Value Investing = Get Rich Quick ?

I came across a forwarded email promoting a 1 day Value Investing Seminar, talking about philosophies and investment styles of Benjamin Graham, Philip Fisher and Warren Buffett .

The email (written by the organiser) is as follows:

"If you like to get rich quickly, this is the way. Please kindly circulate this to all your friends who are also interested to get rich quickly."

Well, I did forward and highly recommend that seminar to a few of my friends, but NOT because I or they want to get rich quickly. I forward and personally will be attending the seminar because I think the philosophies and investment styles of Benjamin Graham, Philip Fisher and Warren Buffett is very good (if not excellent).

Anyway, here's what Warren Buffett said about Sound / Value Investing.

“Ben Graham wasn’t about brilliant investments and he wasn’t about fads of fashion. He was about sound investing, and I think sound investing can make you very wealthy if you’re not in too big of a hurry. And it never makes you poor, which is even better.”

[Source: http://www.trinitywealth.ca/articles/500MostWittyThings.pdf ]

And lastly, i end with a quote i read somewhere that says,

"The only thing fast about money, .... is losing it!"

About Gold

Is Gold a good investment?
It depends what's your definition of "good". When compared to cash, i think Gold is a better choice, since government have the legal license to keep printing money and thus diluting our cash while we're not compensated enough from interest earned from our cash. That is assuming you're not buying Gold at an overvalued price.

But i don't keep my surplus in "cash". I don't enjoy being "poor" slowly but surely.

To me, keeping Gold is like running on a treadmill. Yes, you're running, but you're going nowhere (after adjusted for inflation). On the other hand, keeping cash is even worse! That's like walking up slower than the escalator coming down, and thereby you're moving slower and slower down.

Question : Where do you think gold will be in five years and should that be a part of value investing?

Buffett : I have no views as to where it will be, but the one thing I can tell you is it won't do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot--and it's a lot--it's a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that. The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset.

Source: Ask Warren Buffett on CNBC's Squawk Box - Part 7 (9th March 2009)

Buffett also says "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"

Benjamin Graham in The Intelligent Investor also expresses his opposition to investing in gold.

Jeremy Siegel in Stocks for the Long Run writes how gold has barely beaten inflation over the past 200 years.

It is impossible to put an intrinsic value on gold. Companies or properties can be evaluated in numerous ways based on earnings, assets, growth etc. However, gold is just a metal which has no intrinsic value. Any time you are buying without establishing a margin of safety you are more likely speculating than you are investing.

If you buy gold at $1350 an ounce and it drops 50% there is no way to tell if it is trading above, at, or below its intrinsic value. That is why you will have no idea what do to if there is a sharp decline in gold prices. On the other hand, if you buy a property or stocks of a good company, you can check to see whether the earnings is affected as much as the drop in the price.

Take for instance, if you buy a property at RM 200,000 that gives you a Net annual rental of RM 20,000, giving you an annual rental return of 10%. If after 3 months and the property price drops to RM 100,000, we can check to see if the rental drops or not. If the rental did not drop, then we'll know that the property's intrinsic value did not drop. In fact, we can confidently buy more provided that the property price drop while rental remains. I don't know how we can say the same thing with Gold.

Owning a goose that lays eggs vs a goose that does nothing

From the green line of the graph above, it shows that Dow grows at a higher rate than Gold. Owning Equities represents ownership of companies and owning good companies is like owning a Goose that keeps on laying eggs.

Does Gold price keeps going up?

No! Infact, if you have bought at the "peak" in 1980, you have to wait 27 years to breakeven, and that's not including the depreciation of money over these 27 years. At this high price of gold currently, it's quite hard to justify recommending investing in gold.

Letter to a fund manager of a local Insurance Company

Here's a letter i wrote to a fund manager (investment-linked) of a local insurance company. Until today, there's no reply from them.

In the year ending Nov 30th, 2007, A** Equity Fund had 92.6% in Equities. That time, the index was 1,396.98. 1 year later, when KLCI is at 866.14, A**'s Equity Fund's equity exposure drop to 42.5% ! Isn't that "buy high, sell low"?

Put it another way, the summary is as below:
Date ------------------- KLCI ---------------A** Equity Fund's Equity Exposure
30th Nov 2007 --------1,396.98 ---------------------------92.6%
30th Nov 2008 ---------866.14 ----------------------------42.5% !!!

Shouldn't it be the other way round? And if the fund manager can't time the market (which i believe nobody can), shouldn't A** Equity Fund maintains as an "Equity" Fund with 70% to 90% in Equity? Having 42.5% in Equity is less than what a balanced fund is putting! And having 42.5% in Equity when prices are low is even more unexplainable!

Please explain this when i can't see any logical reasons for it (other than the fund manager having "buy high, sell low" syndrome, or join the herd mentality to be fearful when prices are low or trying to gamble the market's direction).

And in year 2009, KLCI earned 44.7% while A** equity fund earned less than 2/5 of KLCI's return! And the annual report don't even mention the reason for such poor performance! If the unit holders are truly the owners of that fund, don't they deserve an explaination for such poor performance?

And please don't say that A**'s equity fund return of 17.5% is better than FD! If you travel from Penang to Singapore by flight, and reach there after 7 hours (when other air planes can reach within 1 hour), do you accept excuse as "At least our flight is faster than going by car" ?

As a result, A** under perform KLCI during these times. Am i right to say that? If that is so, then what's the point of hiring A** as the fund manager for their equity funds? Might as well they just buy the Index or ETF and save the 1.5% management fees, and don't earn a return WORSE than KLCI (not to mention savings on the huge upfront service charge, or ended up being tied up to the terrible fund for 6 years to enjoy 0% service charge).

And also, please don't say A** equity fund beat benchmark since launch. The comparison is simply not fair because KLCI doesn't include dividends into their price. Had KLCI add between 3% to 4.5% yearly dividends to the price, A** Equity fund would under perform by a wide margin!

Waiting for an explaination for me to explain to my unhappy clients.

__________________________________________________________________

Lesson Learned:

Don't find mechanic regarding your health.

Don't find doctor regarding legal issues.

Don't find investment companies for insurance.

Don't find insurance company for investments. They Suck!

Quotes: "I don't throw darts at a board. I bet on sure things"

Gordon Gekkon on the movie "Wall Street (1987)" says, "I don't throw darts at a board. I bet on sure things"



Sun Tzu says, "Every battle is won before it's ever fought.”



"You make money when you buy, NOT when you sell."


Think about it!.

Integrity & Investment Performance

“Index funds are imperfect, but they provide the best outcome for most know-nothings, in order to avoid being misled by fools and liars.”

Quote by Charlie Munger

From the article of Stableboy Selections, i borrow his definition of Investing. "Investing is the process of putting money away now to be sure of getting more money back in the future."

If you agree with this definition, then you'll realize most people Speculate rather than Invest. No wonder they have poor long term results. (Do you know any gamblers who have good long term results? However, I know a lot of Casinos that earned a good long term results)

Read his article here: http://stableboyselections.com/2008/05/11/integrity-investment-performance/

Very good article , "Buffett advice: Buy smart...and low"

I came across this article about Buffett in CNN, written by Jason Zweig. Here's some extracts of the article:
____________________________________________________________________

In response to a question from Barbara Kiviat of Time on how he and Munger control their emotions, Buffett replied: "[It] comes about from having an investment philosophy grounded in the idea that a stock is a piece of a business. If you look at it that way, there's no reason to get excited whether some analyst is recommending it or the company is splitting the shares two-for-one, or whatever. The only way to drive the extraneous thoughts out of your mind is to have a philosophy. And for us that philosophy comes from Benjamin Graham and The Intelligent Investor, especially chapters 8 and 20. It's not very complicated stuff."

You need a philosophy and the ability to think independently...It doesn't make any difference what other people think of a stock. What matters is whether you know enough to evaluate the business.

You should be able to write down on a yellow sheet of paper, 'I'm buying General Motors at $22, and GM has [566] million shares for a total market value of $13 billion, and GM is worth a lot more than $13 billion because _______________." And if you can't finish that sentence, then you don't buy the stock.

The key is not to be seduced by crazy ideas, but instead just stick to the fundamentals year after year. Academia doesn't get too interested in us -- we're too simple. What would the professors do? A great many of the formulas [they use to analyze securities and markets] are dead wrong. They exist purely to give the intellectual class something to do. We don't do anything just exercise our intellectual proclivity for mathematical formulas.

There's no reason we should become fearful if a stock goes down. If a stock goes down 50%, I'd look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.

In that single sentence Buffett captured the difference between investing and speculating: An investor, like Buffett, wants the price of a stock to fall below the value of its underlying business so he can buy even more and hold for as long as possible. A speculator (like Jim Cramer) only wants the price of a stock to go up, with no regard for the value of the underlying business at all, so he can sell as fast as possible. To the investor, the market's opinions do not matter. To the speculator, they are the only thing that matters.

A Chinese reporter asked whether Berkshire will be buying more stocks in China now that its market has fallen by almost half, and what the next year will hold for Chinese investors. Buffett's answer held a lesson for investors based anywhere. "We're not in the business of forecasting what the market will do in the next year," said Buffett. "But if a market goes down, we like that. There's no way Charlie and I get upset when stocks go down. We like it, because falling prices give us the opportunity to buy more good businesses at better prices."

____________________________________________________________________

Read the full article here : http://money.cnn.com/2008/05/05/news/companies/buffet.pm.wrap/

Discrepancy in IOI Corp and IOI Properties Stock price

Today, i noticed a discrepancy in prices between those 2 shares. Since i can't take advantage of it, might as well i share it here in the hope that you'll learn a lesson or two, and take advantage of it, if the condition fits you.

Let me share some background info:

1. On 4th February 2009, IOI Corp issues a Voluntary Take-Over Offer to take over IOI Properties at:

• 0.6 shares of IOI Corp , and RM 0.33 CASH for every 1 share of IOI Properties.
  Full Details of the offer is here.

2. Then, on 30th March 2009, IOI Corp have already received (plus their own ownership in IOI Properties) in excess of 90% of the shares outstanding. Since they own more than 90%, the remaining shareholders of IOI Properties are "forced" to convert their shares to IOI Corp at above terms. Full Details of the 90% ownership of IOI Corp is here.

3. By 7th April 2009, IOI Properties would be delisted from Bursa Malaysia, and converted to IOI Corp shares at above terms.

So, the equation below must hold true.

1 IOI Properties share = 0.6 IOI Corp shares + RM 0.33 CASH

If the above equation differs by anything more than the brokerage fees involved (say, 1.5%), then arbitrage opportunity would arise.

As of this writing (4.30 pm on 31st March 2009), you can buy IOI Properties at RM 2.50 per share, and you can sell IOI Corp at RM 3.80 per share. Fitting it to the equation above:

Left Side : 1 IOI Properties share = RM 2.50

Right Side: 0.6 IOI Corp shares + RM 0.33 CASH = RM 2.61

That's a difference of 11 cents, or 4.4% !. Seeing this, I can buy 100,000 shares of IOI Properties at RM 2.50, and "sell" 60,000 shares of IOI Corp at the same time.

This way, i'm making a nearly risk free return of at least 3.4% in a week (that's the holding period for my IOI Properties shares to be converted to IOI Corp shares). After my IOI Properties shares is being converted to IOI Corp shares, i'll "return" the IOI Corp shares back to cover my short selling position.

Nice Arbitrage Opportunity? Too bad Short selling is not allowed in Malaysia since 1998. :-(.

However, if you own IOI Corp shares, you can sell those shares, and buy IOI Properties shares (with the above proportion). 1 week later, you'll have back the same number of IOI shares, and make at least 3.4% profit (assuming total brokerage fee is 1% both sides).

I know i would do that if i manage a portfolio of a few hundred Millions like a mutual fund. :-).

Would i just buy IOI Properties (without short selling IOI Corp at the same time), in the hope that i can sell IOI Corp shares at that above price 1 week later to make 3.4% profit?.
No, i won't. That involves risk, and possibly i might lose money. To me, this way is Speculation (and not Investing). Read the difference between Investing and Speculating here.

Gambling or Investing is about Odds & Probability

I was watching this movie, The Best Bet in Astro Wah Lai Toi channel the other day, and the villagers are betting whether the main actor, Hor Yi ( played by Michael Tse Tin Wah) would stop gambling or not (since his whole life he have been gambling). The odds are as below:

A) If Hor Yi continues to gamble : Bet 1, Win 1
B) If Hor Yi stops gambling : Bet 1, Win 10

A Gambler might choose either one to bet, which gives him chance of winning, as well as losing. However, given this kind of "odds", there is a risk-free betting. Infact, with a simple tweaking, it becomes a sure win for your bet (regardless of the outcome).

If a person bets RM 1 on both outcome A and B, then that person can't lose. Either he break-even if Hor Yi continues to gamble, or he wins RM 9 (Win RM 10, but lose RM 1 on the other bet) if Hor Yi stops gambling.

Now, if that person changes his bet to

• Bet RM 5.5 on outcome A above, and
• Bet RM 1 on outcome B above

The person who bets the way above would 100% win RM 4.5 (from a total investment of RM 6.5) regardless of the outcome (either Hor Yi wins, or Hor Yi losses). This is no longer gambling (or speculating). But it's investing, as long as the person whom you're betting is credible to pay the claims.

My mother used to say that anything that involve winning or losing is gambling. Looking back, I've realised that her statement is very true indeed (though i'm not sure she knows the distinction between investment and speculation when she said that statement). A person who invest the right way, would only have a win, and can't lose (over the long term).

Take for example the Owner of a casino. At a particular table at a particular round, the Banker might lose. However, played over enough rounds, the Banker will almost guarantee themself to a win. Infact, i don't think Genting's Casino ever lose money in their Casino business at any single year (though i can't say the same thing when it comes to days or hours).

Similar post is in the Movie 21 here.

Introduction to Value Investing by Whitney Tilson

Whitney Tilson gave a good speech about Value Investing in 2008's Value Investing Conference. Although most of his ideas came from Warren Buffett, nevertheless, it's a good introduction to those who reads little of Warren Buffett's article.

His slides can be downloaded here:

Introduction
Mental Mistakes
Slides for Wednesday's Workshop
T2 Partners Presentation
Valuing Companies

The entire Video recordings of Value Investing Congress 2008

The entire conference presentation of Value Investing Congress 2008

The Intelligent Investor - "By far the best book on investing ever written." - Warren E. Buffett

This comic describes how Warren Buffett feels when he first read the book "The Intelligent Investor" back then when he was 19 years old. This is his various quotes about the book.

“I went the whole gamut. I collected charts and I read all the technical stuff. I listened to tips. And then I picked up Graham’s The Intelligent Investor . That was like seeing the light .”
(Adam Smith, Supermoney (New York: Random House, 1972),p. 181.)

“I don’t want to sound like a religious fanatic or anything, but it really did get me. ”
(Source: L. J. Davis, “Buffett Takes Stock,” New York Times Magazine ,April 1, 1990, p. 16.)

“Prior to that, I had been investing with my glands instead of my head. ”
(Source: Warren Buffett correspondence to Benjamin Graham, July 17, 1970.)

Here's the Preface written by Warren Buffett on The Intelligent Investor.
I read the first edition of this book early in 1950, when I was nineteen. I thought then that it was by far the best book about investing ever written. I still think it is.

To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions
and the ability to keep emotions from corroding that framework. This book precisely and clearly prescribes the proper framework. You must supply the emotional discipline.

If you follow the behavioral and business principles that Graham advocates—and if you pay special attention to the invaluable advice in Chapters 8 and 20—you will not get a poor result from your investments. (That represents more of an accomplishment than you might think.) Whether you achieve outstanding results will depend on the effort and intellect you apply to your investments, as well as on the amplitudes of stock-market folly that prevail during your investing career. The sillier the market’s behavior, the greater the opportunity for the business-like investor. Follow Graham and you will profit from folly rather than participate in it.

To me, Ben Graham was far more than an author or a teacher. More than any other man except my father, he influenced my life. Shortly after Ben’s death in 1976, I wrote the following short
remembrance about him in the Financial Analysts Journal. As you read the book, I believe you’ll perceive some of the qualities I mentioned in this tribute.

Warren Buffett recommended this book (The Intelligent Investor) so many times, and it's quoted below:

1966 Letters to his Partners in Buffett Partnership
The availability of a quotation for your business interest (stock) should always be an asset to be utilized if desired. If it gets silly enough in either direction, you take advantage of it. Its availability should never be turned into a liability whereby its periodic aberrations in turn formulate your judgments. A marvelous articulation of this idea is contained in chapter two (The Investor and Stock Market Fluctuations) of Benjamin Graham’s "The Intelligent Investor". In my opinion, this chapter has more investment importance than anything else that has been written.

1984 Letters to Berkshire Hathaway shareholders
(In what I think is by far the best book on investing ever written - “The Intelligent Investor”, by Ben Graham - the last section of the last chapter begins with, “Investment is most intelligent when it is most businesslike.” This section is called “A Final Word”, and it is appropriately titled.)

1990 Letters to Berkshire Hathaway shareholders
In the final chapter of The Intelligent Investor Ben Graham forcefully rejected the dagger thesis: "Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety." Forty-two years after reading that, I still think those are the right three words.

1993 Letters to Berkshire Hathaway shareholders
In fact, the true investor welcomes volatility. Ben Graham explained why in Chapter 8 of The Intelligent Investor.

2003 Letters to Berkshire Hathaway shareholders
Jason Zweig last year did a first-class job in revising The Intelligent Investor, my favorite book on investing.

2004 Letters to Berkshire Hathaway shareholders
Some people may look at this table and view it as a list of stocks to be bought and sold based upon chart patterns, brokers’ opinions, or estimates of near-term earnings. Charlie and I ignore such distractions and instead view our holdings as fractional ownerships in businesses. This is an important distinction. Indeed, this thinking has been the cornerstone of my investment behavior since I was 19. At that time I read Ben Graham’s The Intelligent Investor, and the scales fell from my eyes. (Previously, I had been entranced by the stock market, but didn’t have a clue about how to invest.)

Read the book online (FREE !)

Alternatively, you can view each page individually, seperated by Chapters here. If it's too much, the 3 most important Chapters are as below:

1. Chapter 1 : Investment vs. Speculation : results to be expected by the Intelligent Investor
2. Chapter 8 : The Investor and market fluctuations
3. Chapter 20: Margin of safety as the Central Concept

The 3 Bedrock Ideas above are the cornerstone of Warren Buffett's Billions. Watch the Video from my previous post.

Or if you prefer to own the book, you can get from Amazon from the links below.

21 (Movie by Columbia Pictures)

I've watched this movie yesterday morning after reading they synopsis. I got hooked to the synopsis that i can't wait to watch it with my wife. I had to drag her out from the bedroom because she enjoys sleeping in the morning, while i enjoy taking afternoon nap. :-)

The true story of the very brightest young minds in the country - and how they took Vegas for millions. Ben Campbell is a shy, brilliant M.I.T. student who -- needing to pay school tuition -- finds the answers in the cards. He is recruited to join a group of the school's most gifted students that heads to Vegas every weekend armed with fake identities and the know-how to turn the odds at blackjack in their favor. With unorthodox math professor and stats genius Micky Rosa leading the way, they've cracked the code. By counting cards and employing an intricate system of signals, the team can beat the casinos big time. Seduced by the money, the Vegas lifestyle, and by his smart and sexy teammate, Jill Taylor, Ben begins to push the limits. Though counting cards isn't illegal, the stakes are high, and the challenge becomes not only keeping the numbers straight, but staying one step ahead of the casinos' menacing enforcer: Cole Williams.

It's definitely one of my favourite movies because:

1. This movie is inspired by a True Story
2. It's about brightest minds of students combining their knowledge to beat the Casino
3. Their system of beating the casino deals with Odds and Probability, which is my favourite subject back in the school days.
4. Unlike majority who "Gambles" in casino, they "Invest". Over a long term, they can't lose.
5. They use their Talent to make money.

Download the movie in Tvfreeload.com's Forum
(need a free registration before being able to view the links)

Read more about Card Counting in Blackjack : http://www.squidoo.com/how-to-count-cards (it's written by a math teacher)

Will i try to do Card Counting (In Blackjack) to beat the Dealer?
I don't think so. I rather keep to Valuing Public Listed Companies and "trade" with anonymous people. At least, nobody knows the who they are trading with in Stocks.

I might write about the similarities of their system with Investing (in Common Stocks), if there is enough demand for it.

Distinction between Investment and Speculation

Benjamin Graham, a famous investor in his own right and also notable because he is the man that taught Warren Buffett to invest, defined the difference between speculation and investment in this famous passage from his book The Intelligent Investor.

“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

Note that investing, according to Graham, consists equally of three elements:

1. Thorough analysis - which means the study of the facts in the light of established standards of safety and value;
2. Safety Of Principal - which means protection against loss under all normal or reasonably likely conditions orvariations;
3. Adequate return - which means any rate or amount of return, however low, which the investor is willing to accept, provided he acts with reasonable intelligence;
   (Source: Security Analysis, 1934 Edition, by Benjamin Graham)
   

Like casino gambling or betting on the horses, speculating in the market can be exciting or even rewarding (if you happen to get lucky). But it’s the worst imaginable way to build your wealth. That’s because Wall Street, like Las Vegas or the racetrack, has calibrated the odds so that the house always prevails, in the end, against everyone who tries to beat the house at its own speculative game.

On the other hand, investing is a unique kind of casino—one where you cannot lose in the end, so long as you play only by the rules that put the odds squarely in your favor. People who invest make money for themselves; people who speculate make money for their brokers.

The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator's primary interest lies in anticipating and profiting from market fluctuations. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell."

Benjamin Graham also say that to have a true investment there must be present a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience.