The ASX is proposing to increase the annual dilution limits for all ASX ex-300 stocks from 15 per cent to 25 per cent. We find this to be an outrageous proposal and encourage all investors to make a submission to the ASX, ASIC and the relevant minister (Bernie Ripoll) on this issue.

The Motley Fool has long been a champion of the individual investor – both in the US and now in Australia. We're believe this proposal is not in your best interest, and we hope you'll join us in fighting it.

25% is Outrageous

The proposed changes to ASX Listing Rule 7.1 would allow companies to dilute shareholders' interests by a further 10 percent, on top of the existing 15 per cent annual limit. Worse yet those new shares can be offered at a whopping discount of up to 25 percent.

Companies will now be able to say to faithful shareholders, not only are we going to dilute your ownership, we're giving shares to our mates at 25% discount. But hey, don't worry, the ASX say it's OK!

We are NOT Muppets

The ASX clearly has no respect for retail shareholders and must consider us Muppets. Now is the time to fight back and say NO to this outrageous proposal.

These changes could facilitate changes of control without shareholder approval. This proposal would make it possible for a single shareholder to go from 0 to 23 per cent ownership in six months, without shareholder approval. With 19.9 per cent of those shares issued at a 25 per cent discount to the market price!

Twenty per cent is considered as the control threshold in Australia.  At present it is not possible to go from 0 to 23 percent without shareholder approval in less than 15 months; it could now happen in six months.

Friend or Foe

This proposal also gives management and their advisors much greater capacity to punish 'troublesome' shareholders and reward friendly ones. Consequentially the already too powerful rent seekers (financial sponges) such as investment banks will have even greater power.

Existing ASX related party controls are very weak so the changes would increase the potential for abusive issues to entities that are not technically related parties. As an example, an 11 per cent shareholder with an executive sitting on the board is not considered a related party for the purposes of the Listing Rules.

As an example of the present scope for abuse, both Macarthur Coal and Cash Converters International (ASX: CCV) in the past two years were able to issue large slabs of equity to major shareholders without prior shareholder approval. The only limits were those imposed by the Corporations Act provisions that limit increases above 20 percent to 3 percent every six months without shareholder approval.

Foolish Bottom Line

Please raise your voice on this issue if you think shareholder rights matter (hint: they do). You can email the minister at bernie.ripoll.mp@aph.gov.au to encourage him to stamp out this audacious bid by the ASX to trample our shareholder rights. You can also let the ASX know your opinion — politely — at regulatorypolicy@asx.com.au.

If you are looking for ASX investing ideas, look no further than "The Motley Fool's Top Stock for 2012." In this free report, Investment Analyst Dean Morel names his top pick for 2012…and beyond. Click here now to find out the name of this small but growing telecommunications company. But hurry – the report is free for only a limited period of time.

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The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.

The post Don't let the ASX take your rights! appeared first on The Motley Fool Australia.

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Melbourne IT (ASX: MLB) was once a dot-com darling. Now thrown on the scrap heap, Motley Fool Investment Analyst Dean Morel sees it as an enticing turnaround prospect.

Melbourne IT was Australia's first internet domain name registration company.

From those humble beginnings, it has grown into a world leader in assisting companies do business online via its domain name, web hosting, online brand management, video content delivery and managed IT services.

The business has stalled since revenue and earnings peaked in 2009. Consequently its shares have been tossed on the scrap heap, falling from over $4 to around $1.40 just prior to the 2011 full year results announcement in February.

Green shoots: A Healthy Sign of New Growth
Business appears to have bottomed in the first half of 2011, and the green shoots now sprouting should deliver growth this year. The company is still only firing on three cylinders, but with strong industry tailwinds and experienced management, its transformation project should deliver further results this year.

The current fully franked yield of 8.6% is based on Melbourne IT's stable 15 cent dividend. The dividend is unchanged from 2008 and it appears sustainable. That's a fantastic yield to collect while we wait for further signs of growth to emerge.

The company has a healthy balance sheet with only $21 million in net debt. It has consistently paid down the $57 million in debt it took on to finance 2008 acquisition of VeriSign's Digital Brand Management Services business (DBMS).

Enticingly attractive
At the current price of $1.75 Melbourne IT is an attractive business, offering an excellent yield and undemanding trailing price multiples.

Long-term investors should take a closer look at this enticing turnaround opportunity.

If you are looking for more ASX investing ideas, look no further than "The Motley Fool's Top Stock for 2012." In this free report, Investment Analyst Dean Morel names his top pick for 2012…and beyond. Click here now to find out the name of this small but growing telecommunications company. But hurry – the report is free for only a limited period of time.

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The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691).

The post Melbourne IT: One Enticingly Attractive ASX Stock appeared first on The Motley Fool Australia.

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After reported disappointing earnings Industrea (ASX: IDL) was taken out to the woodshed and mercilessly pummelled by investors on Thursday. Industrea shares fell 23 per cent after first half earnings failed to live up to either expectations or last year's corresponding period.

Net profit of $15.1 million was 14 per cent lower than last year's $17.5 million, despite revenue and EBITDA being marginally higher than a year ago. The company said a higher tax rate and increased depreciation caused the earnings shortfall.

As both tax and depreciation are easy to forecast investors are right to be sceptical of those excuses. I'm not surprised that investors dumped their shares. Shoot first, ask questions later is often the right approach in these situations, especially when the company has a track record of disappointing investors.

It was only a few months ago at the mid November AGM, that CEO Robin Levison was spruiking 20 per cent revenue growth in 2012. As the first half was two thirds completed at that point, management should have had a good idea of performance and should have informed the market.

Levison is sticking to his guns and stated that the second half will be strong.

"We are confident of achieving a stronger revenue performance in the second half and that full year profit will lift given the underlying strength of the markets we operate in, and the continuing improvements being made to our businesses' operational efficiencies."

While the second half may be strong I doubt it can come to the rescue and make those lofty 2012 growth dreams a reality.

I love the smell of opportunity in the morning

The $240,000 question is whether Industrea is now a bargain, or does it smell rotten.

You may recall that Industrea was one of two Australian companies selected by The Motley Fool's Global Gains team during their visit to Australia about a year ago. The special report is available here and a brief summary is below.

Plans by miners in Australia and China to increase production will drive growth for all three of Industrea's businesses. The opportunity to sell equipment in China and earn recurring service revenue is particularly promising given China's need to mine coal safely and efficiently.

This is a niche business with significant growth opportunities and a track record for rewarding shareholders. We'll be watching Industrea's profit margin and the way the company manages its balance sheet, but in the meantime, this could be a compelling way to profit from the rising demand for commodities in emerging Asia.

Net margins were crushed this half, falling to 8.6 per cent compared to 13.4 per cent in 2011. That doesn't bode well for the future, but if management are to be believed it is a temporary fall that will be turned around this half. In light of the recent record, that is a big if!

This isn't the first time Industrea have overpromised and under-delivered. The company also disappointed investors back in 2009. Back then the initial sell-off was the just the beginning of a long slide in the share price.

Cash flow is also concerning, as despite a handy $24.5 million in operating cash flow, the company spent $37.7 million on investing activities. Most of that was for property plant and equipment, so is an investment in future growth, but in light of the disappointing results it's worth keeping a close eye on future cash flows to ensure Industrea is once again self-funding (able to grow without extra debt or equity).

Foolish Bottom Line

At under $1 Industrea's shares appear cheap and are priced as if the company will never grow again. That seems highly unlikely considering the massive growth tailwinds it has behind it. However, with plenty of other opportunities in the market I see little reason to jump in now. Fortune seldom favours the brave in investing, while patience is very rewarding.

If you're looking for a business we think is worth your consideration, check out The Motley Fool's Top Stock For 2012. Request your copy of this report, whilst it's still free and available, by clicking here now.

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Motley Fool Investment Analyst Dean Morel does not own shares in Industrea.

The post Investors take Industrea to the woodshed appeared first on The Motley Fool Australia.

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Cochlear Ltd. (ASX: COH) is up 8% after reporting a $20 million first half loss.

Total revenue was up 3% to $387 million, the net loss of 35.9 cps was due to $100 million of after-tax recall costs. Due to the short-term nature of the hit to earnings the board increased the dividend 14% to $1.20 (60% franked) record date of 28^th February.

Cochlear CEO, Dr Roberts, said "while the $20 million loss was disappointing, the recall costs have been quarantined and importantly, a record number of recipients received a cochlear implant in the first half."

Management's best estimate of total probable recall costs of $139 million was charged to cost of sales this half.

Free cash flow was up slightly on a year ago to $71 million.

Back on the growth train
The most important sentence in the half year report was about supply. "With the ongoing manufacturing ramp-up we do not anticipate we will be supply constrained in the second half of the year, as we were in the December quarter."

Dr Roberts is right, business fundamentals are strong. Cochlear's growth prospects look strong.

The fall in margins and return on equity is highly likely to be a short-term blip, and the chance to buy shares on the cheap may be quickly fading.

Cochlear's ROE and Margins Source: S&P Capital IQ

Source: COH 2012 half year results analyst presentation

Are you looking for other quality stock ideas? Motley Fool readers can click here to request a new free report titled The Motley Fool's Top Stock For 2012.

Dean Morel is slightly embarrassed to admit he has no position in Cochlear. The Motley Fool's disclosure policy is as sane as they come.

The post Cochlear – when down is up appeared first on The Motley Fool Australia.

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In yesterday's Take Stock, we let subscribers to our free email Take Stock know that Maverick Drilling & Exploration Limited (ASX: MAD) was still firmly on our radar.

Today, for a second time since listing in 2010, Maverick doubled its reserves.

I highlighted Maverick as a stock on our radar back in August last year. Maverick is a 35-year old company that has perfected a streamlined system to drill, complete, produce and sell oil.

The excitement had gone out of Maverick's share price, despite the oil price rising to over $100 a barrel. But, as we said yesterday the long-term growth story remains on track.

Maverick's share price is up 16% after today's announcement further validated Maverick's long-term growth potential. Proved reserves are now up  a massive 260% since listing.

• Proved oil reserves (1P) have more than doubled – increasing by almost 16 million barrels to 28.1 million barrels – up 127%.
• Maverick has also hit the milestone of 1,000 BOPD in intermittent daily flush production in late December.

What's to like?

• Maverick was already cheap on a reserves valuation. It just got cheaper.
• More reserve upgrades are highly likely. Maverick is yet to provide reserves on its other salt domes, Nash and Boling.
• Oil production will continue to increase, delivering reliable positive cash flow.

Cheap gets cheaper.
To highlight the fall in price per proved oil reserve I aligned the price per 1P reserves with the share price. Since listing Maverick's price per proved barrel of oil has fallen 68%.

The price per barrel now sits at a low of $3.40. That's cheap!

By comparison, Linc Energy Ltd. (ASX: LNC) paid $11.50 per barrel of 1P reserves for fields near Mavericks. I still expect further upgrades to Maverick's proved reserves as drilling and production begins in earnest on its other two salt domes. With 3,200 of their 5,000 net salt dome acres yet to have reserve estimates, those increases could be substantial.

Despite the price rise, Maverick presents a compelling risk reward picture, with limited downside and excellent market trouncing upside potential.

Are you are looking for investing ideas for 2012? Request our free report, The Motley Fool's Top Stock For 2012. Click here, whilst it's still free and available.

Disclosure: Dean Morel is long MAD.

The post One MAD stock still on our radar appeared first on The Motley Fool Australia.

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With QBE Insurance Group (ASX: QBE) now trading sub $11, is it a buy?

QBE, is best analysed as a potential long-term core holding. So let's jump straight there. Here is QBE's ten year price chart, with it's top two metrics, price to book and annual dividend.

Source: S&P Capital IQ

The key line on the chart is purple, the  price to book ratio. It tells the long term story of QBE's powerhouse years of expansion, and the fall of recent years. Investors began paying too much for QBE in 2004. It's hard to imagine how anyone justified buying QBE when its book value soared above 3 and then a staggering 4.

At $11 QBE's price to book value is 1.06. On the face of it that make QBE a buy. However, just like the dividend, book value can fall, as QBE's did in 2009. But, to be fair that was only the second fall since 1987.

At $11, QBE is priced as if its best days are behind it.
For QBE to be a bad buy at these prices its income and dividend must have peaked and forever be substantially below the average of the last four years. If, like me, you think that is highly unlikely then saddle up and take a closer look. QBE is now my top pick of the ASX20, replacing my August pick of Telstra.

Are you are looking for investing ideas for 2012? Request our free report, The Motley Fool's Top Stock For 2012. Click here, whilst it's still free and available.

The post Time to buy QBE Insurance? appeared first on The Motley Fool Australia.

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The All Ordinaries long-term P/E chart closed 2011 at 12.21.

Here are the last three years.

What do you think? Could the Australian market experience an unprecedented third down year?

Anything is possible, but the odds are certainly more in investor's favour today than they were in 2011, and 2010 for that matter.

If you are looking for investing ideas for 2012, request our free report, The Motley Fool's Top Stock For 2012. Click here, whilst it's still free and available.

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Rediscover that winning sharemarket feeling

Data via Colin Nicholson

The post S&P/ASX All Ordinaries Index P/E (PER) 1974-2011 appeared first on The Motley Fool Australia.

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In part 1 of this series I presented the case for focus investing. In part 2 I discussed the number and size of positions to hold in your portfolio. Now let's look at sizing common stocks, shorts, options and speculation.

Sizing common stocks
I (Whitney Tilson) typically will not add a common stock position to my portfolio unless I'm willing to make it a 5% position. If I don't feel confident enough to invest at least this much, that's a good signal I shouldn't own it at all. Once this initial position is established, I cross my fingers and hope that the stock goes…down. Yup, you read that right, down! Why? Because I want to buy more and make it a 10% position, but need a bigger margin of safety to do so.

Let me give you an example of a dream scenario. At the end of 2002, the worst year in the fast food industry in 20 years thanks to a weak economy and a burger war between McDonald's (NYSE:  MCD) and Burger King, McDonald's stock hit a multiyear low in the $16 range. I believed that, despite horrible mismanagement, McDonald's remained one of the world's great businesses and that the new CEO had a sound turnaround plan. My estimate of intrinsic value was in the mid-$20 range, so at $16, I felt that I was buying with a 40% margin of safety — enough to make the stock a 5% position.

Then I got lucky: McDonald's continued to report weak results and investors became very bearish on consumer spending as the Iraq war loomed, so the stock fell to a 10-year low of just above $12 in March 2003. At the same time, I interviewed a long-time McDonald's franchisee who gave me insights into the dramatic positive changes that were occurring within the company but whose impact was not yet visible in the numbers. Thus, while the stock I had purchased initially was down 25% in only a few months, I had even more confidence in my investment thesis and was thrilled to be able to buy the stock at an even lower price, so I backed up the truck and doubled the position (which I still own).

The following chart highlights the different effect 3% and 10% positions have on portfolio returns. Taking 3% bets on your best ideas dramatically reduces their benefit and the value of you research, whereas blowups on a 10% position don't hit your portfolio much more than if it was a 3% position.

Sizing shorts
Though I do some shorting, it's an awful business for many reasons, one of which is that one shouldn't do it in size, as losses are potentially unlimited. If a stock is a 7% long position at $15 and drops to $5, it will cost you nearly five points of return, but it won't put you out of business, you aren't forced to sell at the bottom, and — if you have real guts and conviction — you can buy more.

But what about a 7% short position at $5 that jumps to $15? That costs you 14 percentage points of return and you may be forced to cover to prevent further losses, even if you have more confidence in the position. Thus, you can see why I rarely make a short position larger than 2-3% and prefer a basket of even smaller positions.

Sizing options
Given the implicit leverage of options, I tend to make them small positions — generally 0.5%-2.5%, though it's hard to share any rules of thumb since some long-dated, deep-in-the-money options are very similar to the underlying stock, while short-dated, out-of-the-money options are highly speculative.

Speculations
One might ask why a conservative value investor like myself would ever invest in something highly speculative, but I'm willing to make such investments with a small portion of my portfolio as long as I'm confident that the expected value is much higher than the price I'm paying. Consider an investment with the following expected one-year payoffs:

• Loss of entire investment: 60% chance
• No gain or loss: 10% chance
• 2x gain: 10% chance
• 5x gain: 10% chance
• 10x gain: 10% chance

The expected value of a $1 investment given these probabilities is $1.80, a fabulous return, but let's assume you could only make this investment once. Would you do so, knowing that there's a 60% chance that you'd lose it all? Try explaining that to your investors (or worse yet, your spouse)!

If you did make the investment, how much of your portfolio would you risk? This is not a hypothetical question; in the past few weeks, I faced a very similar choice and chose to invest 2% of my portfolio.

Conclusion
While there's little doubt that focus investing is likely to yield the highest long-term returns, there are no hard and fast rules about how concentrated one's portfolio should be — it depends on tolerance for volatility, availability of other investment options, the confidence in one's analysis, and many other factors.

For investors who want to add an ASX growing dividend payer to their portfolio, our free special report — "The Motley Fool's Top Stock for 2012"  — is a great place to start. Grab a free copy of that report by clicking here.

More articles on portfolio management:

• Focus Investing – Part 1
• Focus Investing – Part 2
• Diversification without diworsification
• Two great investors sharing one winning strategy

A version of this article was originally written by Whitney Tilson for fool.com.

The post Focus Investing – Part 3 appeared first on The Motley Fool Australia.

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In part 1 of this series I presented the case for focus investing. That is for concentrating your portfolio on your top ideas. Now let's look at what size each of our investments should be.

Position sizing
OK, let's say you're convinced that focus investing is the way to go, and you've found a stock about which you're trembling with greed. What percent of your assets should you invest in it? 2%? 20%? (Or, given the cheap, easy leverage these days, 200%?) The answer depends on a number of factors such as your tolerance for volatility, the expected upside, and the potential downside. Generally speaking, an ideal value portfolio would have 12-20 well-diversified 50-cent dollars (e.g., stocks trading at half of my conservative estimate of their intrinsic value), of which roughly five were 10% positions and rest were 5-9% positions.

I did not pick this range of 12-20 stocks arbitrarily. In Joel Greenblatt's brilliant book, You Can Be a Stock Market Genius, he provides the following statistics (see pages 20-21):

• Owning two stocks eliminates 46% of nonmarket risk of just owning one stock
• Four stocks eliminates 72% of the risk
• Eight stocks eliminates 81% of the risk
• 16 stocks eliminates 93% of the risk
• 32 stocks eliminates 96% of the risk
• 500 stocks eliminates 99% of the risk

The following chart demonstrates this point graphically. As the chart shows, most of the benefits of diversification are gained once 20 – 30 stocks are owned.

Once one has a well-diversified, balanced portfolio of a dozen or so stocks, adding additional stocks does little to reduce risk, yet there's obviously a big penalty in terms of performance if one's best ideas are 3-5% positions instead of 7-10% positions.

Keep in mind, however, that there is no right answer. I know many fantastic money managers who own a few dozen stocks and some who own only a half dozen, but 12-20 is the level at which I'm comfortable. You need to find your own comfort zone.

At one point in my investing career, I (Whitney Tilson) invested in a more concentrated fashion — for example, I doubled my Berkshire Hathaway holdings to an 18% position on March 10, 2000, a day I remember well because it was the last spasm of forced selling of the stock, driven by investors piling into tech stocks (it was the very day that the Nasdaq peaked at 5,032 — a level that, mark my words, we will not see for at least another 10 years).

While that investment worked out well (I still own some of the Berkshire stock), I'd be surprised if I ever again invested so much of my portfolio in one stock. Why? Let me show you the scars on my back and tell you some stories. Just in the past two years — two very good years, incidentally — I've had a 10% position decline by 30%, two 7% positions lose two-thirds of their value (all three subsequently recovered), and a 2% position go bankrupt (I bought at $6 and sold at a penny — ouch!). As a result, I've learned that no matter how much confidence I have in an investment, the future is inherently unpredictable and all sorts of unexpected calamities can occur. I still practice focus investing, but thanks to Mr. Market teaching me some humility, I'm not quite as focused as I used to be.

In part 3 of this series we'll look at sizing common stocks, shorts, options and speculation. Focus Investing – Part 3.

For investors who want to add an ASX growing dividend payer to their portfolio, our free special report — "The Motley Fool's Top Stock for 2012"  — is a great place to start. Grab a free copy of that report by clicking here.

More articles on portfolio management:

• Focus Investing – Part 1
• Diversification without diworsification
• Two great investors sharing one winning strategy

A version of this article was originally written by Whitney Tilson for fool.com.

The post Focus Investing – Part 2 appeared first on The Motley Fool Australia.

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Most investors focus their efforts on stock picking, but I believe that portfolio management is an equally important component of long-term investment success. By this, I mean four things:

1. How many stocks to hold and how large to make each position (concentration)
2. How diversified the portfolio should be (by industry, market cap, etc.)
3. Knowing when to buy more
4. Knowing when to sell

These are all big topics, so for now let's focus on the first one.

Focus investing
While there are a handful of exceptions such as Peter Lynch, the overwhelming majority of great investors that I'm aware of practice focus investing — see the chart below. They invest infrequently, only when they're highly confident that the odds are heavily in their favour, and then they bet big. Not surprisingly, research shows that the same approach works in other endeavours such as poker or betting on horse races. (For more on focus investing, see Bob Hagstrom's excellent book, The Warren Buffett Way.)

Chart: Number of holding and position sizing for 11 noted value fund managers.

The funds are from left to right; Sequoia, Tilson Focus, Clipper, Fairholme, Oakmark Select, Legg Mason Growth Trust, Longleaf Partner, Weitz Value, Legg Mason Value Trust, Tweedy Brown Value, John Hancock Classic and Third Avenue Value.

The number of positions is shown under the bars and ranges from 22 to 41, with an average of 28. The next two rows (% Top), highlight the concentration within the funds; the per cent of funds held in top ten positions (average 58%) and the top position (average 11%). That's focus investing at work!

Berkshire Hathaway's (NYSE: BRK.A ) Warren Buffett and Charlie Munger have commented on this topic in recent annual meetings. Munger commented, "If you took out our 15 best ideas, most of you wouldn't be here. We have this investment discipline of waiting for a fat pitch."

Buffett added:

I keep xeroxes from annual reports 50 years ago. [Some ideas were] just so obvious. I knew when I sat with the CEO of GEICO 50 years ago that it was a big idea.

If we start buying a stock, we want to go in heavy. I can't think of a stock where we wanted to quit.

We've made some big mistakes starting to buy something that was cheap and within our circle of competence, but trickled off because price went up a bit. Good ideas are too scarce to be parsimonious with.

You don't have to be right on everything or 20%, 10%, or 5% of businesses. You only have to be right one or two times a year. You can come up with a very profitable decision on a single company. If someone asked me to handicap the 500 companies in the S&P 500, I wouldn't do a very good job. You only have to be right a few times in your lifetime, as long as you don't make any big mistakes.

It seems so obvious that it makes more sense to buy more of your best idea than add a 100th position to a 99-stock portfolio, yet the average mutual fund holds more than 100 stocks. In almost all cases, this is foolish "deworsification" and reflects closet indexing rather than prudent money management.

Munger agrees, noting that "What's funny is that most big investment organizations don't [look for the fat pitch]. They hire lots of people, evaluate Merck vs. Pfizer and every stock in the S&P 500, and think they can beat the market. You can't do it. Very few people have adopted our approach." Buffett added: "Ted Williams, in his book The Science of Hitting, talked about how he carved up the strike zone into different zones and only swung at pitches that were in his sweet spot. Investing is the same way."

In the next article in this series we'll look more closely at position sizing. Focus Investing – Part 2

For investors who want to add an ASX growing dividend payer to their portfolio, our free special report — "The Motley Fool's Top Stock for 2012"  — is a great place to start. Grab a free copy of that report by clicking here.

More articles on portfolio management:

• Diversification without diworsification
• Two great investors sharing one winning strategy
• Focus Investing – Part 3

A version of this article was originally written by Whitney Tilson for fool.com.

The post Focus Investing – Part 1 appeared first on The Motley Fool Australia.

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Billabong International Limited (ASX:BBG) wiped out yesterday, and still hasn't come up for air. Billabong continues to get dragged against the ragged rocks of disappointment, down a further 13 per cent in morning trade.

Just get me out. Sell, Sell, Sell!
The, I can't stand it anymore phase, ICSIA for short, occurs when investment theories and speculation are simultaneously dashed on the jagged rocks of high debt and earnings disappointment. Billabong shareholders are screaming ICSIA, as they're dashed on those rocks.

Billabong's CFO, Craig White, said he is now less comfortable that the company is within covenants. That vague remark may leave shareholders less comfortable with their long term ownership position in Billabong.

Here is what I said to Share Advisor subscribers two weeks ago.

Billabong wiped out this year after management's ill-timed expansion into retail. As the company picks itself up off the rocks, investors could be in for a gnarly ride. With $615 million in debt, a deteriorating cash conversion cycle and an ever-fickle youth market, Billabong may struggle to find its past form. However, if it manages to do so, then the current price is cheap. Speculative.

The new current price is even cheaper: 50% cheaper! But with covenants coming into question, equity holders could be wiped out. Prior to the warning I was giving management a little benefit of the doubt, but their lack of details and vague remarks is an appalling way to treat the company's owners. Many of those owners now feel forced into making a loss/loss decision on whether to sell, based on insufficient information.

According to the AFR, there is speculation in the investment community that a share placement to a new strategic partner was a likely route. I can see that being attractive for the acquirer. You get a slice of Billabong at prices not seen this millennium, while by injecting fresh capital you assure the near-term future of the company and thus your purchase price mark's the low!

Billabong's team may find it hard to buy their way out of this pickle. But for current shareholders sake, I hope they can at least borrow or beg their way out.

Are you looking for more quality stock ideas? Motley Fool readers can click here to request a new free report titled The Motley Fool's Top Stock For 2012.

Disclosure: Dean has no position in Billabong.

The post I Can't Stand It Anymore appeared first on The Motley Fool Australia.

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MacMahon Holdings Limited (ASX: MAH) was a shining beacon cutting through the economic fog, as it pre-announced better than expected earnings this morning. Management now expect $1.7 billion in revenue and over $55 million in profit. First half profit is forecast to be around $20 million.

At its Annual General Meeting on November 3, Macmahon had forecast a full year profit of in excess of $45 million.  This was based on secured work in hand for 2012 of $1.4 billion and expected additional work which would take the company's full year revenue to $1.6 billion.

We now expect further success on the work winning front which will take our full year revenue past $1.7 billion which will drive the higher profits. With a very strong order book and positive trading conditions across the Group, Macmahon is now on track to deliver a record profit for the 2012 year, Mr Bowen said.

Time to buy?
With a market cap of $400 million Macmahon has a forward price to earnings (P/E) of just 7 and price to sales of 0.24, Macmahon is likely to surge strongly on this upgrade. Some of the money flooding out of the consumer discretionary sector is likely to find its way into construction and engineering, and other less consumer dependent sectors.

Macmahon share price has formed a long base after falling off a cliff three years ago. Since falling, the business has struggling to reconstruct a solid base for growth. This upgrade and and the strong order book are good signs that the business has turned a corner.

Macmahon Holdings Limited engages in the provision of civil construction and contract mining services in Australia, New Zealand, south east Asia, and Africa. It involves in the design and construction of earthworks, road formations, pavements, bridges, tunnels and embankments, drainage, and support infrastructure; railway solutions, including overhead traction, rail laying, signalling, and communications; and quarry development and quarrying.

Are you worried about the falling sharemarket? Make sure you Read This Before The Next Market Crash. It's a free report from The Motley Fool, and taking its advice could save you thousands. Click here to request your copy, whilst it's still free and available.

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Last week we had former market darling JB Hi-Fi (ASX: JBH) warning on profits. Today, Billabong International (ASX: BBG) wiped out, its shares plunging over 40 per cent after the company revealed a significant deterioration in the critical pre-Christmas trading period.

We labelled Billabong as a purely speculative investment opportunity, with some justification. I'm currently deep-diving into the Billabong trading update and accounts. Although some investors may be tempted to buy Billabong shares after the massive collapse in their share price, experience tells me there is no need to rush. As ever, patience is key.

How low can it go?

The current share price of $2.15 is low enough to merit further investigation. That said, with a heavy debt load and high interest payments, Billabong is definitely not a safe investment.

A large write-down of intangibles could easily send earnings into the red.

With $1.3 billion in intangible assets, and less than $1.2 billion in equity, Billabong shareholders don't own any tangible assets. Is the Billabong brand alone worth close to half a billion dollars? Then again, at $2.15, Billabong has a market cap of $540 million and an enterprise value — market cap plus net debt —of just over one billion. So it's worth digging deeper.

Could debt wipe Billabong shareholders out?

With a heavy debt load and high interest payments it is no wonder Billabong has engaged Goldman Sachs for a strategic capital structure review.

This review includes an assessment of all potential alternatives to strengthen the Company's capital structure in light of the existing operating environment and the risk for further deterioration … while nothing has been ruled out, raising equity is not the preferred path at this time as the Company is reviewing other options.

Of course an equity raising is not the favourite path!

No-one ever wants to admit failure. No-one wants to go cap in hand to the owners, especially at the worst possible time to raise equity — right now as the share price is hitting lows not seen in 11 years!

Are the cash flows and management strong?

No. Over the last six years the business has consumed $174 million more than operations have produced. And key management performance statistics have been in free-fall.

Foolish bottom-line

Billabong's board and management chose a poor time to leverage the balance sheet and expand in to bricks and mortar retailing. They have significantly increased shareholders risk without a commensurate increase in the potential rewards. Bad capital management is a corporate sin and red flag.

A clear view of its debt, and its duration and covenants, is the next step. Then an examination of if it's cheap enough to risk getting into bed with poor management.

Are you worried about the falling sharemarket? Make sure you Read This Before The Next Market Crash. It's a free report from The Motley Fool, and taking its advice could save you thousands. Click here to request your copy, whilst it's still free and available.

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I recently shared a partial transcript of Charlie Rose interviewing legendary value investing Seth Klarman. As I said then, Seth Klarman is one of the greatest value investors of all time. He has produced annual returns of 20% for Baupost Group since 1982; incredibly, with just one down year.

Klarman shared the following twenty investment lessons a couple years ago. They are as pertinent today as they were back then. As Klarman says in points one and 18, always be prepared and when a government official says a problem has been "contained," pay no attention.

That means have cash or a source of funds available to buy when bargains appear. Having cash allows you to keep you head and buy while other about you are fearfully selling.

Klarman's Twenty Investment Lessons of 2008

1. Things that have never happened before are bound to occur with some regularity. You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse.
2. When excesses such as lax lending standards become widespread and persist for some time, people are lulled into a false sense of security, creating an even more dangerous situation. In some cases, excesses migrate beyond regional or national borders, raising the ante for investors and governments. These excesses will eventually end, triggering a crisis at least in proportion to the degree of the excesses. Correlations between asset classes may be surprisingly high when leverage rapidly unwinds.
3. Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return. Conservative positioning entering a crisis is crucial: it enables one to maintain long-term oriented, clear thinking, and to focus on new opportunities while others are distracted or even forced to sell. Portfolio hedges must be in place before a crisis hits. One cannot reliably or affordably increase or replace hedges that are rolling off during a financial crisis.
4. Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty – such as in the fall of 2008 – drives securities prices to especially low levels, they often become less risky investments.
5. Do not trust financial market risk models. Reality is always too complex to be accurately modeled. Attention to risk must be a 24/7/365 obsession, with people – not computers – assessing and reassessing the risk environment in real time. Despite the predilection of some analysts to model the financial markets using sophisticated mathematics, the markets are governed by behavioral science, not physical science.
6. Do not accept principal risk while investing short-term cash: the greedy effort to earn a few extra basis points of yield inevitably leads to the incurrence of greater risk, which increases the likelihood of losses and severe illiquidity at precisely the moment when cash is needed to cover expenses, to meet commitments, or to make compelling long-term investments.
7. The latest trade of a security creates a dangerous illusion that its market price approximates its true value. This mirage is especially dangerous during periods of market exuberance. The concept of "private market value" as an anchor to the proper valuation of a business can also be greatly skewed during ebullient times and should always be considered with a healthy degree of skepticism.
8. A broad and flexible investment approach is essential during a crisis. Opportunities can be vast, ephemeral, and dispersed through various sectors and markets. Rigid silos can be an enormous disadvantage at such times.
9. You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy.
10. Financial innovation can be highly dangerous, though almost no one will tell you this. New financial products are typically created for sunny days and are almost never stress-tested for stormy weather. Securitization is an area that almost perfectly fits this description; markets for securitized assets such as subprime mortgages completely collapsed in 2008 and have not fully recovered. Ironically, the government is eager to restore the securitization markets back to their pre-collapse stature.
11. Ratings agencies are highly conflicted, unimaginative dupes. They are blissfully unaware of adverse selection and moral hazard. Investors should never trust them.
12. Be sure that you are well compensated for illiquidity – especially illiquidity without control – because it can create particularly high opportunity costs.
13. At equal returns, public investments are generally superior to private investments not only because they are more liquid but also because amidst distress, public markets are more likely than private ones to offer attractive opportunities to average down.
14. Beware leverage in all its forms. Borrowers – individual, corporate, or government – should always match fund their liabilities against the duration of their assets. Borrowers must always remember that capital markets can be extremely fickle, and that it is never safe to assume a maturing loan can be rolled over. Even if you are unleveraged, the leverage employed by others can drive dramatic price and valuation swings; sudden unavailability of leverage in the economy may trigger an economic downturn.
15. Many LBOs are man-made disasters. When the price paid is excessive, the equity portion of an LBO is really an out-of-the-money call option. Many fiduciaries placed large amounts of the capital under their stewardship into such options in 2006 and 2007.
16. Financial stocks are particularly risky. Banking, in particular, is a highly leveraged, extremely competitive, and challenging business. A major European bank recently announced the goal of achieving a 20% return on equity (ROE) within several years. Unfortunately, ROE is highly dependent on absolute yields, yield spreads, maintaining adequate loan loss reserves, and the amount of leverage used. What is the bank's management to do if it cannot readily get to 20%? Leverage up? Hold riskier assets? Ignore the risk of loss? In some ways, for a major financial institution even to have a ROE goal is to court disaster.
17. Having clients with a long-term orientation is crucial. Nothing else is as important to the success of an investment firm.
18. When a government official says a problem has been "contained," pay no attention.
19. The government – the ultimate short-term-oriented player – cannot withstand much pain in the economy or the financial markets. Bailouts and rescues are likely to occur, though not with sufficient predictability for investors to comfortably take advantage. The government will take enormous risks in such interventions, especially if the expenses can be conveniently deferred to the future. Some of the price-tag is in the form of back- stops and guarantees, whose cost is almost impossible to determine.
20. Almost no one will accept responsibility for his or her role in precipitating a crisis: not leveraged speculators, not willfully blind leaders of financial institutions, and certainly not regulators, government officials, ratings agencies or politicians.

Below, we itemize some of the quite different lessons investors seem to have learned as of late 2009 – false lessons, we believe. To not only learn but also effectively implement investment lessons requires a disciplined, often contrary, and long-term-oriented investment approach. It requires a resolute focus on risk aversion rather than maximizing immediate returns, as well as an understanding of history, a sense of financial market cycles, and, at times, extraordinary patience.

False Lessons

1. There are no long-term lessons – ever.
2. Bad things happen, but really bad things do not. Do buy the dips, especially the lowest quality securities when they come under pressure, because declines will quickly be reversed.
3. There is no amount of bad news that the markets cannot see past.
4. If you've just stared into the abyss, quickly forget it: the lessons of history can only hold you back.
5. Excess capacity in people, machines, or property will be quickly absorbed.
6. Markets need not be in sync with one another. Simultaneously, the bond market can be priced for sustained tough times, the equity market for a strong recovery, and gold for high inflation. Such an apparent disconnect is indefinitely sustainable.
7. In a crisis, stocks of financial companies are great investments, because the tide is bound to turn. Massive losses on bad loans and soured investments are irrelevant to value; improving trends and future prospects are what matter, regardless of whether profits will have to be used to cover loan losses and equity shortfalls for years to come.
8. The government can reasonably rely on debt ratings when it forms programs to lend money to buyers of otherwise unattractive debt instruments.
9. The government can indefinitely control both short-term and long-term interest rates.
10. The government can always rescue the markets or interfere with contract law whenever it deems convenient with little or no apparent cost. (Investors believe this now and, worse still, the government believes it as well. We are probably doomed to a lasting legacy of government tampering with financial markets and the economy, which is likely to create the mother of all moral hazards. The government is blissfully unaware of the wisdom of Friedrich Hayek: "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.")

These investing lessons were originally posted at  Value Investor Insight.
Read more:

• 5 Investing Insights From Another Master Investor
• Value investing wisdom with a margin of safety

The post Seth Klarman's Twenty Investment Lessons appeared first on The Motley Fool Australia.

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Seth Klarman is one of the greatest value investors of all time. He has produced annual returns of 20% for Baupost Group since 1982; incredibly, with just one down year. Klarman makes investments with large "margins of safety" and is comfortable holding cash if opportunities are absent. His book Margin of Safety is rumoured to sit on Warren Buffett's desk and in Karman's words is the "intellectual successor to Intelligent Investor."

Margin of Safety is the best and most accessible book on value investing I have read. Not long after reading it I was fortunate to ride on Klarman's coat-tails in a multibagger investment in the PDL BioPharma spin-off Facet Biotech. I hope you have the fortune to do both.

In this rough transcript of An Interview with Seth Klarman by Charlie Rose I try to present some of Klarman's key insights into value investing. These are rough notes, that I hope encourage you to watch the whole interview. If you do, and are not interested in Klarman's philanthropy, skip to the 20 minute mark.

Why was Benjamin Graham's Security Analysis so profound?
Warren Buffett's captured the idea in his 1984 article the Superinvestors of Graham-and-Doodsville. In that article he says value investing is like an inoculation, you either get it right away or not. It's a gene, you have it or not. [This is why it is so important to know yourself and find the right investing path for you. There are many path to investing success and there is no point travelling down the value path if it is not in your genes.]

Everyone appreciates a bargain, but when markets are going down, most people over react and get scared. "My stock is going down, what am I going to do?" People are happy to get a bargain when they go shopping, but get scared when the sharemarket puts companies on sale.

For me it is natural, for others it is fighting human nature. When you find out about value investing, it's like being let in on a little secret. A key insight is that stocks are fractional interests in businesses, not just prices of paper or ticks on a screen.  So what does it matter if the price goes down a little or gyrates?

Analysis is the easy part
Investing is the intersection of economics and psychology. Economics, the valuation is not hard. The psychology takes experience and a long time to learn, it is the harder part.

What is the right psychological make-up.

• Be patient and disciplined.
• Don't be greedy. Greed and leverage caused financial blow-ups.
• Balance arrogance and humility. Arrogant to buy when others are selling. You're saying I know more than everyone else, but you need the humility to understand you might be wrong.

Warren Buffett evolved through three phases (maybe even a fourth).

1. Buying cigar butts and getting the last few puffs for free.
2. Buying good companies at great prices.
3. Buying great companies at so so prices.
4. Buying weird securities from crappy businesses at better than market prices. For example Buffett's recent purchase of Bank of America special preferred stock .

Klarman thinks he's still in phase one, but believes that a great phase to be stuck  in.

I think Buffett is a better investor than me, because he has a better eye for great businesses.

Don't focus on daily price gyrations
I don't have a Bloomberg on my desk. I spends my time thinking big thoughts.

Liking bad times
We are making medium to long term investments. 3-5 years or longer. We are only interested in the gyrations so we can buy things cheaper. We provide liquidity when people want to sell things in a hurry. Our rhythm is opposite most of the market rhythms.

Little guys get pulled in at exactly the wrong time, when the market is going higher and higher.

Be comfortable holding cash.

Is there any philosophy of timing?
Buying is easier, selling is hard. You can never know how bigger bargain you'll get tomorrow. Try to leave more money to buy more. The dilemma is not figuring out what something is worth today, but finding out that the value is worth less tomorrow. All of a sudden a dollar is no longer worth a dollar; perhaps it is now worth $0.50.

Getting into bed with bad people
A lot of stocks are cheap for a reason. For example, management raping and pillaging a company; overpaying themselves, giving themselves free stock or options and hiring their brother-in-law.

A new value investor might think a stock is cheap fundamentally, but there is usually a reason why it is cheap and that's often poor management.

Good management adds value.

Look at the management of a company. For example, perhaps the management is looking at their compensation packages, and not looking out for the shareholder.

Investment Industry
Put the clients first. Then you'll do great. Relative performance and short term thinking is bad for investors. If someone said, "Seth makes me money by the end of the year." Klarman would tell them to talk to someone else.

Pressures are so short term. Impossible to know where things will trade in a few months or even one year. Look 5-10 years out.

Investment industry adds no value. It matches the market as it is the market.

The post Value investing wisdom with a margin of safety appeared first on The Motley Fool Australia.

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Chocolate, chips and cakes are all good in small doses. However, too much of a good thing can be dangerous — for your waistline at the very least.

What's true for junk food is also true for diversification. Small amounts of each can be beneficial, but go too far and you'll wind up feeling bloated.

A recent Take Stock newsletter inspired Eva to ask the following question about portfolio construction.

Do you recommend a max number of shares a person should hold in their portfolio? Over the years I have accumulated about eleven, a few I have got from companies splitting up etc. But now as a dedicated Fool reader I wish to acquire some of your suggestions. Please help; can someone have too many small holdings?

The short answer to Eva's question is there is no right number of companies to hold in a portfolio. But keep reading, as there is a right number for you. By the end of this article I hope you have enough information to know why you should diversify and what the right number of companies is for you.

How many is enough
We believe in building a diversified portfolio, much like Walter Schloss, who generated astounding annual returns during his lifetime and held nearly 1,000 securities.

We need not own that many shares, but a diversified portfolio protects us from the inevitable sharemarket blips — and allows us to sleep well at night.

As the following chart shows, diversification  can be achieved with as few as eight shares, and its benefit is generally exhausted by the time a portfolio contains 30 shares. The maximum number of companies an individual investor should own is around 50, though most investors should stick to under 30 companies. But remember, as Walter Schloss demonstrated, there is no right answer to the maximum number.

While diversification is good for some portfolios, it can be wrong for others. The trick is to learn how to properly diversify for your situation and tolerance to risk. Avoiding an oversimplified approach to spreading investments thinly gives investors a better chance to beat the market.

Concentrate to accumulate, diversify to protect.
For a retiree living off their investments, diversification is a great idea. But a young investor aiming to trounce the market, may be best served by concentrating their investments as wide diversification is the surest way to guarantee average performance.

So retirees, who also have more time to monitor their investments, should consider 30 or more shares, while young investors aiming to shoot the lights out should own less than 20.

To paraphrase Buffett. The stock market is a no-called-strike game. You don't have to swing at everything — you can wait for your pitch.

The more you swing your bat the more likely you'll achieve average returns. Each swing forms a tiny part of diversification, and diversification is the surest way to achieve average returns. Not that there is anything wrong with average returns.

Diworsification
Peter Lynch coined the phrase diworsification in the investing classic One Up On Wall Street. Lynch was referring to companies who attempted to diversify their business, but in doing so dragged down their overall returns. Individual investors can make the same mistake.

The best way to guard against diworsification is to compare potential additions to your portfolio to your existing holdings. If the new company does not stack up against existing holding then it should not be included.

Pulling out the flowers
I'll turn to Lynch again for another mistake investors can make in the name of diversification. One of the biggest mistakes investors make is cutting back on their winners that have grown to a large portion of their portfolio. This re-balancing can actually take money out of your best stocks and spread it in more mediocre places. As Lynch said that's pulling out your flowers and watering your weeds.

Think about the risk you own
While it may seem obvious that you should diversify to mitigate risks, many investors focus too much on the number of companies they hold, rather than the risks they hold. Perhaps I too am guilty of focusing too heavily on the numbers in this article. So let's address that.

Investors should diversify to remove what are called diversifiable risks. That is, risks unique to individual companies, industries, asset classes and so on. Rather than think about the number of companies you own it is better to think about the risks you own.

As hedge fund manager John Paulson found out this year with his oversized bets on the banking sector, it doesn't matter how many companies you own, if your investments are all exposed to the same risks you may get bitten on the butt.

For example, a portfolio of ANZ Banking Group Limited (ASX: ANZ), Westpac Banking Corporation (ASX: WBC), BHP Billiton Ltd. (ASX: BHP) and Rio Tinto Ltd. (ASX: RIO) is exposed to similar risks. All four companies are exposed to a European collapses and/or China slow-down.

The trick is find companies that have different risks. For example if you replaced ANZ with Telstra Corporation Limited (ASX: TLS), you've started to diversify your risks. Though remember you're not removing risk, you're simply swapping one set of risks for another. The trick is to find risks that won't all come home to roost at once.

Foolish Bottom-line
Having a well-diversified portfolio will help you avoid some of the biggest bumps the financial markets throw your way and will let you sleep better at night. Remember, though, that you can't remove market risk and the calming impact of diversification works both ways — which will sometimes leave you disappointed.

Are you looking for more quality stock ideas to diversify your portfolio? Motley Fool  readers can click here to request a new free report titled The Motley Fool's Top Stock For 2012.

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Now is a good time to trade up to better quality companies.

Speaking of which,  Thorn Group Limited reported excellent half year results on Tuesday. The market was impressed by the revenue and profit growth and rewarded shareholders with a 7.5 cents or 4.6 per cent gain in a falling market.

Revenue grew at 20% while profit did even better, leaping 30%. The operating leverage in Thorn's business model continues to propel earnings growth faster than revenue growth.

Thorn's ability to perform well under challenging market conditions demonstrates the strength of its long-term recurring revenue streams.

The real long term reward for shareholders will be in the resumption of a steadily rising dividend stream. This half's 13 per cent increase in the dividend is a great start.

I reiterate what I said back in October when I put Thorn on our radar.

Thorn is a well-managed company [still] available at a good discount. It deserves a place on our radar. At the very least Thorn should be compared to your existing holdings.

If you are looking for more stocks on our radar, readers need look no further than The Motley Fool's Top Stock For 2012. Click here now to request this special report, while it's still free and available.

Motley Fool Investment Analyst Dean Morel does not have an interest in Thorn Group. The Motley Fool has a tough disclosure policy.

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SeLoger.com the privately held French property portal company paid $1.05 per share. The $12.6m purchase increased SeLodger's holding by almost 7 per cent, from 9.4% to 16.1%.

IProperty Group's founders, Lucas Elliot and Patrick Grove, still own 41 million shares, valued at just over $43 million via their Malaysian based company Catcha Group.

Despite being the number one property portal in Asia, iProperty Group remains a loss making company. In its most recent quarter this fledging company burnt through $2 million in cash. That leaves a mere $6.5 million of cash on the balance sheet.

To be fair, the cash burn rate is not as bad as it seems at first glance. Around half of the cash was used in the acquisition of PT Web Marketing.

Disclosure: Dean Morel is long iProperty Group, but recommends you do what he says rather than what he does. Investing in loss making companies is highly speculative and Dean recommends waiting for earnings to appear prior to investing.

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We awoke to Westpac Banking Corporation's (ASX: WBC) senior economist James Shugg's somewhat pessimistic view of overnight events in Europe…

"Look, I'm really worried.  I think November 9th is going to be remembered as the day Italy dragged Europe into a very deep recession and the world couldn't escape from it…this is serious stuff."

Happy Thursday to you too James.

Fear is back, with a vengeance
Wall Street crashed over 3.5 per cent. The VIX, otherwise known as the fear index, soared over 30 per cent. The Aussie dollar slumped back towards parity. Even gold, the so-called safe haven, fell, although admittedly its falls were relatively modest.

If you're a glass half-empty person, it's a red-letter day for you.

As well as James Shugg, we had International Monetary Fund Managing Director Christine Lagarde warning of the risk of a "lost decade" for the global economy unless nations act together to counter threats to growth.

"It's just like a scary movie as it never ends," said Keith Wirtz on Bloomberg. "The overarching problem is that most of the economies in Europe can't sustain the size of their governments. We're going to have this headache for a long time to come."

(As an aside, if you are worried about the market crash, you might want to first check out our new free report, Read This Before The Market Crashes. It could save you hours of heartache, and thousands of dollars. Click here to request your report now, whilst it's still free and available.)

Throwing the baby out
In such an environment, investors can forget all about company fundamentals. The baby gets thrown out with the bathwater.

As well as the usual suspects, like Fortescue Metals Group (ASX: FMG) and Iluka Resources Limited (ASX: ILU), other commodity stocks are taking it on the chin, with Rio Tinto Limited (ASX: RIO), Oil Search Limited (ASX: OSH) and Woodside Petroleum Limited (ASX: WPL) all down over 3 per cent in morning trade.

It's at moments like these, when investors all around us are in danger of losing their heads, that we throw things over to The Motley Fool's Investment Analyst Dean Morel.

In almost 25 years of active investing, he's seen this sort of stuff before. Many times before. Dean's cool, calm and collected thinking is exactly what's missing from much of the mainstream media. 'Staying calm' doesn't sell many newspapers.

Over to Dean, who naturally enough, sees opportunities in such a chaotic market…

Volatility is our friend
The most important idea to remember, or better yet believe and embrace, is that a volatile market is our friend. As lifelong investors it is important to love volatility and to seize the opportunities it throws our way.

Sharemarkets are for the most part rational. That means equities are fairly priced most of the time and it is difficult to find bargains — though that never stops us from digging deep and trying our hardest to find those hidden gems.

When bearish volatility, caused by emotions and a lack of reason, leads humans to herd, sharemarkets become irrational and oversold. That irrationality allows investors who are able to control their emotions and act in a calm, balanced manner, to take advantage of the many opportunities the market throws up.

In short, volatile markets make our job as investors easier as many more opportunities are thrown our way. The challenge is to control our emotions when others around us are flailing and responding manically to the market's noise.

How to check your emotions at the door
A reader recently asked us what the definition of long-term was. Is it 3-5 years, 5-7 years or longer? I see no point in arbitrarily assigning a specific number of years to the phrase long-term.  To me long term means the rest of my life. I will be an investor for the rest of my life, and I invest accordingly.

I realise that may not be very helpful to everyone, so perhaps think about long-term in the following way. Your starting point for long-term should be the number of years until your retirement. For most people that is what they should be investing for and that should be their long- term. Any money that you require in the next 3-5 years should be in cash or equivalents.

Once you start thinking about long term in that mindset you'll hopefully start to cheer falling markets. As I've said before, falling markets caused by irrational investors lets us buy Louis Roederer Cristal – très  yummy expensive champagne – for the price of cheap sparkling wine.

Thinking about your investing and the long-term in this way should let you check your emotions at the door and allow you to buy shares when volatility throws opportunities your way.

Yeah yeah, but how about an actionable plan?
OK. One of the easiest ways to remove your emotions is to invest regularly. By investing regularly, say every month, you'll be less worried about what the market is doing.

So think very long-term, invest regularly and try to be opportunistic when fear pervades the market.

There is no need to make big decisions. You don't  need to be fully invested in, or totally out of the market. Gradually building positions in the best companies while maintaining a cash cushion will make investing easier and less stressful.

All of this should be even easier for newer investors. When you're young and have a limited amount of money invested, the biggest contributor to your long term wealth and financial independence is you, not the sharemarket. The amount you save and invest every year will most likely dwarf your sharemarket returns. So save hard and invest in yourself as well as in equities.

Where should I look for bargains?
Right now two sectors that appear attractive are asset managers and retail.

Within retail, I recommend looking beyond department stores like David Jones Ltd. (ASX: DJS) and Myer Holdings Limited (ASX: MYR), and big box retailers like Harvey Norman Holdings Ltd. (ASX: HVN). They appear like value traps to me.

When digging through sectors for bargains, it's useful to have a yardstick to compare companies against. For asset managers, I compare companies to Hunter Hall International Ltd. (ASX: HHL) and Platinum Asset Management (ASX: PTM). In the retail sector OrotonGroup Ltd. (ASX: ORL) and JB Hi‑Fi Limited (ASX: JBH) are my yardsticks.

I'm not suggesting you buy those specific shares today, but they are on my radar, as are other asset managers and retailers. Our forthcoming subscription-only newsletter will elaborate further over the coming months. As ever, we'll keep you posted.

Let's get rational, rational. I wanna get rational.
I hope you understand my point of view.

Sorry to have gone all Olive Newton-John on you. I don't know what came over me!

As we're talking about rational markets, now may be a good time to explain why I like, and am long, Telstra Corporation Limited (ASX: TLS).

Ever since the Gospel of Matthew and no doubt before, humans have understood that investment returns are a reward for talking risk. Unfortunately modern finance mistakenly made volatility synonymous for risk.

Risk is better defined as the probability of a permanent loss of capital, or as uncertainty. But how ever risk is defined, Telstra has an attractive risk to reward profile.

If fear wins the day and global stock markets unravel, Telstra will very likely outperform the broader market. That is, its price will go down less. Telstra is also less volatile than the market. At the same time Telstra offers one of the highest yields in the market and that yield is close to certain for the next two years.

The best of both worlds
So Telstra offers a considerably better direct return to shareholders than the broader market, and has less risk to the downside. Investors are being overcompensated for the risk they are taking. Theoretically impossible, but there it is!

The main risk to Telstra is that if the world sorts out its current problems and sharemarkets take off, Telstra's share price will under-perform a rising market. But as Telstra has a gross yield of almost 13%, I can certainly live with underperforming a rising market.

If you are looking for another stock you can bet on now, readers need look no further than The Motley Fool's Top Stock For 2012. Click here now to request this special report, while it's still free and available.

Dean Morel has positions in Telstra and Hunter Hall. Bruce Jackson has an interest in Telstra, Westpac, ANZ and NAB.

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The post One ASX share to buy in today's irrational sharemarket appeared first on The Motley Fool Australia.

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Trading in Alchemia Ltd. (ASX: ACL) was halted this morning. A capital raising announcement is likely, as it is short of cash and burning through it fast. Alchemia won't make it to profitability without a cash injection.

From the horse's mouth…

Alchemia is seeking the trading halt to assist in managing its disclosure obligations in relation to the proposed capital raising and maintaining an orderly market in the trading of the company's shares and to ensure that trading does not take place in an uninformed market.

The Phase III trial of Alchemia's oncology program, HA-Irinotecan, for the treatment of colorectal cancer, has started recruiting patients so cash burn will skyrocket again.

One key to valuing Alchemia is a good estimation of revenue from its approved generic drug, Fondaparinux.

Generics typically achieve a 30% market share. In late October Alchemia announced that since launching a few months ago Fondaparinux has gained a market share of around 10%. Alchemia expects manufacturing volume and market share to increase in the coming months.

Profits from Fondaparinux will begin rolling in next year, after its partner Dr Reddy's has recouped development and registration costs.

Alchemia is a story worth digging in to. After peaking at 86 cents in July, it last traded at 27.5 cents and had a market cap of $53 million.

Thanks to Ron, for bringing this story to our attention.

Dean Morel is The Motley Fool's Investment Analyst. Dean has no position in Alchemia. The Motley Fool's purpose is to educate, amuse and enrich investors. Readers can click here for a free Motley Fool report titled Read This Before The Next Market Crash. 

The post Alchemia Ltd. screams to a halt appeared first on The Motley Fool Australia.

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