Thursday, February 18, 2016

Monday, February 15, 2016

Emerging Market vs. Developed Countries

Emerging Market Info:
Research

Background Info -

	Population (millions)	GDP (billions)	Income per Person	Share of World Population	Share of World GDP
U.S.	312	$14,527	$46,900	5%	21%
Canada	34	$1,737	$50,436	0%	2%
Germany	82	$3,577	$43,742	1%	5%
Japan	128	$5,869	$45,920	2%	8%
S. Korea	49	$1,116	$22,778	1%	2%
Brazil	195	$2,493	$12,789	3%	4%
China	1,348	$7,298	$5,414	20%	10%
India	1,207	$1,676	$1,207	18%	2%

Source: IMF-WEO Database, April 2012, United Nations. 2011 GDP and income per person (GDP per capita), 2010 world population.

Which countries are considered emerging markets?

As of June 2012, MSCI (Morgan Stanley Capital International), the industry standard for measuring foreign market performance, listed these countries as emerging: Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Morocco, Peru, the Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, and Turkey.

A few countries are in transition: South Korea have been under review by MSCI for a couple of years for a potential move to developed status. Morocco is under review for a potential downgrade to frontier market status.

MSCI uses the guidelines below to categorize emerging vs. developed countries. To move up from emerging to developed status, countries need to meet these criteria:

Economic development: The country must have income levels 25% above $12,276 (the World Bank high income threshold) for three consecutive years.
Size and liquidity requirements: The local stock exchanges must have at least five companies with market capitalizations of roughly $1.8 billion each and the amount of trading volume must be significant.
Market accessibility: The country must be open to foreign ownership, allow capital to flow freely, and have stable, efficient markets.

Saturday, February 13, 2016

Refresh on Munger

Munger in 2016

Thursday, February 11, 2016

Income Investing (4)

The primary exit rule is to sell REITs or funds if needed during rebalancing. Certain REITs or funds will likely become overweight, while others will become underweight. When rebalancing, the objective is to sell the overweight portion of a REIT and use the proceeds to buy the underweight portion of the other REIT. The same holds true for REIT funds.

Like with dividend stocks, investors need to watch for “deal breakers”—these are changes to a company that might cause investors to sell an entire REIT position and look for an alternative. The two deal breakers are if a REIT reduces its dividend or experiences a major change in its capital structure.

Deal breakers

Examples of the latter are if a REIT exceeds 100% D/A, or issues a secondary stock offering without accompanying growth. These can signal financial stress. Check for these deal breakers during your periodic rebalancing.

Income Investing (3)

Reading a Bond Quote

When you browse or search for bonds, you’ll view bond quotes, which appear similar to the graphic below.

Expand

While the details may vary, this image shows some of the common types of information you’ll see in a bond quote. The list below defines what these terms mean.

CUSIP: A unique alphanumeric identifier assigned to individual bonds. A CUSIP is sort of like a bond’s UPC symbol. Knowing a CUSIP makes it easy to find information about a specific bond. Here, the CUSIP is 123456AB7.

Sector: Corporate bonds are separated into business sectors, such as Industrials or Financials. This bond was issued by a company from the Industrials sector.

Qty: The quantity of bonds offered by the dealer. This dealer is offering 26 of these bonds.

Min: The minimum order quantity. Here, the dealer is willing to accept orders of at least five bonds.

Issue: The name of the issuer. Below the issuer’s name may be information on whether or not the bond is callable. This bond is non-callable.

Coupon: The stated coupon rate of a bond. The coupon rate for this bond is 8.750%.

Maturity: The date on which the face value of the bond is repaid and interest payments stop. This bond expires on August 15, 2021.

Rating: The credit rating of the bond. This bond is rated A.

YTM: This is the return on the bond, assuming it’s held to maturity. The YTM for this bond is 3.884%.

Price: The price for each $1,000 bond. This is listed as a percentage of its face value (e.g., 110 = 110%). This bond is trading for a premium price at 140.394, or $1,403.94.

Accrued Interest: Interest that has accumulated between the most recent payment and the sale date of a bond. When a bond is resold, the amount of accrued interest earned by the seller is added to the bond price. The accrued interest for this bond is $24.38.

Investors also need to consider their target payment schedule. To identify when a REIT typically provides dividends, use a charting tool, such as the Corporate Snapshot, to view when dividends have been paid in the past. While the exact payment dates may vary, these schedules tend to be consistent enough that you can plan which month the dividend will likely be paid.

Income Investing (2)

Property types within the REIT market

Because REITs are unique types of companies, their performance is not measured by the same standards as other companies. Like any other publicly traded company, a REIT is required to file its earnings statements quarterly. However, standard accounting practices, like depreciation and amortization, can distort the performance of real-estate holdings. Therefore, earnings often aren’t a good way to measure a REIT’s true performance.

A better way to do this is to look at cash flows generated from the company’s operations. Cash flows can be measured three ways:

Funds from operations
Adjusted funds from operations
Return on equity

The preferred method of measurement is funds from operations (FFO).

Basically, FFO measures a REIT’s operating cash flow—the cash generated by a company’s assets. Operating cash flow is an effective measure of profitability because it adjusts for some of the performance-distorting accounting figures, thereby providing a more accurate picture of the amount of cash a company brings in from its operations. Because dividends are ultimately paid from this cash, FFO is an important consideration for an income investor.

Another measure of a REIT’s cash flow is adjusted funds from operations (AFFO).

AFFO is simply FFO minus capital expenditures. Capital expenditures refers to the cash a REIT uses to purchase additional properties for future income. AFFO helps an investor understand a REIT’s current profitability, and whether the REIT is investing in future success as well.

The third cash flow measurement is return on equity (ROE).

As you learned in the dividend stock analysis lesson, ROE measures how effectively a company can generate returns. For REITs, ROE is crucial to understanding the limits of its resources, including both the returns on its assets and the amount of leverage a REIT uses.

The table below summarizes the equity analysis criteria and the state that produces a green-, gray-, or red-colored box.

Expand

The single entry rule is to buy REITs or funds with above-average yields that meet criteria up to your allocation limits. As with other income investing entry rules, market timing is not a factor.