Wednesday, 22 March 2017

Why did Buffett buy Apple Inc. ( AAPL)? - A Cash Cow that turned 24.8% of its Revenues into Free Cash Flow for its Owners.

At the price of US 139.84 per share and with 5,500 million shares outstanding, Apple is priced by the market at a whopping US 769.12 Billion.

It is the company with the highest market capitalisation in a stock market in the world today.

Apple continues to innovate in its products and it is expected to deliver some new surprises in the future.

Despite some negative news in recent years, it has proven its critics wrong in growing its revenues, profit before tax and EPS share over the last 5 years.

The revenue growth showed consistency, however, the profit before tax and EPS were more volatile and less consistent, being affected by efficiency and costs leading to profit margins that were variable over the period.

Though its revenues had grown from US 156 billion in its FY 2012 to US 214 billion in its FY 2016, its net income grew from US 41.7 billion to US 45.7 billion over the same period.

Its profit before tax margins continued to be maintained at high levels of 28.6% and its latest ROE was 38.3%.

Apple started its share buybacks over the years and had reduced the number of shares outstanding from 6,617 million shares in 2012 to 5,500 million shares in 2016.

Due to its huge free cash flow generated yearly and its huge cash reserves, this share buyback should benefit the shareholders who are still holding to its shares.

Apple distributed little dividend in the past.  In 2012, its dividends were US 2.5 billion.  Since 2013, Apple had distributed dividends of US 10.6 billion, US 11.1 billion, US 11.6 billion and US 12.2 billion yearly to 2016.

Over these 5 years from 2013 to 2016, its dividend payout was a total of 22.1% of its earnings.

Apple still retains a lot of its earnings, some being used to buyback its own shares.

This company is a true cash cow.  Its FCF for the year ending Sept 2016 was US 53.1 billion on a revenue of US 214 billion.  This gave a FCF/Revenue of 24.8%.  A remarkably high and cash generating company.

At today's market capitalisation of US 769.12 billion (US 139.84 per share), its FCF to market cap yield is 6.89%.

At today's price of US 139.84 per share, and using the EPS of FY 2016 of US 8.31 per share, Apple is trading at a PE of 16.8x.

When Warren Buffett bought into Apple at the end of 2016, its share price was around US 110 per share.

At US 100 per share then, Warren Buffett bought into Apple which is a great company at a fair price.  At that price, the upside and downside were about even.  The dividend yield was 2.4% and the potential total upside return around 11.1% per year (2.4% from dividends and 8.7% from capital appreciation) for the next 5 years.

At US 139.84 today,  the upside is much less compared to the downside.  The dividend yield is 1.9% and the total projected potential return around 4,5 %per year (2.6% from dividends and 1.9% from capital appreciation) over the next 5 years.

Aeon Credit (22.3.2017)

The revenue, profit before tax and EPS continue to grow.

In its latest quarter, it grew its quarterly revenue 14% and its quarterly EPS 27.4% when compared to the previous year same quarter.

Its share price peaked at RM 18.86 per share in 2013.

Since then its share prices have been range bound between RM 10 to RM 15 per share.

Its EPS continued to grow at a good rate during the same period from 93.1 sen per share to 158.5 sen per share.

The rising EPS and the flat share prices over the last 3 years, resulted in Aeon Credit trading at very low PE of below 10.

At today's closing price of RM 16.60 per share, it is trading at a PE of 10.5.

This stock pays dividend over the years.  Its dividend payout ratio has been around 38%.

It has increased its dividends yearly over the years from 25 sen per share in 2012 to 59.5 sen per share in 2016 (more than double over this period).

At its present price of RM 16.60 per share, its dividend yield is 3.58%.

This dividend yield should appeal to those who are investing for income too.

Projecting into the future, Aeon Credit should continue to grow its revenues, profit before tax and EPS.

Those who own Aeon Credit for the long term should enjoy a satisfactory total return from its capital appreciation and its growing dividends.

Friday, 17 March 2017

Benjamin Graham's teachings on Market Fluctuations and your investing

Market Fluctuations

            Fluctuations of Common Stock Prices
Since common stocks are subject to wide price swings, the investor should seek to profit from these opportunities.  However, attempting to time the market usually ends in unsatisfactory results.  Graham believes that market timing is pure speculation and is not an investing activity.  The best an investor can do is the change the bond and stock proportions in his portfolio after major market swings. 
Formulas do not work, although they have been in vogue since the 1950s.  When the market reached new highs in the mid-1950s, many formula investors sold their equities according to formula only to witness the market grow increasingly higher.  Any approach to the market that is easily described is sure to fail (except for Graham’s method). 
The investor also can focus on the price of a security. Graham recommends this practice.  Short-term fluctuations should not matter.  Over a period of 5 years, the investor should not be surprised if the average value of his portfolio increases more than 50% from its low point or decreases 1/3 from its high point.
Market advances and declines tempt investors to make foolish decisions.  Varying the proportion of stocks and bonds between the 25%-75% ratio occupies an investor’s time during turbulent markets and prevents him from making gross errors in judgement.  The true investor takes comfort that his actions are opposite from the actions of the crowd.
The better a firm’s record and its prospects, the less relationship that its price will have to its book value.  The more successful the company, the more likely its share price is to fluctuate.  More often than not, a fast growing firm’s market price will exceed its intrinsic value.  So, the better the quality of the stock, the more speculative it will be.  This explains the erratic price behavior of some of the most successful and impressive enterprises, such as IBM and Xerox.
The investor should purchase issues close to their tangible asset values and at no more than 33% above that figure.  These purchases logically are related to a company’s balance sheet and not to its earnings.  Any premium over book value may be thought of as a fee for liquidity that accompanies any publicly traded stock.   
            Just because a stock sells at or below its net asset value does not warrant that it is a sound purchase.  In addition to below market values, the investor also must demand a strong financial position, a satisfactory p/e ratio, and an assurance that the firm’s earnings will be sustained over the years.  This is not an entirely difficult bill to fill except under dangerously high market conditions.  At the end of 1970 more than half of the DJIA met these investment criteria.  However, the investor will forgo the most brilliant, high growth prospects.
            With a portfolio purchased at close to book value, the investor can take a more detached view of market fluctuations.  In fact, so long as the earning power of the portfolio remains satisfactory, the investor can use these market vagaries to buy low and sell high.
As seen with the stock fluctuations of A & P over many years, the market often goes wrong.  Although the stock market may fall, a true investor is rarely forced to sell his shares.  Rather, the investor is free to disregard the market quotes.  Thus, the investor who allows himself to be unduly worried about the market transforms his basic advantage into a disadvantage.  In fact, the investor who owns common stock owns a piece of these companies as a private owner would, and a private owner would not sell his business when it is undervalued by the market.  A quoted stock provides an option for the investor to sell at a given price and nothing more.  The investor with a diversified portfolio of good stocks should neither worry about sizeable declines nor become excited about sizeable advances.   An investor never should sell a stock just because it has gone down or purchase it because it has gone up.
Graham provides the parable of “Mr. Market”, who like the stock market, quotes you a price for your shares each and every day.  Mr. Market will either buy your shares or sell you his.  The price will depend upon Mr. Market’s mood.  You can ignore his efforts, or you can take advantage of him when he quotes you a price that you believe is priced advantageously.  Finally, one should not forget the effect of management on a firm’s results.  Good management produces acceptable results and bad management does not.

Fluctuation of Bond Prices
            Short-term bonds, defined as those with a duration of less than 7 years, are not significantly affected by changes in the market.  This applies to US Savings Bonds, which can be redeemed at anytime.  Long term bonds, however, may experience wide price swings as a result of fluctuations in the interest rate.  Thus, long term bonds may seem attractive when discounted, but this practice often leads to speculation and losses.
Low yields correspond with high bond prices and vice versa; prices and yields are inversely related.  The period from 1960 to 1975 is marked by reversing swings in the price of bonds so much so that it reminded Graham of Newton’s law: “every action has an opposite and equal reaction.”  Of course, nothing on Wall Street actually occurs the same way twice. 
Graham acknowledges the impossibility of attempting to predict bond prices, even if common stock prices were predictable.  Therefore, the investor must choose between long- term and short-term bonds chiefly on the basis of personal preference.  If the investor wishes to ensure that his market values will not decrease, then the investor is best served by US Savings Bonds.  With higher yield long term bonds, the investor must be prepared to see their market values fluctuate. 
Convertible issues should be avoided.  Their prices fluctuate widely and unpredictably based upon the price of the underlying common stock, the credit standing of the firm, and the market interest rate.  Because convertible issues experience huge swings in market value, they are largely speculative investments.

Friday, 3 March 2017

Warren Buffett teaches on Share Repurchases

Share Repurchases
In the investment world, discussions about share repurchases often become heated. But I'd suggest that participants in this debate take a deep breath: Assessing the desirability of repurchases isn't that complicated.
From the standpoint of exiting shareholders, repurchases are always a plus. Though the day-to-day impact of these purchases is usually minuscule, it's always better for a seller to have an additional buyer in the market.
For continuing shareholders, however, repurchases only make sense if the shares are bought at a price below intrinsic value. When that rule is followed, the remaining shares experience an immediate gain in intrinsic value. Consider a simple analogy: If there are three equal partners in a business worth $3,000 and one is bought out by the partnership for $900, each of the remaining partners realizes an immediate gain of $50. If the exiting partner is paid $1,100, however, the continuing partners each suffer a loss of $50. The same math applies with corporations and their shareholders. Ergo, the question of whether a repurchase action is value-enhancing or value-destroying for continuing shareholders is entirely purchase-price dependent.
It is puzzling, therefore, that corporate repurchase announcements almost never refer to a price above which repurchases will be eschewed. That certainly wouldn't be the case if a management was buying an outside business. There, price would always factor into a buy-or-pass decision.
When CEOs or boards are buying a small part of their own company, though, they all too often seem oblivious to price. Would they behave similarly if they were managing a private company with just a few owners and were evaluating the wisdom of buying out one of them? Of course not.
It is important to remember that there are two occasions in which repurchases should not take place, even if the company's shares are underpriced. One is when a business both needs all its available money to protect or expand its own operations and is also uncomfortable adding further debt. Here, the internal need for funds should take priority. This exception assumes, of course, that the business has a decent future awaiting it after the needed expenditures are made.
The second exception, less common, materializes when a business acquisition (or some other investment opportunity) offers far greater value than do the undervalued shares of the potential repurchaser. Long ago, Berkshire itself often had to choose between these alternatives. At our present size, the issue is far less likely to arise.
My suggestion: Before even discussing repurchases, a CEO and his or her Board should stand, join hands and in unison declare, 'What is smart at one price is stupid at another.'
* * * * * * * * * * * *
To recap Berkshire's own repurchase policy: I am authorized to buy large amounts of Berkshire shares at 120% or less of book value because our Board has concluded that purchases at that level clearly bring an instant and material benefit to continuing shareholders. By our estimate, a 120%-of-book price is a significant discount to Berkshire's intrinsic value, a spread that is appropriate because calculations of intrinsic value can't be precise.
The authorization given me does not mean that we will 'prop' our stock's price at the 120% ratio. If that level is reached, we will instead attempt to blend a desire to make meaningful purchases at a value-creating price with a related goal of not over-influencing the market.
To date, repurchasing our shares has proved hard to do. That may well be because we have been clear in describing our repurchase policy and thereby have signaled our view that Berkshire's intrinsic value is significantly higher than 120% of book value. If so, that's fine. Charlie and I prefer to see Berkshire shares sell in a fairly narrow range around intrinsic value, neither wishing them to sell at an unwarranted high price ' it's no fun having owners who are disappointed with their purchases ' nor one too low. Furthermore, our buying out 'partners' at a discount is not a particularly gratifying way of making money. Still, market circumstances could create a situation in which repurchases would benefit both continuing and exiting shareholders. If so, we will be ready to act.
One final observation for this section: As the subject of repurchases has come to a boil, some people have come close to calling them un-American ' characterizing them as corporate misdeeds that divert funds needed for productive endeavors. That simply isn't the case: Both American corporations and private investors are today awash in funds looking to be sensibly deployed. I'm not aware of any enticing project that in recent years has died for lack of capital. (Call us if you have a candidate.)

Thursday, 2 March 2017

Why anyone would buy a 30-year bond 'absolutely baffles me,' Warren Buffett says

Billionaire investor Warren Buffett told CNBC he can't see any reason for investors to buy 30-year bonds right now.
"It absolutely baffles me who buys a 30-year bond, the chairman and CEO of Berkshire Hathaway said on "Squawk Box" on Monday. "I just don't understand it."
"The idea of committing your money at roughly 3 percent for 30 years ... doesn't make any sense to me," he added.
Buffett said he wants his money in companies, not Treasurys — making the case throughout CNBC's three-hour interview that he sees stocks outperforming fixed income.

Click here for the video

Buffett: Measured against interest rates, stocks are actually on the cheap side compared to historic valuations.


Warren Buffett is a closet dividend investor.

How Warren Buffett earns $1,140 in dividend income per minute

On April 3rd, 2017, Buffett’s Berkshire Hathaway (BRK.B) will receive $148 million dollars in dividend income from their 400 million shares of Coca-Cola (KO). This comes out to roughly $1.644 million in dividend income per day, $68,500 dollars in dividend income per hour, $1142 dollars in dividend income for Berkshire Hathaway every minute, or almost $19.03 every single second. Those shares have a cost basis of $1.29 billion dollars, and were acquired between 1988 – 1994. This comes out to $3.25/share. The annual dividend payment produces an yield on cost of over 45.60%. This doesn’t assume dividend reinvestment and is 4 – 5 times higher than what investors in 30 year US Treasuries would be earning today. This is why I believe that Warren Buffett is a closet dividend investor.

This is a testament to the power of long-term dividend investing, where time in market is the investors best ally, not timing the market. If you can select a business which is run by able and honest management, which has solid competitive advantages, and which is available at a good price today, one needs to only sit and let the power of compounding do the heavy lifting for them. As Buffett likes to say, time is a great ally for the good business. In the case of Coca-Cola, the past 29 years have been a great time to buy and hold the stock. The company has been able to tap emerging markets in Eastern Europe, Asia, Africa and Latin America like never before. As a result, it has been able to receive a higher share of the worldwide drinks market, which has also been expanding as well. If you add in strategic acquisitions, new product development, cost containment initiatives and streamlining of operations, you have a very powerful force for delivering solid shareholder returns. With dividend investing your are rewarded for smart decisions you have made years before.

If they closed the stock market for a period of 10 years, Coca-Cola would be one of the companies I would be willing to hold on to. This is because ten years from now, the company would likely be earning double what it is earning today, and would likely be distributing twice as much in dividend income than it is paying to shareholders today. Check my analysis of Coca-Cola for more information.

At the end of the day, if you identify a solid business, that has lasting power for the next 20 – 30 years, the job of the investor is to purchase shares at attractive values, and hold on to it. This slow and steady approach might seem unexciting initially, but just like with the story of the slow-moving tortoise beating the fast moving hare, the power of compounding would work miracles for the patient dividend investor.

In the case of Warren Buffett's investment in Coca-Cola, he is able to recover his original purchase price in dividends alone, every two years. Even if Coca-Cola goes to zero tomorrow, he has generates a substantial returns from dividends alone, which have flown to Berkshire's coffers, and have been invested in a variety of businesses that will benefit Berkshire Hathaway's shareholders for generations to come.

Currently, Coca-Cola is selling for 21.10 times forward earnings and yields 3.60%. This dividend king has managed to increase dividends for 55 years in a row. There are only twenty companies in the entire world which have gained membership into the exclusive list of dividend kings. Over the past decade, Coca-Cola has managed to increase dividends by 8.50%/year, equivalent to dividend payments doubling every eight and a half years. This is much better than the raises I have received at work over the past decade, despite the fact that I have routinely spent 55 - 60 hour weeks at the office.

Tuesday, 21 February 2017

Padini 2Q net profit up 64.7%, pays 2.5 sen dividend

Author: moneyKing | Publish Date: 20 Feb 2017, 8:00 PM

By Chester Tay / | February 20, 2017 : 6:33 PM MYT

KUALA LUMPUR (Feb 20): Padini Holdings Bhd's net profit jumped 64.7% to RM54.47 million or 8.28 sen a share in its second financial quarter ended Dec 31, 2016 (2QFY17) from RM33.07 million or 5.03 sen a share a year ago, on improved gross profit margins as there were less markdowns during the quarter under review.

Revenue for 2QFY17 grew 25.4% to RM426.65 million from RM340.38 million in 2QFY16.

The group also declared a third interim dividend of 2.5 sen per share for the financial year ending June 30, 2017 (FY17), payable on March 27.

In a filing with Bursa Malaysia today, Padini attributed the increased revenue to positive same store sales growth achieved, coupled with the eight Brands Outlet stores and five Padini Concept Stores that were opened after 2QFY16.

"Although there was also a 20% (RM18.3 million) increase in operating expenses that was mainly contributed by the increase from rentals and staff salaries for the new stores, the increase in revenue and the improvement in gross margins sufficiently covered for it," said Padini.

"For the quarter under review, the group had managed to improve its efficiencies, having achieved a higher growth in revenues as compared to the growth in operating expenses in spite of the many challenges faced. That said, we note that it was also a historically good quarter with the month long year-end school holidays and the cheer of the Christmas festivities," it added.

For the first half of FY17 (1HFY17), the group's net profit increased by 28% to RM83.09 million or 12.63 sen a share from RM64.9 million or 9.86 sen a share a year ago, while revenue rose 20.8% to RM736.68 million in 1HFY17 from RM609.95 million in 1HFY16.

"The group has concluded the first half of the financial year with a good set of results despite the prevailing challenges of unstable ringgit, rising costs of goods and operations coupled with the current economic situation.

"As the group perseveres on with its stance in continuing to provide value for money, the second half of the financial year will continue to be very challenging but the group is confident in turning in another profitable financial year," said Padini.

Padini's share price closed unchanged at RM2.58 today, giving it a market capitalisation of RM1.7 billion.

Friday, 10 February 2017

An academic professor who made millions from investing.

Horsky spent almost four decades at the University of Rochester’s Simon Business School, where he became a renowned scholar in quantitative marketing. He researched Internet startup companies, particularly in Israel, where he once lived. He lost money in 17 companies he invested in, running up credit-card debt and taking a second mortgage, according to the memo from his lawyers. In 2000, he invested in a British company through a Swiss account, sticking with the firm even as he ran up $350,000 in debts, often using margin loans.
In 2005, shares in the company began to take off, and by 2008, his holdings were worth $80 million after a second firm bought the company. He then reinvested in the second company, and his assets grew to $200 million by 2014. Even as he hid those assets, “he lived his modest life as a university professor,” according to his attorneys.

Saturday, 4 February 2017

Quantitative versus Qualitative Analysis. Lessons from Isaac Newton's South Sea's debacle.

Isaac Newton’s South Seas debacle is typically told as a parable of the dangers of market manias, which can consume even the brightest of investors. 

That is true. However, Newton’s South Seas adventure also illustrates another, less commonly acknowledged point: 

1.  Many critical investment questions cannot be solved by math. 

2.  And devoting too much attention to matters quantitative, while giving insufficient attention to issues such as judgment and data quality, can be outright harmful to portfolio results.

Thursday, 19 January 2017

Dividend Yield Investing

As deposit accounts pay very low interests or next to nothing, dividends on shares seem attractive. But you'll need to choose carefully.

Many large companies pay decent dividends once, twice or even four times a year. The yield – the dividend expressed as a percentage of the share price – is often attractive by comparison with interest rates on savings. There are now a wide range of blue chip companies yielding 4pc.

Warnings for those seeking Dividend Yield in their investing

When comparing a dividend yield with the interest rate on a savings account, however, certain warnings should be borne in mind.

1. The first point is that your capital is not guaranteed; share prices can and do fall.

2. Secondly, dividends can be cut drastically or axed altogether with little or no notice – and this can lead to a fall in the share price as well.

So just buying the shares with the highest dividend, without researching how safe that dividend is, can be a mistake.

There are now a huge range of high yielding blue chips but it is best to look for a dividend that is less likely to be cut even if that company's profits fall.

A high yield alone is not synonymous with a decent dividend.

If you carry out thorough research and pick the right shares, you will get better value for your cash than by leaving it in a savings account.

Measure of a dividend's reliability is Dividend Cover

The long-established measure of a dividend's reliability is dividend cover: the ratio of net profits to the size of the dividend payout.

Generally, a cover ratio of at least two – meaning that the company has twice as much net earnings as the amount earmarked for dividend payments – is considered a strong indicator.

Once again, for those who invest for yield or income - either Dividend Yield Investing or Dividend Growth Investing - STOCK SELECTION is still the key.

Search out for those companies that have a good chance of sustaining or even increasing their dividends.

If you are knowledgeable, you can even anticipate and avoid those companies that may skip or reduce their dividends in the future.

Stock selection is the key to dividend yield investing.

Some investors look at historic yields; some at forecast (or "prospective") yields.

But either way, those yields can be unexploded mines, lurking for the unwary.

Looking at yield on its own, in short, can quickly introduce you -- painfully -- to the meaning of the term "yield trap".

Yield Trap

The yield trap is simply explained.

You buy a share, attracted by the high yield. But the dividend is then cut, or cancelled -- leaving you without the anticipated income. Worse, unsupported by the payout, the share price usually falls as well, leaving you also nursing a capital loss.

Let's see it in action.

Company A pays out 9 pence a share, with shares changing hands for 100 pence per share. So the dividend yield -- which is the dividend per share, divided by the share price, and multiplied by a hundred to turn it into a percentage -- is 9%.

But that 9 pence is unsustainable. Company A then halves its dividend, slashing investors' income. What happens to the yield? If the share drops to -- say -- 80 pence, the historic yield the becomes 5.6%. The "yield on cost" figure, of course, is 4.5%.

How, then, should investors spot potential yield traps?  Answer:  Dividend cover

The most obvious reason for slashing the dividend is that the business simply hasn't got the money to pay it.

The business's earnings, in short, aren't large enough to support a distribution to shareholders at historic levels.

Put another way, actual earnings per share aren't sufficiently large when compared to the anticipated dividend per share.

Which is where the notion of 'dividend cover' comes in: earnings per share divided by dividend per share.

Interpret Dividend Cover with care

Now, dividend cover shouldn't be followed blindly.

Some businesses -- such as utilities, for instance -- can quite happily operate with lower levels of dividend cover than more cyclical businesses.

Other businesses -- such as REITs -- must pay out a fixed proportion of earnings as dividends, so again a low level of dividend cover is the norm.

Still other businesses have very high levels of dividend cover, because they are growing -- and therefore retaining earnings for future investment -- rather than paying them out as dividends.

But as a broad brush generalisation,

- A ratio of close to one is definitely the danger zone.
- A ratio much bigger than two indicates a certain parsimony.
- A ratio of 1.5-2.5 is usually what I'm looking for.

Stock Performance Guide on Dividends (by Neoh Soon Kean)

He considers dividend per share (DPS) as the most important factor when evaluating the worth of a share.

The ideal situation is for the DPS of a company to grow smoothly and rapidly over the years. (This is the Dividend Growth Investing I mentioned).

The DPS track record should be unbroken for many years.

One important caveat: you must compare the amount of dividend paid with the amount of earnings per share (EPS). (This is the dividend payout ratio).

- The growth of DPS must be proportionate to the growth of EPS.

- A company cannot sustain year after year of higher DPS thanEPS.

- On the other hand, the DPS should not be too small compared with the EPS unless the EPS is growing rapidly.

He advises, under normal circumstances, the DPS should be between 30% to 70% of the EPS.

Happy Investing

Sunday, 15 January 2017

Key Investment Principles of Charlie Munger

What Are The Eight Key Investment Principles of Charlie Munger?

As we all know, Charlie Munger uses mental models to look at issues and problems. He’s got hundred of them but the selected core models handle most of the freight.
What then are Charlie Munger’s Keys Investment Principles?
  • Take Into Account Your Personality and Own Psychology.

CM: Each person has to play the game given his own marginal utility considerations and in a way that takes into account his own psychology. If losses are going to make you miserable – and some losses are inevitable – you might be wise to utilize a very conservative patterns of investment and saving all your life.
  1. If You Can Find Three Good and Super Investments, That Can Be Good Enough. (Caveat Emptor: Are you and me who are mere mortals as good as Charlie Munger? If not, we may need more than three.)
CM: My own inquiries on that subject were just to assume that I could find a few things, say three, each which had a substantial statistical expectancy of outperforming averages without creating catastrophe. If I could find three of those, what were the chances my pending record wouldn’t be pretty damn good. I just sort of worked that out by iteration. That was my academic study—high school algebra and common sense.
  • Odds Must Be In Your Favor And You Are Not Risking Everything On A Penalty Shoot-Out

CM: This great emphasis on volatility in corporate finance we regard as nonsense. Let me put it this way; as long as the odds are in our favor and we’re not risking the whole company on one throw of the dice or anything close to it, we don’t mind volatility in results.
  • Go For An Index Fund If You Are Average Investor

CM: Does that mean you should be in an index fund? Well, that depends on whether or not you can invest money way better than average or you can find someone who almost surely will invest money way better than average.
  • Achieve The Optimal Position Of A Few Great Investments and Sit Back

CM: There are huge advantages for an individual to get into position where you make a few great investments and just sit back. You’re paying less to brokers. You’re listening to less nonsense. If it works, the governmental tax system gives you an extra one, two, or three percentage points per annum with compound effects.
  • Read, Not Just A Little, But A Lot

CM: I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.
  • Invest In A Way That Does Not Require Continuing Intelligence

CM: Berkshire’s assets have been lovingly put together so as not to require continuing intelligence at headquarters.
CM: Invest in a business any fool can run, because someday a fool will. If it won’t stand a little mismanagement, it’s not much of a business. We’re not looking for mismanagement, even if we can withstand it.
  • For Companies ([Sic] And In Many Things In Life), There Is No One Size Fits All

CM: You need a different checklist and different mental models for different companies. I can never make it easy by saying, ‘Here are three things.’ You have to derive it yourself to ingrain it in your head for the rest of your life.

Your investments using Mutual Funds or Money Managers

There are various avenues individual investors may exercise in managing their investments. 

Investing properly is a full-time job, and that it would be very difficult for individual investors to manage their own money if they have other employment. 

This leaves them two options:

1) Mutual Funds
2) Money Managers

Open-end mutual funds

Open-end mutual funds offer the investor access to both liquidity and the ability to sell for net asset value. 

On the other hand, many funds are driven by relative performance and often grow to sizes where market-beating returns are not possible. 

Since managers are compensated by assets under management, they are also prone to follow short-term trends in order to avoid falling behind their peers in the near-term which could trigger a mass exodus of investors.

Closed-end funds

Closed-end funds do not offer investors ready liquidity at net asset value.

However, they may be prudent investments when they trade at substantial discounts to their net asset values. 

Money Managers

In evaluating money managers, individual investors should raise the following questions which will help select a manager:
  • Do they manage their own money in parallel with their clients'?
  • Has the size of the portfolio grown exceedingly large?
  • What is the investment philosophy of the manager? Does it make long-term sense?

In evaluating investment results, investors must look deeper than a manager's historical investment returns. 
  • For example, any manager can generate phenomenal returns within a certain period of time. 
  • Are the returns described over at least one full business cycle
  • Also, were the returns generated using leverage?
  • Or were they generated despite the portfolio holding large amounts of cash (in which case risk is much lower)?

Take Home Message

Investors who adopt a value-oriented investment approach should be able to invest safely with promise of a satisfactory return. 

If they do not have the time to manage their money full-time, find a trustworthy manager who employs this value investing philosophy.

Read also:

Trading and portfolio management from a value investing point of view.

Portfolio Management

Portfolio management is described as an on-going process that is never complete. 

While certain businesses may be fairly stable, its prices will fluctuate over time, and so the investor must constantly monitor the situation. 

Value investors are not into buying certain industries or business ideas without regard to price, and so price changes are a fundamental factor that drive portfolio decisions.

The portfolios need to be somewhat liquid. 

Investors are advised not to purchase their entire positions at one go, but rather to leave room to buy in at cheaper prices should the stock go down. 

A good test for an investor is to consider whether he would indeed buy more of the stock were it to drop; if he is not, he is probably speculating and should not be buying in the first place!

The Decision of When to Sell 

Determining when to buy a stock is usually a much easier decision for a value investor, since the stock at that time is trading below what the investor considers an adequate margin of safety. 

But when the stock is trading within the range of values the investor believes it to be worth, what is the investor to do? 

We can argue against selling after percentage gain thresholds or price targets have been reached.   

Instead, the investor should compare the investment to available alternative investments:

  • It would be foolish to sell if there were no better investments and the stock was still undervalued, but 
  • it would be foolish not to sell if there are better bargains around!

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