Well, consider this. Former world chess champion Vladimir Kramnik once stated that the game of chess is really about who makes the least mistakes in a game. The Italian soccer team, a four-time World Cup champion, is well known for their defensive play style. If you watch tennis, consider the impact of unforced errors on the results of any match.

To quote superinvestor Charlie Munger, "Warren [Buffett] and I are better at tuning out the standard stupidities. We've left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error".

Seven deadly sins of investing

There are many such errors, all of them avoidable if you know what to watch for. I like to classify them according to the seven deadly sins:

1. Lust: Addiction to short-term price action; using the share price as proxy for value
2. Gluttony: Overconcentration in favourite sector/industry; lack of diversification
3. Greed: Hunting for short-term profits in price swings
4. Sloth: Buying on "tips" with no research; more widely, lack of knowledge and lack of drive to pursue more knowledge
5. Wrath: Making decisions in anger, usually because share prices won't behave the way you expect them to
6. Envy: Chasing hot stocks in hot sectors that everyone is making heaps of money on
7. Pride: You made 1,000% last year, therefore you are a genius, nothing can go wrong, just double down

Process of elimination

Over long periods of time, the share market reflects the steady improvement in human endeavour. Due to competitive forces, some companies will prosper but many will perish. To paraphrase Sherlock Holmes, once you remove the losers, whatever remains, no matter how improbable, must be the winners.

Foolish bottom line

There are over 2,000 listed securities on the ASX alone. The vast majority of them should be on your "DO NOT BUY" list. Shares with lots of debt, such as Fortescue Limited (ASX: FMG) and Slater & Gordon (ASX: SGH) present clear and present dangers. So are shares presently selling promises in various stages of pre-revenue or pre-profits. For those companies you decide to own, keeping your emotions in check and avoiding the 7 deadly sins will go a long way toward increasing your returns.

Looking to add a little growth to your portfolio? We've just released our "Top 2 Biotechs To Buy Now." These two companies — each with potential blockbuster drugs in the pipeline — could create untold wealth for early investors. Will you be one of them? Click here for this brand-new FREE report.

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Motley Fool contributor Peter Phan does not own any of the shares listed in this article. 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 7 deadly sins of investing appeared first on The Motley Fool Australia.

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Once again, investors were presented with a rock solid balance sheet:

It is most remarkable that the balance sheet remains a Fort Knox even after payment of $80m as a return of capital in January 2012, and a further payment of $15m as a dividend in May 2012.

UOS also disclosed that it has entered into contracts to sell two of its investment properties.  Given that both sales are at prices above values carried on the balance sheet, shareholders can have more confidence on the valuation of the investment properties held on the balance sheet.  After all, the market capitalisation of UOS is only AUD$428m.  The Net Tangible Asset per share for UOS is slightly under 95 cents, and these shares are available for purchase at less than half of that value.

If you're in the market for some high yielding ASX shares, look no further than our Secure Your Future with 3 Rock-Solid Dividend Stocks report. In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

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Motley Fool contributor Peter Phan owns shares in UOS. 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). Authorised by Bruce Jackson.

The post UOS racks up another strong result appeared first on The Motley Fool Australia.

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The positives from the latest results are:

1. Sales increased 16.7% to 62.3m
2. EBIT improved by 35% to 11 m
3. EBIT/Sales improved to 17.4%
4. Operating Cashflow improved 23% to 7.9m
5. Debt decreased by 4m from to  19 m to 15 m with financing costs reduced from 1.2m to 794k.

The negatives for the latest results are:

1. Faster growth in receivables than payables;
2. Lack of expected dividend;
3. Decline in revenue from panel repairs segment.

Management has previously stated its aim to focus on current businesses, to ensure each business is profitable on its own, to reduce debt quickly, and to utilise its franking credits.  Apart from the lack of dividend, this latest report confirms that they are delivering in excess of what they have promised.

We have previously stated our hope that the lack of exciting news updates and the absence of a half yearly dividend will cause impatient punters to dump their stock at lower prices.  We did not get the very low prices hoped for, but a fair price was available for over 6 months for diligent investors.

AMA's market capitalisation is about $56m. Business operations generate cash of about $7.9m per year, and accrued losses will ensure that no tax is payable for at least 3 more years.  Apart from the previous steady as she goes mantra, management has now demonstrated that the businesses are capable of growth.  At current prices, investors are getting the growth option for free.

If you're in the market for some high yielding ASX shares, look no further than our "Secure Your Future with 3 Rock-Solid Dividend Stocks" report. In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

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Motley Fool contributor Peter Phan owns shares in AMA. 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). Authorised by Bruce Jackson.

The post AMA: Positives behind the headlines appeared first on The Motley Fool Australia.

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Low Cashflow

Operating cashflow deteriorated to $15m, and cash from investing activities chewed up a massive $70m.  Finance costs totals $6.8m for the full year.  Yet curiously enough, despite this cashflow situation, Slater & Gordon will pay significant dividends again.  The following is a table summarising the cashflow situation for the last five years.

Increasing Debt

Once again, the latest cashflow deficiency was plugged by an increase in borrowings.  The total liabilities of are now $282m.  On the asset side of the balance sheet, there is $128m in accounts receivables, and $246 m comprising "Work-In-Progress".  With $15m of cashflow to cover $6.8m in finance costs, there really is not much room for error, and shareholders will hope that the costs of funding do not spiral out of control, and that debt rollover takes place smoothly.

ROE and ROIC versus Money in the bank

As at 30 June 2012, Slater & Gordon had total assets of $525m and net assets/equity of $243m. It made $15m in net profits.  This is about 2.85% per annum return on total assets, and 6.2% per annum return on equity.  At these rates of return, shareholders are not compensated for the additional risks involved.  Returns need to be at least double this to qualify as investment grade.

Foolish bottom line

Slater & Gordon has made its way into the good graces of Mr Market in the last six months.  Current prices imply a market valuation of about $320m for SGH, which is an increase of 28% in the last six months. We would prefer to watch this from a safe distance.

If you're in the market for some high yielding ASX shares, look no further than our "Secure Your Future with 3 Rock-Solid Dividend Stocks" report. In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

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Motley Fool writer/analyst Peter Phan doesn't own shares in Slater & Gordon. 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). Authorised by Bruce Jackson.

The post Slater & Gordon: A faintly familiar story continues appeared first on The Motley Fool Australia.

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In our previous articles, we set expectations for IMF to achieve an average net profit per year of at least $24m.  This has been easily met, but dividends of 10 cents fell short of our expected 15 cents per share. We also estimated that after the Centro payback, IMF's cash would exceed $100m.  The balance sheet shows $130m in current assets, before payment of dividend.

As at 30 June 2012, IMF had a case investment portfolio of $1.2b.   This does not include the Wyvenhoe Case and the major portion of the Banks Fees Case.  Other important figures include the amount invested in cases being $66m. and book value increasing to $111m.

Foolish takeaway

The current market capitalisation of IMF at $1.65 is $200m.  The current assets less convertible notes liability is $95m, which accounts for nearly half the market capitalisation.  The implication is that the current case portfolio is worth only $105m.  IMF has already spent $66m, and based on its past track record, we expect this to generate at least $200m ($3 for every $1 spent) over the next 3 years.

In summary, IMF's financial performance has easily exceeded our expectations, and the balance sheet has improved.

If you're in the market for some high yielding ASX shares, look no further than our Secure Your Future with 3 Rock-Solid Dividend Stocks report. In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

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Motley Fool contributor Peter Phan owns shares in IMF. 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). Authorised by Bruce Jackson.

The post IMF exceeds expectations appeared first on The Motley Fool Australia.

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It is convenient for UOS shareholders that its 66% owned subsidiary, UOADB, is listed on the Malaysian stock exchange and is required to file quarterly updates. The most recent was on 30 May 2012.

Basically, UOADB once again presented a rock-solid balance sheet, with an impressive pipeline of developments worth about MYR$1.5 billion. Debt levels are minimal, and equity as at 31 March 2012 is about MYR$1,888,000,000.  At current exchange rates, this equity is worth about AUD$600m.

UOS' 66% holding is therefore worth about AUD$400m, which is roughly its market capitalisation at current prices. On top of this, we estimated that UOS holds at least AUD$250m worth of net assets, together with its 46% stake in UOA REIT worth about $90m. The value of these assets will continue to go up as the Australian dollar continues its decline.

The Foolish bottom line

Share market prices can stay irrational for a long time, but not forever.  Investors should take advantage of such irrational pricing whenever possible. UOS is a good starting point for investors to apply the value investing principles of Ben Graham, Philip Fisher and Warren Buffett.

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Fool contributor Peter Phan owns shares in UOS. Take Stock is The Motley Fool Australia'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 Update: United Overseas Australia appeared first on The Motley Fool Australia.

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My caveat is that we also have to apply common sense.  After all, there are two certainties in life, namely, death and taxes.

Below are some headlines taken from the Business Section of the Sydney Morning Herald this week, and the implications for a five year investing timeframe.

New twist in battle

Gina Rinehart's children have been granted access to their trust.  There is a chance the outcome may have a spillover effect in relation to the iron ore industry in WA. However, this factor pales in significance to the issues we have canvassed in earlier articles concerning Fortescue Limited (ASX: FMG).

Shares slide on Europe worries

This is certainly newsworthy, but we shouldn't let daily news sway our investing decisions. That said, any falls can be good times to look for bargains that the market offers in times of pessimism.

Billabong dumps boss

To holders of Billabong Limited (ASX: BBG), this is important long term news, given the announcement of a new CEO. Credentials, track record and shareholder-orientation are all important considerations. If she can replicate the success  Sally MacDonald had with Oroton Ltd (ASX: ORL), shareholders will be richly rewarded for their patience.

Gillard vows to cut company tax, sometime

Government policy can have a long term impact on your investments.  Be aware that the impact usually arises from totally unintended consequences. A reduction in the the corporate tax rate should boost corporate cash flow and profits, all things being equal.  The effect compounded over 5 to 10 years can be significant.

New life ahead for zombie Gunns

A very informative and interesting article.  Mr Manning has done most of the legwork for anyone interested in Gunns Limited (ASX: GNS).

Management reshuffle at David Jones

We have covered retail in several articles. This latest news from David Jones Limited (ASX: DJS) means more disruption and raises more questions concerning management's ability. In retailing, management is all important. Holders of David Jones have to decide whether the current management is capable of guiding the company through major structural changes affecting the industry.

Foolish Takeaway

The application of a long term view to news items will have a two-fold beneficial effect on investors.  The first effect is the prevention of knee-jerk reactions and short-termism.  The second effect is clarity of thought and greater insight on the investing environment, fostering better decision-making.

If your looking for dividend stocks to add to your portfolio, look no further than "Secure Your Future with 3 Rock-Solid Dividend Stocks". In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited 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). Authorised by Bruce Jackson.

The post Taking the long view appeared first on The Motley Fool Australia.

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The central premise of IMF's business model is to gain $3 for every $1 spent.  This is reaffirmed in the Centro settlement, with IMF spending $18m and getting a return of $60m.

Meeting expectations

In our previous articles, we set expectations for IMF to achieve an average net profit per year of at least $24m.  If the Centro settlement is approved and the results recognised in this financial year, then IMF will easily achieve our net profit expectations.  Even if Centro is not recognised this financial year, the actual results are expected to come close to our expectations.

I have also estimated that after the Centro payback, IMF's cash will exceed $100m.  This is more than sufficient to pay a dividend of at least 10 to 15 cents per share.  If this happens, then our dividend expectations on IMF are fulfilled.

Case Portfolio

On 3 May 2012, IMF published its investment update with $1.535b case investment portfolio, of which $325m was expected to complete by June 2012.  If we make a conservative assumption that the whole of $325m relates to Centro, this means that the current case investment portfolio stands at $1.21b.

We know await the results of further cases.  The significant ones include Collyer Bristow, the Bank Fees case and Wyvenhoe.

Foolish takeaway

The current market capitalisation of IMF at $1.45 is $180m.  The downside is more than sufficiently covered by expected cash on hand and its remaining cash portfolio.  The upside is an average of 30% per year for the next 5 years.

If your looking for dividend stocks to add to your portfolio, look no further than "Secure Your Future with 3 Rock-Solid Dividend Stocks". In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

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Fool contributor Peter Phan owns shares in IMF (Australia) Limited. 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). Authorised by Bruce Jackson.

The post Centro settlement good news for IMF appeared first on The Motley Fool Australia.

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JB Hi-Fi Limited (ASX: JBH) announced on 27 April 2012 that even though its sales forecast remains on track, difficult trading conditions have impacted its margins, and consequently, its full year profit will now be lower than expected.

Even though the share price has dropped, the relatively mild share price reaction (especially when compared to the shellacking handed to Seven West Media (ASX: SWM) yesterday) perhaps indicates that the market expected — or at least wasn't surprised by — the result.

We certainly expected it, with my colleague Scott Phillips' first article on JB Hi-Fi here, and more recently here, concerning the potential impact of Amazon's entry into Australia.

JB's CEO has put on a brave face, saying that even though he expects discounting to continue, he does not believe this is a long-term structural change.  He also believes the company may benefit from consolidation in the current environment, and that it will react aggressively to maintain market leadership.

We disagree on both counts.

Misplaced Optimism

Firstly, JB Hi-Fi is facing headwinds in the continued drift of retail online. It is widely accepted that adoption of online technology in Australia is somewhat behind the USA.  As a comparison, by some estimates online retail in the US makes up 20% of total sales, but is only approaching 10% in Australia. This indicates more pain on the way for our retailers.

Secondly, the major 'structural'" change in our retail market involves the collapse of differential pricing.  Differential pricing by manufacturers and suppliers is the main reason why Australians pay more for nearly everything such as cars, books, CDs, clothing, etc. For example, a pair of Levis 501s sells for US$40, and yet retails in Australia for AUD$100.  While there may be some difference in retail margins, wholesale prices to Australia are consistently higher, resulting in higher prices to Australian consumers.

The potential impending entry of Amazon (in addition to existing players such as Kogan) is likely to result in a change in differential pricing practices insofar as consumer electronics are concerned.  This blatant price gouging is unlikely to be condoned by Jeff Bezos, and he can back this up with the massive purchasing power available to Amazon.  Before you know it, JB Hi-Fi will no longer be perceived as having the lowest prices, and this will be the death-knell to its business model.

Of course, other retailers stand to lose in that environment. Clearly in the path of the advancing forces of online retail are Harvey Norman (ASX: HVN), Woolworths' (ASX: WOW) Big W, Wesfarmers' (ASX: WES) K-mart and the department store duo David Jones (ASX: DJS) and Myer (ASX: MYR).

JB Hi-Fi will continue to face relentless assaults on its business model, in a similar vein to those confronting US electronics retailer Best Buy. We believe there are strong parallels between Best Buy and JB Hi-Fi, and the latter's fate may be foretold accordingly.

With the expansion of online retail in Australia (and with the seismic shift of Amazon perhaps not far away), investors must surely question whether JB Hi-Fi will become, as many in the US jokingly refer to Best Buy, merely a showroom for products to be purchased on Amazon.

Foolish takeaway

The world of retail is moving predominantly towards services, or a blend of service/product, consumed on the spot. Perhaps consumers in the future will have to pay money for physical window shopping and physical browsing, with delivery of products being merely ancillary.  This may be wildly speculative, but it is difficult to imagine a scenario where JB Hi-Fi in its current form can remain relevant.

The ASX is already on the move in 2012, and Goldman Sachs experts recently said they reckon S&P/ASX 200 could top 5,000 next year. Read This Before The Coming Market Rally is a must-read for investors who don't want to miss out on the party. Click here now to request your free copy, before it's too late

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 Take Stock is The Motley Fool Australia'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 JB Hi-Fi: Best Buy or bye-bye? appeared first on The Motley Fool Australia.

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Fortescue Metals Group Limited (ASX: FMG) has been on the Foolish radar for a while.  We first covered in a controversial article on 24 October 2011 and a follow up on 15 February 2012, and highlighted the huge capital raising Fortescue was pursuing soon after.

The crux of our review was that based on analysis and comments from renowned hedge fund manager Jim Chanos, Fortescue exhibits a worrying number of signs of potentially being a value trap.

It was no surprise when it was reported today that Chanos is 'short' FMG.  This means that he has sold FMG shares, and expects to profit by buying back the same shares at a lower price if shares in the company fall.

A shopping list of concerns

Writing on the Fairfax website BusinessDay, Michael Evans reported that Chanos recently presented to a private investment forum, and was scathing of the company. Chanos reportedly called Fortescue shares a "value trap" and that shares will fall "materially".

As well as expressing concerns that the company has a "somewhat promotional management team", he expressed concern about Fortescue's business model, citing earnings before interest, tax and depreciation, or EBITDA, of $2.8b but with a capital expenditure program of $1.5b and increasing. Chanos also cited a balance sheet with more than $6b in debt — becoming even more concerning when any reversion to the mean for iron ore prices will dramatically impact FMG's ability to service its debt, and to maintain its capex program.

Not content to stop there, Jim Chanos noted his concerns including cost inflation in the Pilbara, shortages in staff and accommodation and the impact of the strong Australian currency to round out his 'bear' case on the company.

Lastly, Fortescue also runs the risk of being an architect of its own decline, with its capacity expansion playing a role in an oversupply of iron ore which would depress prices.

Litigious Company

Fortescue is certainly keeping its lawyers happy.  The well-publicised (and perhaps somewhat promotional) stoush with Canberra on the mining tax — replete with the threat of a High Court challenge — is just one of many high profile court cases making the headlines.

These cases include an action from ASIC alleging misleading and lack of disclosure by Fortescue, shipping disputes a few years back, and a current dispute with Leucadia.

In addition to these court cases, we are also well acquainted with Andrew Forrest's very public stoush with Wayne Swan.

In general, we attempt to keep away from litigious companies, as more often than not, legal disputes usually take up a significant proportion of management time and resources better spent on running the business.  We also prefer management with the consistent ability to settle disputes without resort to the courts.

Unless, of course, such companies are called IMF Australia Limited (ASX:IMF).

Foolish takeaway

Aside from his views on Fortescue, we found it very interesting that Chanos is 'long' BHP Billiton (ASX: BHP), meaning that he has bought BHP shares in the expectation that BHP will continue to do well.  In his own words: "BHP is a much more stable company. They see the cycle more than others do, they've been through it more than others have and it's been an interesting hedge for those that play it that way."

The ASX is already on the move in 2012, and Goldman Sachs experts recently said they reckon S&P/ASX 200 could top 5,000 next year. Read This Before The Coming Market Rally is a must-read for investors who don't want to miss out on the party. Click here now to request your free copy, before it's too late

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Motley Fool contributor Peter Phan owns shares in IMF. Take Stock is The Motley Fool Australia'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 Fortescue: Coming up short? appeared first on The Motley Fool Australia.

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The basic idea of Long News is to focus on news stories that might still be relevant fifty years, one hundred years, even ten thousand years from now.  You can find more information and examples on the Long Now Foundation blog.

We do not have investing ambitions with 10,000 year horizons.  However, we do believe that the basic idea of Long News can be usefully applied to investing.

Every time we read a news item, article, blog, tweet, email, or any other form of information, we should ask ourselves whether this piece of news will still be important in 5 to 10 years time.

Below is an example of headlines taken from the Business Section of the Sydney Morning Herald on 20th April 2012:

Woolies share falls- third quarter sales, slowest rate of growth in a decade

Markets Live: Downgrades weigh on shares

Super bounces back as markets rise

Lynas hit by Malaysian plant delays

Wet weather eating into Boral's profits

Rinehart secrecy bid thwarted

Terms of trade soften as export prices plunge

Packer buys Foster's former wine arm stake

Maritime union, Patrick settle pay dispute

BHP last aboard China exchange

How many of the above news item will be important to investors in 5 years? Sure, the articles may be useful for employees, customers, suppliers and other interested parties for whom the short term does have relevance – for jobs, sales orders and deliveries, for example. For investors, they are at best irrelevant, and at worst a distraction that leads to poorer investment decisions

We aim to invest for the long term – eschewing the difficult (and arguably impossible) task of reliably attempting to profit from trading on short-term news and price movements.

The last news item may be of some relevance in the long term, and will prompt readers to consider the impact of a trading network controlled by China. Surely a much better intellectual exercise than to worry about short term wet weather fluctuations on Boral.

Foolish take-away

By taking a moment to reflect, we avoid our instinctive bias towards hasty action.  The 'do something' part of all of us is the great destroyer of investing profits, to the benefit of brokers and the tax man.  We reduce stress in our lives when we can quickly discard or ignore irrelevant information.  An uncluttered mind fosters better decision-making, not just in investing, but in our lives generally.

If you're looking for income from your shares, look no further than "Secure Your Future with 3 Rock-Solid Dividend Stocks". In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

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Motley Fool contributor Peter Phan does not own any of the shares listed in this article. 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.

The post Get rich by taking things slowly appeared first on The Motley Fool Australia.

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The history of disasters suggest that any investor betting on successful overseas expansions by ASX listed companies is engaging in a low probability bet.  Having said that, the bounty that comes with success is mouth-watering.   Just ask any long-term Flight Centre Limited (ASX: FLT) shareholder.

Shareholders of the major ASX listed banks must now consider the exact same issue. Having reached saturation and with limited growth prospects in the domestic market, our big four banks are all looking towards further growth by expansion.  Rather than attempting to pick the winners, we suggest that investors should consider which of the banks embarking on expansion is least likely to destroy value.

Today, we examine and compare the strategies of Australia and New Zealand Banking Group (ANZ) and Commonwealth Bank of Australia (ASX: CBA).

ANZ – super-regional

ANZ CEO Mike Smith has been beating the Asian expansion drum for the last 4 years.  The author is puzzled as to how a team of ex-HSBC executives running an Australian bank can succeed in the tough Asian market, especially since the venerable HSBC has continually found it tough in China.

To identify the magic ANZ sauce, we looked at the ANZ's CEO Address of 16 Dec 2011:

"This reflects our strong belief that a portfolio diversified by geography, by customer segment and by product will deliver differentiated revenue growth and long-term shareholder value –growth and value that are simply not available with a domestic only strategy."

The message here appears to be that having many fingers in many pies is better than having one full hand in a single pie.

We then looked at the Group Strategy Update published on 18 March 2012.  ANZ's strategy is to capture a part of the growing Asian market and become a leading super-regional bank.  The update referenced a "consistent coherent strategy –connectivity driving competitive advantage."  There is a mention of cross-border customer focus, technology and operations hubs, "throw and catch" capability and culture, and a whole lot of other fancy ideas.

I concluded that there will always be things which I cannot understand.  My best attempt at a plain English translation is this:

"We believe very strongly that Asia is where the big money is to be made.  Asia is growing strongly whilst the West is going backwards.  We do not want to stay in Australia only.  We want to go into all these Asian countries and become a super regional bank with a presence everywhere. Our strength is in having a tentacle in every part of Asia- connectivity and cross-border."

CBA – a logical continuation

Commonwealth Bank published its Group Strategy Update on 19 April 2012. The heading is tellingly succinct- A Logical Continuation.  CBA identified its competitive edge in three areas – application of technology to financial services, customer focused culture and a strong balance sheet. CBA's strategy is to improve its competitive edge i.e. widening the moat.

By improving its competitive edge, CBA aims to grow the domestic retail market through identifying unmet needs and by improving productivity.  A recent example is its mobile payment app called Kaching.  Improving its competitive edge also underpins growth outside Australia, by transferring existing capabilities and value-adding.   CBA also emphasized "a disciplined approach" to mergers and acquisitions and a "focus" on return on equity.

The translation into plain English appears to be:

"We are good at technology, customer service and financial discipline.  We will continue to improve these areas. Some of our expertise can be used in markets outside Australia. We will not expand just for expansion's sake.  Anything we do must benefit shareholders financially, which requires a good return on shareholder capital."

Foolish take-away

Two different strategies – one loftier, the other less aggressive and perhaps with less upside (and less put at risk).  A (perhaps rhetorical) question: If management is unable to deliver a clear message to the investment community, what are the chances of management being able to deliver a clear message to its employees?

The mere fact that a strategy was communicated clearly does not guarantee that the strategy will work, or that the strategy will be executed in the manner as communicated.

However, a strategy that is not communicated clearly is not capable of being executed, much less being successful.

If you're looking for income from your shares, look no further than "Secure Your Future with 3 Rock-Solid Dividend Stocks". In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited 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 Asian expansion – the big bank edition appeared first on The Motley Fool Australia.

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The end result is a Momotaro made in Okayama, Japan which achieved a selling price of US$2000 per pair.

On the other end of the scale, the town of Xintang in Guangzhou, China, manufactures one out of every four pairs of jeans sold worldwide.   The end result is likely to be on the shelves of Premier Investment Limited's (ASX: PMV) Just Jeans selling for AUD$70.

Competitive Moat

These are illustrations of businesses with differing competitive advantages.  Okayama has turned a commodity into a brand.  The people in Xintang focus on producing as many jeans as cheaply as possible.

Just having a competitive advantage alone is insufficient.  A business must protect its competitive edge.  Japanese handmade denim may be overtaken by the winds of fashion, perhaps by handmade silk pants sewn by virgins in China.  The factories in Xintang with rising labor costs may be replaced by automated factories in Japan taking customised electronic orders from customers worldwide.

The ability of a business to defend its edge is its competitive moat.

The business environment is never static.  Every single day, moats are either narrowing or widening. Apple and Samsung do battle every day, just like Woolworths Limited (ASX: WOW) and Coles of Wesfarmers Limited (ASX: WES).

The challenge for investors is to be able to purchase, at a fair price, a business with a widening moat.

The inverse logic is deadly simple, if the moat ain't widening….

Overseas Expansion

My brief ruminations on the denim industry now bring us to the repeated attempts, both past and current, of businesses in Australia to expand overseas.  In particular, the current focus is on Insurance Australia Group (ASX: IAG) and Australia and New Zealand Banking Group's (ASX: ANZ) Asian forays.

In his excellent book, Competition Demystified, Bruce Greenwald postulates that competitive edges are usually local in nature.  Consider the fact that  Australia is isolated. There is very little common links between Australia and its neighbouring the Asian markets.

We have differing cultures, and our relative proximity is tempered by ocean divides.  This lack of homogeneity means that investors cannot expect rollout successes such as McDonald's or Starbucks in the USA. The success of any business expansion will rely heavily on the ability of its business model to cross-borders.

If history is any guide, it is obvious that success stories are far and few inbetween.  The notable success stories are Cochlear Limited (ASX: COH), CSL Limited (ASX: CSL) and Computershare Limited (ASX: CPU). In these cases, I would argue that the competitive edge of each of these companies is clear.

Let's consider the many significant failures in the past. National Australia Bank (ASX: NAB) is still losing money in the UK.  ANZ (ASX: ANZ) has had previous unsuccessful forays into India and Indonesia.  The Fosters Group disaster in China is only superceded by its next disaster in wine (with its Rosemount/Southcorp takeover.  Telstra Corporation Limited (ASX: TLS) lost millions and millions playing with Richard Li in Hong Kong.  In each of these cases,  I would also argue that the lack of competitive edge is clear. After all, are IAG and ANZ bringing anything unique into the Asian market? And if not, can they do the same thing already being done in Asia, but better?

Foolish Takeaway

Management who never listen to history is doomed to repeat it.  But investors do not have to. Just listen to Warren Buffett:

"There is no easier game than stocks.  But make sure you don't play too often."

If you're looking for income from your shares, look no further than "Secure Your Future with 3 Rock-Solid Dividend Stocks". In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

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IMF (Australia) Limited (ASX: IMF) was featured in our previous articles of 3 December 2012 and 28 February 2012. In both articles, we outlined and reiterated our expectations for IMF to achieve an average net profit per year of at least $24m, and to grow its investment in its case portfolio.

In the months since, IMF's share price has traded in a tight range, with the bottom range of prices flirting with yearly lows.  For daily watchers of share prices, this will be an unnecessarily nervous experience.

The central thesis underpinning this investment is the premise that IMF will continue to gain $3 for every $1 spent.  This was affirmed in the recent Centrex settlement.  Happily enough, on 10 April 2012, IMF once again reaffirmed our investment case with the announcement of a conditional settlement for the claim it funded against Transpacific Industries Group Ltd (TPI). This settlement will result in revenue of $13.1m and a profit of $10.5m.

From our investing experience, and contrary to popular investment advice disclaimers, whilst past performance is no guarantee of future performance, it is more often than not a reasonably reliable indicator, especially in the absence of evidence to the contrary.

Foolish take-away

Once again, our positive view of IMF remains unchanged. The lumpy and uncertain nature of earnings from its operation will create difficulties and uncertainties for analysts and investors. This will create volatility in the share price, which is where patient investors get the opportunities to make money.

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Fool contributor Peter Phan owns shares in IMF (Australia) Limited. 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.

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United Overseas Australia Limited (ASX: UOS) announced its full year result on 28 February 2012.

The profit result was heavily boosted by over $65m in unrealised gains.  The effect of this can be seen through the jump in the value of investment properties on the balance sheet. The investment property portfolio is underpinned by gross rental of $29m per annum.

A dividend of 1.5 cents per share was declared.

Solid balance sheet

Once again, investors were presented with a rock solid balance sheet:

A clearer picture

UOS' financial records include the full results of the company's 66% owned subsidiary, UOADB, on a fully consolidated basis.  UOADB is a public company listed on the Malaysian stock exchange.  Since UOADB reported its 4th quarter results on 24 February 2012, we can now compare the balance sheet of the two entities as at 31 December 2011, to try to get some idea of the nature of assets held purely by UOS.

Using a consistent exchange rate of 3:1 for the Malaysian Ringgit to Australian Dollar, we believe UOS parent holding company has assets and liabilities that look something like this:

*In January 2012, UOS paid about $80m as a capital return.  This would have reduced cash.

Sum of Total Assets

On top of these assets, we can easily calculate the value of UOS' public listed subsidiaries. UOS' 66% holding of UOADB at current market capitalisation is about $400m.  UOS' 46% holding of UOA REIT at current market capitalisation is about $90m.

Thus, the total sum of UOS' net assets and subsidiaries is a cool $890m, out of which about $200m is held as cash at head office.  The market capitalisation of UOS is about $470m. Subtracting cash held at head office, Mr Market is saying that UOS' investment properties and its public listed subsidiaries are worth a relatively small $350m on the ASX, even though it is worth close to double that amount on the Malaysian share market. Bear in mind that gross rental per year is now $29m, and to put this in perspective, the ratio of gross rental to market capitalisation of UOS is 6.17%.

The Foolish bottom line

The current share price of UOS, even after recent increases, contains a substantial margin of safety.  Investors are getting a portfolio of investment and development properties at half market values, and this portfolio is managed by a management team with a track record in excess of 20 years of delivering above average returns to shareholders.

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Fool contributor Peter Phan owns shares in UOS. 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.

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IMF (Australia) Limited (ASX: IMF) was featured in our previous article of 3 December 2011. In that article, we outlined our expectations for IMF to achieve an average net profit per year of at least $24m, and to grow the investment in its case portfolio.

On 23 February 2012, IMF announced its half yearly results with a net profit figure of $11.9m, which just about met our expectations. This profit is down 21% from the last comparable half.  Management also deferred its decision on payment of a dividend.  Case investments have gone up to a total of $69m on the balance sheet, and the size of the case portfolio remained at $1.6b.

That is all pretty disappointing on the face of it, until you get to IMF management's lengthy presentation plus Q & A.  The presentation is available via BRR Media and I would strongly urge interested investors to listen carefully because the excitement really begins here.

Dividends and cashflow

Managing Director Hugh McLernon stated that a half yearly performance such as this will normally result in payment of a dividend. He explained that the decision is not due to lack of cash, as IMF has $50 m in the bank and expects payment of another $20m very soon for their involvement in the Pan Pharmaceutical and Credit Corp cases.  Indeed, a glance at the cashflow statement also shows that IMF has positive operating cashflow this half.

McLernon explained that there are currently no franking credits, so a decision to pay an unfranked dividend does not make sense for shareholders.  More importantly, he explained that the money is required because of the nature of the case pipeline.

Cases and cases galore

For the first time in a decade, IMF has to deal with 6 major cases nearing finalisation at the same time. Hugh was emphatic that IMF expects to be successful in these 6 cases, either by court judgment or by settlement.  The cases in question are Lehmans, BOQ, Uniloc, LGFS, Centro and Collyer Bristow.

The message is quite clear – IMF expects to win, and to win big, and we will see the results very soon.

McLernon also emphasised that there are a series of other big cases, including Great Southern, Air Cargo, Brisbane's Wivenhoe Dam, ABC Learning, and the Bank Fees cases. Apparently, these cases involve huge dollar sums but are currently not included in the case portfolio.

Other positive news

The company also mentioned that regulation is no longer a serious threat to IMF's business model, that the US business is progressing well with three matters coming up for presentation before the Board, and that the competition for litigation funding "remains desultory."  Hence, IMF is not forced to sacrifice margins or quality for the sake of volume.  This is an important indicator on the quality of the case portfolio, and the expected returns.

Conservative and shareholder friendly

One would normally expect conservative behaviour from a person with Hugh McLernon's background.  Nevertheless, after listening to the presentation, I am comforted that IMF management is acting in a conservative manner for the benefit of shareholders.  The following are just several examples of such conservatism:

1. The preservation of a cash buffer to fund the current case pipeline
2. Cases in the pipeline are not included in the case portfolio
3. Refusal to back down on funding terms or to sacrifice quality of cases to be funded
4. Planning based on "absolute worst case scenarios"

Foolish takeaway

Our view of IMF remains unchanged since our last update on 3 December 2011. In fact, the upside potential has increased considerably, from potential cases such as Wivenhoe.

Our original thesis of IMF gaining $3 for every $1 spent continues to be reaffirmed with the recent settlement of Centrex.  We are certainly aware that many investors may not agree with our opinion on IMF.  Nevertheless, investors should bear in mind Warren Buffett's words that one pays "a high price for cheery consensus".

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Fool contributor Peter Phan owns shares in IMF (Australia) Limited. 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.

The post IMF (Australia) Limited: Making a case appeared first on The Motley Fool Australia.

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AMA Group Limited (ASX: AMA) released its half yearly result on 21 February, 2012. The results from this car parts and panel beating business were mostly steady and solid as expected, following our coverage of the company back in September 2011.  (Since that time, AMA has paid a fully franked dividend of 1 cent per share, and its share price has appreciated roughly 35%.)

Investors would have had some indication of the result from the earlier results of ARB Corporation Limited (ASX: ARP), and the ABS data on motor vehicles and SUV sales.

The positives from the latest results are:

1. Operating cashflow remains healthy at $3.2m for the half;
2. Debt reduced by $2.2m;
3. Finance costs reduced to $441k for the half, overall costs contained.
4. Yearly dividend flagged by management;
5. Good trading months for January and February 2012.

The negatives for the latest results are:

1. Sales growth is relatively soft, and large drop in revenue for Panel Repair division;
2. Operating margins slipped slightly to 14.6%.

Management has previously stated its intent to focus on current businesses, to ensure each business is profitable on its own, to reduce debt quickly, and to utilise its franking credits.

The latest report confirms that they are doing exactly what they have promised.  The company does not promise booming growth and AMA is not a business that will set hearts aflutter.

In fact, we're not market timers, but it's entirely possible that the lack of growth, no exciting news and the absence of a half yearly dividend may cause impatient investors to sell, pushing the share price down in the coming weeks.

AMA's market capitalisation is around $40m. Business operations generate cash of about $7m per year, and accrued losses will ensure that no tax is actually payable for at least 3 to 4 years.  It is rare to find opportunities such as these.

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.

Motley Fool contributor Peter Phan owns shares in AMA Group. 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.

The post AMA Group: An overlooked ASX opportunity? appeared first on The Motley Fool Australia.

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Treasury Wine Estates Limited (ASX: TWE) was created in 2011 as a result of the spin-off of the wine assets of Foster's Group Limited (itself now owned by global brewer SAB Miller).

I have a term for companies created by spin-offs – 'orphans'.  The basic idea is that a neglected division of a large conglomerate often does very well as an independent business entity by being able to concentrate fully on its own business without conflicting demands from a parent company.

The most outstanding examples in Australia are Cochlear Limited (ASX: COH) and Ansell Limited (ASX: ANN), both previously spun-off from Pacific Dunlop, and CSL Limited (ASX: CSL) once a part of the CSIRO.

On 17th February 2012, TWE announced its half-yearly results.  The impact of Foster's management is evident from a cursory examination of key numbers, and comparing them to its global competitor in Constellation Brands, Inc. (NYSE: STZ).  The comparison is summarised in the table below:

Management has indicated that it is on track to strip out $30m per annum of costs – a big number in the context of a $40m half yearly profit.

Investors are well aware of the current problems facing Australian wine growers. An oversupply of wine grapes and the high Australian dollar are severely affecting business.  Even so, there is no doubt that the current numbers for Treasury are abysmal.  The return on assets is 2.1%!  Return on equity is 2.7% in an industry where the norm is 12% to 15%.

Bear in mind that we are talking about the owner of brands such as Penfolds, Rosemount and Wolf Blass!

Foolish bottom-line

The key issue facing current and potential investors in Treasury Wine Estates is very simple. Is management able to whip this business back into shape to be at least on par with industry norms?

Given the lack of comparisons with a previous reporting period, I believe it is too early to know. The next half will tell the story on whether management is delivering. Remember, patience is a virtue.

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.

Motley Fool contributor Peter Phan does not own shares in Treasury Wine Estates. 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.

The post Treasury Wine Estates: One for the cellar? appeared first on The Motley Fool Australia.

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Even though revenues were up 17.3% to $99.4m, net profit dropped by 11.3% to $11.8m. Management explained that the acquisition of Keddies "proved slower to bring up to speed than anticipated" and "revenue is down approximately $4m in H1 FY12".

The law firm Keddies was the subject of billing controversies prior to its acquisition by SGH. Management explained that the poor half yearly result was also affected by acquisition costs for the UK business, and significant investments in Family Law and Conveyancing. In other words, money is being spent upfront to generate growth.

Low Cashflow

Operating cashflow was anaemic at $4m, and cash from investing activities chewed up a massive $23m.  Curiously, despite this cashflow situation, SGH paid nearly $5m in dividends, and declared a further $5m of dividends payable this half.

Below is a table summarising the cashflow situation for the last five years.  Readers can make their own judgment as to whether the financial statements of the business reflect actual economic reality.

To top it all, management has indicated that operating cashflow for the full year will only be about 70% of net profit.

Increasing Debt

The latest cashflow deficiency was plugged by an increase in borrowings.  The total liabilities of SGH started at $55m on listing. This has increased 4 fold to $191m five years later as at 31 December 2011. There is a corresponding increase in assets on the balance sheet. As at 31 December 2011, the asset side of the balance sheet contains $93m in accounts receivables, and $201m comprising "Work-In-Progress".

Acquisitions, Dilutions, and UK Overseas Foray

In the grand tradition of illustrious peers such National Australia Bank (ASX: NAB) and Insurance Australia Group (ASX: IAG), SGH is blazing a path of glory into the UK market via the intended acquisition of a UK law firm for approximately AUD$80m.

SGH will hand over AUD$41m in cash on completion, a further $13m in deferred consideration payments, and equity issue of AUD$25.7m.

Barring a miracle increase in operating cashflow, the acquisition will have to be funded by more debt. Shareholders can also look forward to a further dilution of their shareholdings, which has increased from 82 million shares on listing to 154 million shares in 5 short years since listing. The share dilution shows up in lower EPS growth of 42% despite net profit growth of 168%.

Management has indicated "no further forecast material acquisitions in Australia or UK." They probably do not have much of a choice, as I fail to see how any further material acquisition could be funded based on the current state of its balance sheet and cashflow.

ROE and ROIC versus Money in the bank

As at 31 December 2011, SGH has total assets of $395m and net assets/equity of $205m. It made $11.8m in net profits.  This is about 3% return on total assets, and 5.75% return on equity, for the last six months.  Last time I checked, depositors can get at least 5% per annum return from their bank. At these rates of return, shareholders are not compensated for the additional risks involved.

Market not stupid

Mr Market may have wild mood swings, but he is not stupid. The SGH share price dropped by over 10% in the last 2 days.  Current prices imply a market valuation of about $250m for SGH. We see neither quality nor bargain.

Attention: 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.

Motley Fool contributor Peter Phan does not own shares in Slater & Gordon. 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.

The post Slater & Gordon Limited: Shares not for the faint hearted appeared first on The Motley Fool Australia.

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The main concerns are the cyclical high price of iron ore, the extrapolation of past rapid growth, over-reliance on a single product (and a commodity product at that), over-reliance on effectively only one customer, and the characteristic of the only customer being a sovereign nation.

FMG released its half yearly results on 15 February 2012.  For the six months ending 31 December 2011, FMG shipped 27M tonnes of iron ore.  FMG received roughly AUD$122 per tonne, down from AUD$160 last year.  Its cost of sales are AUD$71 per tonne, up from AUD$64 per tonne last year. Operating cashflow of $1.18b was dwarfed by investing cashflow of $2.4b. No prizes for guessing how the hole was plugged – more debt, of course.

Funnily enough, and this never cease to puzzle me, despite the high demands for cash in its operations, FMG has decided to pay out 4 cents per share in dividends.

There are further headwinds, literally.  Cyclone Heidi affected production, and delayed port construction. Costs continue to increase, which is hardly surprising, given earlier announcements by BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) of blowouts in costs, especially in Rio's Pilbara expansion.

It appears to me that FMG is in a mad dash race against time. It needs to get to 155MTpa output as soon as possible, and this needs to happen before the creditors come knocking, before anything happens to derail China's boom story, and this has to be done in the face of rising input costs and shortage of skilled labour.  FMG will certainly be praying for fair weather ahead.

We at the Motley Fool are happy to watch this amazing race by the sidelines.

Alert: 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.

Motley Fool contributor Peter Phan does not own shares in FMG. 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.

The post Fortescue Metals Group: Growing headwinds, staying on the sidelines appeared first on The Motley Fool Australia.

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• How much is needed in superannuation to target a $95,000 annual passive income?