Showing posts with label Market strategies. Show all posts
Showing posts with label Market strategies. Show all posts

Friday 8 October 2010

Contradictory strategies

For almost any strategy that's been proposed as a good one with shares, there's also a contradictory one.  And the interesting thing is that a strategy may work in certain circumstances whereas in different circumstances the contradictory strategy may work just as well.  There are several important conclusions from this:
  • There's no one strategy with shares that works in all circumstances.
  • The most important factor is to decide on a strategy and stick to it.  Chopping and changing at the spur of the moment and not sticking to your strategy is the cause of most problems in share investing.

Tip

When you've decided on a strategy, stick to it. Give it a fair trial, and change only if the fair trial convinces you that your strategy needs to be adjusted (or abandoned).

Thursday 27 May 2010

****Eight lessons of investing


Eight lessons of investing

I believe the fundamentals of equity investing remain unscathed and investors should learn eight key lessons.

By Kevin Murphy
Published: 7:31AM BST 26 May 2010

During the past 18 months we have seen unprecedented economic events, but I believe the fundamentals of equity investing remain unscathed and investors should learn eight key lessons.

LESSON ONE: PATIENCE IS A VIRTUE
Market sentiment can create exceptional opportunities for investors with patience. At times of market ''panic'', share prices fluctuate far more than underlying fundamentals of many businesses warrant. This creates great opportunities.

There have been many bargains over the past 18 months, Next is a particularly good example. The retailer saw share prices fall from £24 at the peak, to £8 at the trough.

This reflected investors' fears about global recession, but Next seemed a robust company with low net debt and unlikely to go bust. With shares seemingly trading at a low of four times normalised earnings this was a chance to acquire a quality business at a low price. Shares have shot back to more than £20.

LESSON TWO: IGNORE ECONOMISTS

While fund managers are frequently asked their economic views, macro-forecasting is notoriously difficult. The process relies on predicting a range of interrelated variables.

The number of economists proven wrong during this crisis highlights the scale of the challenge. There is little point forecasting economic outlook or using macro-forecasts to determine company values.

Economic growth often has an inverse relationship with subsequent stock market performance.

Research from the London Business School shows stock market returns are no higher in countries with high GDP growth and countries with low GDP growth can exhibit the best stock market performance.

This is an intuitive trend. Stock markets are discounting mechanisms that always look forward and equity markets can rally even while economic growth remains low.

LESSON THREE: CHEAP IS BEST

If macro trends are not the best indicator of stock market returns, valuation remains the surest guide to future investment performance and data illustrates that buying securities on low valuations gives the best opportunity for future returns.

Buying shares at around 5-10 times earnings, would usually see annualised returns for the next 10 years of more than 10pc. In contrast, buying shares on 25-30 times would see extremely disappointing future returns.

LESSON FOUR: GOOD COMPANIES ARE NOT ALWAYS A ''BUY''

Buying a ''good'' company at the wrong price can seriously affect overall returns.

GlaxoSmithKline, a very good company, generated earnings per share of about 50p in 1999-2000 and was trading at around £20 – equivalent to 40 times earnings.

Despite good earnings growth, it did not offer good value at that price. Ten years on, earnings have doubled while the share price has halved. The stock is more attractive now.

LESSON FIVE: IT IS THE AVERAGE THAT COUNTS

Peaks and troughs are part of operating and share price performance, but there is a tendency to revert to averages.

Companies with high profits are unlikely to generate that growth forever and companies with low profits are unlikely to be stuck in long-term ruts.

When valuing companies, strip out peaks and troughs and look at average long-term earnings potential – the intrinsic value or ''normalised'' profit potential.

Barclays' share price was about 700p in 2007, with earnings per share (EPS) of 70p. However, EPS looked unsustainably high given a ''normalised'' earnings estimate of 45p per share.

Mean reversion worked its magic and by April 2009 earnings forecasts dropped to 12p per share and shares to 50p.

Barclays faced obvious pressures, but this seemed a good company whose long-run earnings potential did not appear to have changed. The shares seemed to be trading at just one times normalised earnings – a low valuation that has corrected significantly in the past year.

LESSON SIX: DIVIDEND HISTORY IS KEY

As investors search hard for yield, it is important to note companies' long-term ability to pay dividends, rather than being swayed by short-term distributions.

Some utility companies need to increase their debt every year in order to maintain their dividend at its current level.

Conversely, a company such as AstraZeneca looks to be generating £8-9bn net cash each year, and is paying around £4bn in dividends. This is clearly sustainable and also gives the company flexibility.

LESSON SEVEN: SIZE DOESN'T MATTER

Tracking error (how different a fund looks from its benchmark index) is a widely used ''risk'' measure, but it is inappropriate to assess portfolios on this alone. Not owning a large FTSE All-Share constituent like British American Tobacco results in a higher tracking error and, theoretically, a higher 'risk'.

However, is it more or less 'risky' for investors to buy a company simply because it accounts for a large proportion of the index, and potentially overpay?

It is preferable to assess investments in terms of absolute risk, looking at

valuation risk (the risk of overpaying),
earnings risk (the risk earnings decline over time) and
financial risk (the risk of insolvency).

If an investment's potential returns significantly outweigh the balance of risks, it should be viewed as an attractive long-term opportunity, regardless of index size.

LESSON EIGHT: DON'T FOLLOW THE HERD

Willingness to go against the crowd (and for your fund to look different to the index) is fundamental for generating superior long-term returns.

Given ongoing search for yield and the disappearance of the banks as major dividend payers, many income funds have been forced into a smaller set of high yielding stocks. In many cases, these are among the biggest stocks in the market – names like BP, Royal Dutch Shell, BHP Billiton and Tesco.

This trend has left many funds in the income sector clustered in just a handful of stocks. This is not the way to produce superior performance.

Kevin Murphy is the manager of the Schroder Income Fund

http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/7765851/Eight-lessons-of-investing.html






















Eight lessons of investing

I believe the fundamentals of equity investing remain unscathed and investors should learn eight key lessons.

By Kevin Murphy
Published: 7:31AM BST 26 May 2010

During the past 18 months we have seen unprecedented economic events, but I believe the fundamentals of equity investing remain unscathed and investors should learn eight key lessons.

LESSON ONE: PATIENCE IS A VIRTUE
Market sentiment can create exceptional opportunities for investors with patience. At times of market ''panic'', share prices fluctuate far more than underlying fundamentals of many businesses warrant. This creates great opportunities.

There have been many bargains over the past 18 months, Next is a particularly good example. The retailer saw share prices fall from £24 at the peak, to £8 at the trough.

This reflected investors' fears about global recession, but Next seemed a robust company with low net debt and unlikely to go bust. With shares seemingly trading at a low of four times normalised earnings this was a chance to acquire a quality business at a low price. Shares have shot back to more than £20.

LESSON TWO: IGNORE ECONOMISTS

While fund managers are frequently asked their economic views, macro-forecasting is notoriously difficult. The process relies on predicting a range of interrelated variables.

The number of economists proven wrong during this crisis highlights the scale of the challenge. There is little point forecasting economic outlook or using macro-forecasts to determine company values.

Economic growth often has an inverse relationship with subsequent stock market performance.

Research from the London Business School shows stock market returns are no higher in countries with high GDP growth and countries with low GDP growth can exhibit the best stock market performance.

This is an intuitive trend. Stock markets are discounting mechanisms that always look forward and equity markets can rally even while economic growth remains low.

LESSON THREE: CHEAP IS BEST

If macro trends are not the best indicator of stock market returns, valuation remains the surest guide to future investment performance and data illustrates that buying securities on low valuations gives the best opportunity for future returns.

Buying shares at around 5-10 times earnings, would usually see annualised returns for the next 10 years of more than 10pc. In contrast, buying shares on 25-30 times would see extremely disappointing future returns.

LESSON FOUR: GOOD COMPANIES ARE NOT ALWAYS A ''BUY''

Buying a ''good'' company at the wrong price can seriously affect overall returns.

GlaxoSmithKline, a very good company, generated earnings per share of about 50p in 1999-2000 and was trading at around £20 – equivalent to 40 times earnings.

Despite good earnings growth, it did not offer good value at that price. Ten years on, earnings have doubled while the share price has halved. The stock is more attractive now.

LESSON FIVE: IT IS THE AVERAGE THAT COUNTS

Peaks and troughs are part of operating and share price performance, but there is a tendency to revert to averages.

Companies with high profits are unlikely to generate that growth forever and companies with low profits are unlikely to be stuck in long-term ruts.

When valuing companies, strip out peaks and troughs and look at average long-term earnings potential – the intrinsic value or ''normalised'' profit potential.

Barclays' share price was about 700p in 2007, with earnings per share (EPS) of 70p. However, EPS looked unsustainably high given a ''normalised'' earnings estimate of 45p per share.

Mean reversion worked its magic and by April 2009 earnings forecasts dropped to 12p per share and shares to 50p.

Barclays faced obvious pressures, but this seemed a good company whose long-run earnings potential did not appear to have changed. The shares seemed to be trading at just one times normalised earnings – a low valuation that has corrected significantly in the past year.

LESSON SIX: DIVIDEND HISTORY IS KEY

As investors search hard for yield, it is important to note companies' long-term ability to pay dividends, rather than being swayed by short-term distributions.

Some utility companies need to increase their debt every year in order to maintain their dividend at its current level.

Conversely, a company such as AstraZeneca looks to be generating £8-9bn net cash each year, and is paying around £4bn in dividends. This is clearly sustainable and also gives the company flexibility.

LESSON SEVEN: SIZE DOESN'T MATTER

Tracking error (how different a fund looks from its benchmark index) is a widely used ''risk'' measure, but it is inappropriate to assess portfolios on this alone. Not owning a large FTSE All-Share constituent like British American Tobacco results in a higher tracking error and, theoretically, a higher 'risk'.

However, is it more or less 'risky' for investors to buy a company simply because it accounts for a large proportion of the index, and potentially overpay?

It is preferable to assess investments in terms of absolute risk, looking at 

  • valuation risk (the risk of overpaying), 
  • earnings risk (the risk earnings decline over time) and 
  • financial risk (the risk of insolvency).

If an investment's potential returns significantly outweigh the balance of risks, it should be viewed as an attractive long-term opportunity, regardless of index size.

LESSON EIGHT: DON'T FOLLOW THE HERD

Willingness to go against the crowd (and for your fund to look different to the index) is fundamental for generating superior long-term returns.

Given ongoing search for yield and the disappearance of the banks as major dividend payers, many income funds have been forced into a smaller set of high yielding stocks. In many cases, these are among the biggest stocks in the market – names like BP, Royal Dutch Shell, BHP Billiton and Tesco.

This trend has left many funds in the income sector clustered in just a handful of stocks. This is not the way to produce superior performance.

Kevin Murphy is the manager of the Schroder Income Fund

http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/7765851/Eight-lessons-of-investing.html





Friday 5 February 2010

Can you be brave, or Will you cave?

Many people stop investing precisely because the stock market goes down.  

Psychologists have shown that most of us do a very poor job of predicting today how we will feel about an emotionally charged event in the future.

Because so few investors have the guts to cling to stocks in a falling market, Benjamin Graham insists that everyone should keep a minimum of 25% in bonds.  That cushion, he argues, will give you the courage to keep the rest of your money in stocks even when the stocks stink.

One advice given is that you should not place 100% of your security portfolio money in stocks unless you....

1.  have set aside enough cash to support your family for at least one year.
2.  will be investing steadily for at least 20 years to come.
3.  survived the bear market that began in 2007.
4.  did not sell stocks during the bear market that began in 2007.
5.  bought more stocks during the bear market that began in 2007.
6.  have read chapter 8 of Graham's Intelligent Investor (human psychology emphasis).

Sunday 15 November 2009

****Bull and Bear Market Strategies - Damn Bloody Good Gems!


Bull and Bear Market Strategies
The stock market often falls under the conditions of the so called bull and bear markets. Intelligent investors are well familiar with the conditions of both and know exactly what to do.


The names of the two market conditions are used in order to imply the effect that these markets may have on the value of your stocks.


The stock market hides its risks in terms of devaluating your stocks when the prices are down. However, an educated investor should be familiar with the difference between a decline in the market and a general problem with the stocks.


There are many examples which show that even under the conditions of a bear market some types of stocks perform well. The same is true under the conditions of a bull market. On the other hand, some stocks do really suffer from such extraordinary market conditions.


Why is that? The major reason for this is that stocks don't respond equally to the rises and falls of the market.


If you have done an educated investment that was based on thorough preliminary analysis you will be in an advantageous position relative to an investor that has invested in stocks just like that.


The difference between a trader and an investor is that the latter invests in a particular company stock because he likes the company and its activities. S/he is well informed and attached to the company. That is why in bad market conditions the investor will be able to tell whether the decreasing price is in accordance to the decreasing market trend or there is a problem within the company that drives the price down.


What to Do?
Under a down market you have several options.
  • One of them is to sell immediately in order to minimize your losses.
  • Another option is to let the market work its way through the problem with no action from your side.
  • A third option is to benefit from the stock decline and add some more to your portfolio. But, this should be done only if you don't perceive that there is something wrong with the company that has led to the stock decline.


A bull market may make your stock's price increase, from which you can benefit in one way or another. However, the possibility of your stock becoming too costly always exists since after the up a down in the price may follow, which may be of an extreme speed.


So, under bull market conditions you can do one of the following in order to counteract the potentially negative effects.
  • First of all, you can sell a part of the shares and use the money to repurchase the stock when its price falls again.
  • Secondly, you can leave the market work its way through the imbalance with no action from your side.
  • Thirdly, you can take advantage of the high prices and sell the stocks for a profit.


Never forget that a market correction will follow that may push the price of your stock below its initial level.


A useful strategy to counteract the negative effects of a bull market is to sell a portion of your stocks at the current bull market price, which will be greatly higher than the one at which you have purchased the stock. After the market correction is at place you can use the money you have acquired from the bull market sale to purchase shares at the current lower price. As a result you will have more stocks than you used to have before the bull market. You have not only avoided losses but also have reduced your average cost per share.


Final Piece of Advice
Never forget that it is important to base your decisions on knowledge not on feelings. This means that being educated about the company and the industry from which your stocks come from, the market conditions under which you operate will be of small importance to you.

http://www.stock-market-investors.com/stock-strategies-and-systems/bull-and-bear-market-strategies.html

Saturday 11 April 2009

Market Strategies Review Notes I (January 2009)

AVERAGING DOWN
Averaging Down: Good Idea Or Big Mistake?


THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
THRIVING IN EVERY MARKET
MR. MARKET
SUITABLE SECURITIES AT SUITABLE PRICES
PAYING RESPECT TO THE MARKET
TIMING VERSUS PRICING
BELIEVING A BULL MARKET
THE PAUSE AT THE TOP OF THE ROLLER COASTER
MAKING FRIENDS WITH A BEAR
BARGAINS AT THE BOTTOM
SIGNS AT THE BOTTOM
BUYING TIME
IF YOU ABSOLUTELY MUST PLAY THE HORSES


BALANCE SHEET VALUE: ASSETS AT WORK
1.Balance Sheet Value: Assets at Work
2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary


INCOME STATEMENT VALUE
Income Statement Value: The Earnings Payoff
Adjustments in Current Earnings figure
Avoid Pro Forma financial figures
Avoid Extrapolated Future Earnings Growth figures
Estimating Growth in Value Investing
Franchise Value
GROWTH'S VALUE
GROWTH'S VALUE (illustrations)


CASH FLOW STATEMENT VALUE
Cash Flow Statement Value
Discounted Cash Flow valuation method
Hazards of the Future and Limitations of DCF


UNDERSTANDING DISCOUNT RATES
Understanding Discount Rates
Risk-free rate
Traditional Method: Discount rate or WACC (I)
Traditional Method: Discount rate or WACC (II)
Modern Portfolio Theory
Portfolio Theory: Market Risk Premiums
Portfolio Theory: Beta
Is the market efficient, always?
Discount Rate Determinations: Summary


STOCK MARKET PRICES
Stock Market Prices
Market metrics P/E and Intrinsic value
Rational Thinking about Irrational Pricing
The Anxiety of Selling
Control Value of Majority Interest


10 TENETS OF VALUE INVESTING
MR. MARKET PRINCIPLE
BUSINESS ANALYST PRINCIPLE
REASONABLE PRICE PRINCIPLE
PATSY PRINCIPLE
CIRCLE OF COMPETENCE PRINCIPLE ****
MOAT PRINCIPLE
MARGIN OF SAFETY PRINCIPLE ****
IN-LAW PRINCIPLE
ELITISM PRINCIPLE
OWNER PRINCIPLE


SUBSETS OF RISKS:
Partitioning Risk
Business risk
Financial risk
Purchasing power risk
Interest rate risk
Foreign exchange risk
Political risk
Social risk


Also read:
My Investment Philosophy and Strategy
****Investment Philosophy, Strategy and various Valuation Methods