Showing posts with label long-term winners. Show all posts
Showing posts with label long-term winners. Show all posts

Sunday 7 April 2013

Invest like Buffett - Hold on to your Winners Forever

Best holding period is holding forever.
Sell your losers, hold on to your winners.

SELL THE LOSERS, LET THE WINNERS RUN.
Losers refer NOT to those stocks with the depressed prices but to those whose revenues and earnings aren't capable of growing adequately. Weed out these losers and reinvest the cash into other stocks with better revenues and earnings potential for higher returns.




< I suggest this video: http://www.youtube.com/watch?v=WVqyCRYBieI >
Newbie
on 4/7/13

Thanks to Newbie for highlighting this video to me.

Thursday 28 May 2009

Observing Long-Term Investing

Observing Long-Term Investing

Study the 2 lists of the top 30 shareholders of a particular company below.

Excluding the institutions, there are 10 individual investors who invested in this company from the year 2002 to 2008. These are certainly long-term investors.

The share price of this compay ranged 3.85 to 8.35 in 2002.

In 2008, the price ranged from 10.50 to 13.00.

It is presently priced at 10.70.

The dividend per share for the recent 6 years were 5.8c (2002), 12.8c (2003), 56c (2004), 63.2c (2005), 63.5c (2006), 63.5c (2007), giving a total of 264.8c. The DY the last 5 years ranged from 10.1% to 6.7% varying with the share price.

What lessons can we derive from the investing behaviours of these long-term "buy and hold" investors? Perhaps, you may spot my name within this list. hahaha!!

http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f8098680348256c6f0017a6bf/6a8c0c56bb45fd2c48256d02000ff5d0/$FILE/DLady-AnnualReport%202002%20(950KB).pdf
Dutch Lady Annual Report 2002
30 Largest Shareholders Page 45

1. Frint Beheer IV BV* 32,074,800 50.12
2. Amanah Raya Nominees (Tempatan) Sdn Bhd* 16,008,000 25.01 %
- Skim Amanah Saham Bumiputera
3. RHB Nominees (Asing) Sdn Bhd 540,000 0.84 %
- Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A.
4. Yong Siew Lee 270,000 0.42 %
5. Kumpulan Wang Simpanan Guru-Guru 220,000 0.34%
6. Yeo Khee Bee 215,000 0.34 %
7. Employees Provident Fund Board 201,000 0.31%
8. Menteri Kewangan Malaysia Section 29 (SICDA) 189,800 0.30 %
9. Ng Lam Shen 160,000 0.25 %
10. Quek Guat Kwee 160,000 0.25 %
11. Amanah Raya Nominees (Tempatan) Sdn Bhd 157,000 0.25 %
-Dana Johor
12. Universiti Malaya 144,000 0.23 %
13. Amanah Raya Nominees (Tempatan) Sdn Bhd 128,000 0.20 %
-Amanah Saham Johor
14. Lee Sim Kuen 120,000 0.19 %
15. Tong Yoke Kim Sdn Bhd 120,000 0.19 %
16. Foo Mee Lee 117,404 0.18 %
17. Wong So-Ch’I 111,000 0.17 %
18. Soon Ah Khun @ Soon Lian Huat 110,000 0.17 %
19. Wong So Haur 109,000 0.17 %
20. Lim Teh Realty Sdn Bhd 90,000 0.14 %
21. Foo Loke Weng 80,804 0.13 %
22. HSBC Nominees (Asing) Sdn Bhd 80,000 0.13 %
- Pictet and Cie for Ace Fund Sicav (Emerging Market)
23. Mayban Nominess (Tempatan) Sdn Bhd 75,000 0.12 %
- for Goh Sin Bong
24. Lim Pin Kong 75,000 0.12 %
25. Neoh Soon Leong 72,000 0.11 %
26. See Cheng Siang 72,000 0.11 %
27. Leong Lai Meng 60,000 0.09 %
28. Looi Chin Seng 60,000 0.09 %
29. HSBC Nominees (Tempatan) Sdn Bhd 60,000 0.09 %
- for Goh Hiong Eng
30. Sak Mok @ Sak Swee Len 58,000 0.09%




http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f8098680348256c6f0017a6bf/5f300a009db8aabf482575a70014e6ae/$FILE/DLADY-AnnualReport2008%20(1MB).pdf
Dutch Lady Annual Report 2008
30 Largest Shareholders Page 49

1. Frint Beheer IV BV* 32,074,800 50.12%
2. Amanah Raya Nominees (Tempatan) Sdn Bhd 12,500,000 19.53%
- Skim Amanah Saham Bumiputera
3. Kumpulan Wang Persaraan (Diperbadankan) 2,109,200 3.3%
4. Permodalan Nasional Berhad 1,843,500 2.88%
5. Public Nominees (Tempatan) Sdn Bhd 837,300 1.31%
- Pledged Securities Account for Aun Huat & Brothers
Sdn Bhd (E-IMO/BCM)
6. Aun Huat & Brothers Sdn Bhd 587,100 0.92%
7. Cartaban Nominees (Asing) Sdn Bhd 540,000 0.84%
- Exempt An For Bank Sarasin-Rabo (Asia) Limited (AC Client Frgn)
8. Yong Siew Lee 430,000 0.67%
9. Yeo Khee Bee 391,300 0.61%
10. Quek Guat Kwee 162,000 0.25%
11. Kumpulan Wang Simpanan Guru-Guru 156,300 0.24%
12. SBB Nominees (Tempatan) Sdn Bhd 144,000 0.23%
- Universiti Malaya (CAFM)
13. Citigroup Nominees (Asing) Sdn Bhd 125,700 0.20%
- CBNY For DFA Emerging Markets Small Cap Series
14. Lee Sim Kuen 120,000 0.19%
15. Wong So-Ch’i 111,000 0.17%
16. Tong Yoke Kim Sdn Bhd 110,000 0.17%
17. Wong So Haur 109,000 0.17%
18. Chow Kok Meng 99,900 0.16%
19. Lim Teh Realty Sdn Berhad 90,000 0.14%
20. Foo Yoke Keong Adrian 80,000 0.13%
21. Cartaban Nominees (Tempatan) Sdn Bhd 80,000 0.13%
- Exempt An For Kam Nominees (Tempatan) Sdn Bhd
22. Tan Pak Nang 74,000 0.12%
23. Mayban Nominees (Tempatan) Sdn Bhd 74,000 0.12%
- Affin Fund Management Berhad For CIMB Aviva Assurance
Berhad (270185)
24. Ng Lam Shen 71,300 0.11%
25. Tan Kim Onm 66,000 0.10%
26. Labuan Reinsurance (L) Ltd 62,700 0.10%
27. HSBC Nominees (Tempatan) Sdn Bhd 60,000 0.09%
- Pledged Securities Account for Goh Hiong Eng
28. Sak Moy @ Sak Swee Len 58,000 0.09%
29. Theo Chin Lian 56,000 0.09%
30. Chua Sim Hong 55,900 0.09%
Total: 53,280,000 83.27%

Tuesday 21 April 2009

****Stock selection for long term investors

Overview of the the market and stock selection for long term investors

The Market

There is much volatility in the market. This is due to trading activities. The majority of trades are short term trading. Trading has increased in the market due to various factors:

• Increase turnover rates of mutual funds, hedge funds, off shore funds and pension funds.
• Decrease cost of trading.
• Speed of trading facilitated by technology innovations.
• Investing institution and managers are acting more as agents rather than as investors on behave of their clients.

A minority invests based on fundamentals.

Trading can be in derivatives. The nature of derivative securities is based on price or action of another security. Trading in derivatives has too increased.

Is trading a good thing? It does increase liquidity to the market and this is good. However too much trading and speculation has its downsides. This is akin to breathing 21% Oxygen (life-sustaining) versus breathing 100% Oxygen (too much oxygen has the associated danger of spontaneous combustion).

In this market downturn, questions we have been hearing the most recently are:


  • Is it different this time?
  • How long will it last?
  • Have we seen the bottom yet?
Who knows? These questions are important but not knowable, therefore don’t waste time pondering on these.

The questions long term investors should ask are:


  • Are you investing in an easy to understand, wide moat and well run business?
  • Does that business generate consistent cash flows and has a clean balance sheet?
  • Finally, are you buying at a large discount to what the business is worth?


Strategies for selecting stock for the long term investor

Benjamin Graham: "Investment is best when it is business like. "

However, long term investing is not the only way to make money, there are other ways too.


These 4 strategies should aid one’s investment into equities:
1. Select the business that is long term profitable and giving good return on total capital (ROTC).
2. The business should have managers with talent and integrity in equal measures.
3. Understand the business reinvestment dynamics.
4. Pay a fair price for the business.

1. The business to invest in must make money over time.

  • Examine how its revenues and profits are generated. 
  • How do its products or services contribute to the value of its business? 
  • What are its costs? 
  • Look for a business that gives good RETURN ON TOTAL CAPITAL (ROTC), not just those with high ROE. 
  • Be aware that high ROE can be due to taking on too much debt. 
  • Avoid IPOs, start-ups and venture capitals.



2. Look for managers with a good balance of talent and integrity.

  • Those with integrity but lack talent are nice people to have as friends, but they may not be able to deliver good results for the business. 
  • Those with talent but lack integrity will harm your business and longer term investment objectives.


3. Is the company able to reinvest its money or capital at a better rate over time?

Basically, be conscious of the reinvestment dynamic of the company.

(a) There are companies giving good return on total capital and able to reinvest their capital at better incremenetal rates over time.
  • Invest in these companies as they are effectively compounding your money year after year. 
  • This is the powerful concept of REINVESTMENT COMPOUNDING seen in some companies, best illustrated by Berkshire Hathaway. (Reinvestment Compounding)
(b) Some companies have good return on total capital but can’t reinvest this at better rate over time.
  • For example, a restaurant business may be dependent on the personal touch of the owner. 
  • Expanding the business to another restaurant may not generate the same return on capital. 
  • In such cases, the worse approach is to grow the business of the restaurant. This is unlike McDonald. 
  • Those investing into such businesses should understand that their RETURNS ARE FROM DIVIDENDS and from RETURN OF TOTAL CAPITAL.
(c) Avoid those businesses with no return on total capital but use more capital all the time.

  • An example of this is the airline industry. AVOID such investments.

4. Determining the fair price to pay for the ownership of the business is important.

  • For the outside shareholder, the investment should earn the same returns as the company’s business returns.
  • If the company earns 10% or 12% or 15% per year for 5 years, the outside shareholders should likewise aim to earn a return of 10% or 12% or 15% per year for 5 years by paying a fair price. 
  • Paying a PE of 40 for this company may mean not earning such return as the price paid was too high. 
  • On the other hand, paying a PE of 10 – 15 gives the investor a better odd of getting this fair return.
  • Paying a fair price for owning a business is important. The company earnings maybe as expected but then your returns failed to match these as you have paid too much to own the business.



What about other factors?


The economy, interest rates, fuel prices, commodity prices, foreign exchange, price of gold and geopolitical situations; should not these influence your investing?

Yes, these are hugely important factors. However, they are not predictable and largely out of our control. They are not knowable in advance. It is better to distance oneself from thinking about them when assessing the business to invest in.

Therefore, the approach adopted should generally not be a top-down macroeconomic one, but a bottom-up microeconomic one. “The implication is with the passage of time, a good business over a long period of time produce results to the investor over time.”


Summary

Identify the company that is in a profitable business giving good return on total capital (ROTC).

The managers should be talented and honest, and have the interest of the shareholders.

The business should be able to reinvest capital at higher incremental rates of returns and with discipline. (Reinvestment compounding).

Also, acquire the company at fair price to ensure a fair return. Avoid paying too much for the current prospect of the company, look long term.

-----
-----


Effectively the above is the same as the QVM approach.


Quality: A good quality company has consistent and/or increasing revenue, profit, eps, and high ROE or ROC.


Value: This is dependent on the price paid to acquire the business. Using earnings yield or PE enables one to determine the fair price to pay for this business.


Management: Look for businesses where the managers have these 2 qualities in the right balance - talent and integrity.


Search out for companies with high ROE or ROTC and low PE or high earnings yield (indicating "cheapness"). Relate the ROE or ROTC to the PE or earnings yield of the business.


A fair price to pay for the business will be the price that guarantees at least a return equivalent to the returns generated by the business you invest in.


Owning a good quality company with talented and honest managers at a good price (fair or bargain price) incorporates all the elements of investing preached by Benjamin Graham, namely the safety of capital considerations, reward/risk ratio considerations and the margin of safety considerations.

Also read: ROE versus ROTC

Thursday 9 April 2009

Fund management: A game of luck?


Fund management: A game of luck?

A large part of the active versus passive debate has always revolved around whether an active manager's returns are through luck or judgement.

Last Updated: 8:14AM BST 08 Apr 2009

The debate was reignited at the end of last year when Inalytics, a specialist firm that helps pension funds to select and monitor equity managers, published research which showed managers typically get only half of their decisions correct.

The research, based on an examination of 215 long-only funds worth a combined £99 billion, found that the average manager's ability to identify winners and losers was no better than 50-50. Put simply, they would do no worse tossing a coin.

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The research looked at two measurements of fund manager skill: what it termed the hit rate and the win/loss ratio. The hit rate shows the number of correct decisions as a percentage of the total number of decisions. The win/loss ratio is a comparison of the alpha generated from good decisions with the alpha lost from the poor decisions. To judge these, Inalytics daily analysed every purchase/sale, underweight and overweight made by the fund managers.

Rick di Mascio, the chief executive and founder of Inalytics, says: "The industry maxim suggests that six correct decisions out of 10 would constitute good performance. However, we did not find one manager who got six out of 10. The average was five out of 10 (49.6pc) and the really good managers only managed to get a 53pc hit rate, which was a surprise as we expected the best manager to be a lot higher."

To compensate for this, di Mascio says the average manager is able to generate good gains from "winners" to offset the losses from "losers". According to the research, the average win/loss ratio was 102pc, which means the alpha gained from good decisions was 2pc higher than that lost from the poor decisions.

"The good managers had a win/loss ratio of 120pc, with the best getting up to 130-140pc," says di Mascio. "This is where the skill comes in, running your winners and cutting out the losers. It's what differentiates the also-rans from the best. There is nowhere to hide with these numbers."

http://www.telegraph.co.uk/finance/personalfinance/investing/5093111/Fund-management-A-game-of-luck.html

Friday 23 January 2009

Buffett-Style Buy And Hold

Investing Strategies
Buffett-Style Buy And Hold



Drew Tignanelli, 01.22.09, 03:52 PM EST


Buy good values, hold them until they're fully priced and move along, unless the business keeps improving.


Warren Buffett is not a buy-and-hold investor, so why are you?


The concept of buy and hold is nothing more than a sales pitch that was created by the financial services industry in the last secular bull market preparing for the next secular bear market (what we are currently experiencing). The industry is the only one making money on the buy-and-hold myth. They even use Buffett as the poster boy for this philosophy, but when you read his biography Snowball and study his investment moves, he certainly is not a buy-and-hold investor.
Yes, Buffett started buying Geico in 1950 and owns the whole company today. Yes, he has owned The Washington Post (nyse: WPO - news - people ) for 30-plus years. He also owned Freddie Mac (nyse: FRE - news - people ) and sold it after 15 years. He has owned Petro China (nyse: PTR - news - people ) and sold it after three years. He even owned Hospital Corp. of America and sold it in less than a year.
The truth is that Warren is a risk manager and buys what he believes is a good value.
Value can arise from income, assets, economic expectations, company expectations or intrinsic values. He wants to own a good company run by good people and buy it for a good price. He then constantly monitors his thesis for owning the property and will sell when he admits his assessment was wrong, the situation has changed or the value has been extravagantly realized. Sometimes that happens in a few days, a few weeks, a few years or a few decades, and he has not been investing long enough to say if it would be a few centuries.
Risk, in fact, is wrongly assessed as the volatility of an asset. The emerging markets are assumed risky, because the past trading range can be up or down double digits. When China declines as it did in 2008 by 65%, I would suggest that there is less risk today in China's market than in the U.S. market, which went down only 38% in 2008. American investors have a false belief that our markets are more developed and therefore less risky, but I would say due to our economic and demographic landscape the general U.S. market is riskier, especially considering the significant discount difference that took place in 2008. As a shopper I would not be attracted to a DVD player marked down 30% as compared to the latest iPhone 3G marked down 60%. This is in essence what is happening in the mature U.S. vs. the upcoming China.


Special Offer: Economist and Forbes columnist Gary Shilling warned in 2005 of the housing crash, the credit crunch and the deep recession to follow. Think the problems have passed? Click here for advice to keep your wealth with Gary Shilling's Insight.


Risk is about the price you pay and what you get for that price. If I know what I own for the price I paid, then the daily price other investors are willing to pay is irrelevant. The flip side of buying a solid asset at a good price is selling that solid asset at an irrational price. It may also mean selling an asset when the economic conditions have shifted, reducing future value.
Risk managers focus on not losing money and not on making money (although you have to wonder what at all they were doing at the big Wall Street firms these past few years). The most ridiculous concept young people have learned is, "I am young so it is OK if my account goes down 50%, because I have time for it to come back." A young Buffett would consider that foolish. Buy a great asset at a great price so that it is less likely to go down, but if it does you know for sure it will come back. If you buy a mediocre asset at a bad price, it may never come back, or it may take many years for it to recover. This defines the average American investor trying diligently to be a long-term buy-and-hold investor, but after 10 years of losing money their patience is running thin. American markets are currently mediocre assets at a fair price but certainly not a cheap price.


Comment On This Story




It is true you cannot time the market, but you can tell in general when the risk reward ratio is not in your favor. You can also tell where the price decline of a good long-term asset is reflecting value and lower risk due to the price decline. Great examples of these value opportunities today are the Asian tigers and commodity companies. If you buy into these ideas, then make sure you understand why so that you can be ready to sell in the future when new investors and economic shifts have consumed the opportunity.




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The sell decision is the key of a great investor, more so than the buy decision. Buffett knew it was time to unload Freddie Mac because things changed. He also knew that Geico was still a great company after 50 years.
Many professional and amateur investors want a simple investment concept that takes minimal effort, but great investing takes work and requires an understanding of some concepts that are worth learning.
It's important to have a good understanding of economics and how governmental policy, currency movements, tax policy, interest rates and monetary policy impact the risk of a country's market for stocks and bonds. You also need to understand the drivers of investment values and where market prices stand in relation.
Also keep in mind that market movements are both rational and irrational. The market you see daily is the inefficient market that is irrational, emotional and psychologically driven by investors overcome with greed and fear. The invisible, efficient market is driven by smart investors who seek value and buy assets priced right for a solid risk-reward opportunity. This efficiency can take days, weeks, months or years to be realized.
You need to be a risk manager like Buffett.


Drew Tignanelli is president of The Financial Consulate, a financial advisory firm in Hunt Valley, Md.



http://www.forbes.com/2009/01/22/buffett-value-investing-fan-is-in_dt_0122investingstrategies_fan.html?partner=alerts



My comment: Buy, hold and selective selling

Tuesday 9 December 2008

Under 50? Do This, or You'll Regret It!

Under 50? Do This, or You'll Regret It!
By John Rosevear December 8, 2008 Comments (1)

I know, I know -- the stock market is crazy and unpredictable right now.

I know that sitting in cash or doing nothing until things settle down seems like a sensible course of action.

But I also know this: 10 or 15 years from now, the market will be up. Way up from here, in all likelihood.

If you're under 50, and you're trying to figure out what to do with the wreckage of your retirement portfolio, there's only one good answer: Buy great stocks.

Here's why.

When the game is rigged, bet with the house No, the stock market isn't "rigged" in the sense of being manipulated. It is, however, inherent in the market's nature to go up over the long term, scary bear markets notwithstanding.

Check out these 15-year returns, which assume purchase on Dec. 8, 1993 and include reinvested dividends for those stocks that have them:

Stock-----15-Year Gain

McDonald's (NYSE: MCD)
430%

Apple (Nasdaq: AAPL)
1,110%

Southern Company (NYSE: SO)
804%

Nokia (NYSE: NOK)
541%*

Qualcomm (Nasdaq: QCOM)
1,945%

Johnson & Johnson (NYSE: JNJ)
573%

Target (NYSE: TGT)
612%

Source: Yahoo! Finance.
Figures as of market close on Dec. 5, 2008. *Nokia return since Apr. 25, 1995.

Those returns are despite the dot-com bubble bursting and despite the recent market crisis. As Richard Ferri, an investment manager and author of several books on asset allocation and indexed investing, argues in this month's issue of Rule Your Retirement, there are strong reasons to believe that the market is naturally prone to going up over time -- and that average annual returns near 10% over the next 15 years are extremely likely.

His methodology and reasoning are a little too elaborate to lay out here -- check out the complete article for specifics -- but his recommendations for those under 50 are crystal-clear:

  • Your portfolio should be 100% in stocks.
  • Continue to add to your retirement accounts, and use that money to buy stocks.
  • Be aggressive -- as aggressive as you can stand.
  • Ignore performance. Don't look at your statements.
That last one might seem weird -- how will you know how you're doing if you don't look at your statements? -- but Ferri has a point. He argues that they're "completely irrelevant" -- following short-term price movements just doesn't give you any useful information. In fact, it's more likely to give you something to worry about, needlessly.

I'd add this caveat: This only works if you have very long-term investments! Not all portfolios are built to run 15 years or longer with no more maintenance than the occasional trade or rebalance -- in fact, most aren't.

How do you do that?

Construct a long-haul portfolio

Ferri is a proponent of indexing -- of using index funds and ETFs in your retirement portfolio. That’s one way to build a long-term investment strategy. Another way, one likely to yield far greater returns if done right, is to buy great stocks -- the blue-chip dividend monsters and future giants that will keep delivering rewards year after year. (Can you guess which method I favor?)

Of course, "buy stocks" isn't a complete to-do list. To maximize your gains over the long haul, you need a solid asset-allocation plan -- one that gives you exposure to all the key corners of the stock market. Your 401(k) provider can probably help you come up with a decent one -- though as a rule, those computer-generated templates tend to be more conservative than is appropriate for most young investors.

A far better set of asset allocation roadmaps for retirement investors -- one of the best I've seen, and one that works well whether you're using mutual funds in a 401(k) or stocks in an IRA, or a combination of the two -- are the ones maintained by the team at Rule Your Retirement. They're available to members by clicking on "Model Portfolios" under the Resources tab after you log in.

What do the unfolding financial crisis and ongoing market volatility mean for your money? The Fool's here with answers. Fool contributor John Rosevear owns share of Apple. Southern Company and Johnson & Johnson are Motley Fool Income Investor selections. Nokia is a Motley Fool Inside Value pick. Apple is a Motley Fool Stock Advisor recommendation.

http://www.fool.com/personal-finance/retirement/2008/12/08/under-50-do-this-or-youll-regret-it.aspx

Wednesday 13 August 2008

What are you -- a bull, bear, chicken or owl?

http://www.thejakartapost.com/news/2007/09/23/what-are-you-bull-bear-chicken-or-owl.html-0



What are you -- a bull, bear, chicken or owl?
The Jakarta Post , Jakarta Sun, 09/23/2007

Financial markets of late have been volatile, to say the least.

After soaring to record highs in June, the U.S. and most other stock markets then fell by up to 10 percent before making a partial recovery. Each day brings surprises with ups and downs reflecting the good or bad news of the day.

Stock markets have also been spooked by the crisis in the lower end of the housing market in the U.S. and the resulting collapse of a number of related hedge funds.

Even a rock-solid UK building society has come under pressure as panicking investors withdraw their savings. The price of oil has hit record highs and gold has gone over the US$700 an ounce mark. (Remember my earlier advice to have holdings in energy and precious metals?)

Are the 'bears' winning?


With housing worries and unemployment growing in the U.S., with consumer confidence and the dollar falling (note that the rupiah has been falling with the dollar), fear of a recession is on everyone's mind. A recession in the U.S. would invariably impact the global economy. In such a scenario the bears will certainly have it.

In case any reader is not familiar with the term, a ""bear"" market technically signifies one that has fallen at least 20 percent, the allusion to the bear being that a bear is ""clawing it down'.

Have the 'bulls' conceded defeat?

Again, for readers unfamiliar with the terminology, a ""bull"" market is one that is rising, the analogy this time being one of a bull ""tossing it upward"".

All is far from being gloom and doom except for those directly affected by the narrow band of assets that have collapsed in value. Most economies are still strong and expanding.

Unemployment is still close to historical lows in many countries and the twin powerhouses of India and China continue to steam ahead supporting commodity-based economies such as Australia.

A lower dollar can also be positive for the U.S. as it will discourage imports and stimulate exports. Another factor that is encouraging for stock markets is that valuations are not particularly expensive.

Many P/E (price-to-earnings ratios) are around 16/1, which means shares are paying dividends of over 5 percent. This compares favorably with bonds and money markets, particularly since stocks have the potential for capital growth over time.

During the height of the technology boom some shares were trading at P/E levels of 300/1 which meant a return of only one-third of 1 percent per annum or, putting it another way, it would take an investor 300 years to get his money back if he relied on the dividend alone.

Of course, people were relying on capital growth but at those P/E levels their hopes were doomed. We do not have that scenario today.

So, overall, a ""crash"" on the scale of 1987 or the bursting of the technology bubble in 2000 seems unlikely, although if the property market or unemployment worsen in coming months the bears could have their way. If markets can limit their fall from previous highs to less than 20 percent, then what is happening now can be written off as a ""correction"".

What does history tell us?

Since 1946 there have been 10 official ""bear"" markets (falls of at least 20 percent) based on the S&P 500 index. During the same period there have been 16 ""corrections"" (falls of at least 10 percent). Anyone who invests in the stock markets should keep this in mind.

How long can it take for markets to recover? Historically, (since 1946) it has taken 669 days on average to recover from a full bear market and 111 days to recover from a correction. Hence the reason for repeated advice to the unwary that investing in the stock markets is not for the short term.

The bulls are unquestionable winners over the long term as stocks invariably rise over time. Their rise is not a constant one, however, and is regularly interrupted by corrections and bear markets.

These are a necessary part of the process; without them, the markets would be driven to unrealistic heights which, in turn, could lead to a serious collapse of the system. A bit like geological faults; when pressure from the earth's crust builds up, it is preferable to have it relieved gradually by minor earthquakes rather than delay until the advent of a major one.

How to win in a bear market

The secret is simply to invest when others are selling. To do this requires resisting our instinct (built into our genes over thousands of years) to follow the herd.

Regular savers also win in a bear market because they continue to buy shares or units when prices have fallen. Provided they keep doing this they will benefit when the next bull market comes along.

Patience and perseverance is the key, since the recovery could take several years, but rest assured, a bull market will follow a bear market as sure as night follows day.

Investing in a hedge fund that ""goes short"" is also a way to make money in falling markets. In this case the fund manager does not invest directly in stocks but actually borrows and sells them.

He then repurchases and returns them at a later date. If he has judged correctly and the repurchase price is lower than what he paid then the difference, less expenses, is pure profit.

Such a fund can be a useful component in a portfolio to soften the impact of a falling market, but much depends on the skill of the manager. It is not something you should try at home!

Where do the chickens come in?

Bulls and bears are part of standard financial terminology. Chickens and owls are not, but I thought I would throw them in to add a bit of color.

Chickens, I would say, are those who panic out of an investment when faced with the grunts of the bear. This is quite a natural reaction. Chickens can live quite comfortably with vegetarian bulls but would not fare well in the proximity of a bear.

In fact, a chicken could come out quite well if it flies out at the top of a bull market. But, in practice, it tends not to react until the market has fallen a long way, then it finally panics.

But it's too late; it has already fallen victim to the bear and is no longer around when the bull comes back onto the scene to save it.


Another group of chickens will not even venture into the fray. They remain with cash under the mattress or in a bank account year after year watching the purchasing power whittle away while others are making their fortunes.

But if they are of a nervous disposition this is probably their best strategy as they would probably come off worse among the bulls and bears.

And finally the owls ...

What does the wise old owl do? It sits quietly on a high branch watching the world go by until a suitable victim is in sight. It then swoops and grabs its prey.

The financial analogy is an investor who quietly and unemotionally watches the markets go up and down and then seizes the opportunity when he spots a bargain. I would place Warren Buffett, the world's most successful stock market investor, in this category.

So who will win?

History and logic tell us the bulls will be the long-term winners. The stock markets represent real assets and global wealth.

Bear markets will still have their day every few years. They can inflict a lot of pain but if we see how they fit into the big picture we can live with them and even profit from them.

While ""bulls"" and ""bears"" are terms describing the markets they can also relate to investors who can be described as ""bullish"" or ""bearish"".

What should we strive to be? Clearly, unless we are bullish we will never get anywhere, but there are times when we may need to be bearish.

There may even be times when it can pay to be a ""chicken"" but it is not easy to judge the timing. It can also pay to be a ""wise old owl""; just stay calm and alert.

You may spot a great opportunity!

Colin Bloodworth is a senior financial adviser with Financial Partners International.