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Archive for March, 2010

How Warren Buffett Beats the ‘Financial Experts’

Adam Khoo is an entrepreneur, best-selling author and a self-made millionaire by the age of 26. Discover his millionaire investing secrets and claim your FREE bonus chapter of his latest bestselling book ‘Secrets of Millionaire Investors’ at http://www.SecretsOfMillionaireInvestors.com

The reason why Warren Buffett is able to consistently beat the market of average investors & money managers is because he holds very different beliefs and philosophies about how the markets work. Let’s compare the beliefs of Warren Buffett to the beliefs of the average investor or fund manager.

Broad Diversification versus Focus

Fund managers and financial experts often advise clients to broadly diversify their money across many different financial instruments such as stocks, bonds, currencies & money market funds. the logic is that by spreading your money into different areas, you reduce your risk. Master Investors like Warren Buffett believe that although broad diversification reduces risk, it also reduces any potential of return. if you invest in 50 stocks, then for your portfolio to double in value, you must find 50 stocks that double in value. That is almost impossible! At the same time, by investing in so many companies and instruments, it is impossible for you to become an expert in anything. he believes that people diversify into everything to protect themselves against
their own ignorance! It’s like asking the great tenor Luciano Pavarotti to diversify into Heavy Metal, Country & Western, Techno, Hip Hop and R&B in order to reduce his risks in case he does not do well in Opera.

Instead, Warren Buffett believes in focusing all his money into a few, very well selected stocks that he knows will double in value. he believes that an investor must only invest into a few companies that he understands very well and can track very closely. he calls it investing within your circle of competence. does this mean that you should bet your entire savings on one or two companies? of course not! That is too dangerous. it is still important to spread your money across at least 8-10 stocks that you know inside out. however, once you buy more than that, it becomes harder to invest intelligently.

Following the Market versus Going Against the Market

Fund managers & the investing public tend to be very short-term performance focused. They tend to buy a stock when there is lots of good news (i.e. economy is strong, company’s earnings beats forecast, launch of a new product etc) that pushes the stock price higher and higher. Consequently, they tend to jump out of a stock when bad news sends the stock price falling. actually, there is nothing really wrong with this approach.

By doing so, you are investing along with the trend. this strategy is known as ‘momentum investing’. however, the danger with ‘momentum investing’ is that it is all about timing and the ability to read into investor psychology. the trouble is that most average investors who lack these skills jump in too late (after all the professional funds have entered), when the stock price has already risen near its peak! Sure enough, they find that the stock prices start falling the day after. out of fear and panic, they sell the stock and end up with a loss. this is why the typical
investor always experiences their stock price falling soon after they have entered the market.

On the other hand, value investors like Warren Buffett take a Contrarian approach. They go against the market psychology and trend. They buy the stock of a good company when nobody else wants it. this is when the stock price is extremely low and attractive. They then wait patiently for the stock to come into favour again. when optimism returns and the crowd starts to push the shares of the company higher and higher, the value investor will then sell his shares at a nice profit.

High Risk, High Return versus low Risk, low Return

While many financial experts preach the concept of having to take high risks in order to make high returns, master investors like Warren Buffett believe that it does not take high risks to make high returns. instead, it takes a high level of financial and business competence to make high returns! in fact, he will only make an investment when there is a very low risk of loss and a very high probability of gain. he does this by only investing in companies that are selling way below their true value. in this way, he gives himself a wide margin of error. which means even if his calculations are off, he will still be making money.

Invest only when there Is a High Probability of Success

The trouble with professional managers of mutual funds is that they are pressured to invest 80% of their cash into the market, even when there is nothing attractive to buy. this happens after a prolonged bull-run when stock prices are so high that companies are way overvalued. on the other hand, Buffett would happily keep all his money in cash and only invest when there is a golden opportunity. this is exactly what happened in 1999-2000 (stock prices were insanely overvalued) when Buffett was criticized for not making a single investment and keeping all his money in cash. Buffett only moved in to buy after 2001, when stock prices had crashed and companies could be bought for a steal.

Before you can successfully model a person’s investment strategy, you must first model their beliefs. it is a person’s beliefs about investing that shape their decisions, their actions and their results. So, if you want to be able to consistently beat the market and make higher returns than anyone else, shouldn’t you begin by adopting the beliefs of the world’s greatest investor?

How Warren Buffett Beats The 'Financial Experts'

Wells Fargo’s (WFC) stock appears to be trying to break to a new high. could this possibly mean that Wall Street is underestimating their earnings over the next couple of years?

Recently I wrote a blog offering my thoughts on when the big banks would begin hiking dividends. in doing research on that blog, I stumbled across a presentation that Wells Fargo made at the Credit Lyonnais Asia Conference. Wells Fargo’s presentation at the conference was one of the most upbeat presentations of a bank that I have heard in a long time.

It wasn’t a pep rally, but it left a clear picture of the strategy that the company is employing to return to solid earnings growth. in two words, that strategy is cross-sell and market share expansion.

WFC’s culture has been wedded to the concept of cross-selling multiple products to their customers going all the way back to the old Norwest days. in the recent meeting, they said their average cross sell was now up to 5.95 products per customer. what was most interesting was their discussion of their Wachovia acquisition and the roll out of the WFC cross-selling program within Wachovia. it seems Wachovia’s cross-sell average is about 4.6 products per customer.

CEO John Stumpf spent a lot of time discussing the opportunities of moving Wachovia’s cross-sell average up to WFC’s average. he said it would increase revenues on the Wachovia business by nearly 30%. and he wasn’t just talking about the opportunity, he described WFC’s ongoing program to accomplish this growth. not surprisingly, the growth plan had many moving parts primarily related to training and incentivizing employees to the WFC way. what was surprising was the number of new employees that were being added to former Wachovia branches. This was surprising because WFC is noted as a low expense-ratio bank and adding lots of new people in branches would seem to be counter to expense control in these difficult times. Stumpf made it clear that WFC was using these bad times to take market share.

Listening to mr. Stumpf, it was clear that they were being selective about what new business they went after, but it was equally clear that they were aggressively competing to expand their business footprint in every market in which they served.

The final chapter on how the financial debacle of 2008-2009 will turn out has not been written. it may be years before loan losses can return to historical trends. certainly, WFC has plenty of problem loans, but mr. Stumpf convinced me that WFC had sufficient capital and reserves to handle their problems.

One day the banking crisis will fade from the front pages and lending will not be seen as such a treacherous undertaking. when that day comes, my guess is WFC will have been the big winner in gaining market share in the United States.

From the looks of the price graph above, there are many investors who believe Wells Fargo is on the right track. with any kind of luck, it will break to a new intermediate high, joining GE and further signaling that investors are trying to put the subprime crisis behind them.

Disclosure: We own WFC.

Is Wall Street Underestimating Wells Fargo's Future Earnings?

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At the Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and “initiating coverage at neutral.” So you might think we’d be the last people to give virtual ink to such “news.” and we would be — if that were all we were doing.

But in “This just In,” we don’t simply tell you what the analysts said. We’ll also show you whether they know what they’re talking about. To help, we’ve enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. with CAPS, we track the long-term performance of Wall Street’s best and brightest — and its worst and sorriest, too.

Following the best
What do you do when one of the greatest investors in history (Warren Buffett, if you hadn’t guessed) tells you that the great Recession is over? What do you do when one of the best analysts out there agrees with him, predicts a return of the commodities boom, and tells you that the best way to capitalize on it is to buy Caterpillar (NYSE: CAT) stock?

I do. and what I’m hearing this week is that Avondale Partners, ranked in the top 6% of investors we track on CAPS, believes the global economy is ready to grow again, and that Caterpillar will grow with it. whether it’s mining the raw materials that fuel economic growth, or growing the food that wealthy populations can afford to eat, Avondale reminds us that Caterpillar makes the machines that keep the global economy humming.

According to Avondale, it doesn’t really matter if the recovery arrives swiftly or takes its sweet time. Caterpillar’s long-term potential makes the company a “buy” in either instance.

At the same time as Avondale was initiating coverage on Cat with a bullish bent, fellow All-Star investor Wells Fargo was reiterating its own “outperform” rating on the stock. “We believe that several catalysts are becoming visible to support expectations for longer-term growth,” said Wells, assigning the stock a valuation of somewhere between $73 and $75 a share — with “upside potential to our valuation range.”

Let’s go to the tape
But here’s the bad news: Avondale may be a fine analyst in many sectors (last year’s advice to pick up shares of Dolby (NYSE: DLB), for example, and this year’s suggestion that US Airways (NYSE: LCC) was due for a rebound are both working out brilliantly). But Avondale has just about no reputation in the Machinery sector, according to CAPS. Caterpillar is its first public pick in this industry in at least three years.

And the worse news: Wells’ “me too!” shout-out on Cat doesn’t really help Avondale’s case, because while Wells has more Machinery sector experience, it’s batting precisely .500 on its picks there (a good number in baseball, but in investing? not so much).

Company

Wells Says:

CAPS Says
(out of 5):

Wells’ Picks Beating (Lagging) S&P by:

Deere (NYSE: DE)

Cummins (NYSE: CMI)

Terex (NYSE: TEX)

(14 points) (two picks)

Navistar (NYSE: NAV)

Damned with faint praise
Wells did make a nice pick of Caterpillar in 2007 and scored 31 points with it, but its recommendation to buy Caterpillar today gets undermined by the very language in which Wells voices it.

You see, while Wells sides with Avondale in arguing the long-term bullish case for Caterpillar, the analyst also warns that short-term prospects don’t look so hot: “Short-term demand trends appear to be weaker than previously anticipated, and we are decreasing our Q1 10E EPS to $0.30 from $0.45 and are now beneath consensus. we are also lowering our 2010 and 2011 EPS estimates to $2.75 and $4.50, respectively, from $2.90 and $4.70.”

But we’re supposed to invest for the long term, right?
Even long-term, I see a fatal flaw in the Wells/Avondale case for Caterpillar. Pardon my bluntness, but over the long term, Cat has been a real dog of a business.

Right now, the stock’s selling for a sky-high 43 price-to-earnings ratio driven up by the company’s miserable 2009 performance, in which it earned just $895 million. But even if you value Cat on its average earnings over the past 10 years, it still works out to just $2 billion a year, and values the stock at over 19 times average annual income. and it gets worse.

The fact is, as overvalued as its GAAP numbers already make Cat look, they may be giving the company too much credit. Examine the company’s income statement, and you’ll find that far from earning consistent profit in the $2 billion-per-year range, this company actually burns cash more often than not. over the past 10 years, Caterpillar has racked up free cash flow losses around $5.2 billion in aggregate. and none of this factors in the nearly $30 billion in net debt that the company sports.

Foolish takeaway
What we see this week is a pair of analysts — one with a middling record in Cat’s industry, and the other with no record at all — telling you to buy Caterpillar on its long-term prospects. (Because in the short term, they see Cat running into the briar patch.) and viewed from this very long-term perspective, Cat has failed to generate positive free cash flow over a 10-year period that included one of the biggest commodities booms in recorded history.

Cat is a stock that only a dog person could love.

This Just In: Upgrades and Downgrades

I have recently began to embrace the idea of value investing after reading up on people like Warren Buffet and Phil Town. I have found it very difficult to find information I need to finish my calculations. Information like earnings per share data spanning up to 10 years prior to the present. Also is there anyone here familiar with Phil Town and his method for picking stocks. I find some of his instructions a bit confusing and would like a simple breakdown of it or any other successful methods for value investing. thank you everyone for your help!

Value Investing: Where and/or how can I find past earnings per share data for publicly traded securities?

FRANKFURT, March 24 (Reuters) – The following are some of the factors that may move German stocks on Wednesday:

The company will cut 3 percent of staff and shift jobs outside Germany as part of a broader cost-cutting move to save 150 million euros ($202.2 million) by 2013, the company said on Tuesday.
Related news

The company was charged on Tuesday with violating U.S. bribery laws by showering foreign officials with millions of dollars and gifts of luxury cars to win business deals.
Related news

Unit T-Mobile USA, the no. 4 U.S. mobile service, said on Tuesday it expects to have 100 metropolitan areas in the United States covered by its upgraded high-speed wireless network by the end of 2010.
Related news

CEO Nikolaus von Bomhard reiterated that the reinsurance group expects 2010 profit to be below 2009 levels and said Warren Buffett does not “interfere” in day-to-day decisions despite having a good grasp of the business, Frankfurter Allgemeine Zeitung said in its Wednesday edition.
Related news

Annual news conference. The company in February reported a 2009 EBIT loss of 116 million euros.
Related news

The company said it expected 2010 sales of 1.0-1.2 billion euros and an improvement in operating income.
Related news

The company said it expected 2010 sales to exceed 4 billion euros.
Related news

Q4 results. The German computer manufacturer said 2009 EBIT came in at 30.1 million euros, below the 32 million analyst forecast in a Reuters poll.

ANNUAL GENERAL MEETINGS:
Douglas, proposed div 1.10 eur/shr

Dow Jones +1 pct, S&P 500 +0.7 pct, Nasdaq +0.8 pct at Tuesday’s close.
Nikkei +0.4 pct.

Markit Service Flash PMI for March due 0828 GMT. Seen at 52.2, compared with 51.7 in the previous month.

Markit/BME MFG Flash PMI for March due 0828 GMT. Seen at 56.8, compared with 57.1 in the previous month.

Ifo business climate for March due at 0900 GMT. Seen at 95.8, compared with 95.2 in the previous month.

European Factors to watch
Diaries
Reuters top News

(Reporting by Edward Taylor and Christoph Steitz) ($1=.7417 Euro)

(christoph.steitz@thomsonreuters.com; +49 69 7565 1269; Reuters Messaging: christoph.steitz.reuters.com@reuters.net)

COPYRIGHT

Copyright Thomson Reuters 2010. All rights reserved.The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.

(AFX UK Focus) 2010-03-24 06:51 German stocks – Factors to watch on March 24

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Home Page – Foreign Institutional InvestorsMarkets – Stock Markets FIIs drive Sensex to 2-month high

Equities surged to a two-month high on Tuesday, the first trading day after the Budget, as foreign institutional investors poured in a net of Rs 1,335 crore into Indian stocks.

The Sensex jumped 343 points to close at 16,772, a level last seen in January. and the Nifty was up 1.92 per cent to close above the 5,000- mark at 5,012.

Almost overnight, equity analysts are singing praises of the Budget and finding Indian equities “appropriately valued”, whereas even a couple of weeks ago, several overseas brokerages had been branding them as overvalued, said a research analyst.

On the day of the Budget itself, FIIs bought equities for Rs 841 crore in the net.

On Tuesday, a lot of FIIs were selling in the international markets and taking long positions here, said Mr Alex Mathew, head of research at Geojit BNP Securities: “They are selling in other markets in the Euro zone and the UK. India looks very strong even among the other emerging markets. The FII money is coming in both dollars and in yen.”

Many analysts felt the FII investment outlook was “long-term.”

With India’s fiscal deficit under control, the currency risk is also reduced for the FIIs, said Mr. Harjit Singh Sethi, Country Head, Institutional Equity Broking at Almondz Global Securities.

Auto, bank, metal and FMCG stocks were lapped up. Tata Motors was the biggest gainer, surging more than 12 per cent on improved sales figures for February.

Domestic investors, both individual and institutions, mostly booked profits. DIIs sold for a net of Rs 711 crore and retail for Rs 63 crore. but the mood was so upbeat that even retail investors who sold are planning imminent buys: “I sold a few shares today as the markets rose. but the Budget was a good one and I will be looking at putting my money in a few blue chip stocks,” said Mr Jason D’Souza, a retail investor from Mumbai, who said he closely tracks Warren Buffet’s advice in these matters.

Mr Jagannadham Thunuguntla, Head of Equity at SMC Capital, observed that the retail participation is set to go up after the Budget as all this while there was a lack of clarity in the markets.

At Deutcshe Equities India, the prediction is that the Sensex is likely to touch 22,000 by the end of 2010.

Related stories:Pranab wants India inc to step up investmentsPranab takes more than he givesIndex Outlook: thank you, Mr Mukherjee

More stories on : Foreign Institutional Investors | Stock Markets

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FIIs drive Sensex to 2-month high

ZURICH -(Dow Jones)- Credit Suisse (CS) expects significant opportunities in investment banking this year, and plans to build on market share gains achieved last year to drive the business, a senior executive said Tuesday.

“Credit Suisse is well positioned for an uncertain economic and regulatory environment,” said David Mathers, chief operating officer of the Zurich-based bank’s investment banking unit, according to a summary of a presentation to investors held at the Morgan Stanley European Financials Conference in London.

The summary was released on Credit Suisse’s website.

Among other areas, Mathers predicts opportunities in megers and acquisitions.

The stability of world economies is resulting in improved confidence by chief executives and a renewed willingness to engage in strategic dialogue, he said.

in the year ahead, Credit Suisse plans to extend its strong market share gains in equities, while also growing client flows and expanding distribution in fixed income, Mathers said.

The bank also forsees high growth potential in emerging markets and wants to capitalize on this, he added.

Bank Web Site: http://www.credit-suisse.com

UPDATE: Credit Suisse Sees Big Investment Bank Opportunities

the collapse of the Wall Street stock exchange in Australia?

IDG News Service – Google inc. has developed a prototype cell phone that could reach markets within a year, and plans to offer consumers free subscriptions by bundling advertisements with its search engine, e-mail and Web browser software applications, according to a story published Thursday in The Wall Street Journal.

Google is showing the prototype to cell phone manufacturers and network operators as it continues to hone the technical specifications that will allow the phone to offer a better mobile Web browsing experience than current products, the Journal said.

Google declined to comment on the report of the prototype, but confirmed that it is working with partners to expand its software applications from the traditional Internet to mobile devices.

“We’re partnering with carriers, manufacturers and content providers around the world to bring Google search and Google applications to mobile users everywhere,” Google spokesman Michael Kirkland said in an e-mail statement.

“What our users and partners are telling us is that they want Google search and Google applications on mobile, and we are working hard every day to deliver that,” Kirkland said.

The move would echo another recent product launched by a phone industry outsider, Apple inc.’s iPhone. but Google’s product would draw its revenue from a sharply different source, relying on commercial advertising dollars instead of the sticker price of at least $499 for an iPhone and $60 per month for the AT&T inc. service plan.

Negotiating the fairest way to split those advertising revenues with service providers could be a big hurdle for Google, one analyst said. Another problem is the potential that consumers could be scared off by the prospect of listening to advertisements before being able to make phone calls, said Jeff Kagan, a wireless and telecommunications industry analyst in Atlanta.

“I don’t know how successful it’s going to be. the model of an ad-supported wireless Web has not been successful over the past 10 years,” he said, referring to municipal Wi-Fi networks that offer free Internet connections to users willing to view advertisements while they surf the Web.

“The average adult who can afford a cell phone is not going to want to listen to ads. so this is mainly for teenagers, twenty-somethings, high schoolers or people who can’t afford a phone,” said Kagan.

Industry watchers have long heard rumors that Google was designing its own mobile phone. Google added fuel to that speculation in July when it announced it was willing to spend $4.6 billion to buy wireless spectrum in a U.S. Federal Communications Commission auction.

At the same time, an increasing number of industry newcomers have made bids to enter the market, such as Apple with the iPhone and the Walt Disney Co., which launched a wireless version of its ESPN cable sports channel that ultimately failed.

Google Shows Phone Prototype to Vendors