29th November 2006, 04:47 pm
In a classic “Sense & Nonsense in Corporate Finance”, the author, Louis Lowenstein, debunks some wrong notion on dividend policy.
“The central issue of dividend policy is how well a company uses its resources compared to the available alternatives, notably those available to shareholders. That point of view, however, necessarily tends to ignore other, short-term considerations, such as day-to-day happenings in the stock market. A great deal of ink has been spilled by scholars who believe that dividends are useful as a signal to the market of management’s expectations about future earnings. A higher dividend is said to signal its conviction that the earnings are real and will continue to grow, and this signal, in turn, is expected to produce a higher stock price. None of this makes much sense to me. Dividends can give inaccurate prophecies, as happened at Ford in 19791981, as well as accurate ones. But prophetic or not, if a company allocates capital intelligently and if it communicates those decisions with candor, dividend signals are irrelevant. Dividends are too important a business issue to be relegated to the role of (trivial) news carrier for the stock market.”
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The Wal-Mart Effect :
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27th November 2006, 12:55 pm
A portfolio of stocks designed on the basis of Benjamin Graham’s principles has beaten the market over the past three years.
Benjamin Graham, the author of Security Analysis, is hailed as the dean of Wall Street. In another book titled Intelligent Investor, Graham outlined an analytical method for defensive investors who want to use only simple methods of analysis as they cannot spare much time for active investment effort.
To make Graham’s method growth-oriented and more explicit, this author provided specific numerical estimates and the modified Graham-Rao method was described in A Nine-step Route to Picking Value Stocks published in the The Smart Investor dated August 25, 2003.
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It’s all in the family
Sometimes there is more than what meets the eye. This is especially true for companies with unlisted subsidiaries.
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Follow the leader?
There have been numerous private equity deals of late. But should ordinary retail investors follow in the footsteps of PE investors?
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It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price. Now, when buying companies or common stocks, we look for first-class businesses accompanies by first-class managements. - Warren Buffett
26th November 2006, 08:38 am
By Maria Crawford Scott - AAII
No modern-day investment “sage” is better known than Peter Lynch. Not only has his investment approach successfully passed the real-world performance test, but he strongly believes that individual investors have a distinct advantage over Wall Street and large money managers when using his approach. Individual investors, he feels, have more flexibility in following this basic approach because they are unencumbered by bureaucratic rules and short-term performance concerns.
Mr. Lynch developed his investment philosophy at Fidelity Management and Research, and gained his considerable fame managing Fidelity’s Magellan Fund. The fund was among the highest-ranking stock funds throughout Mr. Lynch’s tenure, which began in 1977 at the fund’s launching, and ended in 1990, when Mr. Lynch retired.
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26th November 2006, 06:14 am
Popularly known as the “Guru of Contrarian Investing”, David Dreman follows an investment philosophy based on low P/E approach to stock selection. Dreman, who has authored the recent Contrarian Investment Strategies: The Next Generation, among several other investment books, is also the Founder and Chairman of Dreman Value Management. His Large Cap Value Fund has returned on an average 17 per cent annually, and Small Cap Value Fund 16.5 per cent annually, since inception in 1991.
There is a bit of difference between value investing and contrarian investing. Basically, I buy stocks when they are really battered. I am very strict with my discipline. I always buy stocks with low price-earnings ratios, low price-to-book-value ratios, low price-to-cash-flow ratios and higher-than-average yield.
Academic studies have shown that a strategy of buying out-of-favour stocks with low P/E, price-to-book and price-to-cash-flow ratios outperforms the market pretty consistently over very long periods of time. The operative phrase there is `very long periods of time’.
Psychology is probably the most important factor in the market — and the one that is least understood. There’s constant overreaction in the market. Low-P/E stocks are constantly priced too cheaply over long periods of time, and higher-P/E stocks are priced too dearly.
People like exciting stories; they don’t like boring companies. That is the normal cause of investor overreactionAlthough financial advisers uniformly praise good long-term records, most concentrate on performance over short terms, like three years.
The problem is that this period may be shorter than the life span of a Wall Street fad, like Internet stocks. First-rate funds may look weak over three years, as many did during the tech bubble, because their investing styles are temporarily out of favour.
Anyone can get lucky for three years. Daniel Kahneman of Princeton won the Nobel Prize in economics for, among other things, showing that this fixation with sizzling near-term performance hurts investors. Avoid the problem by looking at 10- or 15-year numbers.
If you follow them (popular trends), odds are you’re buying near the peak, and the lovely outperformance will end soon. Today hedge funds are hot, driven by billions of dollars that advisers are shepherding into this sector. The same is true for foreign securities, gold and natural resources. Am I being too hard on financial advisers? If the news is better than expected, the Dow Jones industrial average shoots up 150 points; if worse, the drop is just as steep.
Hedge fund managers, day traders and swarms of other quick-buck types trade instantly to get the edge from news flashes. Maybe you can make money trading on these moves, but only if your transaction costs are nil and your computer is ten seconds faster than every other trader’s. Neither condition holds.
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It has become fashionable at public companies to describe almost every compensation plan as aligning the interests of management with those of shareholders. In our book, alignment means being a partner in both directions, not just on the upside. Many ‘alignment’ plans flunk this basic test, being artful forms of ‘heads I win, tails you lose.’ - Warren Buffett
25th November 2006, 09:15 am
In a classic “Classics II – Another Investor’s Anthology”, there is a piece of wisdom by Benjamin Graham and David Dodd which every investor should read and re-read.
“The old rule for the ordinary investor was that he should buy sound securities when he had funds available. If he waited for lower prices he would be losing interest on his money; he might “miss his market,” even if prices declined; in any case, he was turning himself into a stock trader or speculator. Much of this view retains its validity. However, the time when the investor should clearly not buy common stocks is during the upper ranges of a bull market. For most issues this is tantamount to saying that he should not buy them at prices higher than can be justified by conservative analysis-which is something of a truism. But, as we pointed out previously, this warning applies also to the purchase of apparent “bargain issues” when the general price level seems dangerously high.
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