Should there be changes to our disclosure laws?

Paul Kerin in The Oz argues for 'fundamental reforms', not knee-jerk reactions.

He argues:

These dramatic changes require a major rewrite of compulsory disclosure rules. We should replace the outdated singular "reasonable person" benchmark with a more specific test. For example, we could require directors to disclose information if at least, say, 5 per cent of actual or potential investors may deem it price-sensitive. Recent outcries suggest many investors think director margin loan information is. I don't, but as a director I shouldn't deprive many investors of information they think is valuable just because I don't.

This change would generate more disclosures. Directors could readily minimise investor overload risk by flagging announcements that they consider most material. Investors who trust directors could just read the announcements the board flags. Others could readily scan the announcement's web page for items more relevant to them.

This would provide directors with valuable information, too. Observing price impacts of the various announcements helps them understand - rather than pre-judge - what investors find useful. With better information and less wriggle room, directors would serve shareholders' interests better and investors would be better informed.

BTW, you can find the actual continuous disclosure listing rules at the ASX website. <- link to pdf of chapter 3 of the ASX Listing Rules.

Got disclosure?

More continuous disclosure problems, this time from Hedley Leisure & Gaming (Bryan Frith in the Oz is all over these CDR breaches).

Here's the start of the article:

ONLY a week after telling the ASX that Hedley Leisure & Gaming property fund did not possess any undisclosed information that would explain a sharp fall in the price of the fund's securities, the directors have admitted that the fund is seeking to reduce debt through asset sales.

The directors yesterday obtained a trading halt of up to two days because the fund was finalising divestment transactions to reduce debt. The halt would end when the fund made an announcement on the divestments.

On March 5, the ASX queried HLG about a two-day slump of 44 per cent, from $1.49 to a low of 83.5c. HLG immediately obtained the halt to enable it to properly respond, which it did last Monday.

HLG replied that it wasn't aware of any information that hadn't been announced but which, if known, would explain the price movement.

Business strategy - don't forget the demography

Bernard Salt in the Oz provides a timely reminder that changing demographics will impact on both business strategy and forecasting. If the nature of a population (target market) is changing, then that's worth taking into account in assessing the likely success of a business strategy.

Business spectator / RealClearMarkets

While I remember, here's a good resource of Australian financial/business information: Business Spectator.

Kind of a local RealClearMarkets, which is great for U.S stuff.

Disclosure, accounting, debt, breaches

City Pacific has it all. And Bryan Frith of the Oz is all over it. Here.

Ten Questions Every Investor Should Ask

Janice Revell in Fortune produced a really good summary for equity analysis. Read it here.

Again, what's the number one rule?

1 HOW DOES THE COMPANY MAKE MONEY?

If you don't know what you're buying, you're hardly in a position to know what you should be paying for it. So before you buy a stock, you need to get a handle on how the company earns its dough.

How did they value stocks?

A good old article (from 2001, yep, 2001!!!) from Gretchen Morgenson in the New York Times discussing the ways that analysts and salesmen were trying to value stocks back in the internet bubble days. In short, because these companies weren't reporting positive earnings, folks were looking for something else to use as a valuation metric (like number of viewers, or internet clicks, or marketing expenditure). Turns out that turning a profit is still a good way to stay in business, and continuing to make losses is a good way to go out of business.

The article (page 3) also discusses the extensive use of 'pro-forma' earnings numbers being peddled by companies at the time (and it still continues).
Last para in the article reads:

Byron Wien, chief United States investment strategist at Morgan Stanley, is fearful that companies that spin their results using pro forma figures could do serious damage to investor confidence in the financial markets. "Corporations have a lot of flexibility in how they report results," he said. "Nobody knows more about the truth than the corporate executives themselves. Taking a short-term view of truth may make things look good in a quarterly report. But it will ultimately catch up with them."

That is a good description of what seems to be happening today.

And continuous today.

Warren Buffett

Here's the latest Chairman's Letter from Berkshire Hathaway: pdf link. Have a read.

And a key section (from page 6):

Businesses – The Great, the Good and the Gruesome
Let’s take a look at what kind of businesses turn us on. And while we’re at it, let’s also discuss what we wish to avoid.

Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stockmarket purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.

A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business
“castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the lowcost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies
whose moats proved illusory and were soon crossed.

* Photo taken from JasonSmith's public flickr stream. Original photo found here.

When in doubt, blame the accounting rules

That's what's happening in the U.S., with respect to losses being recorded by some of the financial services firms. The requirement that financial instruments be 'marked to market' means that when the value of the loans (i.e. the investment in the loans made by the financials) falls, this needs to be reflected in the balance sheet.

Wall Street Journal article. Key grafs:

But these market seizures are what have made market values so contentious. Robert Herz, chairman of the body that sets the accounting rules governing the use of market values, the Financial Accounting Standards Board, acknowledged the difficulty investors and companies are facing.

"But you tell me what a better answer is," he said. "Is just pretending that things aren't decreasing in value a better answer? Should you just let everybody say they think it's going to recover?"

Others who favor the use of market values say that for all its imperfections, it also imposes discipline on companies. "It forces you to realistically confront what's happening to you much quicker, so it plays a useful purpose," said Sen. Jack Reed (D., R.I.), a member of the Senate banking committee.

Got margin loans?

If you're a director, and you do have margin loans, get ready for some disclosure. The Australian reports that The Australian Securities Exchange and ASIC were going to require directors to disclose their margin loans. Red flag to a bear, anyone?

ABC Learning: debt issues

Some financial policy analysis; particularly leverage (debt).

The unfortunate ABC Learning again. The amount of debt, the conditions relating to the debt, and the quality of assets supporting the debt are all referred to here.

How to short sells and win!

Andrew Main in The Australian.