Fake?

The final investment thought of the year is from an article on Bloomberg that I felt, resonated well with the year that has gone by. The quote is both politically and economically applicable to 2014. The quote resonates with my studies of intermediate microeconomics and macroeconomics at university. Particularly in macroeconomics, where we focused on the causes and triggers of events such as the great depression and the GFC. The long term sustainability of recent central bank policy was a key area of debate between us, students. The basic conclusion I came up with was that recent central bank policy will be A cause of the next big crisis that grips the global economy.

“Nobody can predict how long governments can get away with fake growth, fake money, fake jobs, fake financial stability, fake inflation numbers and fake income growth. When confidence is lost, that loss can be severe, sudden and simultaneous across a number of markets and sectors.”

– Paul Singer, founder and president of Elliott Management Corp.

See you in 2015!

When your company falls by 50%, do you buy more or sell?

The last few weeks have shown that the share market never fails to surprise! The Australia mining engineering services sector and the broader mining sector have recently seen large corrections. Falling commodity prices are to blame with iron ore down by 45% and crude oil down by more than 30%. Investors reacted by wiping $28 Billion from the market on Monday the 1st of December. A 1.8% drop, one of the largest moves in recent months. Market volatility (that was missed for most of the year) has finally returned.

What did all this mean for my portfolio?
I invested in RCR Tomlinson (a mining engineering company) back in early 2012, around the same time I purchased FMG. RCR fundamentally, was a strong company and I believe it still is. As the graph shows, the market hasn’t shown the same view.

As the chart shows, I was making significant capital gains this time last year, around 70 per cent around September to November last year. Recent market sell offs have brought the share price and subsequently my self-affirmation to its knees. The stock price is down 50 per cent from its September high of $3.46.

At this point in time I am thinking of buying more shares in the company because I still believe it has potential despite the fact that mining investment in Australia is declining. This means that RCR and other companies such as Leighton Holdings and Ausdrill are competing for business in a shrinking market.

Earlier this year the company diversified into infrastructure specific civil engineering by buying out Norfolk Group (NGA) for $78 million through cash and bank borrowings. The acquisition has now created a a company with three specific business units, which include Resources (33% of revenue), Energy (13% of revenue) and Infrastructure (54% of revenue).

Recently the company has achieved a great track record which includes:

• 5 years of consecutive earnings per share increases.
• 5 years of consecutive increases in dividends.
• A strong order book of $800 million (currently).
• Double digit increases in net profit after tax for 5 consecutive years
• A 138% increase in revenue since 2010.
• Large scale projects for Fortescue Metals and Newcrest Mining along with civil engineering contracts for transport NSW, Sydney water and Legacy way road tunnel project in Brisbane.
• Very little or no debt until the NGA acquisition.

There’s no doubt shareholders have done well with RCR. Total shareholder return in the last 5 years has being a staggering 414%! Despite recent events and market volatility I am cautiously optimistic about RCR. I think it’s the perfect time to add to my holdings but…
I will be reviewing the companies free cash flows and other financial information in order to make a final decision on what I should do with my holdings. Markets are after all, forward looking.

Peter Lynch on investing

“As I look back on it now, it’s obvious that studying history and philosophy was much better preparation for the stock market, than say, studying statistics. Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage. If stockpicking could be quantified, you could rent time on the nearest Cray computer and make a fortune. But it doesn’t work that way. All the math you need in the stock market (Chrysler’s got $1 billion in cash, $500 million in long-term debt, etc.) you get in the fourth grade.” – Peter Lynch, One up on Wall Street

A quick recap on 2013

The equity markets performed well against all other major asset classes in 2013. In developed world equity markets, the highest performer by far was the Nikkei 225 which rose by 65%. Further asset classes and 2013 returns are as shown below –

Asset class (as of 30th November 2013)	Return
Japanese equities (Nikkei 225)	65.80%
US (S&P 500 accumulated)	30.30%
Australian equities (ASX 300 accumulated)	22.70%
British equities (FTSE)	17.50%
Chinese equities (MSCI China)	9%
Gold Bullion	-27.40%

Source: Australian Financial Review

2013 has being claimed as the best year for equities since 2009 and the best sectors include Media, up 64%, Diversified financials, up 49% and retailers up around 35%.   All gold companies took a beating in 2013, with market heavyweight Newcrest Mining (NCM) down close to 65%. 

House prices

In my recapping on 2012 post, I wrote that I agreed with a comment made in the Sydney Morning Herald claiming that ‘the years of strong house price growth are well and truly behind us.’ Unfortunately the commentator and I were both wrong on house prices in 2013.  Below is a graph showing why we were wrong.

 

Capital city house prices increased by 10% and Sydney house prices in particular increased by 14.5% to a median of $665,250.  It is claimed that investors have driven out first home buyers substantially over the last year.  I sure think it is a warning sign that house prices could go up in such a drastic way.  Talk of bubbles and overvaluations dominated the media last year and I’m sure there will be large media coverage on the topic again this year.  Even though I am still hesitant about house prices increasing substantially in the future, I know where I went wrong.
Australia has a major shortage in supply of housing in the capital cities such as Sydney, Melbourne and Perth.  The supply shortage, low interest rates and attractive yields are all reasons as to why investors dived into property so spectacularly in 2013. Even so, I think a nation that is obsessed with property should be careful in the future because there is potential for the situation to escalate.

References –

Australian Financial Review

Sector by sector – https://www.mywealth.commbank.com.au/investing/the-australian-marketa–s-best-and-worst-performers-in-2013-news20140102

Australian house prices, stats and figures – http://news.domain.com.au/domain/real-estate-news/capital-city-house-prices-rise-10-in-2013-20140102-306zk.html

Barton Biggs’ Hedgehogging: Thoughts on bull and bear markets

I have previously exclaimed that Barton Biggs’ book Hedgehogging is my inspiration for this blog. So therefore, in honour of Biggs, I will be posting on key details I found very interesting in the book.

Hedgehogging contains Barton Bigg’s reflections on working in the investment industry over many years. He worked for Morgan Stanley and created his own Hedge fund by the name of Traxis. The texts were taken from his regularly updated diaries. The introduction gives a brief statement as to why he wrote the book….

Why did I write this book? I love the business and am fascinated by its citizens.  For many years I have found that the act of writing regularly, keeping a diary so to speak, not only helps crystallise my own investment thinking but also provides a record of right and wrong calculations, which is very instructive on future review.  Just as some investors shape and sort their calculus by talking, I get the same effect by writing.  For me writing is a crucial investment and personal discipline.   

I found the book to be a great insight into the hedge fund industry and investment topics such as shorting, bull & bear markets, industry practices and insights into the lives of professional investors.  It even contains information on historically important characters such as the late Margaret Thatcher and John Maynard Keynes.
Hedgehogging has Biggs’ humour tied throughout the book. The many witty parts make it quite an interesting read.  Here are some of the highlights.

The members of the triangle, opinionated veterans of the investment wars, are not shy about expressing their opinions, and we all have known each other for years.  The insults flew like shrapnel on a bad day in Baghdad.  Pg.6

Professional investing is about performance, just as professional sport is about winning.  There is an element of luck in the investing game. Even the best investors have slumps.  Pg.57.

Wringing their hands, the doomsayers wail that derivatives are a huge tumour inexorably growing day by day like a cancerous lump in the world’s gut.  Pg.123

I make him a partner.  He makes big money in his first year.  At our year end partners’ dinner he is all choked up and he thanks me for all I’ve done for him with tears in his eyes.  His wife takes pictures of us.  Then she kisses me and she is crying.  They both hug me.  I’m like a sandwich between them.  I cry, too. It’s the rags to riches story, the American dream come true. I felt really good about it.  Pg. 194

Bulls and Bears, Secular vs Cyclical: What does it all mean?
One of the most fascinating chapters in the book revolves around bull and bear markets.  Biggs describes that in his observations, a secular bear market is a decline in a major stock index by at least 40% over a 3-5 year period.  This is followed by a long hangover period. Therefore, a new bull market can take a while to emerge after the onset of a secular bear.  Biggs mentions that cyclical bulls can occur in secular bear markets as shown in the aftermath of the Japanese bubble…

A cyclical bear market is a fall of at least 15% but less than 40% that rarely lasts more than one year.  Length is an important difference in the secular and cyclical description.

Long cycles in US equities according to Biggs:
1921-1929 Secular Bull, 1929-1949 Secular bear, 1949-1966 Secular bull, 1966-1982 Secular bear, 1982-2000 Secular bull.  2000- , Secular bear.
Biggs claimed that at onset of the tech crunch, we are in a secular bear market. He claims that the 2003 to 2006 rally is a cyclical bull rally in the hangover period.  He questions, ‘have we seen the lows of this secular bear market, and what will its duration be?’

I think we have seen the lows, but I keep remembering Japan and the long, cruel, secular bear market that still is grinding on almost 15 years later.  The Japanese market kept having short, sharp, cyclical bull market rallies but each one was a sucker rally that was eventually followed by a decline to further lows.

He agrees with other professionals in that the NASDAQ won’t see its year 2000 highs for years.  At least a decade.  And they were right! Recently the Nasdaq closed above 4000 points for the first time since September 2000.

How long before stocks will begin a true, new secular bull market? Biggs says it is very difficult to guess.  The key conditions he looks to are listed below.

• Money should be cheap and available.
• Deflated debt structure.
• Greater demand for goods and services.
• Valuations should be cheap.

At that point in time only two of the four conditions were met, Biggs says.

I believe the current situation hasn’t changed all that much!
The current situation is that the DJIA, NASDAQ, S&P500 have broken 2007 highs six years after the onset of the GFC.  In between, a cyclical bear market that lasted 4-5 years in 2007-2011. Does this indicate we are well and truly in a secular bull market? Your guess is as good as mine!

The years 2003-2007 saw a cyclical bull market. The S&P 500 increased by around 75% from the start of 2003 to June 2007.  Then came the 2007/08 Global financial crisis and its repercussions such as the European debt crisis. I believe 5 years is a short time for a reversal of the bear trend!  For that reason my intuition tells me we are in a cyclical bull rally even though the most of the indices in the US and Japan have broken through the 2007 highs.

Could the quantitative easing policies of the central banks be a part of the reason markets have gone up so much in such little time? The inflation of financial assets as a result of QE could explain why markets in the US have spiked over the last two years.  Therefore, what will happen when tapering occurs? As stated by Biggs in 2006, we still only have a few of those conditions that are right for secular bulls!

My thoughts on the bull/bear argument 
My thoughts are that the market has increased too quickly to be at the early stages of a secular bull. The bull rally does not seem ‘natural’ enough to be a proper secular bull market.  For this reason we might be heading for a large correction or maybe even a cyclical bear in the next 1-3 years.  If things get ugly, we might even test a critical support level.  In saying that, the stock markets are booming and so there are signs that the major economies of the world are improving which could mean a new secular bull started in 2011.  After all, the S&P 500 has gained close to 115% since 2009 which makes the bull rally nearly into its fourth year of gains!

Either way, what is interesting is reading about the secular/cyclical, bull and bear relationship from a great investor who lived through so many bull and bear markets including the infamous tech crunch.

Biggs on the rally in the aftermath of the tech crunch –

 So far we haven’t had anywhere near the distress of late 1970’s.  Secular bear markets have always taken valuations back to levels at which preceding bull market started.  I also recall all too well the agonising, extended hangover from the secular bear market of the early 1970’s.  The U.S equity market wondered up and down in a relatively narrow range for years. If the time table of previous two secular bear markets applied, we wouldn’t get back to a new high in the Dow and S&P 500 until 2017.

References:

Nasdaq hits 4000 http://www.marketwatch.com/story/us-stocks-inch-up-nasdaq-eyes-4000-again-2013-11-26

Cyclical bull? Forbes things so! http://www.forbes.com/sites/sharding/2013/11/15/why-its-still-only-a-cyclical-bull-market-within-the-long-term-secular-bear/

Ray Dalio’s take on the economy.

This is a video coordinated by multi-billionaire Wall Street investor and founder of Bridgewater associates, Ray Dalio. Bridgewater is claimed to be the worlds largest hedge fund with around $122 billion USD’s of funds under management.
I find this video quite interesting in that it explains key concepts quite well in a small amount of time and it really does keep you interested. It does show an overall picture of what has happened in the past and what is happening now in the US and Europe.
A question I would like Mr. Dalio to answer would be, where is Australia currently in the long-term debt cycle? Given the talk of inflated house prices, I would also like to know what Dalio’s thoughts are on house prices in Australia i.e. Are they in bubble territory?
And if you have thoughts along the line of those questions… Please don’t hesitate to tell me. Bubble or not… Dalio’s has some handy advice for countries around the world. I think rule no.2 & 3 applies greatly to Australia right now.

Some information I found particularly interesting:

• The self-reinforcing pattern of uptake of credit which increases in spending causes cycles.
• Productivity matter more for an economy in the long term but debt swings are short term.
• Debt swings are caused by two big cycles which consist of the short-term debt cycle (5-8 years) and the long term debt cycle (75-100 years).
• Borrowing involves pulling spending forward, which is essentially borrowing from your future self. Need to spend less in the future in order to pay debt back.
• Credit is bad when it is used for over consumption that can’t be payed back later.
• Credit is good when it efficiently allocates resources in the economy and produces income.
• Short term debt cycle consists of the expansion phase, where spending increases, prices rise, interest rates rise. It also consists of the recession phase where credit is not readily available, incomes drop, less money to spend overall.
• The short-term debt cycle causes total debt to accumulate over long periods of time. Over the long term debts rise faster than incomes.
• At the peak of the long term debt cycle, debt burdens become too big. E.g. US, Europe in 2008/9. Japan in 1989.
• Deleveraging occurs. Spending is cut, incomes fall, credit disappears, Asset prices drop, Banks lose funds, stock market falls, and people feel poor.
• Difference between recession and deleveraging is that interest rate drops by central bank do not work to fix the economy.
• Government budget deficits explode due to fewer taxes, more unemployed and the use of stimulus packages.
• To combat deleveraging countries can 1. Cut spending 2. Reduce debt through restructuring, default 3. Redistribute wealth by increasing taxes on the wealthy 4. Print money.
• Printing money is inflationary and stimulative. Money is used to buy assets but that helps only those who own financial assets.
• Printing money is quite risky. Balance of deflationary drivers and inflationary drivers have to be maintained. Germany in the 1920’s printed too much money which caused hyperinflation.
• A beautiful deleveraging involves debts declining relative to income, economic growth becoming positive and inflation kept under control.
• Central banks need to print enough money to get the rate of income growth above the rate of interest. If handled well, deleveraging can be fixed but very slowly. Depression can be present for up to 2-3 years. Reflation occurs 7-10 years later. This is the meaning of the ‘lost decade’.
• Dalio’s tips: 1. Don’t have debt rise faster than income. 2. Don’t have income rise faster than productivity. This results in uncompetitiveness. 3. Do all that you can to raise productivity. That’s what matters most in the long run.

BBG: An examination of an investment nightmare

Billabong International Limited (BBG) is an Australian surf wear company that was founded on the Gold Coast QLD, Australia in 1973 and listed on the domestic stock market, the ASX in 2000.  This was followed by a period of large acquisitions by the company in the early 2000’s and continued success in foreign and domestic markets. This meant that the share price rose accordingly to a high of $17 .43 in May 2007.

Figure 1: BBG stock price from May 2007 to July 2013. An alarming 98% loss of value in 6 years.

In 2012, the company was on the verge of being bought out by American private equity companies TPG and Bain Capital.  An offer of $1.45 and later on, $3.30 was put forth by TPG, but was rejected by the BBG board who claimed that the company was worth more.  The shares plunged 18% in the wake of news that TPG withdrew its interest in the company after the rejection of the revised bid of $3.30.  Bain Capital withdrew its bid in just two weeks, after conducting due diligence on the company.  A few more buyout offers followed in 2013 and there has being immense pressure on the company’s board to take almost any offer now that the share price and fundamentals of the company are at their worst since inception despite sales of assets, shrinking of staff and frequent changes in management.

Its fundamentals show why the stock price has being under such pressure since it experienced its first loss, of $276 million in 2012, which drove the earnings per share of the firm into negative territory of ($0.91) per share.  To compare, full year net income available to shareholders in 2011 financial year was $119 million and earnings per share for the same period was $0.47 per share.  A large swing from profit to loss is a big sign that the company is in serious trouble.

The so called ‘retail decline’ in Australia has affected many bricks and mortar Australian retailers such as David Jones, Target (part of the Westfarmers group), JB HIFI, Myer and Harvey Norman.  There’s no doubt that conditions under which retailers are operating on are the most difficult they have being for some time. Billabong International and its shareholders have being hit by systemic risk and also a large dose of unsystematic risk such as high debt levels due to constant acquisitions in the early 200’s and changes in tastes of consumers.

So what lessons can we learn from Billabong saga?
The biggest lesson is that companies, no matter how big and successful they are, are prone to bad runs or even financial hardship.  So therefore, investors should do financial checkups on the companies that they own to make sure that the worst doesn’t occur to them, even though the worst occurring is only a very small possibility if market conditions are ‘right’ and the selection of companies are of good fundamental nature.  Personally, I denounce the buy hold and forget strategy that many people practise because I believe in the long term you will forgo opportunity and your returns will suffer. I take time to read my companies annual reports when they are released and I also keep a whole bunch of old reports on my computer.  Thankfully we are blessed with Morningstar, which is a great resource for time-series analysis of companies.  It is a great tool!

So what did Billabong Internationals’ past fundamentals say about the company and how might financial disaster have being averted with the use of fundamentals?
To answer this question quickly, I chose three indicators to look at. All show a picture of when investors should have seen a potential sharp decline coming. Be aware that these indicators are not necessarily all that you need to make an investment decisions but can definitely help in the process.

Return on Equity (ROE) and Return on Assets (ROA)

	2006	2007	2008	2009	2010
Return on Assets	13.27	12.63	11.7	7.95	6.59
Return on Equity	21.54	22.78	22.72	15.5	12.2

The table above shows BBG’s ROE & ROA, and as you can see both profitability ratios started marginally contracting in between 2007 and 2008, at the heart of the GFC and the following global economic slowdown.  A clear trend only appears when looking at the data in 2009, which shows a clear decrease in both indicators, a sign that many investors took to heart and exited through the door at an accelerated pace.

Year on year & 3-year Earnings per Share

	2004	2005	2006	2007	2008	2009
Year on Year EPS	13.56	42.86	15.57	14.47	5.45	-19.27
3-Year EPS	26.49	26.55	23.31	23.64	11.74	-0.86

Both the year on year and 3-year earnings per share values show that signs of distress showed up in years 2007 & 2008 where earnings per share both fell dramatically. In conclusion to the above analysis, 2008/9 was a clearly the time to sell the stock.
The only problem is… It’s always easier to say that in hindsight!

Sources:
Billabong perilously close to a wipeout: http://www.smh.com.au/business/billabong-perilously-close-to-a-wipeout-20130405-2hc9k.html?google_editors_picks=true
Morningstar research
TPG walks away from Billabong: http://www.smh.com.au/business/tpg-walks-away-from-billabong-20121012-27gpt.html

THE MAKING OF A PORTFOLIO

The last few days I’ve being focusing on making a portfolio based on companies that give a great value for money.  The techniques that I have learned come from the book, the ‘Intelligent investor’ by Benjamin Graham. The aim is to test out the theory that companies that are good value for money can:

1. Minimise potential for losses in volatile markets (the margin of safety).

2. Provide dividend returns in the meantime, as this is the main form of income.

The companies listed below, are undervalued or show a great value for money in relation to their current share price. There is very specific reasoning why I chose these companies to be included in the ‘value’ portfolio. I will expand further on the reasoning at a later date. This group will be called the value fund group I’ve used $10,000 as the amount that I am investing in these companies.
The companies are:

• Tabcorb Holdings Limited (TAH) a gambling and other entertainment services companies. The company has wagering, gaming, keno and other media operations.
• Ausdrill Limited (ASL) an international mining services company that provides drill and blast, exploration, supply and logistic services.
• Collins Foods Ltd. (CKF) a restaurant operations company that owns KFC and ‘Sizzler’ restaurants in QLD and NSW.
• Iluka Resources Ltd. (Ilu) a mineral sands production company.

Portfolio allocation –

• TAH – 30%
• ASL – 30%
• CKF – 20%
• Ilu – 20%

The Value Fund Group, as of 9th of January (before market open) –

Code	Holdings	Value	Change
ASL	1085	$2,995	-$15
TAH	995	$2,995	-$15
Ilu	215	$2,002	-$15
CKF	1400	$1,995	-$15
Total		$9,987	-$60

The Vulture Fund Group

I will also be tracking a number of stocks that under performed last year as part of a vulture fund.  I found these companies in the Australian Financial Review on the 8^th of January 2012. My experiment is to see how the ‘worst stocks of 2012’ perform in the year 2013 and beyond. And how they will perform against my very own value fund group. Notice: I have included one of the stocks (Ilu) into my value fund after doing research on it.

They are-

• Qantas  (QAN) with a 25% stake in my portfolio.
• Iluka Resources (Ilu) 35% stake in portfolio.
• Harvey Norman (HVN) 25% stake in portfolio.
• Billabong (BBG) 15% stake in portfolio.

View of my vulture fund group portfolio on the 10th of January 2013 –

	Holdings	Value	Change
Ilu	373	$3,435	-$63
QAN	1623	$2,499	-$15
HVN	1315	$2,498	-$15
BBG	1724	$1,500	-$15
Total		$9,933	-$108

To keep things simple, Iluka Resources 9^th of January share price was used to calculate the value of the stock on the 10^th of January.

For more information on what can be achieved through dividends, please visit Get Rich Slowly, a post on how constant accumulation of stocks that pay dividends can make you wealthy in the long run, despite market down turns etc.The post even comes with an incredibly detailed excel spreadsheet which emphasizes the power of putting money into financially sound companies that pay dividends in the long run. It’s truly amazing what can be achieved!

Recapping on the year 2012

The year 2012 in finance has being a roller coaster ride to say the least.  I will remember 2012 by the major international financial issues that dominated the picture. The European debt crisis, the health of the American economy and the ‘slowing down’ of the Chinese economy were the three BIG issues of 2012. Europe fell back into recession in 2012 and Japan experienced weaker than expected economic growth and further uncertainty regarding growth. America avoided the fiscal cliff and has witnessed the Dow Jones Industrial Average regain most of its GFC losses.

Closer to home, the main issues were the high Australian dollar, whether the mining boom was over or not, volatile commodity prices and the housing market. These issues led to an under performance in the mining and energy sectors compared to the rest of the ASX 200.

Chart 1 (S&P Indices,2013) shows ASX200 (Blue) vs Materials sector (Green). The materials sector underperformed due to recurring issues regarding high funding costs, lower commodity prices and the debt situation in Europe.

The Greek elections in May resulted in a stalemate and which caused major financial jitters around the world. A re-election was later held in June and a government was formed. Consequently, the ASX 200 was immensely volatile in May/June of 2012 and a low of 3985 points was reached on the 4^th of June 2012.
The ASX 200 performance in 2012 –

• Opened 3/1/2012 – At 4101 points.
• Closed 31/12/2012 – At 4641 points.

Therefore, ASX 200 rose by 13.36% during the course of the year.

Just for interest, during the course of the year the market hit a low of 3985 points on the 4^th of June 2012, and hit a year high of 4689 points on the 28^th of December. From low to high, the market gained 17.67%.

The best performing sectors of the ASX 200 were the ‘defensive & high dividend sectors’. They included:

•  The health care sector outperformed all other sectors with a 46% rise. Medical equipment manufacturer and distributer ResMed (RMD) led the charge with a gain over 60%.

Chart 2: Showing ASX 200 Materials sector (Green) vs ASX 200 health care (Blue). The health care sector gave a 46% annual rate of return over the last year vs 1.89% for the Materials sector (SPINDICES, 2013).

• The telecommunications sector was hot in 2012, Telstra and IInet up 34% and over 60% respectively. Telstra’s very attractive dividend of 9.4% vs the ASX200’s 5.2% hit all the right chords with investors. For more information: http://www.thebull.com.au/articles/a/23053-telstra-back-on-broker-buy-lists.html.
• Even low growth areas such as utilities were favourable with investors with a 20.4% increase in the utilities sector(SPINDICES, 2012). DUE (a gas pipeline company I was looking into buying earlier during the year) gained a modest 17% in 2012. No doubt, investors have bypassed the common ‘growth stocks’ and looked to stable earnings and high dividend yields during 2012.
• Other sectors such as financials and A-REITS were favourable for investors with an annualised yearly return of 27.65% and 27.2% respectively (SPINDICES, 2012). For more information on any of these figures, please visit the S&P INDICES website.

Just a quick view on house prices in 2012 –

As reported in the Sydney Morning herald on the 2^nd of January 2013, House prices fell for the second year in a row even though interest rates were slashed six times by the reserve bank of Australia. Read more: http://www.smh.com.au/business/property/house-prices-sink-for-a-second-year-20130102-2c506.html#ixzz2H3Cfhgdk.

‘It is clear that the previous strong value growth conditions to which many home owners became accustomed to in recent years are well and truly behind us (Cameron Kusher, 2013).

I agree with Cameron Kusher’s statement and believe that the Australian housing market is going through a cyclical change and little growth is to be expected in the near future. Despite many rate cuts, the housing sector hasn’t shown any sign of revival during the course of the year and it tells me that it will continue to drop or gain very little in 2013.

So that is the year that has being and I’m sure this new year will be as exciting and eventful as last year. Companies that stood out for me, during the course of the year included Fortescue metals group (FMG) and Billabong International (BBG). They were in the news many times and became under priced very quickly as investors rushed out the door due to bad financial press. What I got out the most from those two companies is that bad news generally causes a mass exodus of investors which results in an under valued share price. This can make a perfect buying opportunity for businesses that are cyclical in nature. I think that’s one of the biggest lessons I learned while analysing companies and markets in the year 2012.
Happy new year to you all, and please stay tuned! I will be covering some very interesting things in 2013!

The value game

Price is what you pay but value is what you get
-Warren Buffett

These days trading and investing are interchangeably used and the word ‘trading’ is very well marketed by online brokers who offer low brokerage fees. The mentality it produces, is of the speculative kind. To the people involved in trading, the stock market is like a big casino. The gains could be HUGE, but they aren’t guaranteed.People generally buy, in order to sell to the bigger fool who buys it for more. There’s no real guarantee of a profit. It is purely speculation. I’m sure millions have being made with the use of the greater fool theory. So what is investing and where does value come into the equation?

The first chapter of the book, The intelligent investor, states the definition of an investment as ‘upon thorough analysis, it promises safety of principal and an adequate return. Everything else is purely speculation’ (Page 18, Ch.1, Updated version 2003).
It goes on to say that investors defer from speculators because:

• They look at fundamentals of the companies they want to invest in.
• They try and protect themselves from serious losses.
• They aspire to get an adequate return. Not extraordinary returns, with the help of added risk.

Investors don’t look at the stock tickers, they look at the company itself. E.g. It’s past (not future est.) P/E ratios, it’s net tangible assets, the return on equity and earnings per share (EPS) growth over a number of years. Upon looking at the nuts and bolts of the business, they then decide to make a move on it. So really… Investing is about the search for value. If a company is looking good in terms of value then it should provide the safety of principal and an adequate return, whether it is through capital gains, dividends or both. This, my friends… Is what INVESTING is all about.
Overpaying for companies can also lead to disaster and that’s why investors have to be careful of the price they pay. The higher the price you pay the lower your potential return will be. And this will be a story for another day.

The Intelligent investor –
An investing masterpiece written by Benjamin Graham. The book aims to teach the techniques of adopting and executing investment policies. It uses historical data and patterns in the financial markets. Along the way, it busts some myths e.g. That stocks are a good hedge against inflation and that diversification leads to under performance of a portfolio in relation to a comparable index. It has changed my views on what investing is all about and I would recommend it to anyone who wants to dwell into this topic more.