Thursday, 25 September 2014

Value Investing

Some years ago I was introduced to a book by Warren Buffett titled "The Intelligent Investor" written by Benjamin Graham. He recommended the book and described it as the one book that changed his life. I was searching for a life changing experience myself. I went and bought the book and took about two and half evenings to complete reading it. The chapters eight and twenty were the two most important chapters. The two most important things lead me to a better understanding of the principle of value investing around two central planks of investing. Number one: the investor and the fluctuation of the market and two, the margin of safety.

As an investor you have to develop the emotional strength or fortitude to hold your ground on an investment despite the volatility of the stock price movements of the company. Price is what you pay and value is what you should get.

You may have to remove yourself from an environment of euphoria and or excitement of any market sentiments that may impact your quiet thoughts before and after you have made an investment in the stock of a company. The value of company is not necessarily determined by the stock price. The stock price operates at the whims and fancy of the market and does not always represent the true value of the company. You want strike when this market misprice exists.   

The fear of losing money should the price of the stock decline can be countered with a margin of safety. In this case, that margin of safety means simply buying the stock at a deep discount to the book value of the asset of the company. This can be judged by the 52 week low price, low P/E ratio, low book to earnings and any other valuation metrics that may suggest it is time to buy. These opportunities generally come up when there is bad news on a company and the market beats down the company's stock price into the ground making it dirt cheap. Before you run into a cheap stock you must do some research homework to make sure the company can rebound from Mr. Market's melancholic mood.

Your research homework can start with a Phil Fisher's "Common stocks and uncommon profit" that will help you with your research approach. Phil Fisher is the other side of Warren Buffett investment skill sets and that is what made him half Graham and half Fisher. 

I will conclude by saying "buy Mr. Market on the sad days at deep discount and at margin of safety that protects you from losing too much in a declining market, but provide a bounty on the upside in a market recovery". Do your research before you jumping two feet in. Remember even when one horse enters the race, is the sole runner and appears to be a sure winner, don't forget he may jump the fence and not complete the race.

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Warren Buffett on investing:

Phil Fisher on Common Stock:

Sunday, 21 September 2014

Buying a Stock 101...

Buying a stock 101.

Often time people contemplate investment and the first thing they will say is “I don’t have the money to buy stocks”. Buying stock is really not difficult. It is no different from going to the supermarket to pick up a basket of grocery. Each item in that basket of grocery has or serves different purposes and will add different value to your life.

Your first stop in buying a stock is at the stock brokerage house where you will speak to a stock broker and open a brokerage account to which you will place a sum funds. You can pick the stock of a company that is listed on a stock market like the New York Stock Exchange (NYSE), London Stock Exchange (LSE) or the Jamaica Stock Exchange (JSE).

There is a small brokerage commission associated with the purchasing and selling a stock and this fee generally ranges from 1% - 2% plus other related cess which may not be more than 100 basis points, hence your total purchasing/selling cost in addition to the unit price of each share. You would know the total cost prior to the purchase order being placed in the stock market. The transaction activity is a market action beit sell action or purchase action on the stock exchange.

If and when the order is executed your broker will inform you and the total number of shares is reflected in your account. The words stocks and shares are used interchangeably to mean one and the same.

So now you are in the market with your first item (stock) in the basket. Remember that in the same way you went about evaluating the grocery item you purchased at the supermarket, it is the same way you would evaluate a stock. You may have to do some research on the company or on the stock. And I say both company and stock because a good company may not necessarily be a good stock. By that I mean, a company may have a certain asset valuation on its balance sheet, but the market capitalization of it at outstanding shares may be valued less or more than its asset valuation. This asset value of the company also called the company’s book value. Ideally, you should want to buy a stock at a price below the company’s book value.

As I said in the last blog, you must firstly start off with a company that is making a profit and the second thing is to make sure that the price you pay for the stock/share is below book value and has low price to earnings ratio. You will see price to earnings ratio represented as P/E ratio.

Go open a brokerage account and start the process, and wet your feet in owning a piece of a company. Next time will share something on value investing with you.

But I can’t finish this blog without giving you a dose of Warren Buffett:

Who better to copy than Warren Buffett?

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Wednesday, 17 September 2014

Why must I buy the stock of a company?

I must buy a stock for the mere reason that somebody else will help with my future income, by doing the heavy lifting and making sure the company remains an economically viable company into the future. But before I do that i must make sure of these things;

For a first, the company:

  1. must be profitable 
  2. must pay a dividend or at least buying back share to create value for me as I continue hold  shares while at the same time increasing my share ownership
  3. must have a defensible competitive business advantage in its field of business
  4. must have honest management in place with skin in the game to run the company for the collective interest of all shareholders
  5. must be on the look out for a "tuck in" business or "bolt on" business enterprise to increase cash flow and Buffett-like float to allocate. (and by float I mean capital that is not yours, but come with zero interest charges that you can use until a claim is made against it, eg. insurance premium)
  6. must be growing its asset faster than it can deploy its capital on its own steam without borrowed money
  7. must be priced at below its asset value whether listed or not
  8. must be targeting "share of mind" (Disney) rather than "share of market" (Coca Cola) business
  9. must be clear from government regulatory legal squabble

See Peter Lynch video

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Saturday, 13 September 2014

Productivity and Growth in Jamaica (Final)

In the two previous discussions around “Productivity and Growth in Jamaica” blogs, we wrote on two theme of ideas. In the first instance (Part One) we spoke about the public/private sector differentials and how they conduct themselves in rendering customer service delivery, and in the second instance (Part Two) we spoke about innovation and growth advances. The differentials in customer service delivery and innovation and growth advances in both private and public sectors must collaborate at some point to achieve the synergy required to make Jamaica become more productive as a nation. The Vision 2030 National Development Plan hinges on the Information Communication and Technology (ICT) as one of the pillows to drive the vision forward. The plan outlined the issues and challenges, but really never spoke to a working plan of required activities to make the vision come through. 
But for me and others the questions are: 
1. How is the ICT industry clustered in Jamaica?
2. What are the Government of Jamaica (GOJ) policy is in place to support the ICT cluster?
3. Where can that national ICT policy be found at?
4. Who is working on or with that ICT policy now?
The section of Vision 2030 that speaks to ICT sector spoke to the issues and challenges and not the opportunities and incentives to kick-start the success of the ICT industry. First thing for a start, some good recommendations for the policy would be that;
1. GOJ develop a policy designed around building out the platform for the ICT future 
2. GOJ capital base incentivizing ICT infrastructure build out and
3. GOJ legislate data/content management regulations.
The two critical components necessary for these recommendations to be successfully implemented are; 
  • Active mobile broadband infrastructure consideration
  • Smart phone base technology consideration.
I say this considering the connection economy and the ecosystem prerequisite needed to move the economic activities from land base business operation to internet base business operation. Private sector must support public sector and public sector must reciprocate for mutual benefits of both sectors. This can only be done through collaboration with the available ICT innovation to speed dial economic growth in the new connection economy
The InSight: I bought a private sector company stock/share through my private sector brokerage account via the internet, the purchase order was place with a quasi government entity (Jamaica Stock Exchange) and I did not walk into an office building to conduct this transaction. The transaction gets executed, and within minutes I receive a text on my smart phone to say my transaction was successful,
1. No truck to transport anything,
2. No security guard to watch over anything at the gate, and
3. No warehouse space required to store anything.
No wonder Warren Buffett loves buying stocks. I think you too should copy him since he is the second richest man on the Forbes list. Be a shameless cloner and follow Warren Buffett the Oracle of Omaha.

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Wednesday, 10 September 2014

The Power of the Smart Phone

The smart phone is the way to the near future;

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Sunday, 7 September 2014

Productivity and Growth in Jamaica (Part Two)

This past week had raving fan fare on the announcement of Jamaica’s upward movement on the Global Competitive Index; The report defines competitiveness as the set of institutions, policies and factors that determine the level of productivity of a country. The index is also an indicator of economic growth and provides an early warning signal for what can become a better economic future. Innovation, mobile broadband subscription, and Government budget balance were the areas with significant movement on the index. Both private sector and public sector entities are responsible for any economic growth prospect to be realized in Jamaica. Neither of these sectors can succeed without the other, as both sectors form the nation’s economic ecosystem and need each to survive.

Innovation is the one common feature available to either sector enabling each of them to grow for the mutual benefit of all.

The real sweet spot in innovation for Jamaica is in the area of telecommunication or as some people put it, Information communication and technology (ICT). Some quarters may have it that, we chat a lot in Jamaica and so voice service is the preferred service sold by the two service providers, and this as oppose to active mobile broadband service for data services.Chatting is a means of educating one’s self, but this is channel of gaining knowledge is sometimes limited to the literacy level (knowledge base) of the chatters’ exchange and may not be as informed as they could otherwise be with valid third party information. Data services is more than just chat, as it provides a stream of data in more forms the one e.g.
  1. video, 
  2. audio and
  3. printed content
The stream of information would, by extension, improve the chatters’ literacy level (knowledge base) thus moving Jamaica’s adult literacy rate from its current 87 to 97 over time or even to 99 where Barbados is currently rated. See International Communication Union annual report - Measuring the Information Society 2013. Pg. 250.

This adult literacy rate gap problem can be fixed in short order if the data services capacity infrastructure is built out and promoted specifically to benefit the connection economy so that new sprout can spring for Jamaica i.e;
  1. Smart phone ownership, (Private Sector - Commercial Activities)
  2. Broadband speed and (Public Sector – Incentive Policies)
  3. Data access points (Public and Private – Wireless Point)
These things coupled with an already developed National Development Plan Vision 2030 can be made available jump starting the innovation for the growth agenda to take off making it easier, faster and cheaper to get to. See Vision 2030;

No success can be had without the vigilant eyes of the Government to ensure these developments are free from corruption and of the highest order of transparency. I want to draw your attention to the Corruption Perception Index and where Jamaica is ranked (83) compared to Barbados (15). See index; Jamaica is not highly rated and need to improve our ranking.

From the Corruption Perception Index you will see that we have a far way to go, but this is not to say that nothing is happening. The establishment of the Major Organized Crime Anti-Corruption Agency (MOCA) is a step in the right direction. See article;

Productivity and growth are what we desire and a comparison between Trinidad and Tobago and Dominica Republic and Jamaica can’t be a positive comparison. A better comparison certainly would be one between Barbados and Jamaica. Yes, I know some folks would say we can’t compare, but I would say, look to the heavens where you want to go and not to the valleys from which you came from.

What we really need are Growth Based Policies and not an Industry Policy per se, those days of industry as we knew it, has changed. It is no longer the mechanics of an engine in the industrial age, but more so the mechanics of the internet in the digital age as now exists that will move Jamaica forward. Any competitiveness we can achieve must be with the consideration of the digital age through our local service providers providing data service. The connection economy is the new drivers of industry, example Google, Facebook, EBay and Alibaba. General Electric is still profitable, but pale in comparison to the connection economy companies.

Ian Boyne

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