HEADLINES [click on headline to view story]:

Family Money

The Doctor's Consultation by Dr. Iain Corness

Agony Column

Camera Class by Snapshot

Wine Column

Mrs. DoLittle’s Corner

Family Money:Taking a technical look at income & growth stocks

By Leslie Wright,
Managing director of Westminster Portfolio Services (Thailand) Ltd.

If you’re a sophisticated direct investor who does his own stock-picking, or a clever young fund manager whose focus is the same objective, do you go for growth stocks or income stocks?

In theory one or the other shouldn’t exist. Shares should not offer both a high dividend yield and high capital growth.

If a company is expected to deliver sustainable profits growth, its shares ‘ought’ to trade on a relatively high multiple of earnings, so the dividend it pays out of those earnings will consequently be a low percentage (yield) of its share price. But after a three-year bear market, that theory has lost favour since some companies out there with good prospects for low price-earnings multiples are paying rather nice big dividends.

Squaring the circle

Financial theory also states that shares offering high growth should not exist because if a company is growing that quickly, it ought to be pouring its profits back into finding more growth, not handing out cash to shareholders.

That one too has been turned on its head by the recent downturn. Many companies offer the prospect of profit growth not because they’ve been investing in exciting new products and services, but because they’ve been doing the opposite: cutting costs and getting back to what they know works. Now, touch wood, they stand to benefit from a stabilisation or modest recovery in sales, on top of a new slimline cost base.

Admittedly, profit growth created by cost-cutting is hardly the same thing as creating value in an expanding market (if you can find a high-yielding share where the company in question is also profitably riding a high-growth market, it’s time to re-mortgage the house and fill your boots, as they say), but it’s growth nonetheless.

Nobody wants to invest in a company that’s only means of growth is costcutting. There’s got to be the prospect of some topline growth too. But, when you put the two together, you can find high-yielding shares that also offer the recovery story needed to underpin capital growth.

It’s all about finding shares that have been oversold on the back of bad news during the current global economic slump. You’re looking for companies where overly sceptical investors have failed to price-in recovery properly; leaving the shares trading on depressed multiples of depressed earnings. That’s the way of squaring the high income high-growth circle.

At this stage, you might be thinking this all sounds rather unlikely. After all, you’re attempting to spot something everyone else has missed. It’s the equivalent of saying: “I’m right, and the thousands of clever, experienced investors who constitute the market are wrong.”

If it is possible to find high-growth, high-yield shares, the market must currently be guilty of systemic undervaluation. There’s a fairly compelling story – investors could be suffering from excessive pessimism as a response to the excessive optimism of the internet bubble. But compelling-sounding rationalisations are 10-a-penny (remember the internet productivity miracle?).

Matters of fact

So rather than rely on comforting stories, look at hard fact: the market has an appalling track record of predicting earnings’ growth. As mentioned above, if a company’s shares trade on high P/E multiples, it ‘ought’ subsequently to experience high earnings’ growth, and vice versa. In fact, history shows no correlation between P/E multiples and subsequent earnings growth. There are plenty of examples of failed growth stocks (12 of the 25 top-rated companies saw earnings fall) but it’s the other end that interests us. Five years ago, Peterhouse Group, to cite one example, was trading on a P/E of 6.3 and it went on to grow earnings by 104%. Bloomsbury Publishing was on a P/E of 7.7 and grew earnings 147%. T. Clarke traded on 8.4 and grew earnings a mere 3,511% (which sails nicely off the top of my graph!)

In fact, 11 of the 25 companies with the lowest P/E ratios five years ago went on to grow earnings by more than 50% over the intervening years. The market clearly has a habit of applying low P/E ratios – low enough to allow hefty dividend yields – to companies that are destined to grow profits and deliver share price gains.

Other measures back this up. Income portfolios, of one form or another, generally do better than other forms of investing – with the exception of anomalous periods like the internet boom. There has been an extraordinary divergence over the last century between the cumulative return from high-yield investing and investing in a straight market index.

A ฃ1 investment in 1900 in a high-yield index would have turned into ฃ61,235 by 2000, compared with ฃ16,160 from the market index. That’s the magic of cumulative interest. Those figures are for total return (including dividend income) but the same holds true for pure capital returns.

The average performance is marginally better. It’s notable that high-yielders (or ‘old economy’ stocks) underperformed during the TMT bubble, then dramatically outperformed when it burst. It’s also notable that high-yielders underperformed during the recession of the early 1990s.

The strong share price performance of dividend-paying companies is potentially explained by the discipline of having to pay a dividend. It encourages management to concentrate on profitability and cash-generation, hence avoiding overly risky growth strategies.

What’s more, the valuations of unglamorous high-yielders don’t have unrealistic growth expectations built in, so share prices aren’t overcooked and vulnerable to earnings disappointment.

The Doctor's Consultation by Dr. Iain Corness:Tripping down the stairway to heaven

Or a night in the ICU

by Dr. Iain Corness

There are those who are born naturally gifted. There are those who are born naturally left hand dominant. Then there are those who are born just naturally clumsy. I include myself in the latter group.

My dear old Mum will attest to my clumsiness. I well remember my mother, full of good intent, trying to interest me in ballet dancing, citing how manly it was, how athletic and what an achievement it really was. We were on our way to pick up some ballet shoes for my young sister at the time, and I tripped going in the doorway of the shop. At that point, any ideas of her son becoming a ballet dancer were dashed.

Whether it be lack of attention to detail or not, I often “miss” the doorway while walking out of the bedroom in the mornings, and sort of bounce my stunned way into the dining room. More than once have I stubbed my toe on the same bed end. And more than once I have broken it. Within the confines of the household, I am known as “Mr. Clumsy.”

However, I managed to take this clumsiness almost to ‘art form’ levels the other week, catching my toe near the top of the stairs at the office and stumbling. Feeling that I was falling, I grabbed for the handrail, but missed and ended up going down ten steps rather inelegantly, landing, by all reports, in a heap at the bottom, curled up like a prawn! This description I have to assume to be correct, as by this stage I had already hit my head and my brain was, for all intentions, a ‘passenger’ in my own body. I should also hastily add that this was mid-day on a Friday and alcohol played no part in this drama.

Fortunately, the rapid descent was heard in the office, and my old mate Bryant Berry organized the local motorcycle taxis to load my semi-conscious form in his car, and with Khun Am playing Florence Nightingale rushed me to the hospital.

In the ER, my brain decided it would commence work again and I was conscious of doctors and nurses and much activity going on, but most of it was confusing. CT scans and X-Rays all seemed to happen in another blur, as X-Ray technicians did their best to get me to lie this way and that, and, “Please stop moving.”

More trundling around on trolleys and we were back in ER, where Bryant and Am were waiting, now joined by my friends Alan and Noi who had brought Som, my ‘significant other’. The value of the presence of friends and family cannot be over-estimated in these situations. You go from feeling alone and helpless to being reassured by the faces of loved ones and friends. Everything is going to be alright!

By now my ‘medical’ brain was back to functioning well enough for me to accept the doctor’s decision that I had to stay in hospital for observation for the next 24 hours. I was also functioning well enough that I began to feel the various parts of my anatomy which were now letting me know that they had worked as shock absorbers during my tumble down the stairway from heaven.

The trundling began again, and so it was into the Intensive Care Unit for Dr. Iain, and I shall continue this part of the saga next week ...!

Agony Column

Camera Class:How Deep is Depth of Field?

by Harry Flashman

The Depth of Field in any picture can often make or break the entire photograph. Knowing how to manipulate the depth of field improves your photography instantly!

The term Depth of Field is really an optical one and depends solely on the lens being used and the aperture selected. Altering the shutter speed does not change the Depth of Field.

Depth of Field really refers to the zone of “sharpness” (or being in acceptable focus) from foreground items to background items in any photograph.

The first concept to remember is “One Third forwards and Two Thirds back.” Again this is a law of optical physics, but means that the Depth of Field, from foreground to background in your photograph can be measured, and from your focus point extends towards you by one third and extends away from the focus point by two thirds.

For those of you with SLR’s, especially the older manual focus SLR’s, you will even find a series of marks on the focussing ring of the lens to indicate the Depth of Field that is possible with that lens (and you probably wondered why there were all those extra marks on it!).

Take a look at this week’s photograph, which is really two shots, taken seconds apart, of the Chinese lion statue. More importantly, look at the background. In one you can clearly see the leaves on the bush and the fountain spray, while on the other it is a soft blur. How did I change this Depth of Field sharpness? Answer, with a flick of the wrist!

You see, for each lens, the Depth of Field possible is altered by the Aperture. The rule here is simple - the higher the Aperture number, the greater the Depth of Field possible and the lower the Aperture number, the shorter the Depth of Field. In simple terms, for any given lens, you get greater front to back sharpness with f22 and you get very short front to back sharpness at f4.

For example, using a 24 mm focal length lens focussed on an object 2 metres away - if you select f22, the Depth of Field runs from just over 0.5 metre to 5 metres (4.5 metres total), but if you select f11 it only runs from 1 m to 4 m and if you choose f5.6 the Depth of Field is only from 1.5 m to 3 m (1.5 metres total).

On the other hand, using a 135 mm focal length lens focussed at the same point 2 metres away, you get the following Depths of Field - at f22 it runs from 1.9 m to 2.2 m (0.3 metres) and at f5.6 it is 1.95 m to 2.1 m (a total of 0.15 metres).

Analysis of all these initially confusing numbers gives you now complete mastery of the Depth of Field in any of your photographs. Simply put another way - the higher the Aperture number, the greater the depth of field; the smaller the Aperture number the smaller the Depth of Field; plus the longer the lens, the shorter the Depth of Field, the shorter the lens, the longer the Depth of Field.

Now to apply this formula - when shooting a landscape for example, where you want great detail from the foreground, right the way through to the mountains five kilometres away, then use a short lens (24 mm is ideal) set at f22 and focussed on a point about 2 km away.

On the other hand, when shooting a portrait where you only want to have the eyes and mouth in sharp focus you would use a longer lens (and here the 135 is ideal) and a smaller Aperture number of around f5.6 to f4 and focus directly on the eyes to give that ultra short Depth of Field required.

As said before, while initially confusing, it can soon become second nature. Try it out this weekend, but when you are doing it, keep a note of what you have done to compare with the prints later.

Wine Column: The Magic Wine

By Ranjith Chandrasiri

Champagne was first discovered more than a century before the famous old monk, Dom P้rignon, appeared on the scene at the end of the 17th century. Before his time, Champagne’s cold, northern climate was infamous for pale pinkish still wine made from pinot noir; consistently anaemic, thin, tartly unripe and harshly acidic. Determined more by grapes grown on the extreme edge of their ability to ripen properly, P้rignon reversed this situation through improved farming methods that markedly increased ripeness and concentration.

He also evened out dodgy quality by blending wines grown in differing microclimates within Champagne and across both hot and cold vintages. Combined, these practices effectively filled in weaknesses and bolstered strengths. As a result, the region’s reputation soared, demand increased and prices rose dramatically.

Dom P้rignon didn’t invent Champagne but he did achieve a number of breakthroughs that are key to making Champagne as we know it today. He perfected the method of making white wine from red grapes, for example, and most importantly, he mastered the art of blending wine from different grapes and different villages to achieve a complex base wine.

It is more likely that P้rignon’s Champagne bubbled without any intent. He was probably more concerned with trying to keep the bubbles out of his wine, given how deadly the work was back in his days. This danger arose from “stuck fermentation” that was common to cold climates.

Champagne is a region with a very cold climate, which makes it difficult for fermentation to be completed. The ultra-cool climate is prone to early cold snaps that cause yeast to go dormant and fermentation to stop dead in its tracks, leaving behind a partially fermented, low-alcohol wine full of unfermented sugar, but nicely balanced by high acidity. The Champenois went ahead and bottled this for drinking the following year. Things got tricky when spring’s warmth brought the hibernating yeasts back to life. Stored in relatively brittle, thin-walled bottles, the wine went through a secondary fermentation, in which carbon dioxide increased and back-pressure built up, leaving the winemakers at the mercy of potentially lethal time bombs. No doubt tired of copping the odd cork under the chin, P้rignon invented a metal clip to hold the cork in place during second fermentation.

The storage solution, however, came from 17th-century England. The English had developed a fondness for P้rignon’s well-blended Champagne, but wisely preferred bringing it over in barrels rather than risk the unwelcome surprise associated with French glass. The great problem was the transitory nature of the bubbles: they would dissipate after some time in the cask.

At about this time, a new form of harder, thicker glass was developed in the super-hot, coke-fired kilns of northern England. The second innovation came with improvement in bottle making; the indentation called a punt in the bottle base meant the extra pressure that came with fermentation could be contained. Capable of withstanding the pressure of secondary fermentation, this new bottle allowed sparkling wine to be produced, contained and transported reliably for the first time.

Another one of Dom P้rignon’s contributions was the art of blending. He found more complexity blending wines from different villages. The same philosophy applies today; famous champagne houses like Krug carefully maintain all their traditional sources of grapes by offering long and attractive contracts to their growers.

There were two further developments in the refinement of champagne, as we know it. The first was simply the decision to restrict the grape varieties in making champagne to three: Pinot Noir, Pinot Meunier and Chardonnay.

The next refinement was to clarify the wine. Not that it worried Dom P้rignon one jot, but the early champagnes were cloudy from the presence of yeast lees. The trick was to get the sludge out and leave the bubbles in. The credit for cleaning up champagne’s appearance is accorded another monk, Dom Ruinart. He evolved a technique of standing the bottles upside down so the sediment settled against the cork, and then freezing the neck so that a plug of frozen sediment could be fired out by a quick opening and then recorking the bottle. There have been numerous improvements to this idea but basically it remains the same. The process is called r้muage and the traditional wooden shaking tables with chamfered holes used to encourage the sediment to settle still remain in use.

When the good old Dom P้rignon tasted his first glass of bubbly, he is reported to have rushed into his boss’s study yelling, “Father Abbot, I am tasting stars.” It adds to the story to know that Dom P้rignon was blind and couldn’t see what he had created. Champagne hasn’t looked back since.

Ranjith Chandrasiri is the resident manager of Royal Cliff Grand and president of the Royal Cliff Wine Club, Royal Cliff Beach Resort, Pattaya, Thailand. Email: ranjith@royalcliff.com or wineclub@royalcliff.com Website: http://www.royalcliff.com/rcwineclub.htm

Mrs. DoLittle’s Corner

thaiturkeytalk@hotmail.com

Last column I talked about how we can learn things from animals. Most people will dispute that, thinking in order to learn from someone, they would have to be considered “more intelligent” than themselves. Well, let me knock that concept right out of your head! You haven’t even begun to think. Look around at the mess the world is in. Does ‘that’ look intelligent? Who is the smart one here - politicians ordering bombs thrown on civilians, or monkeys in the jungle picking coconuts, minding their own business? You see, we need to take a few steps backward to get a look at the big picture. If you put a bunch of people on a big piece of land, people who are all very different, culturally and spiritually, you will soon have dispute, which many times leads to wars. However, if you put a bunch of different animal species on a big piece of land, you have bio-diversity! That proves they are naturally smarter than we are. Even though they are all very different, they all learn to live harmoniously together, in the same environment.

“Why, why am I in here?” -”Good question, Teddy! It’s because you’re too sweet. There’s some mean humans out here that you don’t want to meet!”

 For humans to go together in harmony, they have to be accompanied by a band! People who look down on animals (as lesser beings, which humans are meant to dominate), have a problem with personal power. They will use any excuse (sometimes only in their own minds) to make themselves more superior than other beings around them. In extremity, even kill animals and drink their blood, thinking they inherit power! All animal abuse is power play. A great bear friend I had named Teddy (of course - what else?), taught the power lesson very well. In fact he was a skilled Master. Despite weighting almost 700 kilos, he used his intellect and his charm to coax even the most fearful youngster into his loving bear arms. He just loved attention. Little guys got gentle squeezes and tough guys got big bear hugs. The thrill of being in those big powerful arms, knowing you could be crushed in a moment, yet finding Benevolence! Now, I ask you, is there not a big lesson to be learnt from this clever bear? The moral of the story today is: Just because you’ve got the bombs, doesn’t mean you have to throw them! Visit our homepage: http://welcome-to.chiangmai-chiangrai.com/animal_sanctuary.htm

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