Investment Strategies: Value, Growth & Dividends

1. Investment Strategies: Value, Growth & Dividends Shaun van den Berg Head of Client Education Wednesday, 12th June 2013

2. Agenda: Investment Strategies • Introduction • Investment Philosophy • Developing a Strategy • Conservative • Aggressive • Value Investing • Growth Investing • Investing for Dividends • Summary & Conclusion

3. Investment Strategies: Value, Growth & Dividends • Investment Philosophy • Developing a Strategy • Conservative (Top 100 shares) • Aggressive (Small Caps)

4. Introduction • Accumulated knowledge • Basic share market concepts • Fundamental analysis (Macro & Micro) • Sector Analysis (Industrials vs Financials vs Resources) • Ongoing financial education • Help you make better, well-informed investment decisions • Develop framework – Decision-making process

5. Investment Philosophy: Good & Bad • Personal Characteristics • Personality • Patience • Risk aversion • Individualism • Time • Age • Financial Characteristics • Job security, Capital, Cash needs & Tax status • Lie awake / Day-to-day movements/ Second guessing choices • Reconsider your investment strategy • Beliefs about the Market • Different viewpoints - What the market actually is, does, or means. • Is the market random, systematic, or a combination of both?

6. Developing a sound investment philosophy • Coherent way of thinking about markets • Set of beliefs about how an investor should behave& how markets work. • Important because it dictates how you should make decisions. • Performance of successful investors linked with their world view • Addresses the question, “Are financial markets & the world stable?” • Market instability leads to uncertainty & volatility - Potentially produce the greatest opportunities. • No philosophy - Live on tips, hunches, dreams, & other people’s opinions. • Leads to poor long-term results. • Good investment philosophy will not help you unless you combine it with discipline& patience (Temperament) • Like a good diet: It only works if it is sensible over the long haul & you stick with it. • Once you have established a solid philosophical foundation, the rest is learning, hard work, focus, patience & experience.

7. Know your investment strategy • Before building your investment portfolio: • Your strategy should reflect who you are • Why you are investing? • Develop a strategy that you can summarise in one page: • Time Frame - Your investment time frame should be at least 3 – 5 years & longer. • Your involvement- How much time will you regularly spend on investing? • Risk Tolerance - This should influence the kinds of shares you invest in. • Investment method - Do you look for large, established leaders(Top 100) or for up-and-comers (Small caps)?How many shares do you aim to own? • Your goals - What kind of average returns are you seeking?) • What will make you sell a share that you are holding? • What will make you change your investment strategy? • Help keep you from moving money back & forth whenever the share market rises & falls. • Find the right strategy for you & stick to it. • Fortunes are made by work & by laying down some flexible guidelines - Managing of money / portfolio.

8. Financial Matters: Housekeeping • Credit Cards - Did you pay them off before investing? Save 25% • Emergency Fund - Did you put your emergency fund into a money market account? • Forever Savings - Did you invest only money that you do not need for at least five years? • Easier to think long-term when financial matters are in order. • Have you given your shares a financial check-up recently? • Do you still believe in them? • Do you know when to sell or rely on a wait-and-see approach? • Better approach - Make sure you invested right in the first place.

9. Forming a macro view of the market (80/20 Rule) • International Markets • Economic Indicators • Currencies • Precious Metals • Local Markets • Specific Sectors • Specific Shares • Checklists • Fundamental • Technical • Portfolio

10. Evaluate a business • Your goal is to get to know the company very well inside & out. • Too many people think of their investments merely as shares • Pay too much attention to the share price • Too little to the underlying business • More than intangible price - Goes up & down each day. • Small claim for its owner on a small percentage of actual business. • PicknPay shareholders – You & Raymond Ackerman’s family. • Own a lot more of the company but your share still counts. • Important decisions - Approving members of the board of directors - Send you a ballot & solicit your vote. • Every time a shopper buys groceries, a set of towels or even a television - Tiny fraction of profit from sale generated is yours. • The fate of each share is tied with fortune of underlying business. • Successful investors need to get & stay familiar with the companies they own.

11. Quality, Price & Value • Past fundamental webinars - Discussed many different measures & research tools that investors use in their share evaluation. • P/E ratios, PEG ratios & Price/ NAV • Return on equity (ROE), Profit Margins, • Debt/ Equity ratio & Interest Cover. • Sort them into two categories: Quality & Price • Is this a strong & growing high-quality company? • Is the company’s share priced attractively right now? • You might end up buying grossly overvalued shares of a wonderful company or you might snap up shares of a hapless, doomed business at what seems like a bargain price.

12. Quality, Price & Value Quality Price • When evaluating a company’s share price, take a number of measures & relate them back to the company’s earnings. • Price-to-earnings (P/E) ratio compares the share price to earnings per share (EPS). • PEG ratio compares the P/E ratio to the company’s expected earnings growth rate. • Is it debt-free, or up to its ears in interest payments? • Debt is not necessary a bad thing, but a lot of it can sometimes spell trouble. • Interest cover - Is the debt manageable? Below three times cover - Alarm bells. • Is the company generating a lot of cash & spending that money efficiently? • Are sales & earnings growing at admirable rate? • Are gross, operating, & net profit margins growing as well? • Is the management smart & executing well? • Is the company generating a lot of value for shareholders? • Is the company well positioned to beat competitors? Value • Better understanding of the company’s quality & its share price • Make a judgement - Offers good value. • Focus on undervalued or quality shares • Foolish to focus on rapidly growing shares • Technical analysis - Charts

13. Aggressive (Small-cap) Investment Strategy • “Rule Breakers” - Some companies succeed by breaking all the rules. • Small caps (Outside Top 100) & penny stocks (Shares below 100c) • Most dynamically high returns achievable on the share market. • Provide inspiration & guidance to all business people - Managers, planners, or executors. • Capitalism’s special sauce - its tastiest & most necessary condiment. • Only for the more experienced, aggressive, brash & daring of investors. • Consciously taking on lots of risk - High risk will lead to high rewards. • Should make up only a small part of any portfolio • Investors should be prepared to lose the money

14. Finding outperforming small cap companies • The company should be a “Top Dog & first mover” - Important, emerging field. • Being top dog in the left-handed scissors industry is not enough. • Company needs to demonstrate sustainable advantage • Business momentum – Organic growth • Patent protection • Visionary leadership • Inept competitors • Look for good management • Look for a company that has a strong consumer brand • Consider it as a good sign when the financial media, not seeing the big picture, rates a company as overvalued. • Advantage – Under the radar of institutions / Growth potential

15. Conservative (Top 100) investment strategy • “Rule Makers” - Some small-cap companies grow up to become dominant in their industry • Call the shots & generate great value for shareholders / Serve most investors well • Investment strategy suggests: • Buying companies that are stalwarts (i.e. financially strong & well-managed) • Generally big large-cap companies. • Not all big companies will meet the criteria • Many non-blue chip companies will be worthy of your consideration. • Investment strategy relies only on: • Simple numeric calculations • Common-sense logic • Patience. • Investment strategy is convenient as a unit trust fund • Offers above-average performance & lower expense.

16. Identifying outperforming Top 100 companies • Look for the number one brand name in an industry • Look for repeat mass-market purchases • Most people do not buy many motor vehicles or washing machines each year • E.G. Consolidated Motor Holdings (CMH) & Amalgamated Appliances (AMAPS). • Think instead of things you routinely use - Because you like to or you have to. • When crunching financial numbers, you can check several measures • Look to see that gross profit margins (gross profits divided by turnover) above 60% • Net profit margins (net income divided by turnover) topping 10% • Turnover is growing faster than 10% per year. • Cash is king with these types of companies - Want to see plenty of it • Little debt as possible on the balance sheet • Manage cash flow by demanding payment quickly & paying their obligations slowly. • How company fares on the above measures is the direction it is moving in. • You want to see rising margins • Company buying back its own shares • Compared with industry peers - This company should be clearly ahead of the class.

17. Investment Strategies: Value Investing Father of Value Investing Introduction to Value Investing Margin of Safety Common Mistakes Value View / Quality View Company Analysis Technical Analysis

18. Father of Value Investing • Value investing is investment model derived from ideas on investment • Two professors at Columbia Business School - Benjamin Graham & David Dodd • Began teaching in 1928 • Subsequently developed in their 1934 text “Security Analysis.” • Benjamin Graham regarded as the “father” of value investing • From 1936 – 1956 - Remarkable record as a stock picker • Over 20-years - Mutual fund had a compound average return of at least 14.7%, compared to 12% for the overall market • $10 000 invested would have earned roughly $60 000 more than the average. • Value investment the only real form of investment - Anything else was speculation

19. Introduction to Value Investing • Value investing taken many forms - Buying companies whose shares appear under priced by some form of fundamental analysis. • Shares trading at: • Discount to Net Asset Value (NAV) • Discount Tangible Net Asset Value (TNAV) • High dividend yields (DY) • Low Price-to-Earning (P/E) multiples • Low Price-to-NAV (P/NAV) ratios. • Defensive investment in shares trading below Tangible Net Asset Value (TNAV) • Safeguard against adverse future developments • Margin of Safety

20. Margin of Safety • “A price so low that you can make money even if some part of your analysis turns out to be wrong” - Benjamin Graham • A true value investor would buy companies that the rest of the market think are lousy. • Net current asset value (NCAV) approach • Look for stocks trading below their calculated value • Instead of buying NAV (Assets – Liabilities) • What the company would be worth if liquidated tomorrow • Only include current assets (cash, stock & debtors) • Ignore long term assets, such as buildings • Subtract long & short term liabilities • Buy companies trading at two-thirds or less of their NCAV (P/NCAV < 0.40) • Ben Graham insisted on a heavy discount

21. Common Mistakes • Perception is that value investing merely means: • Investing on the basis of a discount to NAV / Low PE ratio • Do not consider the quality of the business or growth in earnings. • Growth investing is perceived as: • Investing in good quality companies with high growth rates • Ignore Price/NAV & P/E ratios. • Value Investing - Selecting shares trading for less than their intrinsic values. • Seek shares of companies that they believe the market has undervalued. • Believe the market overreacts to good & bad news • Stock price movements do not correspond with company's long-term fundamentals. • Opportunity to profit by buying when the price is deflated • Biggest problem - Determining a share’s intrinsic value - No "correct" intrinsic value. • Two investors with exact same information - Place different value on a company • Estimated price relative to NAV (P/NAV) or Low P/E ratio relative to expected growth (PEG) • Definition of not qualifying – Shares seem cheap relative to others / Prices in an upward trend. • So many investors focus on trend & outlook - Opportunity for value investors.

22. Problems: Value Investing • Compared to charting, value investors have tons of financial documents to read. • It is very labour-intensive. • Often subject to management buy-outs / “Going private" • Have to wait for market forces to realise company is undervalued to move it up. • You need loads of patience

23. Value View

24. Quality View

25. Company Analysis

26. Technical Analysis

27. Value Investing Principles Focus on following the progress of individual companies, not the share market - Make sure you know everything there is to know about the company. Regular analysis of business reports is key to making an informed investment. Make sure you can clearly picture the future of the company - A long-term earnings outlook is essential to any investment decision. The only reason to invest money in shares is the expected cash flow. Choose shares in the best companies - Only consider companies which have proven that they are excellent in their field of business & have achieved an increase in profits over a number of years. Stick to what you know - Those managers who know their business inside out can avoid false estimations. Identify the actual value of a share - According to Benjamin Graham every company has an intrinsic value. This is calculated by taking into account not only the book value (NAV) of a company but also its earning power. Only buy when the price is right - Even when investing in the best companies, you can end up paying too much for shares. The long-term return on invested capital is calculated by looking at the relation between the purchase price & the earnings trend of the company. If the former is too high, the return can be slim. Do not feel the need to cover all your bases- This does not mean abandoning your conservative & safe approach & throwing caution to the wind, but rather that just a few investments in companies with excellent prospects will be your path to success. Hold on to your shares - Selling your shares should only ever be an option when the basic estimation of the earnings trend changes, or if an investment that promises even higher returns presents itself. A higher stock market price should never be a reason for selling. Avoid additional costs - Try & avoid making non-essential transactions as this results in paying extra brokerage commission & often taxes. Ignore the experts - Trust your instincts & not the opinions of others- least of all the stock market.

28. “Price is what you pay, value is what you get” Warren Buffet

29. Investment Strategies: Growth Investing Successful Investor: Peter Lynch Peter Lynch: His Thinking Introduction to Growth Investing (G.A.R.P.) Growth at a reasonable price (GARP) Company Analysis Technical Analysis

30. Successful Investor: Peter Lynch • Managed Fidelity’s Magellan Fund between 1977 – 1990. • Posted an average annual return of 29%. • No fund manager has ever run a fund of its size ($14-billion) so successfully for such a long time. • Attributes success to the skill of finding investment opportunities in areas you are already familiar with. • Looked closely at stocks for which he & his family had “positive personal experiences as consumers” • Looked for the simplest of businesses to invest in … • “Go for a business that any idiot can run, because, sooner or later, any idiot probably is going to run it.”

31. Peter Lynch: His Thinking • His book was published in 1989 has the same relevance today. • Introduced the Holy Grail of investing … the “Ten Bagger” • Make 10-times your money within 5-years • Financial fundamentals were secondary thing to look at. • First he liked to understand the company thoroughly. • He visited shopping malls to see how the shops were doing; • Checked which brands were selling; and • At what prices • Then he looked at the Balance Sheet • He avoided investing in large, well-established businesses: • Opting for less well-known ones, or • Turnaround (recovery) stories • He was a contrarian investor … seeking out stocks that everyone else was ignoring. • Advice: Think of your stocks as you would your children: you have limited time, so you cannot keep an eye on too many of them at once … • Five stocks are enough for most of us to keep track of.

32. Introduction to Growth Investing (G.A.R.P.) • Peter Lynch pioneered a hybrid of growth & value investing with what is now commonly referred to as a "growth at a reasonable price (GARP)" strategy. • Another acronym SWAN – Sleep Well At Night • GARP combines value & growth investing • Value investors look for relatively cheap shares compared to their earnings & NAV • Growth investors look for companies that will grow faster than others • GARP investors do not look for companies in trouble or drastically undervalued, nor do they look for high-flying growth stocks • Stop short of investigating the companies’ business in great detail • More concerned with historical growth & stock price than qualitative factors • Seek growth from: • The firm itself (Organic Growth) • Headline Earnings growth (HEPS Growth % > 15) • PEG ratio < 100 • GARP might sound like the perfect strategy (S.W.A.N.). • Being greedy for both growth & value is not easy. • If not mastered, you could buy mediocre shares rather than good GARPs.

33. Growth at a reasonable price (GARP)

34. Company Analysis: Altron (ATN)

35. Technical Analysis: Altron (ATN)

36. Investment Strategies: Investing for Dividends Investing for Dividends Risks: Investing for Dividends Strategy Investing for Dividends (Dividend Yield) Investing for Dividends (Pay-out Ratio) Company Analysis Technical Analysis

37. Investing for Dividends • Most straightforward share selection strategy • Pick investments that provide a steady stream of income every month, quarter or year • Combination of ordinary shares, bonds or preference shares • Pay regular & substantial dividends • Assess older, more established companies - Very predictable earnings stream • On R1-million investment - Produce R50 000 – R60 000 in income, minimum tax • Do not invest on the basis of dividends alone - High dividends do not mean that it is a good company • Dividends are paid out of net income • Lower retained earnings (Future growth?) • Large dividends would be better spent invested in the company.

38. Risks: Investing for Dividends Strategy • Value of original investment can drop. • Dividend distribution & level of payouts are not guaranteed with shares as with bonds. • Should the company experience financial hardship or a great investment opportunity comes along that requires significant cash outlay. • Investigate company fundamentals & not do not just look at dividend yield. • Income investing is not perfect. • Maintain a well-diversified portfolio.

39. Investing for Dividends (Dividend Yield)

40. Investing for Dividends (Pay-out Ratio)

41. Company Analysis: Bowcalf (BCF)

42. Technical Analysis: Bowcalf (BCF)

43. Investment Strategies Value InvestingObjective: Defensive investment in bear market Growth at a Reasonable Price (GARP) Objective: Look for undervalued & high growth potential stocks (Bull Market) Investing for Dividends Objective: Assess older, more established companies for regular & substantial dividends

44. Summary • Develop your own style of investing • Fundamentals + Technicals = Rational Analysis • Value + Growth + Dividends • Bullish + Oversold + Outperforming • Match investment strategy to your personality

45. Conclusion • Open a Trading Account with PSG Online • Online Tutorials • Equity Trading Simulator • Research Tools • DataShare Download @R169 p/m • Wen Professional Plus Software is FREE! • Link to the PowerPoint presentation will be emailed soon! • Good Luck • Happy Trading!

46. Contact Us Thank You Shaun van den Berg Shaunvdb@psg.co.za (011) 996 5254

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