Investing and Trading Lesson, Check Your Facts!

“Bank profits amongst the Top 12 banks in Australia are up 15% on the previous year and the recent correction in prices leaves many banks at extremely low historical price to earnings ratios (20-year lows). With this in mind, the Australian banking sector is now offering compelling value.

We view the current environment as an ideal time for investors to increase their weightings in the Australian banking sector”

Source: Unnamed analyst at large broking firm – pre GFC in late 2007!!

The above statement certainly appeared to be factually correct at the time of writing. But did those “facts” prevent Australian banks from being devastated by the 2008 GFC? History shows that the answer is an emphatic “No”. So, when it comes to good trading, are the facts relevant or are they downright dangerous?

A novice trader without a trading plan is all too susceptible to following this sort of advice from so-called “experts”. It is very tempting defer to the better judgement of those who appear to be more learned than us – especially when they are armed with a plausible theory as in the analyst’s recommendation above.

If we have not developed a trading methodology of our own, surely it makes sense to simply follow the experts? At least when things go wrong, we are less to blame. Right?

Wrong – when it comes to trading – the buck stops with us. We have nobody to blame for our mistakes or our losses but ourselves!

Fundamentally Sound or Fundamentally Flawed?

The contemporary research industry is almost exclusively based upon this sort of “fundamental analysis”. Fundamental analysis is the study of a company’s business operations, market prospects, management and systems. Ultimately, this method of analysis boils down to the study of the determinants of the price for the goods and services a company produces.

The analyst must then extrapolate past performance into the future to predict the expected revenues likely to be generated by the company. By subtracting expected expenses he/she may then determine the company’s likely future profits. Analysis of these profits going forwards (and through some convoluted valuation model!) allows the analyst to calculate his/her perceived value of what the company is worth today.

The analyst then divides this perceived value of the company by the number of shares on issue to calculate the value per share. Now the analyst compares the perceived value per share to what the company’s share price is actually trading at on the share market. If the current share price is significantly below the perceived valuation, the analyst will label the company’s shares a “Buy”. If the current share price is significantly above the perceived valuation, the analyst will label the company’s shares a “Sell”.

That sounds fair enough doesn’t it? Well, this analysis is indeed good enough for the vast majority of institutional investors in the stock market and constitutes the basis of their buying and selling of shares under most circumstances. For this reason, in most cases, it is worthwhile keeping an eye on what the brokers are saying. In practical terms we can do this by monitoring “broker consensus” data.

Broker consensus data is simply the compilation of a number of brokers’ recommendations in order to gain an understanding of the average valuation of a company, sector, or market. This average valuation often gives us clues to whether the market overall is being influenced by bullish or bearish broker sentiment. As we imply above however, there are going to be some times where this sort of analysis isn’t as effective as most of the investors who follow it would like. In fact, there are times when it is downright useless.

The above statement about the banking sector by our unnamed analyst is an excellent example. Whilst appearing to be sensible and grounded in observable and valid analysis of the facts, it only considers the determinants of the value of a company’s shares, not the determinants of the price of a company’s shares. Value is not price and price is not value. So is it better to study value or price?

Fundamental analysts believe these concepts are interchangeable. They assume that all things being equal, price will tend to move towards value over a period of time. But how long will it take the market to catch up to the analyst’s perceived value of the share, and what then should the determinants of value change in the mean time?

Value tends to based upon assumptions and beliefs, upon plausible theories. What is an example of a plausible theory? Perhaps: “The internet will revolutionise the way the world does business and “new economy” companies can not be valued in the same way as “old economy” companies”. Many will remember that cracker from 1999-2000 when the mania of the Dot-com boom gripped stock markets around the world. How about: “The miracle of Chinese economic growth, and not to mention that of other developing countries such as India will power global growth for the next 20 years driving a sustained commodity boom…”

Plausible theories are potentially the most dangerous red herrings facing novice traders. Unfortunately when the world changes (and the recent financial crises have reminded us of just how quickly this can happen), plausible theories spontaneously combust into a poof of smoke. That’s the fundamental analyst’s bull market profits going up in flames by the way! Comfortingly, the price of a company’s shares will always be determined by the market – regardless of the prevalence of plausible theories. It is for this reason that traders study and follow the market price. Not perceived value. Value is a concept, price is the reality.

How to Create the Best Perception When Selling Your Business

Perception is reality when you are selling your business so it’s important to give the best impression possible.

You need to get tangible about the tangibles when selling your business. Buyers will likely pay more if they perceive your business to be an orderly, coherent, well-run enterprise.

That’s why good current documentation is important. This includes tangible assets such as facilities, inventory, machinery and other items.

A potential buyer will walk into your business and will visualize themselves there. Will they like what they see? Will they be inspired, enticed by it?

Spruced up buildings, grounds, parking areas, signage and equipment can convey prosperity, productivity and strong management. All should be in top notch condition and show well.

These observable aspects speak as a proxy for the thousand unseen things that are in the organization’s DNA.

What about your virtual facilities, you’re online presence? Well, get online and check yourself out. Do you like what you see there, too? Any posted materials should be relevant, recent and brand compliant.

Understand that potential buyers will go to your website and do an Internet search. So get out there and conduct a web search on yourself and your company or hire an outsider for an objective analysis and report.

Next would be inventory. Often owners keep inventory low prior to sale. Make sure your inventory is organized and presentable. You want to know exactly how much inventory you have and so will a buyer.

Our next topic is assets and machinery. Draw up a detailed asset list and review the condition of the machinery. Replace equipment that’s obsolete or ending its useful life. Or if return on investment is there, repair it.

You may be tempted to reduce expenditures for repair and maintenance prior to sale. Savvy buyers, however, will realize that and reduce their asking offer price knowing that they must spend that money to replace or refurbish the equipment anyway.

Next, is the technology running your business up to date, or have you gotten perhaps a little too much wear out of your current system?

Assessing how your technology resources, software, hardware and qualified staff affect performance might show you how to enhance it. Having up-to-date technology could make your firm more attractive to younger buyers.

If buyers perceive they will have to invest money to bring your systems up to date, they will offer you less money to buy it. That may be a trade off you’re willing to make, just be aware that you’re making it.

You will also need to document intangible assets.

Many businesses, large and small, own valuable intellectual property or IP: trade secrets, trademarks, copyrights and patents.

That can be the most valuable asset of a business. You should register domain names, copyrights, trademarks and patents. And remember, unlike trademarks, patents have a limited life, so record when they expire.

Many firms are purchased just for their IP. IP can have significant value and determine what buyers will be attracted and what they are willing to pay. So make sure you own it.

A prospective buyer will insist on IP records, especially records documenting ownership. If your firm has significant IP assets, a formal intellectual property audit is essential.

Your corporate attorney can direct you to experts who will appraise your IP and transferability to a new owner.

One more thing you will need to do before a sale is settle any outstanding actions. Clean up any current or potential legal messes. Resolve partnership and shareholder disputes and outstanding or threatened litigation as soon as possible. These can completely halt the sales process.

An astute buyer will collect outside information on past and present lawsuits, your credit history and that of your business, complaints by consumers and public agencies, the official status of the corporation or partnership and the existence of uniform commercial code and tax liens.

Do due diligence on yourself and see what a buyer will see, and take action. Be prepared to disclose and discuss issues that may surface.

Local Search Marketing And Its Efficiency

Every big business started as a small one. So those who have just started their business only needs to be reminded that they can start small and that in the long run they can become owners of big businesses just like the others. Most owners of business would try to save up whatever they have left of their initial investment. As much as they want to spend a lot on advertising and marketing, they have second thoughts doing it because they worry that it may not do anything for their business and would only result to bigger loses that they expected.

But then again, every business owner needs to remember that no one who has tasted the fruits of success was able to obtain it because they did not take the risk. All of them took the risk of spending money on advertising campaign though they were not sure it would reap them the benefits of successful marketing. They tried them anyway. With the new realm of marketing through the internet, even small business owners could spare a few of their entire business budget to their advertising.

When people have heard of the term local search marketing, in an instant, they felt that it would cost them much and do they don’t push through with the plans of exploring it. And sadly, most of them let go of the very chance that could uplift their business into a whole new stage by simply marketing through local search marketing. It is the kind of marketing that will bring them more consumers and more paying customers and if at an early stage they already abandon the idea of it.

Since everything today seems to be online, then there is no use not to go online if you really want to enjoy the many benefits that an efficient internet campaign can offer. Local search marketing is yet the best that the internet can offer considering that it is something that can be done without spending a cent. All you needed to have is to trust that the local market will pick up your campaign and that’s it.