Archive for November, 2009
A stark warning from Dubai
Source: Mint
Dubai’s problems stem from the surreal happenings in real estate there, with the place being home to the world’s tallest tower and the biggest man-made islands.
The shock waves emanating from Dubai World’s attempt to reschedule its debt rocked global equity markets on Thursday. The fear was all the more because Dubai World is state-controlled, which means that effectively it’s the government that is asking for more time to repay.
Is Dubai another canary in the coal mine, just as Iceland was at the beginning of the crisis, or is it just a real-estate related problem confined to Dubai?
Valuing a Stock with the DCF Method
Source: Old School Value
You may have found a great company that you feel has outstanding potential but always end up getting stuck at what price you should purchase the company. Finding the value of a stock is a critical part of investing successfully. Valuing stocks is not hard, but it does require logic and practice. Calculating stock values surprising should not consist of lengthy and complicated formulas. If you understand the concepts of how to go about thinking through a stock valuation, you will understand that you don’t need to understand the derivation of the formula to apply it well and to achieve profits off your investments. MoreWhat if a Recovery Is All in Your Head?
Beyond fiscal stimulus and government bailouts, the economic recovery that appears under way may be based on little more than self-fulfilling prophecy.
Consider this possibility: after all these months, people start to think it’s time for the recession to end. The very thought begins to renew confidence, and some people start spending again — in turn, generating visible signs of recovery. This may seem absurd, and is rarely mentioned as an explanation for mass behavior late in a recession, but economic theorists have long been fascinated by such a possibility.
The notion isn’t as farfetched as it may appear. As we all know, recessions generally last no more than a couple of years. The current recession began in December 2007, according to the National Bureau of Economic Research, so it is almost two years old. According to the standard schedule, we’re due for recovery. Given this knowledge, the mere passage of time may spur our confidence, though no formal statistical analysis can prove it.
Return of the Money!
If your money doubles every five years, the compounded return that you are earning on your investment is somewhere close to 15%. Similarly, if it is doubling in every four years, the compounded return is in the vicinity of 19%. Have you ever wondered how long it will take to double your money if the interest rate is as low as 0.01%? Well, you don’t have to do the math. We will save you the effort and let you know that it will take all of 6,932 years! Yes, you’ve read that right. It will take a mammoth 6,932 years to double your money if you are earning a return of 0.01%.
While this may seem like a joke to you, people invested in the US money market instruments currently are earning just that, a paltry return of 0.01%. Bill Gross, who runs the world’s biggest bond fund at PIMCO, believes that it is the measly return in the US that is driving investors towards higher yielding asset classes like gold and emerging markets. But can the US Fed continue maintaining short term interest rates at such low levels, especially given the fact that the specter of bubbles is being raised in most high yielding asset classes? Indeed, says Bill Gross.
According to him, Fed’s foremost worry is the recovery of the US economy. Unless the US economy recovers and its employment scenario improves dramatically, Fed will continue to hold interest rates close to zero, asset bubbles or no asset bubbles. Gross is also of the opinion that once China starts letting its currency appreciate, which it would in about six months time, asset prices might come down and hence, the US Fed should not be hasty in its decision to tighten monetary policies and put the fledgling recovery under further pressure. Gross’ prognosis also has implications for Indian investors. Since easy liquidity policy is likely to continue for some time to come, we believe that Indian markets might witness renewed surge from current levels and may even start resembling a bubble. Hence, the temptation to make that quick buck has to be avoided.
Please bear in mind that in an effort to increase the return on money, investors should not put themselves in a situation where they have to forego the return of their money
Source: Moneycontrol.com board
How EBITDA Can Mislead
During the dot-com boom, EBITDA became a popular way to measure how healthy a business was. EBITDA scores became the talk of Silicon Valley cocktail parties, where party goers would ask each other, “How soon will you be EBITDA positive?”
Today EBITDA remains a valuable, if controversial, number for evaluating a company’s earnings. After all, the WorldCom meltdown was facilitated by financial fraud related to EBITDA.
Before we examine why EBITDA is favored by some and scorned by others, we need to consider EBIT (Earnings Before Interest and Taxes). As you might know, EBIT is synonymous with Operating Income, and is the profit or loss that is generated by operations of a business before interest expenses and taxes. In essence, it’s the number that tells you how much profit or loss your operation is generating.
EBITDA is a form of EBIT. Actually, Joe likes to say it’s an obvious form of EBIT — EBIT “DUH” (sorry…it’s hard to make jokes about EBITDA). It stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
Rakesh Jhunjhunwala on how to pick the right stock
Source: Moneycontrol
If you’re a proponent of value investing, which involves buying stocks that offer value when they’re cheap and holding on to them till they achieve their potential — Warren Buffet style — here are tips from India’s own Buffet, Rakesh Jhunjhunwala, that you may use.
— Jhunjhunwala’s advice to investors is not to look for companies that would give profits but understand factors that help in creating profits. “Don’t emphasise too much on analysis of profits,” he says. “Profits are created due to various stages of circumstances. I always look at how large is the opportunity for that business in the sector.” He recalls how he bought Praj Industries, a bio-ethanol company that gave him large returns. “When I bought Praj, we thought there would be a humongous demand for ethanol. The opportunity was huge but it was not recognized.” IT bellwether Infosys, he said, benefited because of the internet revolution. “Nobody knew about Infosys in 1993 but Infosys could become Infosys because the opportunity for the internet went through the roof.” “When opportunities come, they can come through technology, marketing, brands, value protections, capital, etc. You need to be able to spot those.”
Rakesh Jhunjhunwala’s Presentation to FLAME Institute
‘Greatest Trade’: How You Can Make $20 Billion
by Gregory Zuckerman – WSJ.com
Even as the financial system collapsed last year, and millions of investors lost billions of dollars, one unlikely investor was racking up historic profits: John Paulson, a hedge-fund manager in New York.
His firm made $20 billion between 2007 and early 2009 by betting against the housing market and big financial companies. Mr. Paulson’s personal cut would amount to nearly $4 billion, or more than $10 million a day. That was more than the 2007 earnings of J.K. Rowling, Oprah Winfrey and Tiger Woods combined.
Adapted from “The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History,” by Gregory Zuckerman. Broadway Books. Copyright © 2009 by Gregory Zuckerman.
How did he do it? Believing that a housing-market collapse was coming, Mr. Paulson spent over $1 billion in 2006 to buy insurance on what he then saw as risky mortgage investments. When the housing market cracked and the mortgages tumbled, the value of Mr. Paulson’s insurance soared. One of his funds rose more than 500% that year. Then in 2008, he shorted financial shares, or wagered that they would fall in price, profiting again when these companies collapsed.
And are there any investing skills that average investors can learn from his success? Yes. There are no guarantees, of course, but the success of Mr. Paulson and a few other underdog investors lends encouragement to individuals trying to compete with Wall Street’s pros.
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The value of value investing
One of the simplest—yet the most ignored —investment concepts is value investing. It is something that has inherently been woven into our psyche as consumers, but continues to elude our understanding as investors. Value investing has a simple logic: buy things cheap. This means that stocks should be bought at a price that is less than their actual worth. If you feel that a stock’s current price is less than what it could be at a future date, then buy it now. Value investing is as easy as that.
However, unfortunately, value investing hasn’t gained much ground in India. The concept has failed to catch up largely because Indian markets are growth and momentum driven. When investors are busy chasing returns, it is hard to be patient and look at stocks that are undervalued. There have been a few funds that have made noises about value investing, but none are dedicated to it. Although that is about to change later this month, Fidelity Investments is launching India’s first value investing fund. It will be interesting to see how the concept is adapted by the AMC and how it is accepted by the Indian investors.
