A question often asked is weather its better to have a growth or value strategy. But growth and value are connected.
A stock that has good value but low growth will not be worth a lot more than its current price, because the earnings per share will not get better. A growth stock that is above good valuation is not that good either. The stocks has already discounted much of the growth in its price.
So a really good stock must be cheap and grow fast at the same time. This is why many are no longer looking at only the price earnings ratio(p/e ratio). But look at the price earnings growth ratio (peg ratio). This metric looks at the current stock price you have to pay for the earnings per share but ads the growth in the equation.
Stocks that are mis priced can often be found in the emerging markets and commodities sector. Stocks can be found here that are both cheap and fast growing which is the best of both world you need.
Wednesday
Tuesday
Emerging market technology
Emerging markets are no longer just making cheap products. Some of them are making technological leaps and have production technology that is more advanced than in developed countries. Good examples are Korea and Taiwan.
Korea and Taiwan produce almost all of the world lcd screens and computer memory. Samsung and LG are producing advanced mobile phones with touch screens. And Taiwan is home for the biggest chip contractors in the world: TSMC and UMC. Taiwan is also world leader in laptop production. But they often dont sell these under their own name. They make products for companies like Dell who sell them to the consumer. From a marketing perspective korea has a stronger position with good brand names like Samsung, LG and Hyundai.
Companies in China still lag Korea and Taiwan in technology. It is building its own chip foundaries for example and is starting to build ships. But it has found out Korea and Taiwan are still very strong. Korea is the worlds biggest shipbuilder with Hyundai heavy as the biggest shipbuilding company in the world. It takes more than just a low price to catch up with them. China will have to do more in research and development and marketing if they want to catch up.
Mutual Funds
Mutual Funds are much criticized for bad performance and high fees. But not all of them are bad.
If you own a mutual fund that continually lags its benchmark or barely follows it with high fees you should sell it. But some mutual funds that have good management and a good strategy can continually outperform their benchmark. Some of these funds ask for performance fees, but if the fund is good it could be worth it.
The advantage of mutual funds over stocks is diversification. The risk of one company going out of business is much bigger than a bunch of them. Mutual funds exist not just for stocks but also for bonds, real estate and even commodities.
A good way to buy these funds cheap is at an fund supermarket. These over a lot of fund at little or no transaction costs. Because they offer a lot of funds you can pick out the best performing ones per category. This is an easy and cheap way to invest. But beware you still have to pay for the fund management fees.
If you own a mutual fund that continually lags its benchmark or barely follows it with high fees you should sell it. But some mutual funds that have good management and a good strategy can continually outperform their benchmark. Some of these funds ask for performance fees, but if the fund is good it could be worth it.
The advantage of mutual funds over stocks is diversification. The risk of one company going out of business is much bigger than a bunch of them. Mutual funds exist not just for stocks but also for bonds, real estate and even commodities.
A good way to buy these funds cheap is at an fund supermarket. These over a lot of fund at little or no transaction costs. Because they offer a lot of funds you can pick out the best performing ones per category. This is an easy and cheap way to invest. But beware you still have to pay for the fund management fees.
Thursday
Emerging markets and demographics
As we all know people are getting older in developed markets. This means that the workforce is becoming smaller. This is bad for the economy. The country with the biggest problem is Japan. The workforce of this country will shrink in the future.
But in most emerging markets the case is different. These countries were not involved with the second world war and their prosperity came later. This is why there are more young people and less baby boomer's getting old. This means that the workforce can expand. This is good for economic growth. A good example is India which has many young people. These younger workers also bring an entrepreneurial spirit, which is needed in the business world.
An other fact about emerging markets is that they are very populous. There are many people living there and the number of people is rising. This is the case in particular for India and China. The people there are still poor but the income is rising fast. This means huge consumer markets are forming.
But in most emerging markets the case is different. These countries were not involved with the second world war and their prosperity came later. This is why there are more young people and less baby boomer's getting old. This means that the workforce can expand. This is good for economic growth. A good example is India which has many young people. These younger workers also bring an entrepreneurial spirit, which is needed in the business world.
An other fact about emerging markets is that they are very populous. There are many people living there and the number of people is rising. This is the case in particular for India and China. The people there are still poor but the income is rising fast. This means huge consumer markets are forming.
Emerging markets and export dependency
In the past most emerging markets relied on heavy exports to developed markets. This was a risky strategy. The emerging markets were very dependent on the west. This resulted in low predictability and unstable earnings.
But luckily there are two favorable developments. Firstly emerging markets are becoming internal markets. Secondly emerging markets trade with each other.
Because emerging markets become more advanced the worker get richer. These workers start spending more and create internal demand for good and services. Some governments take an active role and support the development of internal markets. A good example is China.
The trade between emerging markets is becoming bigger and bigger. As an example i pick Brazil and Russia but the same story could be told about more nations. Brazil is rich in natural resources. China is in high need of these resources. This is why ships full of iron ore and fuel are sailing from Brazil to China. The people in Brazil are getting richer and have some money to spend. But they don't have very much so they prefer cheap products. China makes a lot of cheap consumer products. Once the ships have unloaded the natural resources they are stuffed full of consumer product before they sail back to Brazil. As you can see the role the western world has to play is getting smaller.
The reasons above are only part of the reason to like emerging markets.
But luckily there are two favorable developments. Firstly emerging markets are becoming internal markets. Secondly emerging markets trade with each other.
Because emerging markets become more advanced the worker get richer. These workers start spending more and create internal demand for good and services. Some governments take an active role and support the development of internal markets. A good example is China.
The trade between emerging markets is becoming bigger and bigger. As an example i pick Brazil and Russia but the same story could be told about more nations. Brazil is rich in natural resources. China is in high need of these resources. This is why ships full of iron ore and fuel are sailing from Brazil to China. The people in Brazil are getting richer and have some money to spend. But they don't have very much so they prefer cheap products. China makes a lot of cheap consumer products. Once the ships have unloaded the natural resources they are stuffed full of consumer product before they sail back to Brazil. As you can see the role the western world has to play is getting smaller.
The reasons above are only part of the reason to like emerging markets.
Monday
Promising markets
Some regions in the world are a great opportunity to invest. These regions have multiple advantages including demographics, high growth or natural resources.
China and South Korea are very attractive producers of consumer products. The wages are low here but the production technology is getting pretty competitive. You may think Korea is an old emerging market story but that is not true. It also takes brains and good marketing to get there. And many Korean companies are active in China. If you like tech you could look at Taiwan to. Taiwan owns many high tech factories in China. So it combines a good price with high technology.
If you are into commodities Brazil is a good bet. Brazil is full of metal ore and there has been found a lot of oil in the sea there. There is even talk of Brazil joining OPEC. An other region full of natural resources is Australia. It is also not far from China which is a cost advantage. When thinking about commodities don't forget the softs. The globe is not only consuming more ore and fuel but also food. More and more people are eating meat, it takes a lot of soft commodities to make meat.
Service providers to the commodity industry will also have a bright future. You can think of oil drillers and fertilizer companies. A well known theory: when there is gold to be found the sellers of the tools to find it and extract it will certainly get rich.
China and South Korea are very attractive producers of consumer products. The wages are low here but the production technology is getting pretty competitive. You may think Korea is an old emerging market story but that is not true. It also takes brains and good marketing to get there. And many Korean companies are active in China. If you like tech you could look at Taiwan to. Taiwan owns many high tech factories in China. So it combines a good price with high technology.
If you are into commodities Brazil is a good bet. Brazil is full of metal ore and there has been found a lot of oil in the sea there. There is even talk of Brazil joining OPEC. An other region full of natural resources is Australia. It is also not far from China which is a cost advantage. When thinking about commodities don't forget the softs. The globe is not only consuming more ore and fuel but also food. More and more people are eating meat, it takes a lot of soft commodities to make meat.
Service providers to the commodity industry will also have a bright future. You can think of oil drillers and fertilizer companies. A well known theory: when there is gold to be found the sellers of the tools to find it and extract it will certainly get rich.
Exchange traded funds
Exchange traded funds or tracker funds are funds that represent an underlying basket. This basket can contain almost anything from indices to commodities.
ETFs are a good investment vehicle because it is very hard to outperform an index. You can see this by the fact that monkeys do a good job at this compared to pros. You can still strategise with these funds because you can decide which index or commodity to track.
Benjamin Graham supports investing in indices. It is a good way to invest especially for beginners. Some of these funds also have a very low cost. It is also easy to diversify with ETFs by bying a broad index ETF or buying multiple ETFs.
ETFs are a good investment vehicle because it is very hard to outperform an index. You can see this by the fact that monkeys do a good job at this compared to pros. You can still strategise with these funds because you can decide which index or commodity to track.
Benjamin Graham supports investing in indices. It is a good way to invest especially for beginners. Some of these funds also have a very low cost. It is also easy to diversify with ETFs by bying a broad index ETF or buying multiple ETFs.
Sunday
Books by Benjamin Graham
In my opinion Benjamin Grahams best books are:1 The Intelligent Investor
This book explains all his concepts but its is a better read than security analysis.
2 The interpretation of financial statements
Book about doing the fundamental analysis. Explains how to calculate the value of security.
3 Security Analysis
Good book but a bit old and dusty compared to the intelligent investor.
My Advice
If Warren Buffet and Benjamin Graham were born today i am convinced they would take a serious look at emerging markets and commodities. In fact Warren Buffets best recent bets have been in those markets. He has done good business in the Korean steel giant Posco. Its good to know Korea dominates the shipbuilding market, so Posco sells most of its products domestically. He has also done a great trade in Petro China. China needs a lot of energy. All this while his business in the USA is doing not very well.
Stocks in Asia and Brazil are often cheap. The good future for those regions are not reflected in the stock prices. As we all know stocks in the USA can be even more risky and not safer than emerging ones.
Emerging markets are the place to be because they are developing at a high pace. There are also very many people living there which means many future customers. Emerging markets also hold commodities which are getting very scarce. More and more people are eating better and using cars. In fact China is already the biggest car market.
Stocks in Asia and Brazil are often cheap. The good future for those regions are not reflected in the stock prices. As we all know stocks in the USA can be even more risky and not safer than emerging ones.
Emerging markets are the place to be because they are developing at a high pace. There are also very many people living there which means many future customers. Emerging markets also hold commodities which are getting very scarce. More and more people are eating better and using cars. In fact China is already the biggest car market.
Good Prospects
A cheap stock of a bad company is not useful to you. In this case the price is right and you can leave the stocks alone.
But what is a good company. A good stock is a company you would like to own. You should see your stocks as your ownership. You would like your own company to have rising stable earnings power. If the earnings grow the company will be worth more to investors in the future.
The companies you own need to be in a great competitive position. They need to make great products, better than the competition. The company needs scale so that the company can sell its products at a lower price than the competition.
Even good companies can go out of business. So its also important not to put all your eggs in one basket.
But what is a good company. A good stock is a company you would like to own. You should see your stocks as your ownership. You would like your own company to have rising stable earnings power. If the earnings grow the company will be worth more to investors in the future.
The companies you own need to be in a great competitive position. They need to make great products, better than the competition. The company needs scale so that the company can sell its products at a lower price than the competition.
Even good companies can go out of business. So its also important not to put all your eggs in one basket.
Good Price
Because of hype some stocks can become very expansive. Even if the company performs well in the future, the stock price is not. This is the case because the price has already discounted the price. But if the company disappoints the stock will get hammered.
If you buy cheap stocks and the company disappoints a lot of it is already in the stock price. But if the company does well the cheap stock can do great.
With cheap i don't mean a low absolute price. But a low price of the stock relative to its earnings. A way to measure it is the p/e ratio. Cheap stocks are also measured by a high dividend yield. This is a high dividend pay relative to the stock price.
Warren Buffet and Benjamin Graham buy stocks who are below their intrinsic value. This means looking at the companies fundamental business position. It is important to guess what the company will make and how stable these earnings are. A stock is a buy when mister market values a company below the value it really deserves.
If you buy cheap stocks and the company disappoints a lot of it is already in the stock price. But if the company does well the cheap stock can do great.
With cheap i don't mean a low absolute price. But a low price of the stock relative to its earnings. A way to measure it is the p/e ratio. Cheap stocks are also measured by a high dividend yield. This is a high dividend pay relative to the stock price.
Warren Buffet and Benjamin Graham buy stocks who are below their intrinsic value. This means looking at the companies fundamental business position. It is important to guess what the company will make and how stable these earnings are. A stock is a buy when mister market values a company below the value it really deserves.
Why Stocks?
If you don't know what you are doing stocks can indeed be dangerous. You can buy stocks high when feeling good and sell them low in a panic. But in the long run stocks still earn the most. So it is important that you have to know what you are doing. Its best to learn this from theory that has proved its self.
Benjamin Graham introduced us to the concept of mister market. In his view the stock market is not efficient at all. In fact mister market like a is manic depressive. Always being overly optimistic and then pessimistic. More popular terms are a bull market and a bear market. When making investment decisions be aware of this.
An other important thing introduced by Graham is intrinsic value. This is what a company is worth when looking at the company fundamentals. When mister market is in upper mode he tends to value companies above their intrinsic value, and when in downer mode he tends to value companies lower than intrinsic value.
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