INVESTING IN GROWTH STOCKS

INVESTING IN GROWTH STOCKS

The Growth Investor seeks to profit by investing in companies that are growing at rates above the normal rates of growth in the economy or in an industry. This article looks at two basic approaches to investing in growth stocks: Fundamental and Relative Value. Lastly a broad set of rules is presented which should assist the Growth Investor.

FUNDAMENTAL APPROACH TO GROWTH STOCK VALUATION – THE DDM

The Dividend Discount Model (“DDM”) is a conservative model that attributes a value to a company based on its discounted future dividends. As the market price rises relative to the fundamentals the DDM will find fewer and fewer undervalued companies, which can be viewed as either a strength or a weakness if the market remains at historically high levels.

The basic valuation model is called the Gordon’s Growth Model and it is calculated as follows:
Value of Stock = D1/(r-g), where D1 = the dividend next year, r = the required rate of return for the equity investor, g = the growth rate of dividends in perpetuity.

The DDM is a simple model, which works quite well, when the dividends are growing at a “stable rate”. The difficultly is to find an appropriate and “stable rate” of growth for the future. In theory a firm cannot grow at a faster rate than the economy forever, so it can be assumed that a firm with a stable growth rate is one whose growth rate does not exceed expected inflation plus the expected real growth rate of the economy.

The deficits of the Gordon Growth Model are its extreme sensitivity to the growth rate used. Furthermore, it does not effectively reflect the various stages of growth through which businesses go. For this purpose Multi-Phase DDM models were developed. The Classical 2 Stage DDM Model incorporates a phase of extraordinary growth and then a subsequently phase of stable growth, whereas the “H model”, which is also a 2 stage model, has an initial growth phase, which declines linearly through time. Lastly there is the 3 stage model which has a High Growth, a Declining Growth and a Stable Growth phase. All these models help the Growth Investor to find those companies that can sustain above-average growth in a competitive economy.

Past growth rates are often used to predict future growth rates, although Little’s study (1960) showed sequential earnings growth rates having little correlation. Nevertheless, evidence suggests that companies with little variation in their earnings in the past will have more predictable growth rates in the future. In my own screening tools I favor Growth Stocks with less volatility in earnings over the previous 5 years. Furthermore, the size of the firm is a factor inversely correlated with its growth rate. However, investors must also be careful using historic Growth rates for cyclical firms, where the trend is calculated for a period shorter than one business cycle. Changes in business fundamentals or regulation also mean that past growth rates cannot be used. Finally the quality of earnings growth may change due to acquisitions or accounting.

Caution is necessary in using analysts’ forecasts to predict growth, as the quality of their forecasts deteriorates over time. Consensus numbers should also be not used blindly, although the secret of predicting growth rates may lie in discovering inconsistencies between analysts’ forecasts.

Another measure of growth that I use in selecting Growth Stocks is the Return on Equity (“ROE). Academics have empirically linked this ratio to stock outperformance. Theoretically, the ROE multiplied by the “1-dividend payout ratio” should equate to the growth rate of future earnings and many Growth Investors will not invest in stocks unless they have ROEs of at least 20%.

RELATIVE APPROACH TO GROWTH STOCKS– THE PEG RATIO

In his book “The Zulu Principle” (1992), Jim Slater advocates the use of a PE/Growth screening process, or PEG ratio, to identify securities which are undervalued in relation to their prospective growth rate. To an extent Slater is using Ben Graham’s principles of value investing with a margin of safety. Slater states: “Many people believe that the term value investing only refers to buying assets at a discount. In fact, value investing is broader than that – the essential concept is to look for values with significant margin of safety relative to share prices.”

Slater points out that when a dynamic growth company is bought on a low P/E ratio, with a consequently low PEG factor, then those growth prospects are being bought by the investor at a discount. Slater is prepared to buy stocks at higher P/E ratios than Graham, but he claims to obtain his value by linking the P/E paid to the estimated growth rate and establishing a safety net with other criteria.

The advantage of Slater’s system, compared with Graham’s fundamental strategies, or the DDM Model, is that the investor does not have to withdraw from the market until conditions are suitable. However, during periods of negative growth rates, as in the 1930s, Slater’s methodology would be largely inapplicable.

Slater’s criteria for selecting his PEG stocks are as follows:

• Growth of EPS in four of the last five years, being at least 15% compound
• A low PEG ratio of 0.75 or less, preferably under 0.66
• Optimistic Chairman’s Statement
• Borrowings limited to 50% of net assets
• A competitive advantage, evidence by a good PBT margin and ROCE
• Something new, e.g. a management shake-up or a new product
• A small market capitalization $20-200 million, but the method is also applicable to large firms
• High relative strength
• Dividend yield of 4% plus, but less if dividends are growing strongly in line with earnings
• A reasonable asset position
• Some management share holding – ideally 20%

A similar PEG strategy, tested by Peters (1991), showed the top decile achieving a return of 1536%, beating a 356% return on the S&P 500. However, the sample studied was only from 1982 to 1989.

RULES FOR INVESTING IN GROWTH STOCKS

You should see the investment as an investment in the individual business. Do your own research on the company and get to know the business well. Furthermore, try to do your own valuation of forward growth expectations.

Growth stocks offer potential hefty gains and losses. The objective is to find tomorrow’s winners. The Growth investor must ignore the myths that the profits are higher in fast growing industries. It is also worth remembering that every blue chip growth company will ultimately mature.

Earnings are what count, not empty promises. You are looking for above-average EPS over the last 5 years (minimum 3 years) and to buy the stock at a reasonable price. The potential double benefit comes from growing earnings and expanding P/E multiple after broker upgrades.

For non-seasonal businesses you need to focus on consecutive quarterly sales to derive the most up to date growth rate. For Retailers you may need to focus on year-over-year quarterly growth.

Historic prices are not important, so do not be drawn in by rising stock prices. The investor should rather concentrate on P/E relative to growth, or P/E relative to historic P/E ranges. A company that consistently beats estimates is probably cheaper than the P/E suggests as the prospective Earnings may be understated. Lastly, try to avoid highly visible companies with high P/Es. In times of pessimism growth will be understated and in times of optimism growth overstated.

The growth must come from a “sustained” demand for the products or services of the company and not a “temporary” cyclical factor, e.g. construction booms. Competitors must also not be able to enter the market easily and take market share.

The type of industry is not critical. More important is sales growth and a corresponding profits or EPS growth. Falling margins are not good, whereas increasing profitability is an indicator of long-term success. If the Price/Sales ratio is over 5, then the company must have excellent growth and margins. If the P/Sales ratio is under 1, then more modest growth and lower margins are acceptable.

Carefully review the balance sheet to examine why the firm is growing so fast. The profit growth may just come from a large increase in inventories. Read the notes to the accounts to identify extraordinary items or future problems.

Diversify your portfolio. This is very important as the prices of individual stocks in the portfolio will be very volatile. Holding some cash as part of the portfolio is a good idea, as there will be opportunities to take advantage of exaggerated price falls in stocks you would like to add to the portfolio.

If the P/E ratio, the P/S ratio, trends and future growth prospects for products and services look excellent, but the Relative Strength Indicator of the price over the last 12 months is low then do not buy, as something is probably wrong. Watch what insiders are doing! Directors’ Buying may be a good indication.

SPECIFIC RULES FOR INVESTING IN TECHNOLOGY STOCKS

The best technology does not always win and do not be fooled by technology that sounds too good to be true, even if a few Big Names take investment stakes. What the customers say about the technology or the company can be decisive, so Trade Fairs like CEBIT in Germany can be useful. If a firm does have a winning product then product protection or a strong brand name are important. Ideally you want to find companies which have products in growing markets; with a growing market-share; and which are creating new products and markets. It never ceases to amaze me how analysts are jubilant when companies announce they are increasing their market share in a declining market. This is normally the road to ruin. Technology Investors should look for profitable companies, which are not mature and have a dominant share of a high-growth market.

Operating leverage is excessive in software companies. After deducting fixed costs for people, marketing and offices, the money will flow straight to the bottom line, with less than 5% needed for the costs of goods sold. Therefore in good times Software companies can have high P/Es. However, operating leverage works against companies in bad times.

Set a minimum target for revenue, e.g. $50-100 million. Look for revenue growth of 20-25% over the last three years. You should use Forward Earnings for Technology companies as the numbers can change quickly. Where there are no earnings and therefore no P/E, then use the Price/Sales ratio. For technology companies you can also use the Price to Research Ratio (PRR). This should be less than 5 times, especially in recovery situations.

An RSI technical indicator of 10 to 20 weeks is favored for Technology Growth stocks, whether for recovery or the long term, however, the RSI is meaningless for small cap stocks, or those which do not have a liquid market in their stocks.

Software companies get severely punished when they miss numbers and can fall 50% in an instant (“gapping down”). This may often be due to a delay, as opposed to cancellation, of orders. A Growth Investor with a 12 month time horizon can do very well, if he is convinced that the company is of an adequate size, has a good brand and has sufficient execution skills. After a series of earnings disappointments share prices will fail to price in a recovery. This can present an opportunity, if the company has enough cash in its balance sheet to cover foreseeable R&D costs. You do not want to have to perpetually finance rights issues.

Do not get emotionally attached to a share. Taking part-profits is a good strategy and setting a stop-loss to lock in profits is recommended. Although I do agree with setting a stop-loss of 15% to 20% for most shares, this may not be appropriate to fresh investments. Furthermore, the reaction of Technology stocks to news flow can be very volatile, with 5-15% moves in a single day non being uncommon. Therefore a “simple” Stop-Loss policy must be used with caution.

The management and staff of a Technology company are critical, so the track record of new management is a good indicator. New management will often enjoy a period of grace during which the share price may rise. CEOs do not have to be under 50 years of age, but I am concerned, where I see that the management are stale or are about to retire. Good people remain the key to the execution of a successful software business, so if they go then the business is over. Be careful if the story told by management is “too good”; if they claim to be immune to the pressures faced by their peers; or if they refuse to answer questions from short sellers. Beware excessive related party transactions and check that EPS numbers reflect the potential dilution of executive share option schemes.

CONCLUSION
My intention in this article is not only to give an overview to the Fundamental and Relative Value approach to Growth Investing, but to also present various rules and guidance to becoming a successful Growth Investor. The investable universe is large, with many companies out there, which are not frequently researched and which consequently may offer exceptional gains and having some fun in the process.

HOW DO YOU BECOME A SUCCESSFUL AND PROFITABLE TRADER?

Well you start by getting yourself into the right frame of mind. You are who you are. You are human and your moods, health and inspiration will fluctuate. You need to feel good about yourself to do battle against your opponent.

Your opponent is the Stock Market or Mr. Market as Ben Graham has called him. He is the aggregate of all computations of company values and of all the greed and fear surrounding the future valuation of these companies. Like yourself, Mr. Market has good days and bad days and although he is very smart, he is not always right. It is always worth remembering that good advice is hard to find at the tops and bottoms of stockmarket cycles.

You can start your battle campaign by assessing first of all, whether the markets are rising or falling. It will be a lot easier to earn your money in a rising market, where "everybody is a genius"! Why stand in the way of a charging stampede? If the market is rising, then hold little cash! If the market is falling, then hold more cash, not just for relative outperformance, but because of the need to maintain the feel-good factor and to be able to exploit opportunities to pick up bargains in panicky markets.

Remember that the trend is your friend. However, you need to know more than the trend of individual stock prices. You need to know what each stock is worth. For each stock you hold, you should calculate its fundamental value. You can do a basic calculation by discounting the future value of dividends over the next 10 years and adding to this the Net Asset Value Per Share ("NAPS") at the end of this period. This period covers two business cycles. A 10 year government bond yield can be used for discounting. You arrive at the Year10 NAPS by adding 10 years Earnings Per Share ("EPS")and deducting the respective Dividends for those years. The EPS growth rate can be derived from Return on Equity, Industry Growth or Common sense. This simple Fundamental valuation often approximates to the stockmarket value of individual large cap stocks. The fun begins where you identify stocks where the stock price is way off the fundamental valuation. This is part of the disciplined approach to investing, which will serve you well, when the market starts to fluctuate wildly and brokers raise earnings to catch up with rising stock prices, or vice-versa.

Besides being comfortable with buying fundamentally cheap businesses, it is preferable to buy stocks, where you like the business, where these businesses have good Returns on Capital, have good Profit Margins and they are businesses that you can understand. This is because there will be phases where Mr. Market will drive down your stock's price, due to some news item and will try to convince you that the stock you hold is worth less than it really is worth and you will need to use every weapon in your armoury to reassure yourself that this is the case. However, if a stock falls dramatically without any news, then be on your guard!

It is important to diversify your portfolio as much as possible. It is true that the larger the portfolio, the harder it is to generate good ideas. Warren Buffett has emphasised this many times, but not everybody has a cashflow stream like he does, so it is all the more important for you to avoid panic selling of the holdings that you have and that you see your portfolio as a whole ship, which you should try to steer as calmly as possible though rough waters. Unrealised losses can always turn back to profit and you have lost nothing. If you sell - you lose!

Technical analysis or charting is useful in identifying the right time to buy or sell. I like to look at a moving average chart over periods of 9, 50 and 200 days. For example, the 200 day m.a. line can help define bear trends and the 50 day bear-market recoveries within those longer trends. Combine these with Director Buying/Selling and RSI and MACD charts and you have some nice weapons.

Directors Buying has to be in reasonable amounts. It is better if a number of Directors buy at the same time and even better if the Finance Director is a significant buyer. It is a good feeling to buy into a company at a level below the Directors buying price. At least you know you are not alone in your belief in the business. If the Directors are large Buyers just before the financial year end, then it is reasonable to assume that the results will be good. Do not panic if the market misreads the headline numbers and the stock falls initially on the day of the results! Read the results again carefully and watch as the stock recovers and rises. The Directors know their stock better than the market!

When you hold small cap stocks (or even large caps in poor markets) which are illiquid, then be careful with widening bid-offer spreads. You may be panicked into selling a stock because you saw the mid-price falling, whereas in fact no shares have changed hands in the market. Ignore widening spreads. Liquidity does not affect the value of your investment!

Trying to anticipate trading statements can be a dangerous game and optimistic management statements can change within weeks, especially in the current economic environment. By identifying this economic trend beforehand you can minimise the pain. Look for disclosure by Directors which is honest and which convinces you that they know what they are doing. It may be better to wait until the results are announced to be sure of what you are buying. If you do start trading and nothing is going right, then do as Buffett said about his untimely sale of McDonalds stock: "I should have gone to the cinema instead!"

Use the technology at your disposal. Set up price and news alerts if you trade online. This allows you to get away from watching the screens the whole time and lets you redirect your energies.

Use a Stop-Loss policy and stick to it! This is one of the hardest disciplines to follow. I prefer a 15% stop-loss based on the purchase price. You can reset this later to lock in gains.

Do not let the press or experts panic you. Both the experts and the newspaper men are marketing people. They rarely give good advice when you need it.

Finally, enjoy investing your own money! You have earned it! Why should you pay somebody else a commission of 1% or more per year, for him or her to enjoy playing with your money!

THE BENJAMIN GRAHAM METHOD OF VALUE INVESTING

Few individuals have had a greater influence on how we think about investing in the stock market than Benjamin Graham. His disciplined approach to “Value Investing” developed during the Great Depression is practiced today by investors and fund managers around the world. Graham’s approach consists mostly of patience, common sense and thorough analysis of published information. His most famous disciple is Warren Buffett, once Graham’s pupil at Columbia University and an employee with Graham’s investment firm the Graham-Newman Corporation.

GRAHAM’S DISCIPLES

Giving a talk at Columbia University in 1984 to commemorate the 50th anniversary of Graham and Dodd’s book “Security Analysis”, Buffett asked if value investing was out of date. He stated that “many of the professors … argue that the stock market is efficient, i.e. stock prices reflect everything known about a company’s prospects and the state of the economy. There are no undervalued stocks…. Investors who beat the market year after year are just lucky.”

Now 24 years since this analysis was delivered, confidence in the Efficient Market Hypothesis is much diminished, particularly after the crash of 1987, followed by the TMT Bubble and then the worst Bear Market since 1974. Advocates of modern financial theory had once dismissed Graham’s work, although followers of the Graham approach continued to believe that they could earn returns above those of the stock market indices through consistent application of Graham’s methodology.

The success of Warren Buffett’s firm Berkshire Hathaway is well documented. However, Buffett’s classmates and work colleagues also did well, although they invested in different stocks. In its 30 years of operation, the Graham-Newman Corporation (“GNC”), which was wound-up in 1956, achieved an annual return of 17.4% and generated an alpha of 7.7%, before including its investment in GEICO. The firm’s GEICO investment was bought at 21 cents in 1948 and was worth $61 by 1972 and was to become the cornerstone of Berkshire Hathaway’s success.

After 9 years Walter Schloss left GNC in 1955. His firm “Walther J. Schloss Associates” earned a compounded 21.6% per annum in the 33 years ended 1988, compared to 9.8% for the S&P500. Tom Knapp, who replaced Schloss at GNC, later became principal at Tweedy, Browne and Partners. Tweedy Browne is nowadays a well-known global value player, generating alpha returns of over 15%. Bill Ruane was in Graham’s class in 1951 and set up the famous Sequoia Fund in 1970. This fund generated excess returns of over 8% up until the mid-1980s. Buffett’s friend Charlie Munger, who later became Buffett’s partner at Berkshire Hathaway, generated an alpha of 15% on his own fund from 1962 to 1975. Munger’s own disciple Rick Guerin generated an astounding alpha of 31.6% on his Pacific Partners Fund between 1965 and 1983. Over the same period, arts major Stan Perlmeter, who was introduced to Graham’s methods by Buffett, outperformed the S&P 500 by 17% per annum.
What these investors had in common was the Graham methodology and it is to this that we now turn.

GRAHAM’S METHODOLOGY: THE DEFENSIVE INVESTOR

Benjamin Graham’s book “The Intelligent Investor” is regarded by many as the best book on investing ever written. The book first appeared in 1949. The 4th revised edition in 1973 was the last before Graham’s death in 1976.
The central concept Graham outlines in the book is that there is a half-price sale in the stock market every day. The trick for the investor is to know how to judge the difference between price and value. Graham outlines how to establish this value, but he is well aware that the value of the share in question may change, the estimate may be inaccurate, or that the market price movement may not be favorable. Therefore Graham creates a “margin of safety” approach. The greater the surplus of a stock’s “Intrinsic Value” over its price, the greater the margin of safety.
One of Graham’s objectives in his book was to give the investor an understanding of the risks involved in holding shares, which are inseparable from the opportunities for profit and must be carefully considered in the investor’s calculations. The investor must recognize the existence of a speculative factor affecting the value of his stocks. Graham says it is the task of the investor “to keep this component within minor limits and to be prepared financially and psychologically for adverse results that may be of short or long duration.” This in essence is the Defensive Investor strategy.

Graham defines the Defensive Investor as one interested in safety plus freedom from bother. Each Defensive Investor should divide his holdings between high grade bonds and common stocks. The proportion of each should never be less than 25% and never more than 75%. In setting the allocation of funds between equities and bonds, one of Graham’s concerns was inflation. Graham prophetically wrote in 1970 that that “the possibility of large scale inflation remains and that the investor must carry some insurance against it [and although] there is no certainty that a stock component will insure against inflation, it should carry more protection than the bond component”. The return of inflation makes this allocation all the more relevant today.

In selecting his Defensive Portfolio, Graham is categorically against Growth Stocks. He points out that their stock prices often grow at faster rates than profits and command high PE multiples based on inflated expectations, but that these stocks usually decline in the same way and are consequently too risky for the Defensive Investor. This PE contraction was experienced by many Growth Fund Managers during the 2000-2003 Bear Market, who were no match for their Value Driven peers.

TESTING THE DEFENSIVE INVESTOR STRATEGY

In 1981, Henry R. Oppenheimer tested Graham’s Defensive Investor methodology in his book “Common Stock Selection: An Analysis of Benjamin Graham’s Intelligent Investor Approach”. The results of his study suggest that above average results were available to the Defensive Investor, without following Graham’s advice on the equity v bond allocation.

In his various strategies, Graham tried to gain from what we now recognize as persistent anomalies in the Efficient Market Hypothesis, such as the Low PE effect, the small firm effect and the high Dividend Yield strategy. Oppenheimer says that “Graham viewed the PE as a ratio of price paid to value received and was an indicator of current market optimism about a security’s future earnings”. Graham believed in the market’s mispricing of individual securities.

The academic world had started to pay attention to the outperformance of low P/E stocks after Basu’s article in the Journal of Finance in 1977. It appears though that Graham had been well aware of this outperformance as far back as 1951, as one of his students H.G. Schneider had tested the returns of low PE stocks between 1917 and 1950 and found they beat the blue chip Dow Jones Industrial Average.
Graham counselled that growth rates cannot be accurately predicted by analysts – confirmed later by Malkiel and Cragg’s study in 1970. Accordingly, the prices of growth stocks will eventually be revised downward, while low PE stocks will be revised upward. In essence, Graham’s advice for the Defensive Investor is to judge each potential acquisition as a business entity and not to pay too high a price for value received. However, Graham realized that his PE criterion should change over time, particularly in relation to interest rates.

Oppenheimer followed the investment criteria published in each edition of “The Intelligent Investor” namely:

• Adequate diversification of between 10 and 30 shares
• Selected firms to be large, prominent and conservatively financed
a) Book value should be at least 50% of market capitalization (utilities 30%)
b) Assets/turnover should rank in the first quarter/third of its industry
• Dividends paid continuously over the previous 20 years
• Do not pay more than 25 times average earnings over the last seven years
• Do not pay more than 20 times average earnings over the last 12-month period

Furthermore, the portfolios selected under the above principles should be reviewed once every year.

Oppenheimer wrote that in imperfect markets, with heterogeneous expectations and limited short-selling, many over- and underpriced securities will exist. Graham requires the investor to be immune to the market’s sometimes irrational behavior, to search for sound businesses and purchase those that are reasonably priced.

Oppenheimer tested the Defensive Investor strategy and concluded that “during the 20-year period 1955-1975 [statistically] significant returns were available to an investor” – earning on average 3.25% per annum (before taxes) in excess of a market portfolio of comparable risk. He also tested the strategy in periods following publication dates and highlighted a statistically significant outperformance of 9.2% per annum during the 1973 to 1976 period. Oppenheimer summarizes his extensive testing by saying that the results to the Defensive Investor are “surprisingly good”, especially in view of the little time involved.

CONCLUSION

In this essay I have looked at Graham’s Defensive Investor approach, how it has been successfully tested and the success of Graham’s disciples. Graham used other techniques, for example: the Enterprising Investor; the Net Current Asset Approach; and the Central Value Formulae. Although not included in this article, they all have something in common, which is Graham’s philosophy of how to find value in markets. His techniques continue to be refined 32 years after his death, most notably by his chief disciple Warren Buffett, who was recently declared to be the richest man in the world. But Graham remains, as Buffett once wrote, one of those men who plant trees that other men will sit under.

Pagan Festivals in the US

Many of the immigrants coming to America over the last 500 years brought with them a history of Pagan traditions, although they may have been unaware of such. Some of these traditions were written out of history by the Christian churches and Roman colonization. However, in some cases Christianity adopted to the strong local Pagan traditions, for example the Celtic and pre-Celtic traditions of Ireland, which were beyond the reach of the Roman Empire and its campaigns to eliminate Druidism.

The Celtic pagan solar and agricultural festivals of the spring and autumn equinoxes and the summer and winter solstices have survived to this day. There were four great days of the Celtic year: Beltaine at the start of May; Midsummer; Lughnasadh on 1st August; and Samhain on 31st October. After Samhain the Sun says goodbye to its power and must wait a half year under the dominance of the forces of winter darkness and evil. The Winter Solstice marks the shortest day of the year and is a time of hope and rebirth.

I recently had the pleasure of visiting the spectacular passage tomb of Newgrange, located at Brú na Bóinne, County Meath in Ireland. Newgrange is one of the pyramids of Europe. It is the world’s oldest sun observatory and was built some 700 years before the great pyramids in Egypt. During the Winter Solstice, which occurs about the 21st December, a beam of direct sunlight shines through the roof-box above the entrance, goes along the passage and reaches across the tomb chamber floor as far as the front edge of the basin stone in the end recess. Thus the light of the sun, the source of life, enters the darkness of the entrance to the underworld and symbolizes the birth of new life.

The Church took the approximate time of the Winter Solstice and used that as the birth date of Jesus Christ. Just as Jesus had a cup of life, so too was the Celtic God Dagda the owner of the Cauldron of Life. The Dagda “the good God” was the leader of the Tuatha De Danann, the Gods of the Gaelic people of Ireland. The Dagda himself was the son of the River Goddess Danu and Bel (or Bilé) of the Underworld. Bel is seen as the father of the Gaelic Gods and men. It is the Dagda and his son Angus who are associated with the Newgrange site.

In all the Celtic festivals, bonfires are lit on hilltops and hearth fires rekindled. The modern Christmas celebration begins on Christmas Eve, when the traditional Yule log is brought to the family hearth. This log is cut by the male head of the household and the older son, while the table is being set for the Christmas Eve Fast supper. This tradition still exists in many European cultures. The Yule celebrations are of Viking origin and it is they who gave us the 12 days of Christmas.

Decorating the house at Christmas, with plants and flowers, especially holly, which bears its red berries at this time, comes from a heathen tradition. The Roman temples were decorated during the great Winter Feast in December to celebrate the God Saturn, who represented time. The Mistletoe was venerated by the Druids and is considered lucky to hang in a house at Christmas, but is unwelcome in churches, due to its pagan associations. Images of Robins and Wrens also adorn Christmas cards, probably related to Irish Druids interpreting the singing of the latter to predict the future.

New Years Eve celebrations or “Hogmanay” ,as it is called in Scotland, have become very popular in America. They are a mixture of the Celtic Samhain, which is also a year end celebration, the Roman Winter Feast of Saturn and the Viking Yule Tide celebration.

Then on 2nd February the celebration of Imbolc takes place. Also called Oimelc and Candlemas, Imbolc celebrates the awakening of the land and the growing power of the Sun. The word “Im Bolg” means in the belly and is related to the pregnancy of ewes at this time of year. The church have taken this day as their own as it is 40 days after Christ’s birth on 25th December and is the date that his mother Mary has to go to the temple for purification. Using the Orthodox Church’s date of Nativity, then we get 14th or 15th February as the celebration date.

The 1st February, being the Eve of Imbolc, is the Feast of St. Bridget or Bride, the most popular of the Irish saints. “Brigit” is the daughter of Dagda; is the Gaelic goddess of fire, hearth and home; is the Lady of Smithcraft; is the goddess of poetry and is the midwife to spring. Sites bearing her name are found all over northern Europe. The Christian church took the view that it was easier to convert the Irish Pagans if their Gods were converted to Christian saints.

If a hedgehog came out of its hole on St. Bridgets Day then the good weather was judged to have arrived. This tradition was brought to America and this day became Groundhog Day!

Mardi Gras (Fat Tuesday) takes place on the Tuesday before Ash Wednesday, which marks the beginning of the 40 Day Fasting Period of Lent, which ends on Easter Sunday. It was French settlers who brought the tradition to America . Early records write of Mardi Gras celebrations in Nice, France in 1294 and Venice, Italy in 1268. However, although carnival celebrations have had Church approval since the Middle Ages, it is likely that the traditions date back to pre-Christian times, being similar to the Roman festival of Saturn and the Greek celebrations of Dionysus (called Bacchus by the Romans).

The timing of Easter is dependent upon the first Sunday after the Jewish Passover, which in turn comes from the first Full Moon after the Spring Equinox. The Passover celebrates the release of the Jews from their captivity in Egypt. Its timing relates therefore to a pre-Christian lunar based calendar.

The word Easter comes from the Anglo-Saxon fertility God “Eastre”, whose rites where celebrated at the Spring Equinox. This explains the association Easter has nowadays with eggs and rabbits, as the all are connected with fertility. In Babylon this Goddess was known as “Ishtar”. The Hebrews called her “Astarte” or “Ashtoreth”.

There are also many ancient religions which celebrate the death and rebirth of a deity at this time of year. For example, the Romans celebrated the death and resurrection of the God “Attis” on 25th or 26th March, marking the Spring Equinox. Attis was the son of the Cybele, the Divine Mother. This is similar to Dagda above, who was son of Danu (“the source of all rivers”) and her husband Bel.

Another key Celtic festival day is Beltane, or Bealtinne, meaning Bel’s fire. It takes place on 1st May and has now become May Day or Labour Day throughout the world. It is a happy festival when pagans celebrate Beltane with maypole dances, symbolizing the mystery of the Sacred Marriage of Goddess and God – Bel and Danu. The names Danu and Bel are to be found in rivers and towns from Europe to India, demonstrating how ancient these Gods may be. These two are the Lord and Lady of the Wiccans and the time from the evening of 30th April to 1st May is a major feast for witches, as it is described in the “Walpurgisnacht” scene in Goethe’s “Faust”. As the Gaelic wording “-tinne”, meaning fire, in the name suggests there is once again a bonfire involved. The bonfire is still common today, but many of the wilder celebrations of the coming of summer have gone out of fashion.

The great Celtic Festival of Midsummer Day on 24th June, celebrating the victory of sunshine and crops, has been renamed The Feast of St. John, thus associating John the Baptist with the Summer Solstice, just as his cousin Jesus has become part of the Winter Solstice tradition. The Scandinavian countries still hold big Summer Solstice Celebrations. In Ireland the Eve of St. John on 23rd June was known as Bonfire night. The practice of burning animals in baskets on the bonfires was still being practiced in France until a few hundred years ago. Julius Caesar’s diaries record the use of huge wicker-work images which were burnt containing living men. This idea was used in the film the “Wicker Man” set on the Scottish islands.

Lughnasadh or Lammas is the name of the harvest festival, which takes place on 1st August. Lugh is the God of Light and is known as Lugh of the Long Arms, which were said to be golden, which may be connected with rays of light one sees stretching out from the centre of the sun, when squinting at it. His name is to be found in towns and cities around Europe, including Luton, London and Lyon. The mountain Croagh Patrick, in Ireland, was associated with the Lugh. The name of St. Patrick was imposed on the mountain about 800 AD. Incidentally, religious historians have also stated that it is unlikely that St. Patrick was ever there. The pilgrimage climb up Croagh Patrick takes place on the last Sunday in July and is still effectively held on the old feast day of the God Lugh. Lugh is sacrificed at Lughnasadh by his wife Neasa or Nass to ensure the bounty of the land.

Samhain (pronounced 'sow'inn'), which marks the Feast of the Dead, occurs on 31st October. Many Pagans also celebrate it as the old Celtic New Year (although some mark this at Imbolc). On this, as well as the other three major Celtic Festival days Lughnasadh, Imbolc and Beltane, the spirits of the other world join us. Halloween or Samhain sees the sad farewell to the supremacy of the sun and brings the prospect of shorter sunless days and long dark nights. It also marks the start of the New Celtic Year and is considered an ideal time to perform supernatural experiments and spells, for example to see who you will marry.

There are clearly Celtic origins behind American Halloween tradition. On the Aran Islands, in the West of Ireland, people still celebrate Samhain in its purest form. The locals wear costumes, which were in earlier times made of straw. The doors of the house are left open so that spirits or other beings can enter. However, the owners of the house remain silent. Only the pumpkin is missing, as it is not part of the Celtic tradition.