Buffettology (2)

A continuation of the previous article named "Buffettology".

Three ways to calculate the expected return of an long term stock investment:

1) compare current earning yield (i.e. 1/PE) and long term EPS growth rate with long term interest rate
e.g. for HSBC, historical earning yield = 7.7%, and 5 year EPS growth rate = 21%; current 10 year treasury bill yield around 5%

2) by using ROE, dividend payout ratio, book value & range of historical PE ratio.
i) use current book value & long term average ROE * (1-dividend payout ratio) to project future book value;
ii) use projected future book value & long term average ROE to project future EPS;
iii) use projected EPS & range of historical PE ratio to project future stock price;
iv) add dividend pool to projected future stock price and compare with current stock price to estimate expected return.

3) by using EPS, long term earning growth rate & range of historical PE ratio.
i) use current EPS and long term average earning growth rate to project future EPS;
ii) use projected EPS and historical PE ratio to project future stock price;
iii) add dividend pool to projected future stock price and compare with current stock price to estimate expected return.

陸羽仁 - 股俠創富II鱷口偷金

Just find a "Peter Lynch Formula" mentioned in this book, which is
100*(dividend yield + long term growth rate) / PE >= 1.5

if dividend yield = 0, it means PEG <= 0.67, sounds quite conservative;
if growth rate = 0, i.e. dividend = earnings, it means p/e <= 8.16 or e/p >=12.2%, sound reasonable ?

Buffettology

Revisited this old book, and the content is quite similar to those mentioned in 'The Warren Buffett Way', except
1) use ROE to measure "return to shareholders" ;
2) measure the "value creation" by (increase in earnings over a period) / accumulated retained earnings over the same period, e.g. 5 or 10 years.

I think the first point is okay if depreciation expense is in similar amount as capital expenditure, while the second point can help eliminate the effort of market sentiment on stock price, which in turn affect the market value.

沃倫·巴菲特之路

i am now reading this book, and would like to summarize the principles of investing from business perspective presented.

I. Corporate

1. simple: the business must be simple and be fully understood in every aspect (profit, expense, cash flow, labor relationship, price elasticity, capital need, capital allocation, etc);
2. consistent & proved business model: avoid business which always change;
   
3. economic franchise/consumer monopoly: strong demand, no close substitutes, ability to raise price against inflation;

II. Management

1. rational capital allocation: invest only if return > cost of capital, otherwise pay dividend or repurchase, avoid diworsification;
2. honest: admit to errors, act to the best interest of shareholders;
3. able to act against the crowd: do not follow the crowd without independent thinking;

III. Finance

1. return to shareholders: measured by (earning before unusual, infrequent or extra-ordinary items + depreciation - capital expenditure) / equity;
2. low leverage ratios: less loan borrowings;
3. cost control: high profit margins;
   
4. value creation: increase in market value > increase in retained earnings in long run;
   

IV. Market

1. corporate value: measured by discounted cash flow method, avoid business with unpredictable cash flow to ensure accuracy, and use long term interest rate as discount rate;
2. safety margin: buy only when market price much cheaper than corporate value.

強積金基金開支比率（ FER ）

消費者委員會剛剛發表基金開支資料。

先釐清基金開支的定義：基金開支包括基金管理費、受託人費、法律服務及核數師費等，並在基金資產中直 接扣除；但不包括供款人直接或間接支付的費用開支，例如計劃參加費、年費、供款費、賣出及買入差價、權益提取費等。不過這些費用很多也有豁免。另外，部份 基金收取「表現費」或「獎勵費」 - 最高可收取基金單位在期內的資產淨值升幅的 20%

消費者委員會調查包括的 35 個強積金計劃按資產比重計算的平均 FER 為 2.06% ，由 1.61% 至 2.52% 。

跟据譚紹興的資料，強積金基金收費相對一般股票基金平均高出 0.5 個百分點 。

0.5 個百分點 的分別看來並不起眼，但以 40 年供款年期，年回報 10% 計，0.5 個百分點的開支將令最終退休款項減少約 12.7 % (可超過百萬港元) ！

強積金不能逃避，但基金開支何時才能降低？

reference:
http://appledaily.atnext.com/template/apple/art_main.cfm?
iss_id=20070718&sec_id=15307&subsec_id=15326&art_id=7336848&amp;amp;
cat_id=81&coln_id=6794993

http://www2.consumer.org.hk/p369/mpffee.pdf

2366 & 398

The recent price performance of the following two stocks catch my eyes:

Although both of them have some 'concepts', the massive raises after long silent period are good indications about the current market sentiment. Does it forecast the end of the bull market as well?

Fundology

Just finish reading this book, which is written by an award-winning fund of fund manager.

The author shared his view that top-down investment approach should be adopted (identify high growth geographic markets or industry before picking individual funds / equities). He also shared that picking a good fund is actually picking a good fund manager, whose investment approach you should know well and agree with.

Although the skill is quite remote for a retail investor, I was impressed by the author's warning to avoid funds with 'hockey stick shape' past performance, which was simply too good to sustain.

I just thought of an example:


























(from hangseng.com)