4 Critical Errors You Must Avoid
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September 23, 2008 | Comments (0)
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For all of the attention lavished on managers of hedge funds and mutual funds, nothing beats being a small investor. Peter Lynch said as much in his classic One Up on Wall Street: Big institutions have the resources, but we have the potential for extraordinary returns.
Poor Warren Buffett?
For one thing, we can invest in any company we like. Warren Buffett would love to be able to say that. Instead, Buffett is holding billions in cash because he can't find anything cheap enough to buy. With so much to invest, he must focus on large-cap, super-liquid companies. It must be dreadful having so much money.
Even better, unlike huge institutional money managers, we don't need to perform every quarter. We don't need to jump on every fad or pretend to be "active" out of a fear of falling behind. We don't worry what our manager or client thinks of us. We can focus on buying the best companies at the cheapest prices.
Don't look this gift horse in the mouth
Digging up these rare values is what Philip Durell -- along with thousands of "small" value investors -- do every day at Motley Fool Inside Value. Sadly, too many individual investors do not fully exploit these advantages, and never reach their true potential to trounce the market.
Trust me, you do not want to group yourself in with those underachievers. Fortunately, by simply avoiding these four common mistakes -- all of which I've made myself at some point -- you can dramatically increase your long-term returns.
Mistake No. 1: Trying to time the market
Each week, hundreds of stocks move up or down 10%. If you could just figure out which stocks will move which way, you'd be rich in no time. Some even seem to bounce between price levels, the way Johnson & Johnson (NYSE: JNJ) has generally swayed back and forth from $60 to $70 since 2005. If you could just buy at the lows and sell at the highs, you'd have a profit machine!
It's a great idea ... except that it doesn't work. Over the short term, price changes are essentially random. People are masters at spotting patterns, even in random data. Look at a chart long enough, and a winning strategy will appear -- only to evaporate when real money is at stake. Sometimes you win with such a strategy, and sometimes you lose. So it goes with random events.
When investing, you want your results to be less like the flip of a coin, and more like the flip of a cat. There's some chance of the poor kitty bonking his head, but the smart money says that he'll land on his feet. So don't time the market. Focus on a proven strategy like value investing, where the expected return is significantly higher than average.
Mistake No. 2: Ignoring costs
Fees, trading costs, and taxes are the bane of the small investor. People manage your assets because they want their cut. This can take many forms: fund expenses, trading commissions, account management fees, and the spread between bid and ask prices on stocks. If there's any profit left, the government is quite eager to step in and take its slice.
Always be aware of the fees you'll be paying. Recognizing that higher costs mean lower returns, you should plan to minimize fees and taxes. Buy funds with low expenses. With your personal portfolio, avoid needlessly swapping Coca-Cola (NYSE: KO) for PepsiCo (NYSE: PEP) or MGM Mirage (NYSE: MGM) for Las Vegas Sands (NYSE: LVS) -- pairs of companies in the same industry, with reasonably similar market caps, and comparable long-term performance trends. You'd be amazed by how frequently fund managers do precisely that, and how much it costs you in taxes and commissions.
Mistake No. 3: Buying the hype
Until this year, China's growth seemed unstoppable. With a fast-growing middle class, the eastern nation's population has developed an appetite for things associated with higher standards of living, such as Internet access. Similarly, when energy prices went sky-high, the need for alternate energy sources becomes even more pronounced.
But as many have figured out recently, that doesn't mean you can indiscriminately pick up a Chinese tech stock or just any alternative energy stock. Even with recent declines, you'd still be way ahead if you'd tossed the dice early on First Solar (Nasdaq: FSLR) -- but don't expect to hit home runs often with that kind of strategy. After all, CMGI was an intriguing Internet services play at a time when the world was shifting into the Internet age, yet investors who bought the hype lost massive amounts of money.
Hype usually involves some truth, but says little about whether something will be a good investment. When confronted with large demographic, political, or technological trends, never just assume that the trend will provide a sufficient tailwind to power your portfolio.
Instead, examine the company-specific factors. A tailwind is nice, but it's critical to understand the competitive advantages of companies in the space. Ask yourself why this company will be able to exploit the trend better than its competitors. Southwest Airlines (NYSE: LUV) for instance, recognized early that it could win fliers' loyalty through midsized markets, no-frills flights, and rock-bottom prices. Having avoided many of the bumps that have plagued other industry players, Southwest investors who saw the light in the '80s and '90s don't regret it.
Mistake No. 4: Betting on the market as a casino
The stock market can feel like Vegas. A gambler can go to a casino and get lucky tossing dice. An investor can, in complete ignorance, buy a stock, get lucky, and make money. You don't get turned away from either for lack of knowledge or even common sense -- only lack of cash. If you choose to gamble on the stock market for entertainment, you shouldn't be surprised, upset, or outraged if you lose money.
If, on the other hand, your goal is to make extraordinary profits, don't treat the stock market like a casino. Don't buy on hunches or speculations; buy because you understand the company and recognize that it's selling at a discount to its fair value. Always have a good grasp of (1) its fair value, (2) the company's strategy, and (3) the challenges it is likely to face going forward.
That's a process we at Inside Value follow everyday. In our experience, this is the only way to buy stocks that offer a superior risk-reward trade-off.
What next?
By simply avoiding these four mistakes, you can dramatically improve your chances of success. Focus on value stocks with a suitable margin of safety, and look at the entire market. Then you can really exploit your advantage as a small and nimble investor. Peter Lynch (and Warren Buffett) would be proud.
4 Critical Errors You Must Avoid
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4 Critical Errors You Must Avoid
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Why Value Investing is a Successful Investment Strategy
Credit Klarman
Value investing lies at the intersection of economics and psychology. Economics is important because you need to understand what assets or businesses are worth. Psychology is equally important because price is the critically important component in the investment equation that determines the amount of risk and return available from any investment. Price, of course, is determined in the financial markets, varying with the vicissitudes of supply and demand for a given security. It is crucial for investors to understand not only what value investing is, and that it works, but why it is a successful investment philosophy. At the very core of its success is the recurrent mispricing of securities in the marketplace. Value investing is, in effect, predicated on the proposition that the efficient-market hypothesis is frequently wrong.
Why Value Investing is a Successful Investment Strategy
Credit Klarman
Value investing lies at the intersection of economics and psychology. Economics is important because you need to understand what assets or businesses are worth. Psychology is equally important because price is the critically important component in the investment equation that determines the amount of risk and return available from any investment. Price, of course, is determined in the financial markets, varying with the vicissitudes of supply and demand for a given security. It is crucial for investors to understand not only what value investing is, and that it works, but why it is a successful investment philosophy. At the very core of its success is the recurrent mispricing of securities in the marketplace. Value investing is, in effect, predicated on the proposition that the efficient-market hypothesis is frequently wrong.
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Re: 4 Critical Errors You Must Avoid
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How to be a value investor like Warren Buffett By MoneyWeek Editor-in-chief Merryn Somerset Webb Sep 13, 2006
Print this article
A few weeks ago I wrote about the weird way in which all fund managers consider themselves to be value-investing contrarians. (Read Merryn's article here: Should contrarian investors avoid commodities?) The fact that so few actually are is made clear by all the hoo-ha surrounding the retirement of Anthony Bolton, who has been managing Fidelity’s Special Situations fund since 1979, and over that time has managed to turn an initial investment of £9,000 into £130,000.
I’ve heard a great many fund managers over the years saying they invest in the same sort of way as Bolton, but if they really did we’d probably hear a great deal less about how unique Bolton’s performance is. The same is true of those who style themselves after America’s famous value investor Warren Buffett.
I’ve lost count of the number of articles I’ve read proclaiming some fund manager or the other as the new Buffett, and of the number of managers I’ve spoken to who tell me they follow the same principles as him. But, despite all the talk, I’ve never come across one with the same kind of performance record — Buffett is certainly the only money manager around in a position to give £20 billion to charity.
Value investing: look at fundamental values
The principle of value investing as practised by Bolton and Buffett is hardly complicated. It’s based on the idea that the market is not (as conventional theory has it) efficient. Instead, it is constantly distracted by “noise” of one sort or another.
In the short and even medium term the prices of equities can move substantially in directions and for reasons that have little to do with their fundamental values, something that makes it likely — if they have fallen — that they will then offer better than average returns as they return to their correct value.
So all the value investor has to do in the long term is to find shares that have seen their prices fall for no good fundamental reason and hold on to them until that situation rights itself. This sounds so easy that one wonders how it can be that none of the would-be Buffetts seem able to manage it.
The answer comes down to the fact that one needs more than just knowledge to succeed. In a recent paper, James Montier of Dresdner Kleinwort, an investment bank, listed the characteristics that the best value investors have in common.
Value investing: have a concentrated portfolio
They have very concentrated portfolios (holding only about 35 stocks and having 40% of their portfolios in the top 10); they don’t think they need to know everything so don’t get caught in the noise of the market; they are willing to hold large amounts of uninvested cash if they can’t find good opportunities; they have long time horizons (the average fund manager holds a stock for a year, the successful value investors Montier looked at held them for an average of over five years); and they accept bad years as being only to be expected rather than a reason to change their methods.
These are not things that an average fund manager is up to doing. To have a heavily concentrated portfolio rather than one so diversified that the individual performance of each share is almost irrelevant requires a strong nerve. Holding large amounts of cash also requires a degree of nerve: most fund managers are only prepared to take a relative view on the market (which stock is better than another stock), not to make the leap to taking an absolute view (deciding when cash is better than stocks).
Value investing: have the courage of your convictions
It is also a mark of the supremely confident to not want to know everything. While the rabble bury themselves in data, trying to forecast minute changes in quarterly earnings numbers, the real value investors focus on a few key bits of data and leave it at that.
Having the courage of your convictions to enable you to hold a stock you feel is underpriced for the long term, regardless of short-term performance, is also something most of us simply couldn’t bear to do. Not so the successful value investor: while they may do well over the long term, notes Montier, having three down years in a row is far from unusual for them.
All in all it seems that doing well as a value investor is as much about having a certain type of character as it is about understanding investment, if not more so. Buffett habitually presents himself as a folksy grandpa type and Bolton comes across as a charmingly cerebral kind of gent, but behind their kindly smiles are clearly cores of steel — something that most of us just don’t have.
Value investing: shares to look at now
If we did we’d all have had a much calmer summer. And what would we be doing now? First I think we’d be recognising that there are few real value propositions left in the market (companies whose shares are trading at prices lower than the book value of their assets, for example).
We might look at shares in Wm Morrison: they’ve risen recently on takeover talk but still trade on a price to book ratio (the share price against the value of the company) of only 1.49 times (the supermarket firm owns vast amounts of freehold property) against Tesco’s 2.7 times. And consider Luminar, the nightclub and restaurant company, where shares are trading on a price to book ratio of a mere 1.07 times.
Other than that I have to repeat that Shell and BP are still far too cheap and, as good value investors know, there’s nothing wrong with holding cash.
By Merryn Somerset Webb, as first published in The Sunday Times (09/07/2006)
Print this article
A few weeks ago I wrote about the weird way in which all fund managers consider themselves to be value-investing contrarians. (Read Merryn's article here: Should contrarian investors avoid commodities?) The fact that so few actually are is made clear by all the hoo-ha surrounding the retirement of Anthony Bolton, who has been managing Fidelity’s Special Situations fund since 1979, and over that time has managed to turn an initial investment of £9,000 into £130,000.
I’ve heard a great many fund managers over the years saying they invest in the same sort of way as Bolton, but if they really did we’d probably hear a great deal less about how unique Bolton’s performance is. The same is true of those who style themselves after America’s famous value investor Warren Buffett.
I’ve lost count of the number of articles I’ve read proclaiming some fund manager or the other as the new Buffett, and of the number of managers I’ve spoken to who tell me they follow the same principles as him. But, despite all the talk, I’ve never come across one with the same kind of performance record — Buffett is certainly the only money manager around in a position to give £20 billion to charity.
Value investing: look at fundamental values
The principle of value investing as practised by Bolton and Buffett is hardly complicated. It’s based on the idea that the market is not (as conventional theory has it) efficient. Instead, it is constantly distracted by “noise” of one sort or another.
In the short and even medium term the prices of equities can move substantially in directions and for reasons that have little to do with their fundamental values, something that makes it likely — if they have fallen — that they will then offer better than average returns as they return to their correct value.
So all the value investor has to do in the long term is to find shares that have seen their prices fall for no good fundamental reason and hold on to them until that situation rights itself. This sounds so easy that one wonders how it can be that none of the would-be Buffetts seem able to manage it.
The answer comes down to the fact that one needs more than just knowledge to succeed. In a recent paper, James Montier of Dresdner Kleinwort, an investment bank, listed the characteristics that the best value investors have in common.
Value investing: have a concentrated portfolio
They have very concentrated portfolios (holding only about 35 stocks and having 40% of their portfolios in the top 10); they don’t think they need to know everything so don’t get caught in the noise of the market; they are willing to hold large amounts of uninvested cash if they can’t find good opportunities; they have long time horizons (the average fund manager holds a stock for a year, the successful value investors Montier looked at held them for an average of over five years); and they accept bad years as being only to be expected rather than a reason to change their methods.
These are not things that an average fund manager is up to doing. To have a heavily concentrated portfolio rather than one so diversified that the individual performance of each share is almost irrelevant requires a strong nerve. Holding large amounts of cash also requires a degree of nerve: most fund managers are only prepared to take a relative view on the market (which stock is better than another stock), not to make the leap to taking an absolute view (deciding when cash is better than stocks).
Value investing: have the courage of your convictions
It is also a mark of the supremely confident to not want to know everything. While the rabble bury themselves in data, trying to forecast minute changes in quarterly earnings numbers, the real value investors focus on a few key bits of data and leave it at that.
Having the courage of your convictions to enable you to hold a stock you feel is underpriced for the long term, regardless of short-term performance, is also something most of us simply couldn’t bear to do. Not so the successful value investor: while they may do well over the long term, notes Montier, having three down years in a row is far from unusual for them.
All in all it seems that doing well as a value investor is as much about having a certain type of character as it is about understanding investment, if not more so. Buffett habitually presents himself as a folksy grandpa type and Bolton comes across as a charmingly cerebral kind of gent, but behind their kindly smiles are clearly cores of steel — something that most of us just don’t have.
Value investing: shares to look at now
If we did we’d all have had a much calmer summer. And what would we be doing now? First I think we’d be recognising that there are few real value propositions left in the market (companies whose shares are trading at prices lower than the book value of their assets, for example).
We might look at shares in Wm Morrison: they’ve risen recently on takeover talk but still trade on a price to book ratio (the share price against the value of the company) of only 1.49 times (the supermarket firm owns vast amounts of freehold property) against Tesco’s 2.7 times. And consider Luminar, the nightclub and restaurant company, where shares are trading on a price to book ratio of a mere 1.07 times.
Other than that I have to repeat that Shell and BP are still far too cheap and, as good value investors know, there’s nothing wrong with holding cash.
By Merryn Somerset Webb, as first published in The Sunday Times (09/07/2006)
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Warren Buffett, Value Investing Guru
Have you heard of value investing? According to Wikipedia, it involves buying securities whose shares appear underpriced by some form of fundamental analysis. Technically speaking, you’ll find such stocks in this category as trading at discounts to their book value, and may at the same time present with high dividend yields, low PE multiples and low price-to-book ratios.
The “value” designation is something that applies to a stock in a temporal manner. What I mean is that those stocks that are considered as “value” stocks at some point in time, may not be this way forever. On the flipside, those equities that may have been considered momentum or growth stocks may one day turn into value stocks when they begin presenting with characteristics that define true value.
An astute equity investor may recognize value stocks as undervalued compared to the rest of the market and look to invest in to them in some way. When the stock market winds shift, it may take down some stocks: that’s exactly what’s happened with certain investments that have been pounded heavily lately. There may be high flying shares that are now taking on a value flavor after experiencing a convincing price tumble. When such an opportunity strikes, value investors are around to sniff out the deals: their goal is to find stocks that are functioning at a much higher level than their peers, which people aren’t noticing. That’s exactly what Warren Buffett has done to become a billionaire.
Have you heard of value investing? According to Wikipedia, it involves buying securities whose shares appear underpriced by some form of fundamental analysis. Technically speaking, you’ll find such stocks in this category as trading at discounts to their book value, and may at the same time present with high dividend yields, low PE multiples and low price-to-book ratios.
The “value” designation is something that applies to a stock in a temporal manner. What I mean is that those stocks that are considered as “value” stocks at some point in time, may not be this way forever. On the flipside, those equities that may have been considered momentum or growth stocks may one day turn into value stocks when they begin presenting with characteristics that define true value.
An astute equity investor may recognize value stocks as undervalued compared to the rest of the market and look to invest in to them in some way. When the stock market winds shift, it may take down some stocks: that’s exactly what’s happened with certain investments that have been pounded heavily lately. There may be high flying shares that are now taking on a value flavor after experiencing a convincing price tumble. When such an opportunity strikes, value investors are around to sniff out the deals: their goal is to find stocks that are functioning at a much higher level than their peers, which people aren’t noticing. That’s exactly what Warren Buffett has done to become a billionaire.
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Re: 4 Critical Errors You Must Avoid
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What is value investing?
Value investing is an investment strategy involving the search for and purchase of stocks and securities for which the current market value of the security is perceived to be less than its underlying intrinsic value, or actual value. This probably sounds like an obvious strategy, but the sad fact is when most people buy stocks, they are doing anything but value investing.
Most people buy stocks for one reason or other that typically has absolutely nothing to do with the stock's intrinsic value. In fact, the reason people lose money in the stock market is because they buy stocks that are far overpriced or flimsily inflated by popular demand. The most basic and common mistake that people make when investing is buying a stock or mutual fund based on past performance when in fact past performance tells you exactly nothing about its actual value.
What good is knowing that a stock has earned a 20% return over the last ten years if it turns out that the company was soaring to new heights based on exaggerated market demand?
In the most simplest of terms, value investing is the process of performing a fundamental analysis of a company, its industry, financial health, growth and profitability and comparing this analysis to its current market price. Typically this analysis is done on stocks that have either been ignored by the market (i.e. very little analyst coverage, news stories, press releases, etc.) or have been unfairly judged by the market (i.e. a big sell-off of a stock resulting form unfavorable news that turned out to be unfounded or false). If after careful analysis, it appears that the company is currently priced below its intrinsic value, then and only then is it considered a possible investment opportunity by the value investor.
Think of it this way, if you only pay attention to the stocks that everyone else is paying attention to, by the time you decide to invest in that company, you've probably already missed the band-wagon. If you can see the band-wagon, it's already too late.
There are various strategies for how one might identify these undervalued stocks and securities that you should become familiar with before attempting to make any substantial investment decisions. You don't have to be an expert financial analyst or genius to understand these concepts, but it does take some time and effort. There is no substitute for research and study which is difficult at first. But once you get excited about value investing, it becomes a hobby or passion and doesn't feel like work at all. It is a thrilling feeling to understand exactly what it is you are buying and whether you are getting a fair price.
A good place to start your research is by following some good blogs on the topic. But a word of caution, watch out for those bloggers who throw a lot of charts, lingo and technical indicators at you. In most cases those kinds of bloggers have no better clue about investing than you do and are just using those charts and mumbo jumbo as smoke and mirrors to mask the fact that they are clueless.
Once you've whet your appetite, take a look at a 1934 book by Benjamin Graham titled Security Analysis. Benjamin Graham is thought to be the founding father of value investing and his book is still relevant today all these years after its original publication. The book is huge and daunting. It can be confusing at times, but don't worry and just keep going. Whether you realize it or not, you will pick up on key fundamental concepts that will serve you well in your investing career.
Good luck and always remember to have fun!
- BS
http://gorillainvestors.blogspot.com/
Article Source: http://EzineArticles.com/?expert=Benjamin_Sage
Value investing is an investment strategy involving the search for and purchase of stocks and securities for which the current market value of the security is perceived to be less than its underlying intrinsic value, or actual value. This probably sounds like an obvious strategy, but the sad fact is when most people buy stocks, they are doing anything but value investing.
Most people buy stocks for one reason or other that typically has absolutely nothing to do with the stock's intrinsic value. In fact, the reason people lose money in the stock market is because they buy stocks that are far overpriced or flimsily inflated by popular demand. The most basic and common mistake that people make when investing is buying a stock or mutual fund based on past performance when in fact past performance tells you exactly nothing about its actual value.
What good is knowing that a stock has earned a 20% return over the last ten years if it turns out that the company was soaring to new heights based on exaggerated market demand?
In the most simplest of terms, value investing is the process of performing a fundamental analysis of a company, its industry, financial health, growth and profitability and comparing this analysis to its current market price. Typically this analysis is done on stocks that have either been ignored by the market (i.e. very little analyst coverage, news stories, press releases, etc.) or have been unfairly judged by the market (i.e. a big sell-off of a stock resulting form unfavorable news that turned out to be unfounded or false). If after careful analysis, it appears that the company is currently priced below its intrinsic value, then and only then is it considered a possible investment opportunity by the value investor.
Think of it this way, if you only pay attention to the stocks that everyone else is paying attention to, by the time you decide to invest in that company, you've probably already missed the band-wagon. If you can see the band-wagon, it's already too late.
There are various strategies for how one might identify these undervalued stocks and securities that you should become familiar with before attempting to make any substantial investment decisions. You don't have to be an expert financial analyst or genius to understand these concepts, but it does take some time and effort. There is no substitute for research and study which is difficult at first. But once you get excited about value investing, it becomes a hobby or passion and doesn't feel like work at all. It is a thrilling feeling to understand exactly what it is you are buying and whether you are getting a fair price.
A good place to start your research is by following some good blogs on the topic. But a word of caution, watch out for those bloggers who throw a lot of charts, lingo and technical indicators at you. In most cases those kinds of bloggers have no better clue about investing than you do and are just using those charts and mumbo jumbo as smoke and mirrors to mask the fact that they are clueless.
Once you've whet your appetite, take a look at a 1934 book by Benjamin Graham titled Security Analysis. Benjamin Graham is thought to be the founding father of value investing and his book is still relevant today all these years after its original publication. The book is huge and daunting. It can be confusing at times, but don't worry and just keep going. Whether you realize it or not, you will pick up on key fundamental concepts that will serve you well in your investing career.
Good luck and always remember to have fun!
- BS
http://gorillainvestors.blogspot.com/
Article Source: http://EzineArticles.com/?expert=Benjamin_Sage
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Re: 4 Critical Errors You Must Avoid
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So, there's this guy you may have heard of… Warren Buffet. Why does that name ring a bell? Probably because he happens to be one of the greatest value investors who ever lived. In 2008 he was the richest man in the world worth an estimated 62 billion dollars!
Want to know his secret? Read on.
Choosing Value Over Growth
There are two major stock trading camps: value and growth. Instinctively, most people think that the quickest growing stock will provide the largest returns over time. Counter-intuitively, Warren Buffet has made his fortune in deep value stocks, not high growth companies. OK, great.. but what, exactly, is a value stock?
Value Stocks
Oddly enough, there is no formal definition of what constitutes a value or growth stock. We can, however, speak in generalities. A value stock should have some of the following elements:
•Low Annual Revenue Growth These stocks usually show less than 15% revenue growth annually.
•High Percentage of Net Equity Value companies generally have a higher percentage of their share price made up of net equity (cash and assets minus liabilities) than the stock market average.
•P/E Ratio Value stocks prices per share generally trade at a multiple less than 20 times their annual earnings per share.
Here's another way to think about it:
When a publicly traded company first starts out, they are usually considered a growth stock. The company has big dreams of aggressively attacking the market, increasing its market share, and becoming a giant. In the early stages, this is much easier since the business is going from newborn to toddler. As the company grows, triple-digit growth becomes much more difficult as they may face stiff competition, or simply market saturation. In turn, it becomes a value company. Value companies can still earn high profits, but the year-over-year growth of the retained earnings is less than that of some others.
Lack of Growth Does Not Equal Lack of Profit
Remember, the fact that a company is not growing drastically does not mean you can't profit immensely.
For example, if a company has $1 billion dollars worth of sales and generates $200 million dollars worth of profit, you may not care whether profitability grows. You are earning 20% return for your investment, and as long as this remains static you are happy.
How do you get this profit from the company?
•Dividends If the business has expended most of its lucrative growth opportunities, they will often return profits to shareholders in the form of a dividend. Not all value stock companies do, however, as they may choose to re-invest the retained earnings. In fact, Warren Buffett prefers dividends not to be paid since this can not only help avoid paying some income tax, but it will also allow the company to pursue investing opportunities that are far superior to paying out profits in cash.
•Increased Share Price Even if the company chooses to simply keep its profits in cash and not reinvest it or pay it out to shareholders in the form of dividends, the value of the company has still increased 20% since last year. The share price should at least partially reflect this increase.
The Profitability of Value Investing
How much profit can you potentially make with value investing? For that answer we need to look over some research papers:
Statisticians and researchers in the business world have conducted numerous tests to calculate how much profit can be generated from value investing. A study by Fama and French found that certain value investing techniques earned 7.6% more than growth stock investing. Joseph Piotroski ran his value theories over 20 years worth of data and was able to generate 23% annual profits. From 1965 - 2009 Warren Buffett (Berkshire Hathaway) has been able to create 20.3% annual returns for his shareholders, or a total return of 434,057%!
Keep in mind that these men are theorists or master tacticians. Someone just learning about value investing and fundamental analysis will most likely not be able to create these sort of returns. Still, if we borrow a few techniques from such profitable investors, our stock portfolios will be sure to thank us in the long run.
1. Look For Low Price To Book Ratios
The price is what the market is willing to pay per share. The book value is the net asset value of the company once liabilities are deducted. In theory, if the company was liquidated, this is the amount left over for shareholders to divvy up. The closer the trading price is to book value per share, the deeper value or intrinsic worth the shareholder has. This should provide some stability in share price since, even if the company went bankrupt, the shareholder is given back much of his capital.
Some large stocks currently trading close to their net asset values are Bank of America Corporation (BAC), The Travelers Companies Inc.(TRV), JPMorgan Chase and Company (JPM), and Alcoa Inc. (AA).
2. Pick Companies With Low Debt
High debt can hurt a company when interest rates rise in good economies or when credit is tight in bad ones. The debt to equity ratio is a quick way to determine how well the weight of a company's debt compares to its financial muscles. A ratio of 1 means that they have equal amounts of debt and equity. Obviously, the lower this ratio is, the better off you are.
3. Reasonable Price To Earnings Ratios
Price to earnings is a ratio created by taking the share price and dividing it by the annual earnings per share. So, if the company earns $1 per share and the market price is $10 per share, the price to earnings ratio is 10.
Very low PE ratios often carry higher risk since investors will punish an under-performing stock, or one with a poor economic outlook, to low valuations. Very high PE ratios are indicative of growth stocks and also have higher earnings risk. While every industry has a different PE average, make sure yours is not on the high end since it will likely mean you are not trading value stocks. Stocks paying out large dividends typically have lower PE ratios than those that choose to re-invest earnings.
The Electric Utilities industry group, known for being a group of value stocks that typically pay dividends, has an average P/E of 13.5. Compare this to the Semiconductor Equipment and Materials industry group with a P/E of 60.
4. High Return On Equity
This simple ratio reveals how much return the company makes based on shareholder equity. This number is important to determine how well the company is using your money. Do they sit on your cash or are they actively generating profits from all assets and equity? Compare ROE between similar companies and try to pick businesses that are comparatively higher than, or at least above, the industry average.
As an example, the Water Utilities industry group has a 7.2% return on equity. However, some companies have a much higher rate. Northumbrian Water (NWG.L) has a return on equity of 44%, and Aqua America, Inc (WTR) has a rate of 10.98%.
Final Word
Big money producing value stocks has made the ‘Oracle of Omaha’ wealthy. His secret is to pick wonderful stocks with great management and good valuations. This is no easy task, but there are rewards awaiting those willing to dig into the fundamental analysis of a company. So, the next time you think about buying a stock, consider whether you prefer to buy the dream with the potential for high growth, or follow after Warren Buffet with a deep value investing mentality.
Read more at Suite101: What is Value Investing? Tips and Strategies to Pick Top Stocks http://www.suite101.com/content/what-is ... z1FiCJXtOu
Want to know his secret? Read on.
Choosing Value Over Growth
There are two major stock trading camps: value and growth. Instinctively, most people think that the quickest growing stock will provide the largest returns over time. Counter-intuitively, Warren Buffet has made his fortune in deep value stocks, not high growth companies. OK, great.. but what, exactly, is a value stock?
Value Stocks
Oddly enough, there is no formal definition of what constitutes a value or growth stock. We can, however, speak in generalities. A value stock should have some of the following elements:
•Low Annual Revenue Growth These stocks usually show less than 15% revenue growth annually.
•High Percentage of Net Equity Value companies generally have a higher percentage of their share price made up of net equity (cash and assets minus liabilities) than the stock market average.
•P/E Ratio Value stocks prices per share generally trade at a multiple less than 20 times their annual earnings per share.
Here's another way to think about it:
When a publicly traded company first starts out, they are usually considered a growth stock. The company has big dreams of aggressively attacking the market, increasing its market share, and becoming a giant. In the early stages, this is much easier since the business is going from newborn to toddler. As the company grows, triple-digit growth becomes much more difficult as they may face stiff competition, or simply market saturation. In turn, it becomes a value company. Value companies can still earn high profits, but the year-over-year growth of the retained earnings is less than that of some others.
Lack of Growth Does Not Equal Lack of Profit
Remember, the fact that a company is not growing drastically does not mean you can't profit immensely.
For example, if a company has $1 billion dollars worth of sales and generates $200 million dollars worth of profit, you may not care whether profitability grows. You are earning 20% return for your investment, and as long as this remains static you are happy.
How do you get this profit from the company?
•Dividends If the business has expended most of its lucrative growth opportunities, they will often return profits to shareholders in the form of a dividend. Not all value stock companies do, however, as they may choose to re-invest the retained earnings. In fact, Warren Buffett prefers dividends not to be paid since this can not only help avoid paying some income tax, but it will also allow the company to pursue investing opportunities that are far superior to paying out profits in cash.
•Increased Share Price Even if the company chooses to simply keep its profits in cash and not reinvest it or pay it out to shareholders in the form of dividends, the value of the company has still increased 20% since last year. The share price should at least partially reflect this increase.
The Profitability of Value Investing
How much profit can you potentially make with value investing? For that answer we need to look over some research papers:
Statisticians and researchers in the business world have conducted numerous tests to calculate how much profit can be generated from value investing. A study by Fama and French found that certain value investing techniques earned 7.6% more than growth stock investing. Joseph Piotroski ran his value theories over 20 years worth of data and was able to generate 23% annual profits. From 1965 - 2009 Warren Buffett (Berkshire Hathaway) has been able to create 20.3% annual returns for his shareholders, or a total return of 434,057%!
Keep in mind that these men are theorists or master tacticians. Someone just learning about value investing and fundamental analysis will most likely not be able to create these sort of returns. Still, if we borrow a few techniques from such profitable investors, our stock portfolios will be sure to thank us in the long run.
1. Look For Low Price To Book Ratios
The price is what the market is willing to pay per share. The book value is the net asset value of the company once liabilities are deducted. In theory, if the company was liquidated, this is the amount left over for shareholders to divvy up. The closer the trading price is to book value per share, the deeper value or intrinsic worth the shareholder has. This should provide some stability in share price since, even if the company went bankrupt, the shareholder is given back much of his capital.
Some large stocks currently trading close to their net asset values are Bank of America Corporation (BAC), The Travelers Companies Inc.(TRV), JPMorgan Chase and Company (JPM), and Alcoa Inc. (AA).
2. Pick Companies With Low Debt
High debt can hurt a company when interest rates rise in good economies or when credit is tight in bad ones. The debt to equity ratio is a quick way to determine how well the weight of a company's debt compares to its financial muscles. A ratio of 1 means that they have equal amounts of debt and equity. Obviously, the lower this ratio is, the better off you are.
3. Reasonable Price To Earnings Ratios
Price to earnings is a ratio created by taking the share price and dividing it by the annual earnings per share. So, if the company earns $1 per share and the market price is $10 per share, the price to earnings ratio is 10.
Very low PE ratios often carry higher risk since investors will punish an under-performing stock, or one with a poor economic outlook, to low valuations. Very high PE ratios are indicative of growth stocks and also have higher earnings risk. While every industry has a different PE average, make sure yours is not on the high end since it will likely mean you are not trading value stocks. Stocks paying out large dividends typically have lower PE ratios than those that choose to re-invest earnings.
The Electric Utilities industry group, known for being a group of value stocks that typically pay dividends, has an average P/E of 13.5. Compare this to the Semiconductor Equipment and Materials industry group with a P/E of 60.
4. High Return On Equity
This simple ratio reveals how much return the company makes based on shareholder equity. This number is important to determine how well the company is using your money. Do they sit on your cash or are they actively generating profits from all assets and equity? Compare ROE between similar companies and try to pick businesses that are comparatively higher than, or at least above, the industry average.
As an example, the Water Utilities industry group has a 7.2% return on equity. However, some companies have a much higher rate. Northumbrian Water (NWG.L) has a return on equity of 44%, and Aqua America, Inc (WTR) has a rate of 10.98%.
Final Word
Big money producing value stocks has made the ‘Oracle of Omaha’ wealthy. His secret is to pick wonderful stocks with great management and good valuations. This is no easy task, but there are rewards awaiting those willing to dig into the fundamental analysis of a company. So, the next time you think about buying a stock, consider whether you prefer to buy the dream with the potential for high growth, or follow after Warren Buffet with a deep value investing mentality.
Read more at Suite101: What is Value Investing? Tips and Strategies to Pick Top Stocks http://www.suite101.com/content/what-is ... z1FiCJXtOu
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Re: 4 Critical Errors You Must Avoid
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July 13, 2010 | 9:22 am
10 Tips from Value Investor Howard Marks
Posted by Jonah Lowenfeld
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“Never forget the six-foot-tall man who drowned crossing the stream that was five feet deep on average,” (1) said Howard Marks in an aphorism-filled speech he gave last night. Organized by the Federation’s recently relaunched Finance & Investment Division, 150 men and women gathered in a conference room at the Century Plaza hotel to listen to the chairman of Oaktree Capital Management. Marks, who is in charge of managing the investment firm’s $19.8 billion, is widely known for the publicly available memos he posts on his firm’s website, and he gave last night’s audience plenty to think about.
In a talk called “The Current Cycle and the Long Term,” the value investor and consistent worrier first explained how the world got to where it is today and then outlined a few principles for investors to consider when planning for the future.
One major factor that Marks identified as having helped bring about the bubble and the resulting crash was what he called “expansiveness.” Every person and organization did this, but Marks’ most memorable description was the one he used to describe American spending habits to his European colleagues: “The average American has $1,000 in the bank, $10,000 on the credit card, makes $20,000 after taxes every year—and spends $22,000.” (2)
“People ask me when we’ll be back to normal,” Marks said. “I ask them what they mean by normal.” (3) Marks considers the years from 1992 - 2007 to have been “the best of times,” and he doesn’t think they’re coming back.
The main question that investors have to answer now? “What future do you want to prepare for? Do you want to prepare for prosperity or not?” (4) Marks isn’t talking about something you can achieve with positive thinking and a vision board; he’s telling investors that they should make decisions as if the market will not perform well. Why? “No one ever went bust preparing for tough times.” (5)
The recent tough times have even gotten Marks thinking about gold, which, he says, people speak about in religious terms, much in the way they speak about God. “I’m not going to convince you to believe in God; you’re not going to convince me not to.” (6) But the practical thinker has lately become more open to including gold in his clients’ investment portfolios—even if he can’t determine what a good or fair price for gold is—and he admits that its ability to retain value in a down market has a pretty good track record. “There’s no way to explain it,” Marks said, “but it’s probably done it [retained value] for 3,000 years, so there’s no reason to expect it to stop doing that this month.” (7)
Marks expressed doubts about financial regulation (8: “Yes, it prevents the next crisis; it also prevents the recovery we’ll wish we’d had”) and spoke with concern about the recovery to date (9: “There’s an overly heavy reliance on government stimulus and an artificially low interest rate.”) And he predicted that the next set of big market problems would arise in the commercial real estate market. (The explanation he gave for that can also be found here.)
But when would the problems in commercial real estate actually become too big to ignore? That question—“when”—is one Marks said that “no one” could answer, and cautioned that, “Being too far ahead of your time is indistinguishable from being wrong.” (10)
10 Tips from Value Investor Howard Marks
Posted by Jonah Lowenfeld
Share
“Never forget the six-foot-tall man who drowned crossing the stream that was five feet deep on average,” (1) said Howard Marks in an aphorism-filled speech he gave last night. Organized by the Federation’s recently relaunched Finance & Investment Division, 150 men and women gathered in a conference room at the Century Plaza hotel to listen to the chairman of Oaktree Capital Management. Marks, who is in charge of managing the investment firm’s $19.8 billion, is widely known for the publicly available memos he posts on his firm’s website, and he gave last night’s audience plenty to think about.
In a talk called “The Current Cycle and the Long Term,” the value investor and consistent worrier first explained how the world got to where it is today and then outlined a few principles for investors to consider when planning for the future.
One major factor that Marks identified as having helped bring about the bubble and the resulting crash was what he called “expansiveness.” Every person and organization did this, but Marks’ most memorable description was the one he used to describe American spending habits to his European colleagues: “The average American has $1,000 in the bank, $10,000 on the credit card, makes $20,000 after taxes every year—and spends $22,000.” (2)
“People ask me when we’ll be back to normal,” Marks said. “I ask them what they mean by normal.” (3) Marks considers the years from 1992 - 2007 to have been “the best of times,” and he doesn’t think they’re coming back.
The main question that investors have to answer now? “What future do you want to prepare for? Do you want to prepare for prosperity or not?” (4) Marks isn’t talking about something you can achieve with positive thinking and a vision board; he’s telling investors that they should make decisions as if the market will not perform well. Why? “No one ever went bust preparing for tough times.” (5)
The recent tough times have even gotten Marks thinking about gold, which, he says, people speak about in religious terms, much in the way they speak about God. “I’m not going to convince you to believe in God; you’re not going to convince me not to.” (6) But the practical thinker has lately become more open to including gold in his clients’ investment portfolios—even if he can’t determine what a good or fair price for gold is—and he admits that its ability to retain value in a down market has a pretty good track record. “There’s no way to explain it,” Marks said, “but it’s probably done it [retained value] for 3,000 years, so there’s no reason to expect it to stop doing that this month.” (7)
Marks expressed doubts about financial regulation (8: “Yes, it prevents the next crisis; it also prevents the recovery we’ll wish we’d had”) and spoke with concern about the recovery to date (9: “There’s an overly heavy reliance on government stimulus and an artificially low interest rate.”) And he predicted that the next set of big market problems would arise in the commercial real estate market. (The explanation he gave for that can also be found here.)
But when would the problems in commercial real estate actually become too big to ignore? That question—“when”—is one Marks said that “no one” could answer, and cautioned that, “Being too far ahead of your time is indistinguishable from being wrong.” (10)
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Re: 4 Critical Errors You Must Avoid
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http://www.make-money-stock-value-investing.com/
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Re: 4 Critical Errors You Must Avoid
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Making a Stock Market Investment Plan is Good Financial Investment Advice
Avoids the emotional roller coaster!
Good financial investment advice is to have an investment plan for investment in stock.
This is an important means of controlling the potential emotional roller coaster that can be associated with stock investments.
Your success with value investing will largely depend on your temperament and to what extent you can exhibit patience and discipline to make the best investments.
Sticking to a plan is part of this process.
While plans may vary from investor to investor depending on age, capital available and investment time-line, most plans for investment in stock should have some common elements.
Key Elements of the Financial Investment Advice
The key elements of the financial investment advice includes having a buying strategy, a selling strategy, a portfolio management strategy and a strategy for performance management and review.
My buying strategy is my guide to finding the best stocks to buy using a set of 'buying rules' that remind me of the important characteristics of the best stock picks.
These rules also include information on types of companies to avoid.
Check out these buying rules that provide me with a degree of buying confidence.
My selling strategy provides me with a means to avoid panic stock selling. Using a set of six rules helps me to instil discipline in my selling decisions.
The rules cover situations that apply to when not to sell as well as when to sell. They help me to maximise profits and minimise losses by using IRR (internal rate of return) performance criteria to inform selling decisions
See whether these rules may be helpful to you.
The stock portfolio management strategy allows for a consideration of a number of factors including, among others, portfolio asset allocation, portfolio loans and portfolio tracking.
The strategy includes the types of stock to include, the optimum portfolio size, the dividend return to aim for, as well as tax and gearing strategies.
As well as these, portfolio performance monitoring is an important consideration.
Check out how I deal with portfolio management data.
Performance appraisal tools provide a means to measure the performance of the total stock portfolio, as well as the performance of individual stocks in terms of my stock performance requirements.
The performance appraisal tools that can do this job are Excel worksheets that incorporate the IRR formula. Check this out and then link to the discussion of the worksheets.
To Conclude
Your plan may differ from the financial investment advice encapsulated in my investment plan that I use in conjunction with value investing.
You may have a different risk profile, investment time horizon and/or investment objectives. The plan that I outline may provide a useful exemplar.
The related articles below examine each aspect of the plan in more detail.
Avoids the emotional roller coaster!
Good financial investment advice is to have an investment plan for investment in stock.
This is an important means of controlling the potential emotional roller coaster that can be associated with stock investments.
Your success with value investing will largely depend on your temperament and to what extent you can exhibit patience and discipline to make the best investments.
Sticking to a plan is part of this process.
While plans may vary from investor to investor depending on age, capital available and investment time-line, most plans for investment in stock should have some common elements.
Key Elements of the Financial Investment Advice
The key elements of the financial investment advice includes having a buying strategy, a selling strategy, a portfolio management strategy and a strategy for performance management and review.
My buying strategy is my guide to finding the best stocks to buy using a set of 'buying rules' that remind me of the important characteristics of the best stock picks.
These rules also include information on types of companies to avoid.
Check out these buying rules that provide me with a degree of buying confidence.
My selling strategy provides me with a means to avoid panic stock selling. Using a set of six rules helps me to instil discipline in my selling decisions.
The rules cover situations that apply to when not to sell as well as when to sell. They help me to maximise profits and minimise losses by using IRR (internal rate of return) performance criteria to inform selling decisions
See whether these rules may be helpful to you.
The stock portfolio management strategy allows for a consideration of a number of factors including, among others, portfolio asset allocation, portfolio loans and portfolio tracking.
The strategy includes the types of stock to include, the optimum portfolio size, the dividend return to aim for, as well as tax and gearing strategies.
As well as these, portfolio performance monitoring is an important consideration.
Check out how I deal with portfolio management data.
Performance appraisal tools provide a means to measure the performance of the total stock portfolio, as well as the performance of individual stocks in terms of my stock performance requirements.
The performance appraisal tools that can do this job are Excel worksheets that incorporate the IRR formula. Check this out and then link to the discussion of the worksheets.
To Conclude
Your plan may differ from the financial investment advice encapsulated in my investment plan that I use in conjunction with value investing.
You may have a different risk profile, investment time horizon and/or investment objectives. The plan that I outline may provide a useful exemplar.
The related articles below examine each aspect of the plan in more detail.
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Re: 4 Critical Errors You Must Avoid
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How Interest Rates Can Affect Your Bond's Value
http://www.5min.com/Video/How-Interest- ... -516942563
Real Estate Considerations
http://www.5min.com/Video/Real-Estate-C ... s-34799581
http://www.5min.com/Video/How-Interest- ... -516942563
Real Estate Considerations
http://www.5min.com/Video/Real-Estate-C ... s-34799581
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Re: 4 Critical Errors You Must Avoid
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What Investments do Value Investors Consider?
Value investing utilizes a strict methodology that is based on facts-driven reasoning, not hype. Never forget that the majority of investors lose money because they did not control their emotions.[citation needed]
In addition, a value investor does not look for companies who have yet to prove their products. A great example of this is the biotechnology industry. Many of the smaller biotechnology firms don’t even make money at this stage, as they are still undergoing heavy research, development and clinical trials. Even fewer have patents that protect a consistent stream of revenue (as there usually isn't any revenue during R&D). A true value investor would never invest in a company that does not have an established competitive moat (e.g. brand name) protecting its core business.
Some of Warren Buffett's most successful investments were in companies that were financially struggling, but had enormous brand power, for example, Coke.
Value investing utilizes a strict methodology that is based on facts-driven reasoning, not hype. Never forget that the majority of investors lose money because they did not control their emotions.[citation needed]
In addition, a value investor does not look for companies who have yet to prove their products. A great example of this is the biotechnology industry. Many of the smaller biotechnology firms don’t even make money at this stage, as they are still undergoing heavy research, development and clinical trials. Even fewer have patents that protect a consistent stream of revenue (as there usually isn't any revenue during R&D). A true value investor would never invest in a company that does not have an established competitive moat (e.g. brand name) protecting its core business.
Some of Warren Buffett's most successful investments were in companies that were financially struggling, but had enormous brand power, for example, Coke.
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What Factors do Value Investors Use?
Value investors want to see that the company is making money and that the securities are cheap relative to the value of the company. There are many ways of determining this, but perhaps the most widely used introductory method is to look at the earnings yield of the company. This is the inverse of the Price-to-Earnings Ratio. The earnings yield can be interpreted as the earnings return on every dollar spent on this stock. Intuitively, stocks with low P/E ratios have high earnings yields, which may be indicative of a bargain (especially if the stock has been battered down by bad news, but nothing has changed fundamentally for the company or the industry). This isn’t true in all situations, of course, and must not be used as the sole measure for evaluating a stock. The point is that value investors seek quantifiable facts to determine whether a security is undervalued or not.
However, most value investors agree that it is very difficult to determine the exact value of the company. Because of this uncertainty, value investors try to buy shares when the investment offers a reasonable margin of safety, which is the difference between the price and the calculated value. Historically, value investors have sought a margin of safety of around 60% - 75%. In slightly technical terms, this allows the investor a certain degree of confidence that the security is being offered at enough of a bargain that the risk of loss of principal is significantly lessened.
By using such quantifiable measurements, the value investor can safely stay away from making irrational security selections and being taken in by events like the dot-com busts (when prices were exorbitantly high when evaluated against the companies' fundamentals), and the recent credit crunch (which has essentially crippled global markets). How many times have you received a “hot tip” from someone who claims they know what they’re talking about and assures you of great returns? Value investors ignore “hot tips,” hype, and market hysteria.
As a word of caution - because of this somewhat contrarian approach, value investors sometime lose out on potential money makers. For example, most value investors stayed far away from tech stocks like Qualcomm, Google, and Apple. Had value investors bought in during the bust, their returns could have been enormous. However, compared against the risk of losing the investment, these companies offered no margin of safety.
Consider Warren Buffett's rules of investing:
1.Don't lose money
2.Don't forget Rule #1
Buffett's mentor and teacher was Benjamin Graham. Graham was the father of modern security analysis; a great investor in his own right, businessman (Chairman of the early Geico Corporation) and a Professor at Columbia University where Buffett was enrolled in graduate school majoring in Economics. Buffett gives full credit to Graham and says that he stands on the shoulders of Graham's early teachings on value investing.
However, Buffett refined his ideas and strategies and became more successful because he was influenced by the writings of Phillip Fisher and the influence of Charles Munger who became Buffett's Vice Chairman at Berkshire Hathaway. Fisher taught that an investor should examine investment ideas both quantitatively and qualitatively. That management was key in creating a profitable enterprise. From Munger, Buffett learned that it is better to buy great businesses at a fair price than a fair business at a great price.
Warren Buffett's most important contributions to the understanding of investing can be summed up as follows:
1) Concentrate your ideas within your circle of competence. Know what you are buying.
2) Buy only great businesses that have durable competitive advantages. Companies that can overcome macro-events.
3) Only invest with managers that think like owners. Substantial insider ownership is desirable.
4) Invest with a Margin of Safety. The three most important words in The field of Investing and (read Graham's book, "The Intelligent Investor") perhaps Graham's greatest legacy to investors.
Value investors want to see that the company is making money and that the securities are cheap relative to the value of the company. There are many ways of determining this, but perhaps the most widely used introductory method is to look at the earnings yield of the company. This is the inverse of the Price-to-Earnings Ratio. The earnings yield can be interpreted as the earnings return on every dollar spent on this stock. Intuitively, stocks with low P/E ratios have high earnings yields, which may be indicative of a bargain (especially if the stock has been battered down by bad news, but nothing has changed fundamentally for the company or the industry). This isn’t true in all situations, of course, and must not be used as the sole measure for evaluating a stock. The point is that value investors seek quantifiable facts to determine whether a security is undervalued or not.
However, most value investors agree that it is very difficult to determine the exact value of the company. Because of this uncertainty, value investors try to buy shares when the investment offers a reasonable margin of safety, which is the difference between the price and the calculated value. Historically, value investors have sought a margin of safety of around 60% - 75%. In slightly technical terms, this allows the investor a certain degree of confidence that the security is being offered at enough of a bargain that the risk of loss of principal is significantly lessened.
By using such quantifiable measurements, the value investor can safely stay away from making irrational security selections and being taken in by events like the dot-com busts (when prices were exorbitantly high when evaluated against the companies' fundamentals), and the recent credit crunch (which has essentially crippled global markets). How many times have you received a “hot tip” from someone who claims they know what they’re talking about and assures you of great returns? Value investors ignore “hot tips,” hype, and market hysteria.
As a word of caution - because of this somewhat contrarian approach, value investors sometime lose out on potential money makers. For example, most value investors stayed far away from tech stocks like Qualcomm, Google, and Apple. Had value investors bought in during the bust, their returns could have been enormous. However, compared against the risk of losing the investment, these companies offered no margin of safety.
Consider Warren Buffett's rules of investing:
1.Don't lose money
2.Don't forget Rule #1
Buffett's mentor and teacher was Benjamin Graham. Graham was the father of modern security analysis; a great investor in his own right, businessman (Chairman of the early Geico Corporation) and a Professor at Columbia University where Buffett was enrolled in graduate school majoring in Economics. Buffett gives full credit to Graham and says that he stands on the shoulders of Graham's early teachings on value investing.
However, Buffett refined his ideas and strategies and became more successful because he was influenced by the writings of Phillip Fisher and the influence of Charles Munger who became Buffett's Vice Chairman at Berkshire Hathaway. Fisher taught that an investor should examine investment ideas both quantitatively and qualitatively. That management was key in creating a profitable enterprise. From Munger, Buffett learned that it is better to buy great businesses at a fair price than a fair business at a great price.
Warren Buffett's most important contributions to the understanding of investing can be summed up as follows:
1) Concentrate your ideas within your circle of competence. Know what you are buying.
2) Buy only great businesses that have durable competitive advantages. Companies that can overcome macro-events.
3) Only invest with managers that think like owners. Substantial insider ownership is desirable.
4) Invest with a Margin of Safety. The three most important words in The field of Investing and (read Graham's book, "The Intelligent Investor") perhaps Graham's greatest legacy to investors.
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Re: 4 Critical Errors You Must Avoid
โพสต์ที่ 14
What's a value investor to do?
At a time when almost every stock is on sale, it's harder to sort out the real deals from the junk.
More from Money Magazine
How the economy is really doing
(Money Magazine) -- Value investing in a deep recession is a bit like trying to bargain hunt at a dollar store. At first blush you're overwhelmed by the prices on just about everything. A value investor is, after all, drawn to beaten-down stocks trading at low prices relative to earnings.
But in this market, "you could start randomly typing in ticker symbols and find shares that are cheap," says Bill Nygren, manager of the value-oriented Oakmark Fund. That doesn't make them all good deals.
When shares of nearly every company in all sectors of the market are down sharply, as is the case today, you need to be more discerning about what makes a stock cheap. And to create an extra margin of safety, says Thomas Shrager of the investment firm Tweedy Browne, you should stick with "companies where the probability of them going under is very small."
Here's how to go about it:
Comparison-shop on P/Es. At first glance, a stock might look cheap at a price/earnings ratio of, say, 11, which is below the market's average of 13. But it's not that simple. Just as shoppers pay different prices for Italian wingtips and flip-flops, the market sets different valuations for different types of firms.
The only way to tell if a stock is really on sale is to compare its P/E with those of companies in the same industry. You can find sector ratios at standardandpoors.com. Click on Indices and go to the S&P 500 section.
0:00 /2:32Scary market? Stick with stocks
Understand the business. When you screen for companies with extremely low P/Es, you'll run into some risky shares. After all, if a stock is priced significantly below its peers, either something is wrong with the firm or investors think there is. Take the troubled insurer AIG (AIG, Fortune 500). It trades at a P/E of just 7, based on projected future earnings. But how confident are you that AIG will post profits this year?
This is why it's important to invest only in firms whose business models you fully understand, says Wally Weitz, president of the Weitz Funds. Frankly, that writes off much of the financial sector, since no one seems to know all the counterparty risks banks and brokers are exposed to.
By contrast, you might consider a stock like Nike (NKE, Fortune 500) (see the chart above). It's no secret how this firm makes money - shoes and apparel. And while it's threatened by the recession, Nike has a solid balance sheet, a powerful brand, and is making inroads into the lucrative Chinese market.
Avoid firms with big debts. The father of value investing, Benjamin Graham, argued that financial troubles are often "heralded by the presence of bank loans." So he favored companies with low debt.
Graham, in particular, preferred companies in which working capital - defined as current (or liquid) assets minus current (or short-term) liabilities - exceeded long-term liabilities. In theory, those firms, which include companies like Nike and the oil driller Ensco International (ESV), have enough assets on their balance sheets to meet all their obligations.
At least make sure the company generates enough cash to pay off debts maturing in the next few years. Why? It used to be that firms could simply refinance when debts came due. But in this credit crunch, that's no longer a given, says Bill Fries of the Thornburg Value Fund. You can look up cash-flow figures here. But you'll have to look in the footnotes of corporate annual reports to find out how much debt is coming due soon.
If you don't want to do the leg-work, there are plenty of portfolios that follow value guidelines. Several can be found in the Money 70, our recommended list of funds, including T. Rowe Price Equity Income and Weitz Hickory.
All of these portfolios charge lower-than-average fund fees. And that's important. After all, you're bargain hunting.
At a time when almost every stock is on sale, it's harder to sort out the real deals from the junk.
More from Money Magazine
How the economy is really doing
(Money Magazine) -- Value investing in a deep recession is a bit like trying to bargain hunt at a dollar store. At first blush you're overwhelmed by the prices on just about everything. A value investor is, after all, drawn to beaten-down stocks trading at low prices relative to earnings.
But in this market, "you could start randomly typing in ticker symbols and find shares that are cheap," says Bill Nygren, manager of the value-oriented Oakmark Fund. That doesn't make them all good deals.
When shares of nearly every company in all sectors of the market are down sharply, as is the case today, you need to be more discerning about what makes a stock cheap. And to create an extra margin of safety, says Thomas Shrager of the investment firm Tweedy Browne, you should stick with "companies where the probability of them going under is very small."
Here's how to go about it:
Comparison-shop on P/Es. At first glance, a stock might look cheap at a price/earnings ratio of, say, 11, which is below the market's average of 13. But it's not that simple. Just as shoppers pay different prices for Italian wingtips and flip-flops, the market sets different valuations for different types of firms.
The only way to tell if a stock is really on sale is to compare its P/E with those of companies in the same industry. You can find sector ratios at standardandpoors.com. Click on Indices and go to the S&P 500 section.
0:00 /2:32Scary market? Stick with stocks
Understand the business. When you screen for companies with extremely low P/Es, you'll run into some risky shares. After all, if a stock is priced significantly below its peers, either something is wrong with the firm or investors think there is. Take the troubled insurer AIG (AIG, Fortune 500). It trades at a P/E of just 7, based on projected future earnings. But how confident are you that AIG will post profits this year?
This is why it's important to invest only in firms whose business models you fully understand, says Wally Weitz, president of the Weitz Funds. Frankly, that writes off much of the financial sector, since no one seems to know all the counterparty risks banks and brokers are exposed to.
By contrast, you might consider a stock like Nike (NKE, Fortune 500) (see the chart above). It's no secret how this firm makes money - shoes and apparel. And while it's threatened by the recession, Nike has a solid balance sheet, a powerful brand, and is making inroads into the lucrative Chinese market.
Avoid firms with big debts. The father of value investing, Benjamin Graham, argued that financial troubles are often "heralded by the presence of bank loans." So he favored companies with low debt.
Graham, in particular, preferred companies in which working capital - defined as current (or liquid) assets minus current (or short-term) liabilities - exceeded long-term liabilities. In theory, those firms, which include companies like Nike and the oil driller Ensco International (ESV), have enough assets on their balance sheets to meet all their obligations.
At least make sure the company generates enough cash to pay off debts maturing in the next few years. Why? It used to be that firms could simply refinance when debts came due. But in this credit crunch, that's no longer a given, says Bill Fries of the Thornburg Value Fund. You can look up cash-flow figures here. But you'll have to look in the footnotes of corporate annual reports to find out how much debt is coming due soon.
If you don't want to do the leg-work, there are plenty of portfolios that follow value guidelines. Several can be found in the Money 70, our recommended list of funds, including T. Rowe Price Equity Income and Weitz Hickory.
All of these portfolios charge lower-than-average fund fees. And that's important. After all, you're bargain hunting.
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Re: 4 Critical Errors You Must Avoid
โพสต์ที่ 15
Returns of Value Investing
Value Investing does not promise fantastic returns, or even market-beating returns. However, those who have practiced value investing consistently are considered by most to be among the greatest investors of this time; Warren Buffett, Peter Lynch, John Vogle, Mario Gabelli, Eddie Lampert, Charles Brandes, and quite a few others.
Another point - in the last 20 years, the S&P 500 has obtained annualized returns of 13% per year. Over the same period, small-capitalization companies (market caps are less than 2 billion dollars) that were considered value investments had annualized returns of 15%, better than all other types.[citation needed]
$1,000 invested in small-cap value investments 20 years ago, at an annual return of 15%, would yield about $16,366 today. $1,000 invested in the S&P 500 20 years ago, at an annual return of 13%, would yield about $11,523.
As you can see, the value investments would return almost $5,000 more (on a $1,000 investment)!
Value Investing does not promise fantastic returns, or even market-beating returns. However, those who have practiced value investing consistently are considered by most to be among the greatest investors of this time; Warren Buffett, Peter Lynch, John Vogle, Mario Gabelli, Eddie Lampert, Charles Brandes, and quite a few others.
Another point - in the last 20 years, the S&P 500 has obtained annualized returns of 13% per year. Over the same period, small-capitalization companies (market caps are less than 2 billion dollars) that were considered value investments had annualized returns of 15%, better than all other types.[citation needed]
$1,000 invested in small-cap value investments 20 years ago, at an annual return of 15%, would yield about $16,366 today. $1,000 invested in the S&P 500 20 years ago, at an annual return of 13%, would yield about $11,523.
As you can see, the value investments would return almost $5,000 more (on a $1,000 investment)!
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Re: 4 Critical Errors You Must Avoid
โพสต์ที่ 16
Thailand Stock Market Has Upside: Khiem Do Of Baring Asset Management Details His Picks In Current Asian Growth Economies
On Monday February 28, 2011, 5:49 pm EST
67 WALL STREET, New York - February 28, 2011 - The Wall Street Transcript has just published its Investing in China, East Asia and Other Emerging Markets Report offering a timely review of these markets for serious investors and industry executives. This special feature contains expert commentary through in-depth interviews with highly experienced Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: Focusing on Real Assets - China's Domestic Markets - Investing in Brazil - Undervalued Asian Companies
Companies include: Ralph Lauren (RL); Ferbasa (FESA4.SA); General Shopping (GSHP3.SA); Tao Heung (0573.HK) and many more.
In the following brief excerpt from just one of the many in-depth interviews in this extensive report, an Asian equities research specialist discusses the outlook for these markets for investors.
Khiem Do is a Portfolio Manager of the Asia Pacific Fund at Baring Asset Management. He manages a number of specific Asian portfolios and all Multi-Asset portfolios for clients located in Asia. He was appointed a member of the Strategic Policy Group, the company's global macro research and asset allocation team, in 2006. Mr. Do headed the Asia Pacific Specialist Investment Team from 1997 through 2006, and has been a Co-Manager of the Baring China Absolute Return (long-short hedge fund) since July 2004.
Mr. Do joined Baring Asset Management in 1996 from Citicorp Global Asset Management in Sydney, where he was the Australian Chief Investment Officer, the Chair of the Australian Asset Allocation Committee and a member of the CGAM International Asset Allocation Committee. Mr. Do's prior experience includes seven years at Bankers Trust Australia and seven years at Equitilink Australia. Mr. Do received his B.A. in economics (Hons.) from Macquarie University (Australia), and he was designated an Associate Member of the Securities Institute of Australia (the Australian CFA equivalent) in 1979.
TWST: Within what you'd consider the emerging markets, are there any places where you're overweight/underweight, see anything exciting?
Mr. Do: Within the smaller markets of Malaysia, Thailand, Indonesia and the Philippines, we favor Indonesia and Thailand. Why?
Indonesia is a structural beneficiary of a series of reforms undertaken over the past 10 years, plus the fact that it is one of the greatest beneficiaries of the superb growth in China. That is underlined by the fact that Indonesia is a very large producer and exporter of steaming coal, or brown coal, which is used for power production in China. It is also a large exporter of a number of agricultural commodities to China, including palm oil. In addition, as I mentioned before, it is a beneficiary of many reforms over the past 10 years.
Those reforms led to very significant reduction in the budget deficit, which has in turn led to a reduction in inflation, which has subsequently led to a return of foreign direct investment. For those reasons, we have been building an overweight position in Indonesia and, based on the excellent performance of this market over the past few years, the Fund has been positively rewarded.
The other market which we like in the emerging Asian region and which has also done well is Thailand. Despite some political tensions arising last year, our team is attracted towards the Thai equity market for its cheap valuation and growth surprise. Our research led us to believe that the economy was doing better than expected, which would then flow through to corporate profits.
Moreover, Thailand continues to be a big exporter of agricultural products to North Asia. The investment universe of Thailand also includes a large number of well-established banking, energy and materials companies, trading on attractive multiples some six to 12 months ago.
Another very small market which we have invested in and is performing well over the past 12 months was Sri Lanka. Sri Lanka is in actual fact a special case. This is because the nation was, for some 30 years, burdened by a civil war between the Tiger rebels and the government's army. But at the end of 2009, that civil war ended. That has allowed the Sri Lankan economy to resume its normal economic life and the growth catch-up was fast. This has resulted in a massive bounce in its domestic economy, and this is what attracted us to Sri Lanka.
Once again, the market was relatively to cheap to start with, with potential unrecognized growth surprises, which fits in very nicely with our investment philosophy. So we bought a number of positions there, including some banks, which have done very well.
TWST: How about China? Are Chinese stocks a big part of the portfolio now and why or why not?
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
For Information on subscribing to The Wall Street Transcript, please call 800/246-7673
On Monday February 28, 2011, 5:49 pm EST
67 WALL STREET, New York - February 28, 2011 - The Wall Street Transcript has just published its Investing in China, East Asia and Other Emerging Markets Report offering a timely review of these markets for serious investors and industry executives. This special feature contains expert commentary through in-depth interviews with highly experienced Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: Focusing on Real Assets - China's Domestic Markets - Investing in Brazil - Undervalued Asian Companies
Companies include: Ralph Lauren (RL); Ferbasa (FESA4.SA); General Shopping (GSHP3.SA); Tao Heung (0573.HK) and many more.
In the following brief excerpt from just one of the many in-depth interviews in this extensive report, an Asian equities research specialist discusses the outlook for these markets for investors.
Khiem Do is a Portfolio Manager of the Asia Pacific Fund at Baring Asset Management. He manages a number of specific Asian portfolios and all Multi-Asset portfolios for clients located in Asia. He was appointed a member of the Strategic Policy Group, the company's global macro research and asset allocation team, in 2006. Mr. Do headed the Asia Pacific Specialist Investment Team from 1997 through 2006, and has been a Co-Manager of the Baring China Absolute Return (long-short hedge fund) since July 2004.
Mr. Do joined Baring Asset Management in 1996 from Citicorp Global Asset Management in Sydney, where he was the Australian Chief Investment Officer, the Chair of the Australian Asset Allocation Committee and a member of the CGAM International Asset Allocation Committee. Mr. Do's prior experience includes seven years at Bankers Trust Australia and seven years at Equitilink Australia. Mr. Do received his B.A. in economics (Hons.) from Macquarie University (Australia), and he was designated an Associate Member of the Securities Institute of Australia (the Australian CFA equivalent) in 1979.
TWST: Within what you'd consider the emerging markets, are there any places where you're overweight/underweight, see anything exciting?
Mr. Do: Within the smaller markets of Malaysia, Thailand, Indonesia and the Philippines, we favor Indonesia and Thailand. Why?
Indonesia is a structural beneficiary of a series of reforms undertaken over the past 10 years, plus the fact that it is one of the greatest beneficiaries of the superb growth in China. That is underlined by the fact that Indonesia is a very large producer and exporter of steaming coal, or brown coal, which is used for power production in China. It is also a large exporter of a number of agricultural commodities to China, including palm oil. In addition, as I mentioned before, it is a beneficiary of many reforms over the past 10 years.
Those reforms led to very significant reduction in the budget deficit, which has in turn led to a reduction in inflation, which has subsequently led to a return of foreign direct investment. For those reasons, we have been building an overweight position in Indonesia and, based on the excellent performance of this market over the past few years, the Fund has been positively rewarded.
The other market which we like in the emerging Asian region and which has also done well is Thailand. Despite some political tensions arising last year, our team is attracted towards the Thai equity market for its cheap valuation and growth surprise. Our research led us to believe that the economy was doing better than expected, which would then flow through to corporate profits.
Moreover, Thailand continues to be a big exporter of agricultural products to North Asia. The investment universe of Thailand also includes a large number of well-established banking, energy and materials companies, trading on attractive multiples some six to 12 months ago.
Another very small market which we have invested in and is performing well over the past 12 months was Sri Lanka. Sri Lanka is in actual fact a special case. This is because the nation was, for some 30 years, burdened by a civil war between the Tiger rebels and the government's army. But at the end of 2009, that civil war ended. That has allowed the Sri Lankan economy to resume its normal economic life and the growth catch-up was fast. This has resulted in a massive bounce in its domestic economy, and this is what attracted us to Sri Lanka.
Once again, the market was relatively to cheap to start with, with potential unrecognized growth surprises, which fits in very nicely with our investment philosophy. So we bought a number of positions there, including some banks, which have done very well.
TWST: How about China? Are Chinese stocks a big part of the portfolio now and why or why not?
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
For Information on subscribing to The Wall Street Transcript, please call 800/246-7673
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Re: 4 Critical Errors You Must Avoid
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