InvestorsFriend Inc. Newsletter January 16, 2005
Successful Investing
There are many theories about how to beat the market or how to achieve high
returns without high risk. There are also theories that suggest that investment
success is basically random and that high returns necessarily involve high
risks.
My view is that classic value oriented investing offers the best chance of
higher returns without excessive risk. Value investors seek essentially to
purchase something that is intrinsically worth $1.00 for substantially less than
$1.00. This absolutely does not exclude "growth" companies, but it does
exclude over-priced growth companies.
I believe that I can assume that most readers of this newsletter are to some
extent do-it-yourself investors. While you may rely on various newsletters,
stock picking services, and all the opinions you hear or read about, at the end
of the day most of you are investing your money and relying on your own analysis
of all the advise you see. In that case, I believe you will be most successful
by continuing to learn and re-learn the basics of value oriented investing. Many
of the Articles on this Site are useful in
understanding basic investment math and fundamentals.
Stock Screening
Yesterday I did some screening for Canadian stocks that are good values. I
screened for a Price Earnings ratio of less than 12, a return on equity of at
least 12%, a debt level that is lower than the equity level and a price not in
excess of 3 times book value. The screening program returned 30 Canadian stocks.
Interestingly, two out of my four current Strong Buys (available by
paid subscription) were included and two of my Buys
were also listed.
Now, some of these 30 stocks are truly bargain priced. However, in some cases
they are showing up because of a one-time spike in earnings due to some unusual
event and may not be bargain stocks. I reviewed five year summary data of these
stocks to determine which of these really were bargain priced, based on
consistent high earnings compared to price.
What I found encouraging was that there appear to be at about 8 companies
here (in addition to the four that I already own) that are probably true
compelling bargains. Examples include companies with a price earnings ratio of
less than 7 combined with a return on equity of 20%. I intend to look more
closely at these companies. Now some of these have tended to trade at such "low
multiples" for a number of years and maybe they are not about to jump in price
anytime soon. But, the low multiple reduces down-side risk and the simple
retention of earnings at an ROE of 20% will inevitably lead to an attractive
return if the ROE continues to be achieved, even if the multiple stays low. And,
if the multiple improves that would be additional upside.
In summary, this stock screening indicates that there are still bargains in
the market, even after two straight years of strong market growth.
Performance
The final performance figures for 2004 were
very good at 25% for the Strong Buys and almost 27% for the model portfolio. The
Strong Buys have averaged over 28% per year for the past five years. The graphs
provided illustrate the tremendous consistency with which the Buys and Strong
Buys have increased, on average, and the Sells have decreased, on average.
Current stock picks are available by paid subscription
for just $10 per month, with no obligation to continue past 1 month.
Performance tracking for the Strong Buys selected January , 2005 will commence
by the end of January.
Older Newsletters
Previous editions of this newsletter, from 2004, are available at
http://www.investorsfriend.com/newletters.htm
Should Corporations Donate to charity?
In the wake of the Tsunami disaster and the associated corporate donations,
investors need to think about whether or not the companies that they own shares
in should be giving to any kind of charity and relief effort.
To cut to the chase, my own view is that they don't have to but
I am in favor of a certain amount of it, as long as it is done properly.
Many people favor a socialist agenda and would argue that corporations have a
responsibility to give back to their community, their country
and even the world and that they absolutely should give and if
they don't they should be pressured to do so by consumer boycotts and other
means.
I don't agree with that view for corporation or for individuals. Charitable
giving is done by choice and no one, and no corporation, should be pressured to give,
if they don't want to. They can be
asked, but they should not be pressured, if they refuse. If charity is to be mandatory then
let's include it in a sales tax so that all corporations pay it. Of course, if
some consumers want to boycott a given corporation for not giving, that is their
right. But I don't think it is the right of anyone to say that any other person
or corporation should give to charity.
Another group that generally favors corporate giving is the majority of
Canadians who give to charity on a personal basis. If I give to charity then it
means I support the cause and I would want other people and other corporations
to also give reasonable amounts. Investors who give to charity on a personal
basis, including myself, would probably want the corporations that
they invest in, and certainly those that they do not invest in, to give
reasonable amounts. This is different than passing judgment that corporations
should give, this is simply saying you want them to.
There is also the argument that for most corporations, it is good business to
give reasonably to charity because that is what the customers and the general
public would want.
Overall, I think that most investors would want the corporations that they
invest in to give reasonable amounts to charity and disaster relief because it
might be good for business and because these investors mostly give on a
personable basis and corporate giving ensures that all shareholder are
(indirectly) giving and this makes the charity more efficient from the point of
view of a personal donor.
Investors would want corporations to give in the proper way. This starts with
management always recognizing that when they give to charity they are giving
away the shareholder's money. Management runs the company and holds its
funds in stewardship for the shareholders. A proper way to give to charity would
be to give a reasonable amount of corporate money and to fairly quietly press release it.
The wrong way to give shareholder's money to charity is to do it in a very
loud way seeking publicity for management rather than the corporation. If
management gives money in a loud self-serving way, then this is a tip off that
this management views corporate money as really belonging to management. If
investors see that happening, they would probably be wise to sell their shares
and run.
A very interesting point was raised by the National Post who pointed out that
it was in effect, the so-called greedy capitalist system of the Western World,
that allowed these counties and millions of well-off citizens to donate to the
poor Asian countries. It must gall the socialist crowd to realize that it is
mostly (possibly only) the free-enterprise oriented countries that were able to
afford to give meaningful amounts.
In conclusion, I am glad to see many of the companies that I own shares in
donate to the Tsunami relief. But I don't think they had any particular
obligation to do so. I think it was the right thing to do but it was completely
discretionary. And, I'm thankful for our capitalist (mostly) non-socialist system
that allowed us the luxury to help out.
Investment Advisors and the Conflict of Interest
Throughout 2004, investment advisors were frequently vilified in the
financial press.
They were accused of such things as: not disclosing their total profits and
commissions, putting clients in higher-cost house-brand mutual funds, in the
case of brokers - churning accounts to make commissions, and generally of being
in a conflict of interest position and failing to always put their clients
interest ahead of their own.
Well, I am about to come to their defense. And please remember, I am not
an Investment Advisor and never have been, so I am defending complete strangers
here.
I don't know why Investment Advisors were singled out for putting their own
interests ahead of that of their clients. Do people really think that that
anyone that they deal with is truly going to make his or her own interests secondary
to that of their clients. It's really quite a conceited view to think so. Is
the car salesman selling you a car for your good or for the sake of his
commission cheque? Is the restaurant owner in business for your sake or for his
own? Do you work for your employer's good or your own good? The plain fact is
that in a capitalist system we are all primarily interested in looking out for
number "1". Sure we care about our customers and most of us want to do a great
job and provide good value. But it is really unrealistic to expect any vendor or
service provider to truly put the customer's interest ahead of his own. Such
thinking is socialist drivel. As capitalists we might pretend sometimes to truly
put the customer first, but it's just not how things really work. Vendors will
do things that are good for you, but they also have their own self-interest
firmly in mind. And that's actually a very good thing.
In his famous 1776 book, Adam Smith agued, in effect, that the greatest societal good and
abundance is achieved (as an unplanned by product) by a capitalist free
enterprise system when each person
seeks to maximize his own self interest.
Consider an Investment Advisor facing the following choices of investments to
recommend for clients.