Monday, September 20, 2010
Spotting the winners
Dora Hoan
Group CEO
Best World International Ltd
I BELIEVE it is crucial to take the pulse of the global economy to be able to make good investments, particularly in a post-crisis world. The prospects for the region however remains bright, as Asian consumption has been leading the global recovery relative to the US, the EU and Japan. I foresee even more opportunities for Asian economic growth in the next 20 years as a result of strong inter-regional and intra-regional trade.
I see ample opportunities in properties, construction, food & beverage and health & lifestyle.
Global markets on the whole are bouncing back but are still in their early stages of fragile recovery. Retail players have demonstrated renewed confidence in investing but they are observed to be more selective and not industry-specific. I would advise investing incremental cash in stocks of companies that have done fairly well over the years, with proven track record that they can withstand minor and major dips in the economy.
Investors must get a feel for a company, their accomplishments, their visions, goals for expansion and direction towards the future. It is particularly important in these uncertain times to look at the business model's scalability and sustainability. Certainly, more than trending and speculations, retail investors will go where real values come into play.
Group CEO
Best World International Ltd
I BELIEVE it is crucial to take the pulse of the global economy to be able to make good investments, particularly in a post-crisis world. The prospects for the region however remains bright, as Asian consumption has been leading the global recovery relative to the US, the EU and Japan. I foresee even more opportunities for Asian economic growth in the next 20 years as a result of strong inter-regional and intra-regional trade.
I see ample opportunities in properties, construction, food & beverage and health & lifestyle.
Global markets on the whole are bouncing back but are still in their early stages of fragile recovery. Retail players have demonstrated renewed confidence in investing but they are observed to be more selective and not industry-specific. I would advise investing incremental cash in stocks of companies that have done fairly well over the years, with proven track record that they can withstand minor and major dips in the economy.
Investors must get a feel for a company, their accomplishments, their visions, goals for expansion and direction towards the future. It is particularly important in these uncertain times to look at the business model's scalability and sustainability. Certainly, more than trending and speculations, retail investors will go where real values come into play.
Beating the market for 15 years
Beating the market for 15 years
BILL Miller may not rank among the Buffetts and Soroses of the world when it comes to being a household name. But the mutual fund manager's 15-year market-beating streak is legendary.
Related stories:
» The 7 deadly investment myths
» How to value a company
Born in Laurinburg, North Carolina in 1950, Mr Miller graduated with honours from the Washington and Lee University in 1972 with a degree in economics. He joined asset management firm Legg Mason in 1981 and took over equity fund management arm Legg Mason Capital Management in 1990.
The rest, as they say, is history. The Legg Mason Value Trust beat the Standard & Poor's 500 index every year from 1991 to 2005, growing from US$750 million (S$1.01 billion) to more than US$20 billion in the same time. Only in 2006 did Mr Miller's streak finally come to an end, with the Value Trust's 5.85 per cent return trailing the S&P 500's 15.75 per cent showing.
Mr Miller, chairman and chief investment officer of Legg Mason Capital Management, also manages the newer Legg Mason Opportunity Trust mutual fund. In total, he handles more than US$60 billion.
As a self-proclaimed value investor, his strategy is founded on analysis. He buys mainly large-cap stocks that he thinks are trading at large discounts to their intrinsic value, and takes a long-term view on them: not just buying and holding, but buying even deeper into stocks that he holds if their prices fall.
Mr Miller himself has played down the significance of his streak, once saying: 'Our so-called 'streak' is a fortunate accident of the calendar.' Be that as it may, the Legg Mason Value Trust averaged returns of 16 per cent for 15 years up to the end of 2005, a track record not to be scoffed at.
What were Mr Miller's strategies in achieving his record-breaking run?
Focus on companies, not trends
Mr Miller begins with the companies in mind, not the market trends. As the man himself has said: 'We don't have a forecast-and-trend approach - meaning we don't make a forecast of what we think is likely to happen, or what trends are likely to occur, and then adjust our portfolio to conform to the forecasts.
Related stories:
» The 7 deadly investment myths
» How to value a company
'We estimate the intrinsic value of our companies and invest where we can get the greatest discount to intrinsic value. Then we try to understand the environment we're operating in. But we start with valuation - that's always number one.'
A famous example of this approach in action is his bid for Google's initial public offer in August 2004. Back then, the prevailing sentiment held that Google was just another over-hyped Internet play.
Never one to follow the crowd, Mr Miller set up a task force to analyse the company. They developed a three-tier bid based on their valuation of Google, which turned out to be much higher than the final price of US$85 a share - meaning that Mr Miller scored 2.3 million shares at US$196 million. That initial investment is now worth over US$1.2 billion.
Look for value
When Mr Miller assesses companies on their own merits, he also looks at their current price relative to what he thinks is their intrinsic value. Value investors are the bargain hunters of the stock market, and Mr Miller looks for stocks trading at large discounts.
Related stories:
» The 7 deadly investment myths
» How to value a company
If a stock that he holds starts to fall, he simply sees it as a better bargain. Hence, his famous reply to the question of when he would stop buying a falling stock: 'When we can no longer get a quote.'
Of course, value investors always face the danger of being left with a value trap, or a stock that appears undervalued but is on the decline. Research and analysis is key to avoid ending up with a value trap on one's hands.
In this area, understanding the background of the industry is also important. Says Mr Miller: 'The trap comes in when there's a secular change, where the fundamental economics of the business are changing or the industry is changing, and the market is slowly incorporating that into the stock price.'
Go for the long-term
Mr Miller is definitely not a short-term speculator, and instead sums up his long-term view on stocks as 'creative non-action'.
Related stories:
» The 7 deadly investment myths
» How to value a company
'We are mostly inert when it comes to shuffling the portfolio around, with turnover that has averaged in the 15 per cent to 20 per cent range, implying holding periods of more than five years,' says Mr Miller.
Market changes seldom affect his decisions, either. 'Many funds have turnover in excess of 100 per cent per year, as they constantly react to events or try to take advantage of short-term price moves. We usually do neither. We believe successful investing involves anticipating change, not reacting to it.'
In the late 1990s, Mr Miller famously bought more and more shares of Internet company AOL, even as its price plummeted. Despite widespread scepticism about the wisdom of that choice, his decision eventually paid off when the stock came back strongly.
Do your own thing
Mr Miller's winning bets on Google and AOL illustrate a key component of his style: never be afraid to think differently.
Related stories:
» The 7 deadly investment myths
» How to value a company
After all, Mr Miller once served as a military intelligence officer in Europe. He also sits on the Board of Trustees at the Santa Fe Institute, a centre for research in complex systems theory. Though that may sound esoteric, analysing systems is part of Mr Miller's investing philosophy.
'What we are really trying to do is to think about thinking,' says Mr Miller. 'Understanding how groups behave is central to understanding how complex adaptive systems - such as the stock market - work.'
In practice, this philosophy means that Mr Miller often buys stocks which most investors would not consider holding, as he believes that the conventional wisdom about them is wrong. Of course, he is not contrary for the sake of being so: his decisions are backed by solid analysis.
Going long may not sound as exciting as speculation. Yet Mr Miller's style is not for the faint-hearted. Investors wishing to emulate his philosophy, whether in rejecting the conventional wisdom or buying even deeper into plummeting stocks, will need confidence in both themselves and their research.
BILL Miller may not rank among the Buffetts and Soroses of the world when it comes to being a household name. But the mutual fund manager's 15-year market-beating streak is legendary.
Related stories:
» The 7 deadly investment myths
» How to value a company
Born in Laurinburg, North Carolina in 1950, Mr Miller graduated with honours from the Washington and Lee University in 1972 with a degree in economics. He joined asset management firm Legg Mason in 1981 and took over equity fund management arm Legg Mason Capital Management in 1990.
The rest, as they say, is history. The Legg Mason Value Trust beat the Standard & Poor's 500 index every year from 1991 to 2005, growing from US$750 million (S$1.01 billion) to more than US$20 billion in the same time. Only in 2006 did Mr Miller's streak finally come to an end, with the Value Trust's 5.85 per cent return trailing the S&P 500's 15.75 per cent showing.
Mr Miller, chairman and chief investment officer of Legg Mason Capital Management, also manages the newer Legg Mason Opportunity Trust mutual fund. In total, he handles more than US$60 billion.
As a self-proclaimed value investor, his strategy is founded on analysis. He buys mainly large-cap stocks that he thinks are trading at large discounts to their intrinsic value, and takes a long-term view on them: not just buying and holding, but buying even deeper into stocks that he holds if their prices fall.
Mr Miller himself has played down the significance of his streak, once saying: 'Our so-called 'streak' is a fortunate accident of the calendar.' Be that as it may, the Legg Mason Value Trust averaged returns of 16 per cent for 15 years up to the end of 2005, a track record not to be scoffed at.
What were Mr Miller's strategies in achieving his record-breaking run?
Focus on companies, not trends
Mr Miller begins with the companies in mind, not the market trends. As the man himself has said: 'We don't have a forecast-and-trend approach - meaning we don't make a forecast of what we think is likely to happen, or what trends are likely to occur, and then adjust our portfolio to conform to the forecasts.
Related stories:
» The 7 deadly investment myths
» How to value a company
'We estimate the intrinsic value of our companies and invest where we can get the greatest discount to intrinsic value. Then we try to understand the environment we're operating in. But we start with valuation - that's always number one.'
A famous example of this approach in action is his bid for Google's initial public offer in August 2004. Back then, the prevailing sentiment held that Google was just another over-hyped Internet play.
Never one to follow the crowd, Mr Miller set up a task force to analyse the company. They developed a three-tier bid based on their valuation of Google, which turned out to be much higher than the final price of US$85 a share - meaning that Mr Miller scored 2.3 million shares at US$196 million. That initial investment is now worth over US$1.2 billion.
Look for value
When Mr Miller assesses companies on their own merits, he also looks at their current price relative to what he thinks is their intrinsic value. Value investors are the bargain hunters of the stock market, and Mr Miller looks for stocks trading at large discounts.
Related stories:
» The 7 deadly investment myths
» How to value a company
If a stock that he holds starts to fall, he simply sees it as a better bargain. Hence, his famous reply to the question of when he would stop buying a falling stock: 'When we can no longer get a quote.'
Of course, value investors always face the danger of being left with a value trap, or a stock that appears undervalued but is on the decline. Research and analysis is key to avoid ending up with a value trap on one's hands.
In this area, understanding the background of the industry is also important. Says Mr Miller: 'The trap comes in when there's a secular change, where the fundamental economics of the business are changing or the industry is changing, and the market is slowly incorporating that into the stock price.'
Go for the long-term
Mr Miller is definitely not a short-term speculator, and instead sums up his long-term view on stocks as 'creative non-action'.
Related stories:
» The 7 deadly investment myths
» How to value a company
'We are mostly inert when it comes to shuffling the portfolio around, with turnover that has averaged in the 15 per cent to 20 per cent range, implying holding periods of more than five years,' says Mr Miller.
Market changes seldom affect his decisions, either. 'Many funds have turnover in excess of 100 per cent per year, as they constantly react to events or try to take advantage of short-term price moves. We usually do neither. We believe successful investing involves anticipating change, not reacting to it.'
In the late 1990s, Mr Miller famously bought more and more shares of Internet company AOL, even as its price plummeted. Despite widespread scepticism about the wisdom of that choice, his decision eventually paid off when the stock came back strongly.
Do your own thing
Mr Miller's winning bets on Google and AOL illustrate a key component of his style: never be afraid to think differently.
Related stories:
» The 7 deadly investment myths
» How to value a company
After all, Mr Miller once served as a military intelligence officer in Europe. He also sits on the Board of Trustees at the Santa Fe Institute, a centre for research in complex systems theory. Though that may sound esoteric, analysing systems is part of Mr Miller's investing philosophy.
'What we are really trying to do is to think about thinking,' says Mr Miller. 'Understanding how groups behave is central to understanding how complex adaptive systems - such as the stock market - work.'
In practice, this philosophy means that Mr Miller often buys stocks which most investors would not consider holding, as he believes that the conventional wisdom about them is wrong. Of course, he is not contrary for the sake of being so: his decisions are backed by solid analysis.
Going long may not sound as exciting as speculation. Yet Mr Miller's style is not for the faint-hearted. Investors wishing to emulate his philosophy, whether in rejecting the conventional wisdom or buying even deeper into plummeting stocks, will need confidence in both themselves and their research.
Monday, September 13, 2010
Finding Lynch's 10-Baggers
Finding Lynch's 10-Baggers
By Tom Gardner | More Articles
May 26, 2004 | Comments (0)
This classic investing column originally ran on Sept. 23, 2003. It has been updated.
Peter Lynch is recognized by investors the world over. More than 1 million read his book One Up on Wall Street -- at least, that many bought it. Sadly, many seem either to have disregarded or forgotten the book's tenets for finding great investments.
And that's a shame. After all, the greatest of these investments -- in his words, the "10- to 40-baggers... even 200-baggers" -- can rise 10-200 times in value.
I haven't forgotten. A "student" of Lynch for years, I don't deny that what I've learned has influenced the way I invest. Nor that, when we conceived of our Motley Fool Hidden Gems newsletter service and online community, digging up just a few of these "10- to 40-baggers" was very much on our minds.
It might be worthwhile, then, to take a look at six of his primary principles, all of which are core components to our Hidden Gems investing approach. I strongly encourage you to consider them when building or fine-tuning your own stock portfolio.
1. Small companies
Lynch loves emerging businesses with strong balance sheets, and so do I. His extraordinary returns in La Quinta Inns came at a time when the company was young and small, traded at a discount to estimated future growth, and sported a healthy balance sheet. Why did he veer away from such dominant franchises as Hilton Hotels (NYSE: HLT) and Marriott International (NYSE: MAR) in favor of the promising upstart? He writes, "Big companies don't have big stock moves... you'll get your biggest moves in smaller companies."
Couldn't have said it better myself. When searching for hidden gems, I focus explicitly on strong, well-run companies capitalized under $2 billion.
2. Fast growers
Among Lynch's favorites are companies whose sales and earnings are expanding 20%-30% per year. The classic Lynch play over the last decade might be Starbucks (Nasdaq: SBUX), which has consistently grown sales and earnings at superior rates. The company has a sterling balance sheet and generates substantial earnings by selling an addictive product, repurchased every day at a premium by its loyal customers.
The real trick is to find fast growers like Starbucks or Krispy Kreme (NYSE: KKD) in their early stages. At the same time, don't shy away from a slower-growth business selling at a truly great price. Hidden gems can take either form.
3. Dull names, dull products, dead industry
You might not think this of the world's greatest -- and arguably, most famous -- mutual fund manager, but Lynch absolutely loved dreary, colorless businesses in stagnant or declining industries. A company like Masco Corporation (NYSE: MAS), which developed the single-handle ball faucet (yawn), rose more than 1,300 times in value from 1958 to 1987.
And if he could find that kind of business with a ridiculous name, like Pep Boys (NYSE: PBY), all the better. No self-respecting Wall Street broker could recommend such an absurdly named unknown to his key clients. And that left the greatest money managers an opportunity to scoop up a truly solid business at a deep discount.
4. Wall Street doesn't care
Lynch's dream stock at Fidelity Magellan was one that hadn't yet attracted any attention from Wall Street. No analysts covered the business, which was less than 20% institutionally owned. None of the big money cared. Toys "R" Us (NYSE: TOY), though it might not be so great an investment today, after being spun out from bankrupt parent Interstate Department Stores, went on in relative obscurity to rise more than 55 times in value.
And Lynch is effusive in explaining the wonderful returns from funeral and cemetery business Service Corporation (NYSE: SRV), which had no analyst coverage. He suggests investors compare that to "the fifty-six brokerage analysts that normally cover IBM (NYSE: IBM) or the forty-four that cover Exxon (NYSE: XOM)."
The point is clear: Small, underfollowed companies present the greatest opportunities to long-term investors.
5. Insider buying and share buybacks
Lynch loves companies whose boards of directors and executive teams put their money where their mouths are. A combination of insider buying and aggressive share buybacks really piqued his interest. He would have given a close look to a tiny company like Spar Group (Nasdaq: SGRP), which has featured persistent insider buying, but also a Moody's (NYSE: MCO), which methodically buys back its shares on the open market.
"Buying back shares," Lynch writes, "is the simplest, best way a company can reward its investors." Bingo.
6. Diversification
Finally, don't forget that Lynch typically owned more than 1,000 stocks at Fidelity Magellan. He embraced diversification and focused his attention on upstart businesses with excellent earnings, sound balance sheets, and little to no Wall Street coverage. He admits that, going in, he never knew which of his investments would rise five or 10 times in value. But the greatest of his investments took three to four years to reward him with smashing returns.
Personally, I anticipate an average holding period of three years, with the greatest of the group being held for a decade or more. I believe you can and should run a broad, diversified portfolio of stocks, if you have the time and the team to do so -- like we do here at the Fool and within our Hidden Gems community.
Finding the next hidden gem
Peter Lynch created loads of millionaires with his Fidelity Magellan Fund -- investors who went on to live comfortably, send their kids to college, and give generously to deserving charities.
You might be surprised to hear that he thinks you can succeed at stock investing without giving your whole life over to financial statement analysis. He's outlined a method whereby the total research time to find a stock "equals a couple hours." And he doesn't think you need to check back on your stocks but once a quarter. Doing more than that might lead to needless hyperactive trading that wears down your portfolio with transaction costs and taxes.
Hidden Gems practices each and every one of these Lynchian precepts. If this is how you like to invest, I guarantee you'll love our newsletter service. Try it free for 30 days and if you don't absolutely love it, you can cancel without paying a tin-lizzy nickel.
The next 10-bagger is out there. Good luck finding it!
By Tom Gardner | More Articles
May 26, 2004 | Comments (0)
This classic investing column originally ran on Sept. 23, 2003. It has been updated.
Peter Lynch is recognized by investors the world over. More than 1 million read his book One Up on Wall Street -- at least, that many bought it. Sadly, many seem either to have disregarded or forgotten the book's tenets for finding great investments.
And that's a shame. After all, the greatest of these investments -- in his words, the "10- to 40-baggers... even 200-baggers" -- can rise 10-200 times in value.
I haven't forgotten. A "student" of Lynch for years, I don't deny that what I've learned has influenced the way I invest. Nor that, when we conceived of our Motley Fool Hidden Gems newsletter service and online community, digging up just a few of these "10- to 40-baggers" was very much on our minds.
It might be worthwhile, then, to take a look at six of his primary principles, all of which are core components to our Hidden Gems investing approach. I strongly encourage you to consider them when building or fine-tuning your own stock portfolio.
1. Small companies
Lynch loves emerging businesses with strong balance sheets, and so do I. His extraordinary returns in La Quinta Inns came at a time when the company was young and small, traded at a discount to estimated future growth, and sported a healthy balance sheet. Why did he veer away from such dominant franchises as Hilton Hotels (NYSE: HLT) and Marriott International (NYSE: MAR) in favor of the promising upstart? He writes, "Big companies don't have big stock moves... you'll get your biggest moves in smaller companies."
Couldn't have said it better myself. When searching for hidden gems, I focus explicitly on strong, well-run companies capitalized under $2 billion.
2. Fast growers
Among Lynch's favorites are companies whose sales and earnings are expanding 20%-30% per year. The classic Lynch play over the last decade might be Starbucks (Nasdaq: SBUX), which has consistently grown sales and earnings at superior rates. The company has a sterling balance sheet and generates substantial earnings by selling an addictive product, repurchased every day at a premium by its loyal customers.
The real trick is to find fast growers like Starbucks or Krispy Kreme (NYSE: KKD) in their early stages. At the same time, don't shy away from a slower-growth business selling at a truly great price. Hidden gems can take either form.
3. Dull names, dull products, dead industry
You might not think this of the world's greatest -- and arguably, most famous -- mutual fund manager, but Lynch absolutely loved dreary, colorless businesses in stagnant or declining industries. A company like Masco Corporation (NYSE: MAS), which developed the single-handle ball faucet (yawn), rose more than 1,300 times in value from 1958 to 1987.
And if he could find that kind of business with a ridiculous name, like Pep Boys (NYSE: PBY), all the better. No self-respecting Wall Street broker could recommend such an absurdly named unknown to his key clients. And that left the greatest money managers an opportunity to scoop up a truly solid business at a deep discount.
4. Wall Street doesn't care
Lynch's dream stock at Fidelity Magellan was one that hadn't yet attracted any attention from Wall Street. No analysts covered the business, which was less than 20% institutionally owned. None of the big money cared. Toys "R" Us (NYSE: TOY), though it might not be so great an investment today, after being spun out from bankrupt parent Interstate Department Stores, went on in relative obscurity to rise more than 55 times in value.
And Lynch is effusive in explaining the wonderful returns from funeral and cemetery business Service Corporation (NYSE: SRV), which had no analyst coverage. He suggests investors compare that to "the fifty-six brokerage analysts that normally cover IBM (NYSE: IBM) or the forty-four that cover Exxon (NYSE: XOM)."
The point is clear: Small, underfollowed companies present the greatest opportunities to long-term investors.
5. Insider buying and share buybacks
Lynch loves companies whose boards of directors and executive teams put their money where their mouths are. A combination of insider buying and aggressive share buybacks really piqued his interest. He would have given a close look to a tiny company like Spar Group (Nasdaq: SGRP), which has featured persistent insider buying, but also a Moody's (NYSE: MCO), which methodically buys back its shares on the open market.
"Buying back shares," Lynch writes, "is the simplest, best way a company can reward its investors." Bingo.
6. Diversification
Finally, don't forget that Lynch typically owned more than 1,000 stocks at Fidelity Magellan. He embraced diversification and focused his attention on upstart businesses with excellent earnings, sound balance sheets, and little to no Wall Street coverage. He admits that, going in, he never knew which of his investments would rise five or 10 times in value. But the greatest of his investments took three to four years to reward him with smashing returns.
Personally, I anticipate an average holding period of three years, with the greatest of the group being held for a decade or more. I believe you can and should run a broad, diversified portfolio of stocks, if you have the time and the team to do so -- like we do here at the Fool and within our Hidden Gems community.
Finding the next hidden gem
Peter Lynch created loads of millionaires with his Fidelity Magellan Fund -- investors who went on to live comfortably, send their kids to college, and give generously to deserving charities.
You might be surprised to hear that he thinks you can succeed at stock investing without giving your whole life over to financial statement analysis. He's outlined a method whereby the total research time to find a stock "equals a couple hours." And he doesn't think you need to check back on your stocks but once a quarter. Doing more than that might lead to needless hyperactive trading that wears down your portfolio with transaction costs and taxes.
Hidden Gems practices each and every one of these Lynchian precepts. If this is how you like to invest, I guarantee you'll love our newsletter service. Try it free for 30 days and if you don't absolutely love it, you can cancel without paying a tin-lizzy nickel.
The next 10-bagger is out there. Good luck finding it!
Wednesday, September 1, 2010
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