index linked fund, knowing over the long term, his investment will be safe and with promise of a reasonable return after taking into consideration the low cost. That is intelligent investing of the defensive type according to Benjamin Graham.
For those who are more enterprising, well, investing can be fun and exciting. Embarking on my journey in investing has shown this to be true. It is easy to get market return, but trying to better the market return can be more challenging than it seems. But sometimes you are "lucky". But luck should really not be a big element in your investing should you choose to invest on your own in an enterprising manner. Learning from Benjamin Graham's Intelligent Investor will put you on the right track, allowing you to formulate a sound investing policy for the long term.
Best wishes and may your investing be productive always.
http://myinvestingnotes.blogspot.com/2008/08/strategies-for-buying-and-selling-kiss.html
http://myinvestingnotes.blogspot.com/p/philosophy.html
Thursday 18 December 2014
Bear markets have three stages - "sharp down, reflexive rebound, and a drawn-out fundamental downtrend."
In this market, investors will need the margin of safety that a low price brings.
The crash was just the end of the beginning. Now comes what could be many months of head-fakes and hopeful rallies that wind up in dead ends. You'll be Charlie Brown charging the football with head held high, only to land flat on your back.
Bear markets have three stages - "sharp down, reflexive rebound, and a drawn-out fundamental downtrend."
Where it stops, nobody knows, but a portfolio with strong defensive stocks stands a fighting chance.
http://myinvestingnotes.blogspot.com/2008/12/five-tips-for-buying-stocks-in-bad.html
The crash was just the end of the beginning. Now comes what could be many months of head-fakes and hopeful rallies that wind up in dead ends. You'll be Charlie Brown charging the football with head held high, only to land flat on your back.
Bear markets have three stages - "sharp down, reflexive rebound, and a drawn-out fundamental downtrend."
Where it stops, nobody knows, but a portfolio with strong defensive stocks stands a fighting chance.
http://myinvestingnotes.blogspot.com/2008/12/five-tips-for-buying-stocks-in-bad.html
Wednesday 17 December 2014
Strategy during crisis investment: Revisiting the recent 2008 bear market
FRIDAY, FEBRUARY 26, 2010
Strategy during crisis investment: Revisiting the recent 2008 bear market
Although we may not know where the bear bottom is, buying in a down market may still lead to losing money. This is definitely true. As long as the purchase is not at market bottom, it may still result in losses for the time being. This is likely to be a short-term loss but compensated by a probable long-term gain. Even if we cannot time the market perfectly, we are definitely better off to “buy low and sell high” then to “buy high and sell low”.
----
Prices fell but value intact
Presently stock prices have fallen sharply.
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Warren Buffett, the second richest man in the world who makes his fortune from stock investment, is busy buying undervalued companies. He sees the value and he also sees prices detaching away from the intrinsic values.He said: “I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turn up.”
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Catching a falling knife
Some may argue that buying now is like catching a falling knife. If you are not careful, you may be hurt and suffer more losses from falling stock prices.There is no doubt that we may incur short-term losses as long as we do not buy at the bottom. On the other hand, who can determine where and when is the bottom. As long as there are still unknown events or hidden problems, an apparent bottom now may not be the eventual bottom.Since we do not have all the information in the market, it is almost impossible to guess where the bottom will be.
----
In most cases, we only realise the bottom after it is over and by that time stock prices are running high with much improved market confidence. Market bottom could be there only for a short period. In most cases, market did not stay at the bottom waiting for investors. It will just move on.
----
Since market moves ahead of the economy by about six months, the market bottoms out when the economy is still gloomy, news are still negative, analysts are still calling underweights and most investors are staying at the sidelines.
----
Handling something we know is definitely much easier than dealing with the unknown risks, something which hits from behind without warning.When we invest during a crisis we actually go in with our eyes open. We know it is definitely risky but we also know it could also be very profitable. If we can handle the risk, the risk-reward trade-off will be very rewarding.
----
Emphasise strategies
What we need is to buy near the bottom, not right at the bottom. Investors’ frequent question now is when to buy, that is where is the bottom? Perhaps it is more intelligent to ask how much to buy now since nobody will be able to guess where is the market bottom.
----
Staggered buying is preferred over bullet purchase which is taking the risk of timing the market bottom. In staggered buying, a pre-determined amount will be set aside for investment over time, say in 10 equal portions.
One common method of staggered investment is dollar cost averaging, an investment scheme made in equal portions periodically, either by a small amount monthly or larger amount quarterly. There are also several variations of staggered investment.
----
Anyway, staggered purchase is a preferred method to avoid the anxiety of market timing and the mixed feeling of fear of further downside and worry of missing the market rebound. As long as the market is undervalued, the strategy of staggered investment ensures that investors are in and are benefiting from the undervalued market.
http://klsecounters.blogspot.com/2008/11/strategy-during-crisis-investment.html
----
Prices fell but value intact
Presently stock prices have fallen sharply.
- Banks are trading at 1x book value,
- property stocks sold at 50% discount from net asset value,
- utility stocks trading at single-digit price-earnings ratio providing an earnings yield of more than 10% net of tax and
- there are many good stocks trading at dividend yield of 2x bank interest rates.
----
Warren Buffett, the second richest man in the world who makes his fortune from stock investment, is busy buying undervalued companies. He sees the value and he also sees prices detaching away from the intrinsic values.He said: “I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turn up.”
----
Catching a falling knife
Some may argue that buying now is like catching a falling knife. If you are not careful, you may be hurt and suffer more losses from falling stock prices.There is no doubt that we may incur short-term losses as long as we do not buy at the bottom. On the other hand, who can determine where and when is the bottom. As long as there are still unknown events or hidden problems, an apparent bottom now may not be the eventual bottom.Since we do not have all the information in the market, it is almost impossible to guess where the bottom will be.
----
In most cases, we only realise the bottom after it is over and by that time stock prices are running high with much improved market confidence. Market bottom could be there only for a short period. In most cases, market did not stay at the bottom waiting for investors. It will just move on.
----
Since market moves ahead of the economy by about six months, the market bottoms out when the economy is still gloomy, news are still negative, analysts are still calling underweights and most investors are staying at the sidelines.
----
Handling something we know is definitely much easier than dealing with the unknown risks, something which hits from behind without warning.When we invest during a crisis we actually go in with our eyes open. We know it is definitely risky but we also know it could also be very profitable. If we can handle the risk, the risk-reward trade-off will be very rewarding.
----
Emphasise strategies
What we need is to buy near the bottom, not right at the bottom. Investors’ frequent question now is when to buy, that is where is the bottom? Perhaps it is more intelligent to ask how much to buy now since nobody will be able to guess where is the market bottom.
----
Staggered buying is preferred over bullet purchase which is taking the risk of timing the market bottom. In staggered buying, a pre-determined amount will be set aside for investment over time, say in 10 equal portions.
One common method of staggered investment is dollar cost averaging, an investment scheme made in equal portions periodically, either by a small amount monthly or larger amount quarterly. There are also several variations of staggered investment.
----
Anyway, staggered purchase is a preferred method to avoid the anxiety of market timing and the mixed feeling of fear of further downside and worry of missing the market rebound. As long as the market is undervalued, the strategy of staggered investment ensures that investors are in and are benefiting from the undervalued market.
http://klsecounters.blogspot.com/2008/11/strategy-during-crisis-investment.html
Thursday 11 December 2014
Where to put your cash? A house or a stock
Even as the stock market soars to record highs, federal regulators are announcing new, cheaper ways for cash-strapped borrowers to buy a home. With the catastrophic housing crash of the last decade still glaring through the rear view mirror, the government is again pushing home ownership as the best way to build wealth, but is it? "It would perhaps be smarter, if wealth accumulation is your goal, to rent and put money in the stock market, which has historically shown much higher returns than the housing market," said Nobel Prize-winning economist Robert Shiller at a Standard and Poor's conference last week.
Read More Case-Shiller home price index: CNBC Explains Shiller notes that the comparison between stock returns and home value returns is rough, given that stocks pay cash dividends and housing pays "in kind," in the form of housing services; that is, you get to live in a house. Still, if you remove all forms of dividends and compare the Standard and Poor's U.S. composite stock price index since 1871 and Shiller's own real U.S. home price index since 1890, the stock market capital gains outperform the housing market's capital gains. Both, he notes, are smaller than one might expect.
Read More Low down payment mortgages back for buyers "The real S&P composite has increased 12.2-fold from January 1890 to December 2014, or 2.03 percent per year, much less than most people would have guessed. Most of the real return in the stock market over the last century has come from dividends, not real capital gains," said Shiller. "Home prices have increased only 1.5-fold, or only 33 basis points a year. Essentially, home price capital gains overall have amounted to virtually nothing." One must also account for the costs of home ownership, costs that don't exist in stock ownership. Property taxes, insurance, maintenance, renovation all subtract from the capital gains of owning a home.
Read More The top 10 housing markets for growth in 2015 The downside to stocks, however, is capital gains taxes.
"If we had much stronger 401K [retirement]-type programs in the United States, much more heavily pushed, much bigger commitment from everybody, would that replace homeownership as a way to build wealth?" asked David Blitzer, chairman and managing director at S&P Dow Jones Indices. "Right now my impression is that the tax benefits of a 401(k) plan or other contribution pension plans pale compared to home ownership." The Case Shiller home price index (red) versus the S&P 500 Index (blue) since 1987. Source: S&P Dow Jones Indices A house can offer greater returns if the owner chooses to rent it out and not to live in it; however the consumption value of the home to the owner, again that value of actually inhabiting it, is gone. And that adds to Shiller's point that a home should not be seen as an investment vehicle, like a stock, but as a consumption good, like a car.
Read More Jumbo mortgage: CNBC Explains "You don't accrue as much wealth as a renter as you do as a buyer," noted Sam Khater, deputy chief economist of CoreLogic. "The con, though, is that with home ownership being the primary way that the middle class gets richer over time, and with the bulk of their wealth and equity tied up in housing, if home prices decline, they take a huge hit." The happy compromise, it seems, would be to keep less equity in your home, through a long-term, low-down payment mortgage, or, if you can qualify, through an interest-only loan, and keep more cash ready for investing in the stock market.
Read More Self-employed? Good luck getting a mortgage It's a riskier choice, given the current volatility in home prices, but it may be the best way to build wealth.
https://my.news.yahoo.com/where-put-cash-house-stock-181236282.html
Friday 5 December 2014
Don't just sit there, invest!
Foolish takeaway
To be scared out of the market - or to not start investing - because of periods of market uncertainty, volatility or even steep declines, has been a very expensive mistake.
Ignore market fluctuations. Buy great companies at good prices.
It's an approach that has stood the test of time - and made small fortunes for those who follow that path.
Read more: http://www.smh.com.au/business/motley-fool/dont-just-sit-there-invest-20141128-11w2cy.html#ixzz3L1X4ccRv
Tuesday 4 November 2014
Friday 24 October 2014
Tesco: Expect full-year adjusted earnings per share (EPS) of 15.15p and about the same in 2015, says Deutsche.
Deutsche Bank has cut estimates for the second-half and for the full-year. The broker now expects full-year UK profit of £814 million, 23% less than previous estimates, and 13% less in Asia, driving annual group profit down 45% to £1.8 billion. In 2011, it was almost £4 billion. Expect full-year adjusted earnings per share (EPS) of 15.15p and about the same in 2015, says Deutsche.
At 174p, Tesco shares trade on 11.5 times forward earnings. That’s expensive given the ongoing price war will likely continue to crush UK margins, and without any guidance either on profits, or strategy. Much will be expected from the January statement. Until then, it’s difficult to see any positive catalysts.
http://www.iii.co.uk/articles/200463/tesco-horror-show-continues
http://www.iii.co.uk/tv/episode/tesco-fiasco-dissected
At 174p, Tesco shares trade on 11.5 times forward earnings. That’s expensive given the ongoing price war will likely continue to crush UK margins, and without any guidance either on profits, or strategy. Much will be expected from the January statement. Until then, it’s difficult to see any positive catalysts.
http://www.iii.co.uk/articles/200463/tesco-horror-show-continues
http://www.iii.co.uk/tv/episode/tesco-fiasco-dissected
Wednesday 22 October 2014
Thursday 16 October 2014
What is capitulation?
What is capitulation? CNBC Explains
Traditionally, the word capitulation describes a surrender between fighting armies. What is capitulation when it's used on Wall Street? What does it signify? We explain.
What is capitulation?
In simple terms, capitulation is when investors try to get out of the stock market as quickly as possibleand look for less risky investments. It's also described as panic selling. It's usually based on investor fears that stock prices will fall further than they have.
Capitulation is usually signaled by a decline in the markets of at least 10% in one day.
In getting out of the market, investors give up any previous gains in stock price. That means they take a financial loss, just to get out of stocks. The thinking is: take a smaller loss now rather than a bigger one later.
Real capitulation involves extremely high volume-or high numbers of traded shares-and sharp declines in stock prices.
Why do investors capitulate?
Suppose a stock starts dropping in price. There are two choices. Investors stick it out and hope the stock begins to appreciate-or they can take the loss by selling the stock.
If the majority of investors decide to wait it out, then the stock price will probably remain stable. But if the majority of investors decide to capitulate and give up on a stock, they start selling and that starts a sharp decline in a stock's price.
Are there any benefits from capitulation?
Only for those buyers ready to swoop in. After capitulation selling, common wisdom has it that there are great bargains to be had in the stock market. Why? Because everyone who wants to get out of a stock, for any reason, has sold it. The price should then, theoretically, reverse or bounce off the lowest price of the stock.
In other words, some investors believe that capitulation is the sign of a bottom and a chance to get stocks at a cheaper price than before the capitulation took place.
Is capitulation a way to gauge the markets?
Not at all.Capitulation is very difficult to forecast and use as a way to buy or sell stocks. There is no magical price at which capitulation takes place. Certainly during the trading day, stock prices and volumes are monitored and some measurement is used to determine if a capitulation is taking place and will remain so at the end of the day.
But most often, investors and market watchers look back to determine when the markets actually capitulated and see how far stocks have fallen in price for that one day of trading.
When have there been capitulations?
The stock market crash of 1929 that helped lead to the Great Depression, is a capitulation. In fact, it had more than one day of it.
On Oct. 24, 1929-what's known as Black Thursday-share prices on the New York Stock Exchange collapsed. A then-record number of 12.9 million shares was traded.
But more was to follow. Oct. 28, the first "Black Monday," more investors decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 38 points, or 13 percent.
The next day, "Black Tuesday," Oct. 29, 1929, about 16 million shares were traded, and the Dow lost an additional 30 points.
More recently, there was a massive sell off or panic selling of stocks on Oct. 10, 2008, in what can be considered a capitulation. Not only U.S. stocks, but global markets had major declines of 10 percent or more on one day.
Investors flooded exchanges with sell orders, dragging all benchmarks sharply lower. It's believed fears of a global recession and the U.S. housing slump sparked the sell-off.
Traditionally, the word capitulation describes a surrender between fighting armies. What is capitulation when it's used on Wall Street? What does it signify? We explain.
What is capitulation?
In simple terms, capitulation is when investors try to get out of the stock market as quickly as possibleand look for less risky investments. It's also described as panic selling. It's usually based on investor fears that stock prices will fall further than they have.
Capitulation is usually signaled by a decline in the markets of at least 10% in one day.
In getting out of the market, investors give up any previous gains in stock price. That means they take a financial loss, just to get out of stocks. The thinking is: take a smaller loss now rather than a bigger one later.
Real capitulation involves extremely high volume-or high numbers of traded shares-and sharp declines in stock prices.
Why do investors capitulate?
Suppose a stock starts dropping in price. There are two choices. Investors stick it out and hope the stock begins to appreciate-or they can take the loss by selling the stock.
If the majority of investors decide to wait it out, then the stock price will probably remain stable. But if the majority of investors decide to capitulate and give up on a stock, they start selling and that starts a sharp decline in a stock's price.
Are there any benefits from capitulation?
Only for those buyers ready to swoop in. After capitulation selling, common wisdom has it that there are great bargains to be had in the stock market. Why? Because everyone who wants to get out of a stock, for any reason, has sold it. The price should then, theoretically, reverse or bounce off the lowest price of the stock.
In other words, some investors believe that capitulation is the sign of a bottom and a chance to get stocks at a cheaper price than before the capitulation took place.
Is capitulation a way to gauge the markets?
Not at all.Capitulation is very difficult to forecast and use as a way to buy or sell stocks. There is no magical price at which capitulation takes place. Certainly during the trading day, stock prices and volumes are monitored and some measurement is used to determine if a capitulation is taking place and will remain so at the end of the day.
But most often, investors and market watchers look back to determine when the markets actually capitulated and see how far stocks have fallen in price for that one day of trading.
When have there been capitulations?
The stock market crash of 1929 that helped lead to the Great Depression, is a capitulation. In fact, it had more than one day of it.
On Oct. 24, 1929-what's known as Black Thursday-share prices on the New York Stock Exchange collapsed. A then-record number of 12.9 million shares was traded.
But more was to follow. Oct. 28, the first "Black Monday," more investors decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 38 points, or 13 percent.
The next day, "Black Tuesday," Oct. 29, 1929, about 16 million shares were traded, and the Dow lost an additional 30 points.
More recently, there was a massive sell off or panic selling of stocks on Oct. 10, 2008, in what can be considered a capitulation. Not only U.S. stocks, but global markets had major declines of 10 percent or more on one day.
Investors flooded exchanges with sell orders, dragging all benchmarks sharply lower. It's believed fears of a global recession and the U.S. housing slump sparked the sell-off.
Sunday 12 October 2014
Slow and steady doesn't make headlines, but the company can continue to earn excellent returns on invested capital.
CTB operates worldwide in the agriculture equipment field. Berkshire purchased it in 2002 and by 2009, it has picked up six small firms.
Berkshire paid $140 million for the company. In 2008, its pre-tax earnings were $89 million.
Vic Mancinellis, CEO of CTB, an agricultural equipment company, one of Berkshire's boring manufacturing businesses, exemplifies another reason for optimism.
Since Buffett bought CTB in 2002, it has earned roughly an average 11 percent annual return, compared to the S&P return of only 3 percent.
How can such a basic business produce eye-popping results?
It wasn't through financial innovations or game-changing acquisitions. Instead, Mancinelli focussed on "blocking and tackling, day by day doing the little things right and never getting off course:"
Ten years from now, Vic will be running a much larger operation and, more important, will be earning excellent returns on invested capital.
But slow and steady doesn't make headlines. Investors approaching the stock market continue to put their money in the hare, not the tortoise.
Betting on tortoises can create long-lasting wealth.
Berkshire paid $140 million for the company. In 2008, its pre-tax earnings were $89 million.
Vic Mancinellis, CEO of CTB, an agricultural equipment company, one of Berkshire's boring manufacturing businesses, exemplifies another reason for optimism.
Since Buffett bought CTB in 2002, it has earned roughly an average 11 percent annual return, compared to the S&P return of only 3 percent.
How can such a basic business produce eye-popping results?
It wasn't through financial innovations or game-changing acquisitions. Instead, Mancinelli focussed on "blocking and tackling, day by day doing the little things right and never getting off course:"
Ten years from now, Vic will be running a much larger operation and, more important, will be earning excellent returns on invested capital.
But slow and steady doesn't make headlines. Investors approaching the stock market continue to put their money in the hare, not the tortoise.
Betting on tortoises can create long-lasting wealth.
Goodwill. Understand the "cost" of goodwill.
Goodwill is an accounting term that describes the dollars paid to buy a business over and above its book value. Goodwill is a real number, but it tells us nothing about the future earning power of a business.
Berkshire owns some terrific businesses. Many of them were purchased, however, at large premiums to net worth - point reflected in the good will item shown in its balance sheet. In year 2008, its balance sheet reported a goodwill of US 16,515 millions. The company earned an impressive 17.9% on average tangible net worth in 2008, but if goodwill was included, this reduced the earnings to 8.1%.
Buffett paid more for these businesses because he expects them to earn gobs of money in the future. In this happy event, the goodwill number is not relevant.
However, if increased earnings don't materialize, the amount of goodwill will weigh on the earnings of a business. How will this affect investor returns?
By including the amount paid for goodwill in the return calculation, Buffett clearly reports the "cost" of goodwill.
In 2008, Berkshire investors got a return of only 8.1% on their total net worth, including goodwill, compared to a return of 17.9% on tangible net worth, excluding goodwill.
Most large U.S. companies have large amounts of goodwill reported on their balance sheets. This information is important to know. If companies pay more for acquisitions than the future earnings these ventures produce, investors will be harmed.
Berkshire owns some terrific businesses. Many of them were purchased, however, at large premiums to net worth - point reflected in the good will item shown in its balance sheet. In year 2008, its balance sheet reported a goodwill of US 16,515 millions. The company earned an impressive 17.9% on average tangible net worth in 2008, but if goodwill was included, this reduced the earnings to 8.1%.
Buffett paid more for these businesses because he expects them to earn gobs of money in the future. In this happy event, the goodwill number is not relevant.
However, if increased earnings don't materialize, the amount of goodwill will weigh on the earnings of a business. How will this affect investor returns?
By including the amount paid for goodwill in the return calculation, Buffett clearly reports the "cost" of goodwill.
In 2008, Berkshire investors got a return of only 8.1% on their total net worth, including goodwill, compared to a return of 17.9% on tangible net worth, excluding goodwill.
Most large U.S. companies have large amounts of goodwill reported on their balance sheets. This information is important to know. If companies pay more for acquisitions than the future earnings these ventures produce, investors will be harmed.
Saturday 11 October 2014
Ignore the noises that rattle the markets. A conclusion about the economy does not tell us if the stock market will rise or fall.
In 75% of those years (from 1965 to 2008), the S&P stocks recorded a gain. You can guess that a roughly similar percentage of years will be positive in the future too.Can you predict the winning and losing years in advance? I don't think anyone can.
The economy was in shambles throughout 2009, but that did not tell us whether the stock market will rise or fall.
A conclusion about the economy does not tell us if the stock market will rise or fall.
The economy was in shambles throughout 2009, but that did not tell us whether the stock market will rise or fall.
A conclusion about the economy does not tell us if the stock market will rise or fall.
Understand accounting allows you to understand how companies create value.
To better understand the wealth-producing advantages of the businesses, you have to understand accounting and the "vastly different" financial reporting characteristics of various businesses.
Accounting, just like eating spinach, may not be what you want, but it sure is good for you. :-)
A little patience brings great rewards. You can learn something important about each business and can also use your knowledge to understand how other companies create value.
You want to be informed, confident and loyal in your investing.
Accounting, just like eating spinach, may not be what you want, but it sure is good for you. :-)
A little patience brings great rewards. You can learn something important about each business and can also use your knowledge to understand how other companies create value.
You want to be informed, confident and loyal in your investing.
Buffett: See's Candies - A Great, Not Just a Good, Business
Buffet never forgets that growth is good, but only at a reasonable cost.
In 2007, See's Candies sold 31 million pounds of chocolate, a growth rate of only 2 percent. What does Buffett see that other misses?
1. He paid a sensible price for the business.
2. The company enjoys a durable competitive advantage: Its quality chocolate is bought by legions of loyal customers.
3. It is a business he understands.
4. It has great managers.
But See's Candies possesses one more attraction. It throws off cash and requires very little capital to grow.
Here is Buffett explaining See's value proposition in his 2007 shareholder letter:
" We bought See's [in 1972] for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.
Last year See's sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth - and somewhat immodest financial growth - of the business. In the meantime pre-tax earnings have totalled $1.35 billion. all of that, except for the $32 million, has been sent to Berkshire."
Buffett uses See's cash to buy other attractive businesses.
"Just as Adam and Eve kick-started an activity that led to six billion humans, See's has given birth to multiple new streams of cash for us. (The biblical command to "be fruitful and multiply" is one we take seriously at Berkshire.) .. There's no rule that you have to invest money where you've earned it. Indeed, it's often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can't for any extended period reinvest a large portion of their earnings internally at high rates of return."
But a company like slow-growing See's is rare in corporate America. In order to grow earnings like See's, CEOs in other businesses typically would need "to invest $400 million, not the $32 million" that See's required. Why is this true? Because most growing businesses "have both working capital needs that increase in proportion to sales growth and significant requirements for fixed asset investments." Not so at See's.
Buffett opines that the great business, like See's, is like a savings account that "pays an extraordinarily high interest rate that will rise as the years pass."
See's is not just the candy. To Buffett, the company is a chocolate-powered cash machine.
Additional notes: Great, Good and Gruesome Businesses of Buffett
Capital Allocation and Savings Accounts
Buffett compares his three different types of great, good and gruesome businesses to "savings accounts."
The great business is like an account that pays an extraordinarily high interest rate that will rise as the years pass.
A good one pays an attractive rate of interest that will be earned also on deposits that are added.
The gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.
In 2007, See's Candies sold 31 million pounds of chocolate, a growth rate of only 2 percent. What does Buffett see that other misses?
1. He paid a sensible price for the business.
2. The company enjoys a durable competitive advantage: Its quality chocolate is bought by legions of loyal customers.
3. It is a business he understands.
4. It has great managers.
But See's Candies possesses one more attraction. It throws off cash and requires very little capital to grow.
Here is Buffett explaining See's value proposition in his 2007 shareholder letter:
" We bought See's [in 1972] for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.
Last year See's sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth - and somewhat immodest financial growth - of the business. In the meantime pre-tax earnings have totalled $1.35 billion. all of that, except for the $32 million, has been sent to Berkshire."
Buffett uses See's cash to buy other attractive businesses.
"Just as Adam and Eve kick-started an activity that led to six billion humans, See's has given birth to multiple new streams of cash for us. (The biblical command to "be fruitful and multiply" is one we take seriously at Berkshire.) .. There's no rule that you have to invest money where you've earned it. Indeed, it's often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can't for any extended period reinvest a large portion of their earnings internally at high rates of return."
But a company like slow-growing See's is rare in corporate America. In order to grow earnings like See's, CEOs in other businesses typically would need "to invest $400 million, not the $32 million" that See's required. Why is this true? Because most growing businesses "have both working capital needs that increase in proportion to sales growth and significant requirements for fixed asset investments." Not so at See's.
Buffett opines that the great business, like See's, is like a savings account that "pays an extraordinarily high interest rate that will rise as the years pass."
See's is not just the candy. To Buffett, the company is a chocolate-powered cash machine.
Additional notes: Great, Good and Gruesome Businesses of Buffett
Capital Allocation and Savings Accounts
Buffett compares his three different types of great, good and gruesome businesses to "savings accounts."
The great business is like an account that pays an extraordinarily high interest rate that will rise as the years pass.
A good one pays an attractive rate of interest that will be earned also on deposits that are added.
The gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.
Bill Gross: Financial markets are artificially priced. Discounting of future profit streams by an artificially low interest rate results in corresponding high P/E ratios. Real estates are affected in the same way.
Financial markets are artificially priced. In the bond market, there is nothing normal about a three year German Bund yielding a “minus” 10 basis points. Similarly, UK Gilts and U.S. Treasurys have in recent years never experienced such low yields and therefore high prices. The same comparison can be applied to stocks. While profits in many cases are at record highs, the discounting of future profit streams by an artificially low interest rate results in corresponding high P/E ratios. Real estate cap rates, which help to price homes and commercial shopping centers, are affected in the same way. While monetary policy with its Quantitative Easing and forward guidance for low future interest rates have salvaged a semblance of growth and job gains – especially in the U.S. – they have brought prosperity forward in the financial markets. If yields can’t go much lower, then bond market capital gains are limited. The same logic applies in other asset categories. We have had our Biblical seven years of fat. We must look forward, almost by mathematical necessity, to seven figurative years of leaner: Bonds – 3% to 4% at best, stocks – 5% to 6% on the outside. That may not be enough for your retirement or your kid’s college education. It certainly isn’t for many private and public pension funds that still have a fairy tale belief in an average 7% to 8% return for the next 10 to 20 years! What do you do?
Well the obvious advice on a personal level: Retire later, save more, accept a revised standard of living. But the financial advice varies with your age and willingness to take risk. Younger investors with a Texas Hold’em “all in” attitude could push all of their chips onto the equity table. Boomers nearing retirement probably cannot afford to. A lengthy bear market could force them permanently out of the game. So, one size does not fit all here. It never has.
What might be applicable for most generations, however, is an “unconstrained strategy” that I managed well for the past few years at PIMCO and which now provides me the opportunity for 100% of my time at Janus. An unconstrained strategy sounds very open-ended, and it is. But it allows a professional and experienced investment firm like Janus to select the most attractive alternatives across many asset categories while hopefully diminishing the risk of bond and stock bear markets. The strategy seeks to protect principal while providing an acceptable return in this low yielding, low returning world that I have just described. Unconstrained investors should expect a shorter average maturity for bonds; an ability to profit from currency movements currently taking place with the euro and the yen fits the description as well; taking advantage of what is known as “optionality” and investing in what I have successfully applied in the past with what is called “structured alpha,” would be an important component too. The simple explanation of an unconstrained strategy:
Take your best ideas within the context of a low duration/short maturity portfolio and try to help investors achieve what they consider to be an acceptable return. Watch the fees as well.
Whatever your risk/return persuasion, whether it be stocks, bonds, unconstrained, real estate, or “other,” an “intelligent investor” (as initially described by Benjamin Graham in the late 1940s) should be aware that returns almost necessarily cannot equal the magnificent prior decades that some of you might have experienced during my days at PIMCO. But I/we look forward, with the same intensity and “client comes first” attitude that led to my second marriage at Janus. James Bond famously said that “you only live twice.” I hope to emulate Mr. Bond as Janus Denver and Janus Newport Beach link hands and ideas to improve your financial balance sheet, and ultimately provide a better life for you and your family. Perhaps you only dance twice too. Sue and I would like that.
https://finance.yahoo.com/news/bill-gross-only-dance-twice-153815259.html
24 of the most profitable companies return an average of 573% in a decade
It might seem simple, but if you pick stocks based on earnings, you will be a winner
Bloomberg News/Landov Gilead Sciences (CEO John C. Martin) has been the most profitable of S&P 1500 member companies in health care over the past six months. Its stock has returned 431% in three years.
The best-run companies tend to have the widest profit margins. So how does that translate into stock-price performance?
The short answer is that they are superior bets.
But first, there are several types of profit margins. For example, the gross margin is the difference between net sales and the cost of sales, divided by net sales. That measures the profitability of a company's core business, leaving out general expenses, interest, depreciation, taxes, amortization and other items. It is a useful measure to track companies' progress over time.
A conglomerate such as General Electric Co. (GE) will report an €œindustrial margin, which excludes its financial business, and will even break down a separate margin for each of its lines of business.
Depending on the sector or industry, certain margin measures may not be available. But the net income margin is net income divided net sales or revenue is a common measure available for every profitable company.
So we developed a list of highly profitable companies, using components of the S&P 1500. We picked the top three in the 10 broad market sectors by net income margin over the past 12 months, as calculated by FactSet.
Here they are, with the sectors in alphabetical order:
Most profitable S&P 1500 companies across 10 sectors
Company Ticker Location Sector Net income margin - past 12 months
PulteGroup Inc. (PHM) Bloomfield Hills, Mich. Consumer Discretionary 46.50%
Iconix Brand Group Inc. (ICON) New York Consumer Discretionary 36.10%
Priceline Group Inc. (PCLN) Norwalk, Conn. Consumer Discretionary 27.96%
Philip Morris International Inc. (PM) New York Consumer Staples 26.60%
Altria Group Inc. (MO) Richmond, Va. Consumer Staples 24.31%
Brown-Forman Corp. Class B (BF-B) Louisville, Ky. Consumer Staples 22.12%
Gulfport Energy Corp. (GPOR) Oklahoma City Energy 51.83%
Approach Resources Inc. (AREX) Forth Worth, Texas Energy 30.05%
Atwood Oceanics Inc. (ATW) Houston Energy 28.92%
Capstead Mortgage Corp. (CMO) Dallas Financials 76.49%
LTC Properties Inc. (LTC) Westlake Village, Calif. Financials 56.54%
RenaissanceRe Holdings Ltd. (RNR) Pembroke, Bermuda Financials 54.02%
Gilead Sciences Inc. (GILD) Foster City, Calif. Health Care 42.64%
Anika Therapeutics Inc. (ANIK) Bedford, Mass. Health Care 36.20%
Edwards Lifesciences Corp. (EW) Irvine, Calif. Health Care 35.70%
Delta Air Lines Inc. (DAL) Atlanta Industrials 27.84%
Union Pacific Corp. (UNP) Omaha, Neb. Industrials 20.58%
ITT Corp. (ITT) White Plains, N.Y. Industrials 19.81%
Verisign Inc. (VRSN) Reston, Va. Information Technology 57.43%
Visa Inc. Class A (XNYS:V) Foster City, Calif. Information Technology 44.65%
MasterCard Inc. Class A (MA) Purchase, N.Y. Information Technology 37.14%
CF Industries Holdings Inc. (CF) Deerfield, Ill. Materials 31.44%
Royal Gold Inc. (RGLD) Denver Materials 26.41%
Sigma-Aldrich Corp. (SIAL) St. Louis Materials 18.59%
AT&T Inc. (XNYS:T) Dallas Telecommunications 13.75%
Verizon Communications Inc. (VZ) New York Telecommunications 12.50%
Atlantic Tele-Network Inc. (ATNI) Â Beverly, Mass. Telecommunications 11.78%
Aqua America Inc. (WTR) Bryn Mawr, Pa. Utilities 26.92%
OGE Energy Corp. (OGE) Â Oklahoma City Utilities 17.59%
Questar Corp. (STR) Salt Lake City Utilities 14.46%
Source: FactSet
A look at total returns (through Tuesday) for those groups of companies tells an interesting story:
Total returns
Company Ticker Total return - YTD Total return - 3 Years Total return - 5 years Total return - 10 years
PulteGroup Inc. PHM -10% 359% 83% -25%
Iconix Brand Group Inc. ICON -8% 135% 204% 785%
Priceline Group Inc. PCLN -5% 137% 537% 4,878%
Philip Morris International Inc. PM 0% 46% 109%
N/A Altria Group Inc. MO 24% 96% 244% 627%
Brown-Forman Corp. Class B BF.B 17% 103% 217% 382%
Gulfport Energy Corp. GPOR -22% 108% 481% 1,186%
Approach Resources Inc. AREX -31% -28% 47%
N/A Atwood Oceanics Inc. ATW -21% 18% 18% 225%
Capstead Mortgage Corp. CMO 11% 50% 63% 181%
LTC Properties Inc. LTC 10% 73% 107% 277%
RenaissanceRe Holdings Ltd. RNR 3% 66% 89% 130%
Gilead Sciences Inc. GILD 39% 431% 360% 997%
Anika Therapeutics Inc. ANIK -2% 505% 490% 156%
Edwards Lifesciences Corp. EW 61% 47% 207% 531%
Delta Air Lines Inc. DAL 29% 357% 331%
N/A Union Pacific Corp. UNP 28% 155% 300% 729%
ITT Corp. ITT -1% 209% 182% 268%
Verisign Inc. VRSN -8% 85% 171% 206%
Visa Inc. Class A V -6% 147% 205%
N/A MasterCard Inc. Class A MA -12% 137% 252%
N/A CF Industries Holdings Inc. CF 23% 118% 238%
N/A Royal Gold Inc. RGLD 39% 4% 40% 329%
Sigma-Aldrich Corp. SIAL 45% 124% 168% 432%
AT&T Inc. T 4% 43% 76% 119%
Verizon Communications Inc. VZ 4% 56% 130% 119%
Atlantic Tele-Network Inc. ATNI -2% 89% 19% 504%
Aqua America Inc. WTR 3% 53% 103% 135%
OGE Energy Corp. OGE 11% 65% 161% 319%
Questar Corp. STR -1% 32% 113% 267%
S&P Composite 1500 Index 5% 78% 104% 115%
Total returns assume the reinvestment of dividends.
Source: FactSet
This hasn't been such a good year for the group, with only 12 of 30 beating the 5% total return for the S&P 1500. But over longer periods, the story changes.
Over three years, 17 have beaten the index, and 14 have more than doubled.
For five years, 21 have beaten the S&P 1500, with 10 more than doubling the performance of the index.
Going out 10 years, all but one of the 24 companies (six haven't been publicly traded that long) have beaten the index. The average return is 573%, compared with 115% for the S&P 1500.
So being highly profitable provides protection against the type of decline that took so much out of the index during 2008 at the height of the credit crisis.
Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.
Three categories of businesses based on the cost of business growth: Great, Good and Gruesome
Buffett uses a simple checklist to determine the attractiveness of businesses as investments. To meet his tests, companies must possess:
1. a sensible price tag
2. durable competitive advantages
3. business he can understand
4: managers who have integrity and who are passionately involved in their business creations.
Even though he is not involved in the day-to-day operations, Buffett pays close attention to how much cash each business generates. He determines how much is needed to maintain a rate of appropriate growth and how much can be invested elsewhere to build intrinsic value in the Berkshire enterprise.
In his 2007 shareholder letter, Buffett offered a capsule view of how he assess companies based on their capital allocation profiles. He sorts businesses into three categories based on the cost of business growth: great, good, and gruesome. This sorting allows him to see sizzle where others cannot.
1. a sensible price tag
2. durable competitive advantages
3. business he can understand
4: managers who have integrity and who are passionately involved in their business creations.
Even though he is not involved in the day-to-day operations, Buffett pays close attention to how much cash each business generates. He determines how much is needed to maintain a rate of appropriate growth and how much can be invested elsewhere to build intrinsic value in the Berkshire enterprise.
In his 2007 shareholder letter, Buffett offered a capsule view of how he assess companies based on their capital allocation profiles. He sorts businesses into three categories based on the cost of business growth: great, good, and gruesome. This sorting allows him to see sizzle where others cannot.
Friday 10 October 2014
Buffett devotes his precious time to reading and thinking, looking for gaps in values that others miss.
In 1999, after 34 years in business, Berkshire had a market capitalization that positioned it as the 74th largest American company. Yet it had no Wall Street research coverage. In 1999, Alice Schroeder, a Paine Webber research analyst, wrote the first Wall Street research report on Berkshire.
Buffett continues to rely on his managers to run their day-to-day business operations. he continues to devote precious time to reading and thinking. Like a miner panning for gold, he sifts data from newspapers, annual reports, and other publications, looking for gaps in values that others miss.
Buffett continues to rely on his managers to run their day-to-day business operations. he continues to devote precious time to reading and thinking. Like a miner panning for gold, he sifts data from newspapers, annual reports, and other publications, looking for gaps in values that others miss.
Analysing the substance and character of a business is the holy grail of investing. Guessing a price that someone else is willing to pay, is not.
By 1969, the stock market had reached new highs, and the Buffett Partnership continued to beat its returns. As the market continued to climb even higher, Buffett announced that he would close his partnerships. He told the partners that the speculation-driven stock market didn't make sense; he wanted no part of the folly.
Buffett sold everything in the portfolio except for shares in Diversified Retailing, Blue Chip Stamps, and Berkshire Hathaway, which now included insurance and banking businesses as well as equity investments. Avoiding the speculative market, Buffett continued to hunt for attractive underated businesses. In 1971, he bought a controlling interest in See's Candies.
By early January 1973, the Dow had climbed to an all time high of 1,051 points. But only $17 million of Berkshire's $101 million insurance portfolio was invested in stocks; the rest was in bonds. Not long after this high, the market swooned. The it racheted down further. By October 1974, it hit a low of 580 points. Investors panicked but Buffett rejoiced. He was in his elements once again.
Over the following years, Buffett bagged big game at bargain prices, adding Wesco Financial and buying large blocks of stocks in The Washington Post and Geico. In 1977, Buffett bought The Buffalo News.
Buffett's belief that analysing the substance and character of a business was the holy grail of investing. Guessing a price that someone else was willing to pay - irrespective of fundamentals - was not.
Cinderella at the Ball. Warning investors about the "sedation of effortless money".
The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large dose of effortless money. After a heady experience of that kind, normally sensible people drift into behaviour akin to that of Cinderella at the ball. They know that overstaying the festivities - that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future - will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before mid-night. There's a problem, though: They are dancing in a room in which the clocks have no hands.
Warren Buffett's Cinderella parable in his 2000 shareholder letter.
Warren Buffett's Cinderella parable in his 2000 shareholder letter.
In a financial crisis, when banks cannot lend, cash is particularly valuable.
Buffett is a balance sheet guy. That's where the cash is reported. Cash is the fuel that drives economic value.
Most CEOs, however, focus on growth in corporate profits more than on cash and balance sheet growth. The source of the problem is: some of the reported expenses in these income statements are cash, and some are determined by accounting rules. As a result, earnings include both cash and noncash (i.e., "accounting") numbers. Buffett cares most about the cash part.
Cash is real. Noncash earnings are subject to accounting interpretations. They can be adjusted to inflate earnings and boost the stock price. But it is harder to fiddle with the cash numbers.
Buffett's long-term cash obsession creates unique opportunities that others miss. Buffett keeps a lot of cash on hand in order to be ready for unique crisis-born opportunities. "Do we panic when the price of filet mignon drops? No, we rejoice. Who wouldn't want to buy the highest-quality steaks at chopped meat prices?"
At the end of June 2008, cash represented just over 11 percent of Buffett's balance sheet. He used some of it to provide high-cost financing for then top-credit-rated companies Goldman Sachs and GE, both desperately in need of cash. He announced his biggest acquisition to date - buying the Burlington Northern Santa Fe Railway for $34 billion. At $100 a share, he paid a reasonable, but not a cheap, price.
Most CEOs, however, focus on growth in corporate profits more than on cash and balance sheet growth. The source of the problem is: some of the reported expenses in these income statements are cash, and some are determined by accounting rules. As a result, earnings include both cash and noncash (i.e., "accounting") numbers. Buffett cares most about the cash part.
Cash is real. Noncash earnings are subject to accounting interpretations. They can be adjusted to inflate earnings and boost the stock price. But it is harder to fiddle with the cash numbers.
Buffett's long-term cash obsession creates unique opportunities that others miss. Buffett keeps a lot of cash on hand in order to be ready for unique crisis-born opportunities. "Do we panic when the price of filet mignon drops? No, we rejoice. Who wouldn't want to buy the highest-quality steaks at chopped meat prices?"
At the end of June 2008, cash represented just over 11 percent of Buffett's balance sheet. He used some of it to provide high-cost financing for then top-credit-rated companies Goldman Sachs and GE, both desperately in need of cash. He announced his biggest acquisition to date - buying the Burlington Northern Santa Fe Railway for $34 billion. At $100 a share, he paid a reasonable, but not a cheap, price.
Why Buffett decides not to pay out dividends in 45 years in Berkshire Hathaway?
He has been able to reinvest Berkshire's profits at rates considerably higher than Berkshire's investors could have earned y reinvesting them in the market.
When the company can no longer meet the test of reinvesting $1.00 of EPS to create $1 of additional value, then, says Buffett, Berkshire will pay dividends, and let his owner-partners reinvest the cash.
When the company can no longer meet the test of reinvesting $1.00 of EPS to create $1 of additional value, then, says Buffett, Berkshire will pay dividends, and let his owner-partners reinvest the cash.
Ask yourself this ONE question, every time a stock price goes up or down.
Every time a stock goes up or down, you should ask yourself:
Is this price movement based on changing fundamental or changing sentiment?
Sometimes the answer is not so obvious.
In such a situation, here is a good guiding principle.
It is better to be approximately right than to be exactly wrong.
Is this price movement based on changing fundamental or changing sentiment?
Sometimes the answer is not so obvious.
In such a situation, here is a good guiding principle.
It is better to be approximately right than to be exactly wrong.
Thursday 9 October 2014
Essentials of Value Investing
The Intelligent Investor by Benjamin Graham and Greenwald’s Book: Value Investing from Graham to Buffett and Beyond.
Class Case Studies
This is a class in a specific kind of investing. There are two basic approaches. There are short-term investors (preferably not investing taxable money). Many technical investors who do not care about the underlying quality of the companies invest solely on price information. Although some value investors build a time element into their investments. There are investors who look at short-term earnings. Analysts spend their time on earnings’ forecasting. If you think IBM is going to do $1.44 vs. the analyst estimates of $1.40, then you buy IBM, because analysts are behind the real growth in earnings. Your estimate is correct.
Another group, who has given up altogether, they believe the markets are efficient; they index. Unless the distribution is very skewed, then only 50% of the investors can outperform the market. This is a market for long-term investors with a particular orientation (value investors). You look at a security and it will represent a claim on earnings and assets. What is that claim worth? If you think that a company is worth $22 to $24 per share, then you look to buy with a margin of safety. When the margin of safety is sufficiently large, you will buy. You will look for bargains.
Value Investors constitute only 7% of the investor universe. There is substantial statistical evidence that value investing works: higher returns with lower risks than the market.
Value Investing (“VI”) rests on three key characteristics of financial markets:
1. Prices are subject to significant and capricious movements that can temporarily cause price to diverge from intrinsic value. Mr. Market is to offer you various prices, not to guide you. Emotionalism and short-term thinking rule market prices in the short-run.
2. Financial assets do have underlying or fundamental economic values that are relatively stable and can be measured by a diligent and disciplined investor. Price and value often diverge.
3. A strategy of buying when prices are 33% to 50% below the calculated intrinsic value will produce superior returns in the long-run. The size of the gap between price and value is the "margin of safety
We put someone (into business with a value formula that has averaged 20% plus returns over the past four years. He will be on the show, Imposter!
The preponderance of evidence is overwhelming for value investing as a good approach.
1. Statistical evidence
2. Performance evidence of big value funds (Oakmark, Third Avenue, Fairholme, Tweedy Browne)
3. Relatively episodic evidence that a disproportionately large amount or percentage of successful investors follow the value approach.
All human beings have certain predispositions that hurt themselves and prevent them from following
the value approach.
Class Case Studies
This is a class in a specific kind of investing. There are two basic approaches. There are short-term investors (preferably not investing taxable money). Many technical investors who do not care about the underlying quality of the companies invest solely on price information. Although some value investors build a time element into their investments. There are investors who look at short-term earnings. Analysts spend their time on earnings’ forecasting. If you think IBM is going to do $1.44 vs. the analyst estimates of $1.40, then you buy IBM, because analysts are behind the real growth in earnings. Your estimate is correct.
Another group, who has given up altogether, they believe the markets are efficient; they index. Unless the distribution is very skewed, then only 50% of the investors can outperform the market. This is a market for long-term investors with a particular orientation (value investors). You look at a security and it will represent a claim on earnings and assets. What is that claim worth? If you think that a company is worth $22 to $24 per share, then you look to buy with a margin of safety. When the margin of safety is sufficiently large, you will buy. You will look for bargains.
Value Investors constitute only 7% of the investor universe. There is substantial statistical evidence that value investing works: higher returns with lower risks than the market.
Value Investing (“VI”) rests on three key characteristics of financial markets:
1. Prices are subject to significant and capricious movements that can temporarily cause price to diverge from intrinsic value. Mr. Market is to offer you various prices, not to guide you. Emotionalism and short-term thinking rule market prices in the short-run.
2. Financial assets do have underlying or fundamental economic values that are relatively stable and can be measured by a diligent and disciplined investor. Price and value often diverge.
3. A strategy of buying when prices are 33% to 50% below the calculated intrinsic value will produce superior returns in the long-run. The size of the gap between price and value is the "margin of safety
We put someone (into business with a value formula that has averaged 20% plus returns over the past four years. He will be on the show, Imposter!
The preponderance of evidence is overwhelming for value investing as a good approach.
1. Statistical evidence
2. Performance evidence of big value funds (Oakmark, Third Avenue, Fairholme, Tweedy Browne)
3. Relatively episodic evidence that a disproportionately large amount or percentage of successful investors follow the value approach.
All human beings have certain predispositions that hurt themselves and prevent them from following
the value approach.
Essentials of Value Investing
Long-term - Fundamental (Look at Underlying Businesses)
Specific Premises
(1) Mr. Market is a strange guy - prices diverge regularly from fundamental values
(2) You can buy under priced Stocks - fundamental values are often measurable
(3) Fundamental value determines future price - Buying under priced stocks plus patience implies superior returns.
Patience helps create time arbitrage between short term focus and long-term values.
http://csinvesting.org/wp-content/uploads/2012/06/greenwald-vi-process-foundation_final.pdf
Why Value Investing works. Buying cheaply works.
WHY VALUE INVESTING WORKS
Markets are not Efficient
All you should worry about since you aren’t going to be able to outguess the market is minimizing transaction costs, and allocating assets that creates an appropriate risk profile. What I think you ought to know about that is two things.
Why Are You on the Right Side of the Trade?
Another way of saying that is not everybody can outperform the market. The famous humorist called Garrison Keiller talks about a fictional town called Lake Woebegone. In Lake Woebegone all the women are beautiful, all the men are tall and all the children are above average. In this game all the children are average on average which means half of them underperforms the market. So when you start to think about investing, you must be able to answer the question:
Buying Cheaply Works
When we talk about value investing there is a lot of evidence that value investors have been on the
right side of the trade.
Markets are not Efficient
All you should worry about since you aren’t going to be able to outguess the market is minimizing transaction costs, and allocating assets that creates an appropriate risk profile. What I think you ought to know about that is two things.
- The first is that there is overwhelming statistical evidence that markets are not efficient. In all countries and all periods of time since the early 20th century, that there are variables that can be reliably used to outperform the market and that clearly contradicts the premise that nobody can outperform the market.
- There is a sense in which absolutely and fundamentally markets are efficient and it is this—that when we buy as night follows the day someone else is selling that stock thinking it is going down--and one of you is always wrong. (Don’t play the patsy!)
Why Are You on the Right Side of the Trade?
Another way of saying that is not everybody can outperform the market. The famous humorist called Garrison Keiller talks about a fictional town called Lake Woebegone. In Lake Woebegone all the women are beautiful, all the men are tall and all the children are above average. In this game all the children are average on average which means half of them underperforms the market. So when you start to think about investing, you must be able to answer the question:
- Why are you able to beon the right side of the particular trade?
- Why are you the one who is right, and the person who is trading with you is wrong? That is the most fundamental aspect of Investing.
- Where and what is your investing edge?
- What puts you on the right side of the trade?
Buying Cheaply Works
When we talk about value investing there is a lot of evidence that value investors have been on the
right side of the trade.
- The statistical studies that run against or contradict market efficiency almost all of them show that cheap portfolios—low market-to-book, low price-to-book—outperform the markets by significant amounts in all periods in all countries—that is a statistical, historical basis for believing that this is one of the approaches where people are predominantly on the right side of the trade. And, of course, someone else has to be on the wrong side of the trade.
- Those studies were first done in the early 1930s; they were done again in the early 1950s. And the ones done in the 1990s got all the attention because the academics caught on. There is statistical evidence that the value approaches—buy cheap securities—have historically outperformed the market. Buying Cheap works.
http://csinvesting.org/wp-content/uploads/2012/06/greenwald-vi-process-foundation_final.pdf
Value Investing in Practice: Search strategy, Valuation strategy and Patience
Value Investing in Practice
Long-term - Fundamental (look at underlying business)
(1) Look intelligently for value opportunities (Low P/E, M/B)
o Mr. Market is not crazy about everything
o This is the first step not to be confused with Value Investing
(2) Know what you know
Not all value is measurable
Not all value is measurable by YOU (Circle of Competence)
(3) You don't have to swing PATIENCE
Value Investing: the Approach
Search (Look Systemically for under valuation) -->Value --> Review --> Manage Risk
Value implies concentration not diversification. (Look for a Margin of Safety)
At worst Buy the Market)
----------
1. SEARCH STRATEGY
Look intelligently for value opportunities. You must have search strategies. Every time you sell stock, someone else is buying that security. Vast majority—95%--is selling because the stock will go down versus buying because the stock is going up. You seek a seller that is motivated by psychological imperatives other than the underlying value. One person on one side of the trade is always wrong.
Trust me--that will be the case (with you) in big tech stocks that are covered by 100s of analysts. YOU have no advantage or edge.
Where will I look for opportunities? Where I will be the smart one on the side of this trade? You have to decide what type of investing you want to do in this realm. In every case, they pursue in concentrated fashion a particular niche strategy or specialty within the value area.
You have to know what you know and what you don’t know.
Not all value is measurable *
Not all value is measurable by you.
Where do I have the advantage?
Where am I the smart money? *
* Critical for one to determine
Great investors focus on specific opportunities in concentrated ways. They are very disciplined by staying within their circle of competence.
I (Bruce C. Greenwald) used to sit on panels of money managers who managed foundations' money. Some money managers would say that they are close to MSFT and we know what it will do. Thank God I am not that stupid. MSFT is impossible to value. Much of the value is in the future of the future (think of the large amount of estimation in the terminal value of Disc. Cash Flow). 85% of the value of MSFT will come in the years 2010 to 2020!
How much of the investment in 2000 you get back by 2010—15%. The other 85% value of MSFT is beyond 2010—(2010-2020)! Lots of luck. No one can do that. Then they say they can do it for complicated companies like Citicorp and GE? Forget it.
Understand what valuations are fundamentally impossible. Stay away from those glamour stocks.
If you try to be an expert in everything, you will be an expert in nothing. You can specialize in small stocks, highly complicated situations, or a specific industry or country.
When you say you know what it is worth, you better know better than the rest of the investors in the community.
2. VALUATION STRATEGY
You want an approach, a valuation procedure and a discipline that will restrict you to making decision on the basis of what you really know. You are betting against the person on the other side of your trade. Where is your edge?
3. PATIENCE
You have to be patient. Mr. Market throws a pitch every day, but you only have to swing at the ones that are in your sweet spot. THE FAT PITCH IN YOUR STRIKE ZONE.
Patience is rewarded especially when you are on the other side of impatient money.
The BAD NEWS:
They run up the score whether you swing or not, and you are being judged by the other scores. You are being judged relative to the market.
What is your default strategy when there is nothing to do? Buy the market in an index fund vs. cash. What does the absence of opportunity tell you?
If you think DCF is the best way to value companies, then you will have a problem.
In practice, you want to look intelligently for value opportunities, a valuation strategy that identifies what you really know, and you want an appropriate default strategy for managing risk.
All the elements have to be in place. Valuation strategy must be appropriate to your search strategy. You always have to track what you do. Have you lost money on this type of stock before? If you have made a mistake before, be aware of it. Be aware of the market and what other intelligent investors are doing. If you think Wells Fargo is overvalued, you want to think carefully about selling if Warren Buffett is on the other side.
Reviewing these judgments.
How do you manage risk? How do you put together a portfolio? A more concentrated portfolio requires better patience and valuation. Think about the underlying economic reality.
In general, stocks have outperformed all other assets. Default strategies and investing in indexes and having a balanced strategies. One value investor said cash was better than an index strategy. Test: Read through great value investors' letters when they have mostly cash vs. having the money in an index over the next three years, the results were so discouraging to his hypothesis. The index outperforms cash.
In 1986, Bill Ruane went into cash and thought the market was over-valued. Think of an equity bias.
Another lesson, you can hedge out the risk of the stock market as a whole at a low price. Historically, that has not been a good strategy. Look at the market as a whole and it would influence your allocation between cash and an index.
Notes from video lecture by Prof Bruce Greenwald
http://csinvesting.org/wp-content/uploads/2012/06/greenwald-vi-process-foundation_final.pdf
Long-term - Fundamental (look at underlying business)
(1) Look intelligently for value opportunities (Low P/E, M/B)
o Mr. Market is not crazy about everything
o This is the first step not to be confused with Value Investing
(2) Know what you know
Not all value is measurable
Not all value is measurable by YOU (Circle of Competence)
(3) You don't have to swing PATIENCE
Value Investing: the Approach
Search (Look Systemically for under valuation) -->Value --> Review --> Manage Risk
Value implies concentration not diversification. (Look for a Margin of Safety)
At worst Buy the Market)
1. SEARCH STRATEGY
Look intelligently for value opportunities. You must have search strategies. Every time you sell stock, someone else is buying that security. Vast majority—95%--is selling because the stock will go down versus buying because the stock is going up. You seek a seller that is motivated by psychological imperatives other than the underlying value. One person on one side of the trade is always wrong.
Trust me--that will be the case (with you) in big tech stocks that are covered by 100s of analysts. YOU have no advantage or edge.
Where will I look for opportunities? Where I will be the smart one on the side of this trade? You have to decide what type of investing you want to do in this realm. In every case, they pursue in concentrated fashion a particular niche strategy or specialty within the value area.
You have to know what you know and what you don’t know.
Not all value is measurable *
Not all value is measurable by you.
Where do I have the advantage?
Where am I the smart money? *
* Critical for one to determine
Great investors focus on specific opportunities in concentrated ways. They are very disciplined by staying within their circle of competence.
I (Bruce C. Greenwald) used to sit on panels of money managers who managed foundations' money. Some money managers would say that they are close to MSFT and we know what it will do. Thank God I am not that stupid. MSFT is impossible to value. Much of the value is in the future of the future (think of the large amount of estimation in the terminal value of Disc. Cash Flow). 85% of the value of MSFT will come in the years 2010 to 2020!
How much of the investment in 2000 you get back by 2010—15%. The other 85% value of MSFT is beyond 2010—(2010-2020)! Lots of luck. No one can do that. Then they say they can do it for complicated companies like Citicorp and GE? Forget it.
Understand what valuations are fundamentally impossible. Stay away from those glamour stocks.
If you try to be an expert in everything, you will be an expert in nothing. You can specialize in small stocks, highly complicated situations, or a specific industry or country.
When you say you know what it is worth, you better know better than the rest of the investors in the community.
2. VALUATION STRATEGY
You want an approach, a valuation procedure and a discipline that will restrict you to making decision on the basis of what you really know. You are betting against the person on the other side of your trade. Where is your edge?
3. PATIENCE
You have to be patient. Mr. Market throws a pitch every day, but you only have to swing at the ones that are in your sweet spot. THE FAT PITCH IN YOUR STRIKE ZONE.
Patience is rewarded especially when you are on the other side of impatient money.
The BAD NEWS:
They run up the score whether you swing or not, and you are being judged by the other scores. You are being judged relative to the market.
What is your default strategy when there is nothing to do? Buy the market in an index fund vs. cash. What does the absence of opportunity tell you?
If you think DCF is the best way to value companies, then you will have a problem.
In practice, you want to look intelligently for value opportunities, a valuation strategy that identifies what you really know, and you want an appropriate default strategy for managing risk.
All the elements have to be in place. Valuation strategy must be appropriate to your search strategy. You always have to track what you do. Have you lost money on this type of stock before? If you have made a mistake before, be aware of it. Be aware of the market and what other intelligent investors are doing. If you think Wells Fargo is overvalued, you want to think carefully about selling if Warren Buffett is on the other side.
Reviewing these judgments.
How do you manage risk? How do you put together a portfolio? A more concentrated portfolio requires better patience and valuation. Think about the underlying economic reality.
In general, stocks have outperformed all other assets. Default strategies and investing in indexes and having a balanced strategies. One value investor said cash was better than an index strategy. Test: Read through great value investors' letters when they have mostly cash vs. having the money in an index over the next three years, the results were so discouraging to his hypothesis. The index outperforms cash.
In 1986, Bill Ruane went into cash and thought the market was over-valued. Think of an equity bias.
Another lesson, you can hedge out the risk of the stock market as a whole at a low price. Historically, that has not been a good strategy. Look at the market as a whole and it would influence your allocation between cash and an index.
Notes from video lecture by Prof Bruce Greenwald
http://csinvesting.org/wp-content/uploads/2012/06/greenwald-vi-process-foundation_final.pdf
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