Showing posts with label The Intelligent Investor: A Negative Approach to Portfolio Policy for the Enterprising Investor. Show all posts
Showing posts with label The Intelligent Investor: A Negative Approach to Portfolio Policy for the Enterprising Investor. Show all posts

Thursday 14 May 2015

Positive Power of Negative Thinking


Positive Power of Negative Thinking: Great Leaders Build Great Businesses on the Realities of Negative Thinking…



Negative thinking (fear, doubt, worry…) is a fact of life and of business… You can’t stop negative thinking from entering the workplace, but you can stop it from limiting you and your team… The positive power of negative thinking is a check to the natural, irrational exuberance we feel when we try to attain success. Also, by thinking about the negative events, if and when they occur, the bitter taste of their impact will be lessened thanks to planning… According to Michelle Kerrigan; negative thinking is a catalyst in the change process… managing change means managing negative thinking– including your own. True transformation works best when it is driven by emotion and by support, and by believing everything will be OK, after you worry that it won’t… According to Seth Godin; positive thinking and confidence improves performance… whereas, negative thinking feels realistic, protects us, lowers expectations… In many ways, negative thinking is a lot more fun than positive thinking– so we do it… Positive thinking is hard, but worth it… According to J. D. Fencer; positive thinking– it doesn’t guarantee success, but lack of it guarantees failure… But, the facts remain– a healthy dose of both positive and negative thinking are required for a successful business, organization


http://bizshifts-trends.com/2014/04/23/positive-power-negative-thinking-power-great-leaders-build-great-businesses-reality-negative-outcomes/

Monday 25 March 2013

The Intelligent Investor by Benjamin Graham: What the Enterprising Investor should Avoid.


Portfolio Policy for the Enterprising Investor – the Negative Side
What to Avoid
The aggressive investor should start with the same base as the defensive investor, dividing the portfolio more or less equally between stocks and bonds. 
What to Avoid
To avoid losses or returns lower than that of the defensive investor, the aggressive investor should steer clear of the following pitfalls:
1.      Avoid all preferred stocks.  Preferred stock rarely possesses upside component that is the basis for owning common stock. Yet compared to debt, preferred stock affords little protection.  Since dividends can be suspended at anytime, unlike debt, why not just own debt instead? 
2.      Avoid inferior (“high yield” or “junk”) bonds unless such bonds are purchased at least 30% below their par value for high coupon issues, or 50% below par value for other issues.  The risk of these issues is rarely worth the interest premium that they offer.
3.      Avoid all new issues.
4.      Avoid firms with “excellent” earnings limited to the recent past.
Quality bonds should have “Times Interest Earned” ratio, that is EBIT/net interest, of at least 5x
Preferred stocks, convertible bonds, and other high yield or “junk” bonds often trade significantly below par during their issue, so purchasing them at par is unwise.
During economic downturns, lower quality bonds and preferred stocks often experience “severe sinking spells” where they trade below 70% of their par value.
For the minor advantage in annual income of 1%-2%, the buyer risks losing a substantial amount of capital, which is bad business. 
Yet purchasing these issues at par value provides no ability to achieve capital gains.
Therefore, unless second grade bonds can be purchased at a substantial discount, they are bad deals!
Foreign Government Bonds are worse than domestic high yield junk, for the owner of foreign obligations has no legal or other means of enforcing their claims. 
This has been true since 1914.  
Foreign bonds should be avoided at all costs.
Investors should be wary of all new issues.  
New issues are best left for speculators
In addition to the usual risks, new issues have salesmanship behind them, which artificially raises the price and requires an additional level of resistance. 
Aversion becomes paramount as the quality of these issues decrease.
During favorable periods, many firms trade in their debt for new bonds with lower coupons. 
This inevitably results in too high a price paid for these new issues, which then experience significant declines in principal value.
Common stock issues take two forms - - those that are already traded publicly (secondary issues) and those that are not already traded publicly (IPOs). 
Stock that is already publicly traded does not ordinarily call for active selling by investment houses, whereas the issue of new stock requires an active selling effort. 
Most new issues are sold for account of the controlling interests, which allows them to cash-in their equity during the next several years and to diversify their own finances.
Not only does danger arise from the poor character of businesses brought public, but also from the favorable market conditions that permit initial public offerings.
New issues during a bull market usually follow the same cycle. 
As a bull market is established, new issues are brought public at reasonable prices, from which adequate profits may be made. 
As the market rise continues, the quality of new issues wanes. 
In fact, one important signal of a market downturn is that new common stocks of small, nondescript firms are offered at prices higher than the current level for those of medium sizes with long market histories.
In many cases, new issues of common stock lose 75% or more of their initial value
Thus, the investor should avoid new issues and their salespeople. 
These issues may be excellent values several years after their initial offering, but that will be when nobody else wants them.

Thursday 2 July 2009

The Intelligent Investor: A Negative Approach to Portfolio Policy for the Enterprising Investor

But first, a chapter of cautionary advice. Graham is nothing if not cautious, after all. The focus here is on things that even enterprising investors should avoid.

Chapter 6 - Portfolio Policy for the Enterprising Investor: Negative Approach
So, what should you avoid?

First, avoid junk bonds. If they have anything less than a stellar bond rating, don’t bother, even if they appear to return very well. Junk bonds put your principal at risk, and the point of buying bonds is to have a safe portion of your portfolio.

Second, avoid foreign bonds. Here, there are stability issues, and it’s often hard to adequately judge the risk of buying bonds from government and private entities operating under rules unfamiliar to you. Today, arguably, Graham would be okay with buying bonds within the European Union, but I would guess Graham would avoid anything outside of that.

Third, avoid preferred stocks. Preferred stocks are ones that have a higher priority in the event of a liquidation of the business, but often come at a premium price. Almost always, Graham doesn’t feel these are worth any sort of premium. Of course, in the United States, preferred stock is generally not sold directly to individual investors, only to large institutions, so it’s largely a moot point.

Finally, avoid IPOs. To put it simply, new issues do not have any track record upon which to adequately judge the company. The “hype” of an IPO is all you really have to judge the issue on. Instead, let others jump into that feeding frenzy and wait until time has shown which companies swim and which ones sink.

Those are some good rules for anyone to follow, particularly if you’re concerned about not losing the money you invest. Most of these investments have a pretty significant amount of risk and in Graham’s world, one shouldn’t put the principal at undue risk.


Commentary on Chapter 6
Zweig looks at modern examples of all four of these cases and largely comes to the same conclusions as Graham: they’re quite risky and probably not worth it for the average investor. The only caveat that Zweig makes is that there could be room for a mutual fund of junk bonds in a large and diverse portfolio, but it should be considered risky and not be considered anywhere close to a “safe” portion of the portfolio.

Zweig also covers day trading here, describing it as something for most people to avoid. Why? In a world where trading is completely free and trades could be always executed without delay, many people could make a solid income from day trading.

But that’s not the real world. Brokerage fees can eat up a lot of one’s gains, as can trading delays. This forces day traders to walk a tightrope - it becomes a high risk game, and that’s not a game for an investor with any conservative streak. Zweig almost writes it off as gambling, in fact.

So, in short, avoid junk bonds, foreign bonds, IPOs, and day trading and you’re off to a good start in Graham’s world.


Ref: The Intelligent Investor: A Negative Approach to Portfolio Policy for the Enterprising Investor