Kenyantykoon's Blog
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HOW TO BE VERY RICH
Posted: February 26, 2010, 10:55 am by kenyantykoon
Sometimes, i like doing the odd motivational post on long-term (financial) success. I have done it twice in secrets of the self-made millionaire and a post on whether being richer will make you happier
So this post has a few ground rules that a person aspiring for a high net worth will want to remember.
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WHAT IS A REVERSE STOCK SPLIT?
Posted: February 24, 2010, 5:50 pm by kenyantykoon
The past two posts have been about what corporations do with their stocks. I have handled stock dividends, cash dividends and stock splits.
the difference between stock dividends and cash dividends was handled on my other site (ACKERTALK.BIZ) and the difference between stock splits and stock dividends here.
In this post we will deal with the opposite of the stock split.
What is the reverse stock split?
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the difference between stock dividends and stock splits
Posted: February 23, 2010, 9:29 am by kenyantykoon
In the previous article I differentiated between stock dividends and cash dividends and I think that the difference came out well
In this post, I will differentiate between stock dividends and stock splits but since stock dividends were fully accounted for in the previous post, I will concentrate on stock splits.
Basically stock splits basically increase the number of stocks that the shareholders and still keeping the proportion of shares that the shareholders have. With increasing the number of shares outstanding (as in shares currently owned by investors) the value of each share falls in proportion to the increase in number of shares.
The financial jargon for stock splits is and x for y split with figures 2 for 1 split. In such a case each share that a stock holder has is divided into 2 which means that if he has 200 shares before the split, he/she will have 400 shares after the split. The further implication is that the value of the share falls by half since the shares have doubled in number. So if each share is $10 before the split, value will decrease to $5 after the split.
Another example is a 4 for 3 split. This will mean that each three shares that an investor holds will be increased to four or another way of putting it is that each 1 share becomes 4/3 of the initial. So if an investor has 300 shares before the split, she will have 400 shares after the split and the value of each share will decrease to ¾ of the initial value.
There are many ratios that the management can decide on according to the prevailing situation but the most common is a 2 for 1 split.
Just run through again if it is not well internalized…..
Value investing books like the intelligent investor have belittled this corporate gimmick saying that it just tries to make investors think that they have more shares in the company while in the real sense their standing is still the same as it was. The book uses that example that Yogi Berra saying that he wants his (whole) pizza cut up into eight pieces because he does not think that he can eat four. The authors say that these companies that split their stocks and make so much noise about this are in essence treating their investors like dolts. While sometimes this happens, sometimes it doesn’t and so lets say that the says were doubled(2 for 1 split) this will mean that each share will be entitled to half of everything that the initial share had. So In essence there is nothing that the investor benefits from s split.
Why do companies do stock splits? If a company’s stock is doing well(I prefer to think of it as the stock being grossly overpriced), the management might decide to split the stock so as to make more shares available to the public. In “the intelligent investor” curious historical examples in the internet are shown of how companies split stocks and after the devaluation the same stocks increased in value almost overnight. That means that the company will benefit from the split and the investor will profit in that he will be able to afford shares that were previously too expensive.
The down side is that the stock split in increasing the number of shares in the market means that a dilution can occur making a major loss in stock value.
Something about these stock splits is that they require approval from the Board of Directors and the shareholders(those with voting powers anyways)
There is also something called a reverse stock split but that is a story for another day.
ADMIN’S UPDATE
I have just found this yahoo finance article on Berkshire Hatharway’s stock split. It would be nice to read this real life situation of a stock split so that you internalize this concept.
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the difference between stock dividends and stock splits
Posted: February 22, 2010, 11:01 am by kenyantykoon
I have been reading a lot about finance lately and i have come to notice that the corporations use these two things interchangeably.
So this post is meant to enlighten the readers on the difference between cash dividends and stock dividends and in that you will come to understand why companies use them
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MARGIN OF SAFETY EXPLAINED
Posted: February 8, 2010, 6:43 pm by kenyantykoon
If you have read any books by any value investor or a blog written by a person more inclined towards fundamental investing, you may have heard this phrase “margin of safety”. So I decided to write up a post on this very important concept in fundamental investing.
What is margin of safety?
Since it is Benjamin Graham who first came up with this phrase, it is best to define it from his point of view.
In the case of bonds, it is the security provided by the company’s ability to provide revenues in excess of the interest requirements thus protecting the investor against a slump in the economy because they will still get their interest payments. If you read about how bonds work, you will see that companies pay the bondholders their interest payments from their revenues. So the higher the company’s revenues, the more protection that the investors get if the profitability of the company was to decrease i.e. they would still get their periodical payments.
In the case of stocks, it is the difference between the real (intrinsic) value of a stock (as in what the stock is really worth) and the market price of that stock in the stock market. Sometimes the stock is overvalued in that the market price is way over the intrinsic value and sometimes it is undervalued in that the market price is lower than the intrinsic value. In the case of the overvaluation, the required margin of safety is not provided and a value investor worth his salt will not even touch that stock no matter how much the media and the general investing public is hyping it up.
A value investor will mostly look for grossly undervalued stocks because in most cases the undervaluation is not justified in that the general investing public just does not like the stock, or it is not causing a lot of excitement. A hypothetical example is a company that makes toilet seats would not be as popular as a search engine that seems to control the whole internet. You may find that the toilet seat company has much better fundamentals that the search engine and thus a much better investment.
NB;Something that any investor should know is that margin of safety is to be applied in all areas of investing, be it bonds, stocks, liquid investments, warrants…. basically anything that is included in his portfolio
[Street authority has a large well written longer article about margin of safety with more examples than this post so you would want to read thru for a better understanding]
Contrary to popular belief, it is not that easy to determine the real value of a stock and that make an informed decision as to what price it would be wise to buy the stock. So an undervalued stock provides that very necessary margin of safety to protect the investors from unexpected downturns of the market or the miscalculation in the calculation of intrinsic value of the stock. The greater the margin of safety the more protection the investor has for his money.
In insisting on a large enough margin of safety, an investor reduces the risk that he is exposed to and in most cases will not be so worried about what the market is saying about the security since even before buying it, he insisted on a margin of safety by using figures, persuasive reasoning and experience and thus according to Benjamin Graham, it becomes a true investment.
In this site called the Warren Buffett secrets, margin of safety is well explained in from an approach that is different from the one that I have taken
The first time that I heard of this term was in the intelligent investor and coincidentally simple dollar did a post on that chapter of the book dedicated to this concept that you may find helpful
Any comments or additions are welcome
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4 TIPS FOR VALUE INVESTORS
Posted: February 4, 2010, 12:52 pm by kenyantykoon
For reasons that are out of my control, i have not been able to post as regularly as i was last year but i am intent on reverting to my regularity very soon.
It has been a long time since i linked to any article that i found too helpful for an finance reader interesting in investing from a value standpoint. I have just found this post on CNN-MONEY about the tips that a smart value investor would find extremely helpful.
If you have read the intelligent investor or/and security analysis (arguably the best books on investing ever written-or so they say), you would see a remarkable similarity between the linked article and what these books crusade for.
An overview is
-not wasting a lot of time trying to predict the future of the stock market and trying to get the best investments
-thinking in longer terms and not yearly or monthly
-making sure that you have the costs incurred during the investing enterprise factored into your calculations because as we all know mutual funds’ high fees eat away at most of the returns and thus little gains for investors
-most importantly developing the ability to control your emotions and temperament.
Here is the article again. You should read it because it will refreshen your memory on fundamentals about investing that you may have forgotten.
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Blah blah blah
Fish cakes
Alas a fish cake.
Yet more fish cakes
Guess what ... yeah ... fish cakes.
The end of the fish cakes
