Notably she made lots of money by investing and holding on to a pharmaceutical stock called Schering Plough. From what I read, she has never sold a share… just kept holding on and buying more.

What? Buy and Hold? “That’s just not for today’s market!” … I hear you say.

Maybe so.

Last night while watching CNBC, I heard a commentator say that US stocks are trading lower now than they were 10 years ago. That includes many of the big blue chips.

I haven’t held stocks for that long, but the ones I’ve held for 3-4 years are mostly out of the money… which means I’m sitting on paper losses. So in hindsight, should I have sold 6 or 12 months ago?  Sure… but you know what they say about hindsight right?

I’ve always held the view that short of the divine, it is impossible to time the market.

Meaning that you never know when the market has peaked and when it has hit rock bottom. So why try to time the market at all? Just decide that you want to be an investor for your Life Occupation and don’t even think about quitting your job!

“When times are good, be happy; but when times are bad, consider: God has made the one as well as the other.”
Ecclesiastes 7:14 (NIV)

But having said that, I’d agree that for most people, Buy and Sell is better than Buy and Hold.

In his book Even Buffett Isn’t Perfect, author Vahan Janjigian suggests that “unless you have access to Buffett-like resources, it is better to think of yourself as a stock buyer than a business buyer.”

See unlike Buffett, I can’t afford to buy the entire company and totally ignore the share price. In contrast, if Buffett feels that Mr Market is being foolish, well he can just buy the whole company right?

There’s a big difference when you can afford to buy the whole thing. Think about it… if you bought a house and someone comes along tomorrow and tells you it’s worth 30% less, would you listen to him? You’d probably tell him to fly a kite wouldn’t you? You’ve bought the house, you can afford to pay the bank loan, you can afford to keep it for the next 10 years and you know it will go up eventually. So why listen to Mr Market?

But hang on, what about Anne Scheiber? She doesn’t have Buffett-like resources – yet Buy and Hold has worked for her!

Buy and Hold is Fantastic

… if you can pick wonderful companies and have an investment horizon of 40 years.

Both Warren Buffett and Anne Scheiber have been investors for more than 40 years.

Anne Scheiber invested in businesses that she knew and understood. She loved the movies. And she invested in Columbia, Paramount and so on. She was a Coke/Pepsi drinker and she had shares in both. She took medication, so she invested in Schering Plough and Bristol Myers Squibb.

Actually if you believe Peter Lynch, picking the right stocks is not beyond the normal person:

“Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks as well as, if not better, than the average Wall Street expert.”

Oriental Holdings Berhad – What if You had Bought and Held?

I happened to be reading the Annual Report of Oriental Holdings Berhad (ORIENT) the other day and came across a statement by Chairman Dato Loh Cheng Yean:

“A holding of 1,000 stocks in Oriental when it was listed in 1964 would translate into 40,255 Oriental stocks worth RM263,670, based on the share price of RM6.55 at the end of 2007. In addition the stocks would have earned a total gross dividend of RM137,660. The gross dividends received and the appreciation in value is equivalent to a remarkable average rate of return of 14.60% for each of the 44 years.”

This sounds pretty good… see once again we’re talking 40 years. I find Oriental Holdings to be quite “remarkable” because it is such a diverse collection of different businesses which include auto assembly, auto parts manufacturing, oil palm, hotels, property etc. But 85% of its RM498 million Operating Profit is from auto and oil palm.

Oriental Holdings Bhd (ORIENT)

In the 4-5 years after the 1997 crash, Oriental’s earnings were down or at best flat, then since 2001 it started taking off and the company became a cash cow, building its Net Cash position to more than RM1.3 billion as at end-2007.

Oriental Holdings is a low profile company. I remember that I mentioned this company to a friend casually over dinner one night and she’s never heard of it. And this was no ordinary friend – she’s a Fund Manager & Analyst.

But if you had bought and held on to this company since listing, you’d be pretty happy.

Maxwell recounts the story of Anne Scheiber, an elderly and thrifty lady who lived in New York and worked for the Inland Revenue Service. When Scheiber retired at age fifty-one, she was only making $3,150 a year. She was treated poorly by her employer and was never promoted. Yet when Anne Scheiber died in 1995 at the age of 101, it was discovered that she left an estate to Yeshiva University worth US$22 million!

How did a public service worker with minimal salary accumulate such a staggering wealth? Here’s Maxwell’s take on it:

“By the time she retired from the IRS in 1943, Anne Scheiber had managed to save $5,000. She invested that money in stocks. By 1950 she had made enough profit to buy 1,000 shares of Schering-Plough Corporation stock, then valued at $10,000. And she held on to that stock, letting its value build. Today those original shares have split enough times to produce 128,000 shares, worth $7.5 million.

The secret to Scheiber’s success was that she spent most of her life building her worth… When she earned dividends – which kept getting larger and larger – she reinvested them. She spent her whole lifetime building…. When it came to finances, Scheiber understood and applied the Law of Process.”

The above story of Anne Scheiber was actually used by leadership guru Maxwell to illustrate an important leadership principle. But it can be equally applied to investing. I’m not sure if Maxwell got the facts right, but we can certainly learn a couple of important principles here:

1. Time in the Market
It is now how you start that is important. It is what you do day to day, and how you finish that counts. Sure it’s nice to time the market correctly but if you’re looking to make some serious bucks, time in the market counts.

Patience and consistency is everything!

2. Focused Investing
Most of Scheiber’s wealth was in a handful of stocks, the largest one being Schering-Plough. Like Warren Buffett, Scheiber is a Focused Investor. A Focused Investor puts meaningful amounts of money in a few things. Scheiber liked companies which are leading brands in their market.

Anne Scheiber

Most of us will not have the experience of picking one company which will ride on a tsunami wave. If you had bought a piece of Microsoft or Berkshire Hathaway when they started business, you would have the same ecstasy… but how many companies are like that? What are your chances of picking such companies? Nevertheless it is not impossible… imagine if you had bought and held on to Public Bank since inception. Now isn’t it worth a little time and effort to research and identify the next Public Bank?

3. Compound Growth
Whether the stock went up or down, she never thought, I’m finished building; now it’s time to cash out. She was in for the long haul, the really long haul. We are told that Anne Scheiber reinvested all of her dividends. She didn’t say lets take out some money and buy the latest LV handbag.  In fact Anne Scheiber was frugal to the point of being miserable. She lived in a rent-controlled apartment, wore the same clothes year in year out, didn’t own a car and even went to shareholder meetings so she could take home bags of food.

Don’t get me wrong… I’m not saying you shouldn’t reward yourself once in a while. In fact I would say there is a thin line between extreme thrift and greed. If you are blessed with so much money, spend some of it, give it away or whatever. Not only will you bless others, you release yourself from the trappings of greed

“Keep your lives free from the love of money”
Hebrews 13:5 (NIV)

The important lesson here is to realize the power of regular investment and compound returns. When you invest in good things and you invest regularly, your wealth will eventually multiply.

Remember attending one of those Unit Trust presentation and the Agent puts up that Regular Investment & Compound Return chart? Then everyone’s jaw would drop because your RM100/month savings can turn into a six figure sum when you retire? Start early, invest and have the discipline to keep re-investing…

Anne Scheiber loved stocks for her whole life and it is likely that she started investing much earlier than 1943 (the time she retired). Although she met with limited success initially, she came out tops in the end.

4. Hard Work
Anne Scheiber worked on her investments. She studied the companies she invested in, attended shareholder meetings and asked many questions to satisfy her curiousity and passion. Hard work with laser-like focus usually pays off.

“Successful leaders are learners. And the learning process is ongoing, a result of self-discipline and perseverance. The goal each day must be to get a little better, to build on the previous day’s progress.”
John C. Maxwell

Replace the word leaders with investors. Makes sense, wouldn’t you agree?

compare bursa malaysia companies

Key in up to 5 companies with commas but no spaces in between, for example AMMB,HLBANK,MAYBANK,COMMERZ,PBBANK and the results should come up.

You can only compare banks with banks and non-banks with non-banks. So don’t key in something like GENTING,MAYBANK because it won’t work! Go on, try it and have fun

Q: So how do you double your money every 5 years?
A: Earn a compound return of 15% every year.

Don’t believe?

OK say you have $1 now. Take out your calculator and go 1 x 1.15 – that gives you $1.15 – this is the amount you have at the end of the first year.

Then take that 1.15 and multiply by 1.15 for 4 times (the next 4 years). So you should be doing:

1 x 1.15 x 1.15 x 1.15 x 1.15 x 1.15

By now you should get 2.01, so your $1 has become $2.

OK wait, there’s an easier way to do it. It’s called the RULE OF 72. This just means you take 72 and divide it by the number of years in which you wish to double your money. That is the investment return you need to achieve your goal.

EG. You want to double your money in 7 years. What investment return do you need to achieve this?

Answer: 72 divide by 7 = You will need 10.3%

OK now go try and see!

NOTE: The Rule of 72 has limitations. It will work for a small range of numbers only. Say if you want to double your money in 3 years, the formula is not gonna work.
Hmmm… maybe you should not set such unrealistic targets in the first place?

ROE is a popular measure of how efficient a company is using its funds to generate income for its shareholders.

Unlike Return on Capital Employed, it does not take into account a company’s gearing position. For example, a company can increase its ROE by borrowing money and investing in assets which generate slightly more return that its borrowing cost. So the more a company gears up, the higher ROE it can achieve if it invests the borrowed funds in assets which generate a higher return compared to the financing cost.

Note: some calculations use Opening Shareholders Funds rather than Average.

Capital Employed = Net Assets – Cash + Borrowings

Example: Petronas Dagangan Bhd
PETDAG’s Consolidated Balance Sheet for 2006 and 2007 were reported as follows:

Capital Employed for 2006 = 3091.7 + 15.3 – 466 = RM 2,641.0 million
Capital Employed for 2007 = 3542.9 + 5.3 – 544 = RM 3,004.2 million

Dividends are usually periodic cash payments to shareholders out of a company’s earnings or earnings reserve.

In corporate finance theory, the total returns you get from investing in a share = Income Return + Capital Return

where Income Return is your dividend component, while Capital Return is the increase in value of your share price. Therefore

Share Investment Return = (Dividend per Share + Change in Share Price) / Purchase Price

For example, if you bought Petronas Dagangan (PETDAG) at RM8.45 on 10-Aug-07 with the expectation that you will receive 30 sen in dividends over the coming year and that the share price will grow to RM9.50, your projected return is:

(0.30 + 1.05) / 8.45 = 16%

Your expected Dividend Yield (or Income Return) is 3.6% while your expected Capital Return is 12.4%.

You can then compare this with other alternative investments such as Fixed Deposit or other shares/bonds, and make an evaluation whether this is an acceptable return taking into account the associated investment risks.

Note

1. Share Investment Return calculation is a projected or forecast figure.
2. Dividend Yield calculation excludes Special Dividends

PEG Ratio = PER / Annual EPS Growth

PEG is a widely used indicator of a stock’s potential value. It is favored by many over the price/earnings ratio because it also accounts for growth.

Similar to the P/E ratio:
The lower the PEG Ratio, the more undervalued the stock is and the greater the bargain you are getting.

As a Rule of Thumb, a PEG Ratio of less than 1 is considered good. For example, if a stock is trading at a PE Ratio of 12 times and it’s expected Net Profit growth is 15%, its PEG Ratio works out to be 0.8 and this is generally considered favourable.

Keep in mind that the growth rate used is projected and may not be accurate. Also some investors look at growth rate for several years before deciding on a growth rate to use in the PEG Ratio calculation.

(EBIT stands for Earnings Before Interest and Tax. It is the profits of the company before the impact of interest income, interest expense and tax expense. As such it is an indicator of the earnings of a business excluding the impact of its cash holdings and borrowings).

Calculation of EBIT
Our calculation approach for EBIT is as follows:
EBIT = Profit Before Tax – Interest Income + Finance Cost – Abnormal / Extraordinary / Unusual Items.

Note: EBIT should equal the company’s stated Profit From Operations plus its share of income from Jointly Controlled Entities and Associates, less Interest Income (if it has included this in its Profit From Operations).

Why Look at EBIT?
By understanding the true EBIT of a business, we are in a better position to form a view of the underlying earnings of the business and hence its business value.

Enterprise Value
Enterprise Value is basically the value of a company excluding its cash and debt position. See explanation here.

Using EV/EBIT
EV/EBIT is also known as EBIT Multiple. This is an extremely useful indicator and like PE Ratio, it shows how many times a share price trades against earnings.

The difference between EBIT Multiple and PE Ratio is that EBIT Multiple takes into account distortions in earnings caused by cash holdings and borrowings, while PE Ratio just lumps in everything.

If we were to use just the PE Ratio to measure a company’s valuation, we may overlook the true income generating power of its underlying business.

Example: UAC Berhad
UAC is listed on Bursa Malaysia under the Industrial Products sector. It manufactures fibre cement products and other building materials for the property and construction industries. For the last 2 years, UAC’s financial profile can be summarized as follows:

At the time of writing 4 August 2007, UAC’s share price is RM4.70 and it has 74.3 million issued shares, giving it a Market Cap of around RM349 million.

Earnings Per Share for the year ending 31-Dec-2006 was 41.6 sen, meaning that it is trading at 11.3 times earnings. This does not look excitingly cheap at face value.

However look at UAC’s balance sheet more closely and you will see that they have cash holdings of some RM177 million and no borrowings. If we were to exclude the impact of these cash holdings, we would see something like this:

EBIT = RM35.5 million
Enterprise Value = RM(349 – 177) million = RM172 million

EBIT Multiple = 4.8 times

What this means in theory is that we can buy the entire company at RM349 million and the company we buy has some RM177 million cash which we can draw out completely, implying that the net price we are paying for the business assets is only RM172 million. This RM172 million that we fork out should return us earnings of around RM35.5 million or around 21% return on capital. Now that starts to look a bit better!

Compare this approach to just looking at PE Ratio. Under the PE Ratio approach, you would be looking at Net Profit After Tax of RM30.9 million divided by Market Cap of RM349 million, ie a return of only 8.9% on your capital. This low return is distorted by the company’s excessive cash holding (which you can assume earns a minimal 3-4% return). Strip out this cash and all of a sudden your PE Ratio will come down to below 5 times. So the business assets looks a lot cheaper indeed!

EBITDA Multiple
EBITDA Multiple = EV / EBITDA

(EBITDA is Earnings before the impact of interest income, interest expense, tax expense, depreciation expense and amortization expense)

A commonly used variant is the EV/EBITDA ratio which also excludes the impact of depreciation and amortization expenses incurred by the company, on the basis that these are non-cash expenses.

Accounting policies require that Property, Plant and Equipment are to be depreciated over a finite life. Due to the nature of certain types of assets, such a policy is sometimes considered conservative because the equipment in question may last well beyond the depreciation period, meaning that this equipment can continue to be used to generate business income for an indefinite period (perhaps with a little maintenance). Likewise accounting policies require that intangible assets such as goodwill or intellectual property be amortized over a finite life, while the actual reality is that the value of such intangibles may well increase over time because management successfully utilizes such assets to increase business earnings over time. Therefore under certain scenarios you may also wish to look at EBITDA Multiple to assess whether a company is cheap or expensive.

Where Earnings per share (EPS) is a company’s Net Profit After Tax and Outside Equity Interest, divided by the Weighted Average Equivalent Number of Shares issued.

For example if a company makes a net profit after tax of RM10 million and it has 100 million issued shares, its EPS would be RM0.10. If its share price is RM1.20, the PE ratio is 12x, meaning that the share price is trading at 12 times its earnings.

PE Ratio is commonly used as a rule of thumb to determine whether or not a company’s shares are reasonably priced by the market. Smaller companies on Bursa Malaysia are typically valued at PE Ratios of between 7 to 12 times earnings per share, while larger caps typically command PE Ratios of 12 to 15 times earnings per share.

Note: There are several variants to this calculation including Diluted PE Ratio and PE Ratio before Abnormal/Exceptional/Unusual/Extraordinary Items.

PE Ratio Normalized
This is the PE Ratio of the share before the impact of Abnormal, Exceptional, Unusual and Extraordinary Items. Such items typically include:

• One-off gains & losses (items not in the normal course of business)
• Items which are unusually large, even though they are in the normal course of business
• Property revaluations in the case of REITs

PE Ratio Normalised is the Share Price divided by the Adjusted EPS.

In our calculation, we take the Net Profit After Tax and deduct Abnormal, Exceptional, Unusual and Extraordinary Items. This gives us the Adjusted Net Profit. We then take this figure and divide by the Weighted Average Equivalent No of Shares to arrive at the Adjusted EPS.