myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.

Wednesday 7 April 2010

Insight into stock trading

Wednesday April 7, 2010

Insight into stock trading
PERSONAL INVESTING

By OOI KOK HWA

ooi_kok_hwa@hotmail.com

A LOT of retail investors like to trade in stocks. As a result of high losses incurred over the years, especially on stocks that have been delisted, they do not believe in holding stocks for the long term.

They believe stocks are suitable for trading and not for long-term investment.

Stock trading is not as simple as trading based on tips and market rumours. Most retail investors actually rely on tips from their remisiers to help them make quick gains from the stock market.

Investors need to understand that trading involves high discipline, commitment of time and skills. Based on interviews with some top traders, Jack D. Schwager concluded that all successful traders are serious about their trading and are willing to spend a lot of time on market analysis and trading strategies.

The secret to their success is usually a methodology that worked for them, together with having very rigid loss-control.

They always act independently of the crowd and have the patience to wait for the right timing for trading. In addition, all the successful traders understand that losing money from trading is part of the game.

A lot of traders always say that trading in stocks has a lower risk than buying stocks for the long term. Many retail investors like to buy stocks for trading because they do not have the patience to hold stocks for the long term.

But whenever they incur losses, they tend to change their original objective of stock trading to long-term investment, not knowing that the majority of those stocks for trading are not suitable for long-term investment.

While some of them may be aware of this important fact, due to their unwillingness to admit their mistakes by cutting losses, they choose to continue to hold on to the stocks. As a result, they get stuck with a lot of poor fundamental stocks in their portfolio for the long term. Most of the time, they will hold those stocks until they get delisted!

'Investors' need to understand that stock trading involves constant locking in of gains and cutting of losses. They must always set target profits (profits per trade or PPT) and maximum loss (loss per trade or LPT) for every trade. They need to set the target number of trades that are supposed to bring gains, which is also known as trading success ratio (success ratio or SR).

They then need to set the target number of trades that they are willing to be involved in per month (trades per month or TPM).

Hence, profits that can be made by a trader will very much depend on his SR as well as TPM. Most of the time, the target PPT and maximum LPT are relatively constant and are dependent on individual risk tolerance level and skills.

For example, an investor has set his PPT at RM500, LPT at RM300 and SR at 60%. If he sets 10 TPM, based on SR of 60%, of the 10 trades that he has made, six trades will make gains of RM500 each and four trades will incur losses of RM300 each. The net gain for 10 trades will be RM1,800 ((6xRM500) – (4xRM300)). If the trader intends to increase his profits, he needs to do more trades per month; in other words, increase the TPM.

Given that the movement of stock prices is random, the probability of stock prices moving up or down is 50%. We think it is a great achievement if a trader can achieve an SR of 55% to 60%. Most retail investors hope for 90% because they are not willing to cut losses.

As a result, they will wait for the stock price to break even whenever it drops below their purchase prices. However, the longer they wait, the more losses they will incur. Most of the time, of the 10 trades done, they may achieve SR of 90% where nine trades may give them gains but the one trade that incurs loss may wipe out all their nine gains!

We agree that the above methodology is easier said than done. A lot of times, investors may have the discipline to lock in their gains, but do not have the discipline to cut losses.

Besides, investors need to allocate a certain amount for their trading capital, which is the amount that investors are willing to lose in stock trading. It should not cause financial problems to investors if they lose all the trading capital.

Lastly, investors should not average down their losing position. If they have incurred losses in the past three to four trades, it means they may have lost touch with the market timing and sentiment. In this case, it may be good for them to take a break from trading and analyse the reasons behind those losses before continuing.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2010/4/7/business/6003482&sec=business

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My 18 points guide to Successfully compounding your money in Stocks

Be a good stock picker.
Think as a business owner.
Always look at value rather than the price. Do the homework.
Buy and hold is alright for selected stocks.
Compounding is your friend, get this to work its magic.
Mr. Market is there to be taken advantage of. Do not be the sucker instead. BFS;STS.
Always buy a lot when the price is low.
Never buy when the stock is overpriced.
It is alright to buy when the selected stock is at a fair price.
Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the price is still obviously too high.
Do not time the market for such or any stocks.
By keeping to the above strategy, the returns will be delivered through the growth of the company's business.
So, when do you sell the stock? Almost never, as long as the fundamentals remain sound and the future prospects intact.
The downside risk is protected through only buying when the price is low or fairly priced.
Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.
Sell urgently when the company business fundamental has deteriorated irreversibly.
You may also wish to sell should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality. However, unlike point 16, you can do so leisurely.
In conclusion, a critical key to successful investing is in your stock picking ability.

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html

11 Lessons From Peter Lynch

Peter Lynch taught me:

1. Behind every stock is a company. Find out what it’s doing.
2. Never invest in any idea you can’t illustrate with a crayon.
3. Over the short term, there may be no correlation between the success of a company’s operations and the success of its stock. Over the long term, there’s a 100% correlation.
4. Buying stocks without studying the companies is the same as playing poker – and never looking at your cards.
5. Time is on your side when you own shares of superior companies.
6. Owning stock is like having children. Don’t get involved with more than you can handle.
7. When the insiders are buying, it’s a good sign.
8. Unless you’re a short seller, it never pays to be pessimistic.
9. A stock market decline is as predictable as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.
10. Everyone has the brainpower to make money in stocks. Not everyone has the stomach.
11. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

Lynch’s advice had a profound effect on my stock market approach. He taught me that investment success isn’t the result of developing the right macro-economic view or deciding when to jump in or out of the market. Success is about researching companies to identify those that are likely to report positive surprises.

Capital Expenditure

A great company with a Durable Competitive Advantage will have a ratio of Capital Expenditures to Net Income of less than 25%. Less is better.

Capital Expenditures are expenses on:
- fixed assets such as equipment, property, or industrial buildings
- fixing problems with an asset
- preparing an asset to be used in business
- restoring property
- starting new businesses

A good company will have a ratio of Capital Expenditures to Net Income of less than 50%.

A great company with a Durable Competitive Advantage will have a ratio of less than 25%.

Less is better.

Benjamin Graham's 113 Wise Words

The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

Philip Fisher's Wise Words

"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

The Ultimate Hold-versus-Sell Test

Here is the overriding primary test, followed by observations on why it is so critically important:

Knowing all that you now know and expect about the company and its stock (not what you originally believed or hoped at time of purchase), and assuming that you had available capital, and assuming that it would not cause a portfolio imbalance to do so, would you buy this stock today, at today's price?

No equivocation. Yes or no?

Answers such as maybe or probably are not acceptable since they are ways of dodging the issue. No investor probably buys a stock; they either place an order or do not.

Here is the implication of your answer to that critical test: if you did not answer with a clear affirmative, you should sell; only if you said a strong yes, are you justified to hold.

Some thoughts on Analysing Stocks (KISS)

Ideally a stock you plan to purchase should have all of the following charateristics:

• A rising trend of earnings dividends and book value per share.
• A balance sheet with less debt than other companies in its particular industry.
• A P/E ratio no higher than average.
• A dividend yield that suits your particular needs.
• A below-average dividend pay-out ratio.
• A history of earnings and dividends not pockmarked by erratic ups and downs.
• Companies whose ROE is 15 or better.
• A ratio of price to cash flow (P/CF) that is not too high when compared to other stocks in the same industry.

Margin of Safety Concept: Stocks should be bought like groceries, not like perfume

The high CAGR in the early years of the investing period, due to buying at a discount, tended to decline and approach that of the intrinsic EPS GR of the companies over a longer investment time-frame.

Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?

myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Wednesday 7 April 2010

Insight into stock trading

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All equity security investments present a risk of loss of capital

The Ultimate Hold-versus-Sell Test

Some thoughts on Analysing Stocks (KISS)

Benjamin Graham

Sell the losers, let the winners run.

Investment Style

Warren Buffett

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