Showing posts with label patience. Show all posts
Showing posts with label patience. Show all posts

Tuesday 28 April 2020

Be patient. Patience is sometimes the hardest part of using the value approach.

The patient exercise of value investing principles works and works well.

Value investing requires more effort than brains, and a lot of patience.

Over time, investors should continue to be rewarded for buying stocks on the cheap.

Through the years, there have been changes in the methods of finding value stocks and in the criteria that define value.



Changes in the method of finding value stocks and trading

In Ben Graham's time, the search for undervalued stocks meant poring through the Moody's and Standard & Poor's tomes for stocks that fit the value criteria.  Now, you can accomplish this with the click of a mouse.  You can access almost all the data off your Bloomberg terminals.  The 10k reports or annual shareholder letters are all right there on the Internet for you to access for stocks all over the world.

Trading has changed as well.  For the most part, trading is now done electronically with no effort at all.  You can trade stocks in New York, Tokyo or London just as easily as you can in your own country.


Criteria that define value has changed over time

Just as the access to information and the methods of trading stocks have changed in the past two decades, so have the criteria for value changed.


1.  Net current assets
In 1969, the investors were looking through the Standard & Poor's monthly stock guide for stocks selling below net current assets.  This was the primary source of cheap stocks in those days.  The method had been pioneered by Graham and was very successful.  Generally, they were buying stocks that sold for less than their liquidation value.  Back then, manufacturing companies dominated the US economy.


2.  Earnings
As the US economy grew in the 1960s, 1970s, and 1980s, it began to move away from the heavy industrial manufacturing companies such as steel and textiles.  Consumer product companies n service companies became more a part of the landscape.   These companies needed less physical assets to produce profits, and their tangible book values were less meaningful as a measure of value.  Many value investors had to adopt and began to look more closely at earnings--based models of valuation.  Radio and television stations and newspapers were examples of businesses that could generate enormous earnings with little in the way of physical assets and thus had fairly low tangible book value.  The ability to learn new ways to look at value allows you to make some profitable investments that you might well have overlooked had you not adopted wit the times.


3.  Earnings growth 
There was a great deal of money to be made buying companies that could grow their earnings at a faster rate than the old industrial type companies.  Warren Buffett said that growth and value are joined at the hip.  The difference between growth and value was mostly a question of price.  Paying a little more than just buying stocks based on book value and the investors found great bargains like American Express, Johnson & Johnson, and Capital Cities Broadcasting.  Companies like these were able, and in many cases still are able, to grow at rates significantly greater than the economy overall and were worth a higher multiple of earnings than a basic manufacturing business..


4.  Leveraged buyout business
In the mid-1980s, the leveraged buyout business (LBO) was born.  The US economy was emerging from a period of high inflation and high interest rates.  Inflation had increased the value of the assets of many companies.  For example, if ABC Ice Cream had built a new factory 5 years ago for $10 million and was depreciating it over  10 year period, it would have been written down to $5 million on ABC's books.  However, after  years of inflation, it might cost $15 million to replace that factory.  Its value is understated on the company's books.  Using the factory as collateral, the company might have been able to borrow 60% of its current value or $9 million.  This is what LBO firms did with all sorts of assets in the 1980s.  They would borrow against  company's assets to finance the purchase of the company.

The record high interest rates of the late 1970s and early 1980s drove stock prices to their lowest levels in decades.  The price-to-earnings ratio of the Standard & Poor's 500 was in the single digits.  With long-term Treasury bonds yielding 14%, who needed to own stocks?  The combination of significant undervalued collateral and low PE ratios made many companies ripe for acquisition at very low prices.  

A typical deal in the mid-1980s might be done at only 4.5 or 5 times pretax earnings.  Today, that number is more in the range of 9 to 12 times pretax earnings.  This period was a once-in-a-lifetime opportunity to buy companies at record cheap prices in terms of both assets and earnings.

By using this model to screen for companies that are selling in the stock market at a significant discount to what an LBO group might pay, this  LBO model gave one more way of defining "cheap"


{Summary:  Price to Book Value, Price to Earnings and Leveraged Buyout Appraisal Value]




Value Investing

The basic idea of buying stocks for less than they are worth and selling them as they approach their true worth is at the heart of value investing.

The methods and criteria have changed over the years and they will evolve further with the march of time and inevitable change.  What is important is that the principles have not changed.

On balance, value investing is easier than other forms of investing.  It is not necessary to spend eight hours a day glued to a screen trading frenetically in and out of stocks.  By paying attention to the basic principle of buying below intrinsic value with a margin of safety and exercising patience, investors will find that the value approach continues to offer investors the best way to beat the stock market indexes and increase wealth over time.



Patience is sometimes the hardest part of using the value approach 

When you find a stock that sells for 50% of what you determined it is worth , your job is basically done.  Now it is up to the stock. 

  • It may move up toward its real worth today, next week, or next year.  
  • It may trade sideways for 5 years and then quadruple in price.  
  • There is simply no way to know when a particular stock will appreciate, or if, in fact, it will.   
There will be periods when the value approach will under-perform other strategies, and that can be frustrating.

Perhaps even more frustrating are those times when the overall market has risen to such high levels that we are unable to find many stocks that meet our criterion for sound investing.

It is sometimes tempting to give in and perhaps relax one criterion just a bit, or chase down some for the hot money stocks that seem to go up forever.  But, just about the time that value investors throw in the towel and begin to chase performance is when the hot stocks get ice cold.




Saturday 19 December 2015

Patience - the key to successful stock market investment.

The hardest thing to learn is not the complicated technical analysis formulas that one can be found in textbooks. It is the empirical formula called patience. It is the key to successful stock market investment. Without it even one has the sharpest mind of great stock pick will not yield desirable and consistent results.

I have read countless great textbooks, technical and non-technical, throughout my investing life and in the end, I came to realise that the very one thing that many people lack of in stock investment is patience. It took me years to understand and appreciate this. That is why i always stressed one must have patience, persevere, trust and conviction in stock investment. Yes. Each of this word is about human behaviour. Master it and only then talk about fundamental analysis, technical analysis, stock pick and timing. Case in point, how many would have patiently hold on to Presbhd long enough to achieve extreme profit from it ? It doesn't matter if you have held onto a stock for very long time despite making less paper profit, but the patience that you have developed subconsciously within you to keep that stock is already a good start. 

By the way, the worst enemy of patience is distraction. Think about it.

Good luck.



http://unclezmalaysia.blogspot.my/2015/03/are-you-doing-investment-in-stock-market.html



Thursday 31 October 2013

The value of patience

Price-value gap

Theoretically, with higher trading volumes, the price-value gap should narrow due to better price discovery.   Yet, in reality, this is not the case.

The increase in trading activity actually widen the price-value gap; often increasing the noise in the system and leading to spikes in volatility that we see often in the stock market.

An explanation, which is not surprising, is the majority of market participants are speculators and not investors.  

Rather than narrowing the price-value gap through better price discovery, the exact opposite is the result.


What can you do as an investor?

In this world, an investor who is hostage to short-term performance pressures will feel nothing but discontent.

The only requirement for successful play is the willingness to adopt a different set of rules.  

Of these, none is more important than the value of patience.


Let's learn from Buffett:  Having a patient attitude to investing

Time and patience, two sides of the same coin - that is the essence of Buffett.

His success lies in the patient attitude he quietly maintains toward both Berkshire's wholly owned business es and the common stocks held in the portfolio.

In this high-paced world of constant activity, Buffett purposefully operates at a slower speed.



Learning points

A detached observer might think this sloth-like attitude means forgoing easy profits, but those who have come to appreciate the process are accumulating mountains of wealth.  

The speculator has no patience.

The investors lives for it.

The best thing about time is its length.

Sunday 26 February 2012

PATIENCE



The other thing that Warren Buffett counsels, when deciding on investment purchases, is patience. 

He has said that he is prepared to wait forever to buy a stock at the right price.

Sunday 5 February 2012

Patience - a fundamental investment discipline to have a lot of.

There is only one strategy that works for value investors when the market is high - PATIENCE.

The investor can do one of two things, both of which requires steady nerves:
1.  Sell all stocks in a portfolio, take profits, and wait for the market to decline.

  • At that time, many good values will present themselves.
  • This may sound easy, but it pains many investors to sell a stock when its price is still rising.

2.  Stick with those stocks in the portfolio that have long-term potential.

  • Sell only those that are clearly overvalued, and once more wait for the market to decline.
  • At this time, value stocks may be appreciating at slow pace compared with the frisky growth stocks, but not always.


But come the correction, be it sudden or slow, the well-chosen value stocks have a better chance of holding their price.

As for the hot stocks, when they take a hard hit the investor is cornered.  If the stock is sold, the loss becomes permanent.  The lost money cannot grow.  If the investor hangs on to the deflated stock, the long trail back to the original purchase price will deeply erode the overall returns.


Comments:


When you buy wonderful companies at fair or bargain prices, you can often hold these forever.  The earnings power of these companies ensure that your returns will be positive over the long term.  You often do not need to sell, even if these companies are slightly overvalued as their intrinsic values in the future will probably be higher than the present prices.  When the share prices of these wonderful companies go down in tandem with the market corrections or bear markets, you often have the chance to buy more at lower prices.  The only action you should avoid is to buy these wonderful companies when they are trading at obviously overvalued high prices.  A wonderful company can be a bad investment when you buy it at a high price.


Tuesday 27 December 2011

Waiting for the Fat Pitch

How do I make sure I don't overpay for something?

The answer:  If the pitcher doesn't throw one right down the middle, you don't have to swing the bat.  Unlike in baseball, there is no penalty for being patient in investing.

You should spend a fair amount of time placing a value on a stock before you even think about buying it, and only buy stocks that you are confident are undervalued.

Learning how to value  a stock takes work, but it can be done.


Sunday 25 December 2011

Patience - a fundamental investment discipline to have a lot of.

What does it take to beat the market?
-   Be a focused value investor:
-  Concentrates your capital in stocks of good businesses with strong management. 
-  Be PATIENT enough to buy them at attractive prices and then hold on as they appreciate.


PRICE BEHAVIOUR in individual stocks:
-   10% of the time they’re cheap enough to buy, 
-  10% of the time they’re expensive enough to sell, and 
-  the rest of the time you should just hold them if you own them and avoid them if you don’t.”


PATIENCE is fundamental to that objective of beating the market.  
-  All the great investors agree on this point.   
-  However, most investors do not possess enough of it.

Buffett talks about investors inability to do nothing and just sit still. In distilling the essence of his investing discipline, he sings the praise of “lethargy, bordering on sloth.”

Why not double or triple your investment discipline?

(even if it cannot be measured with anything approaching precision) 
-  Resolve to wait for the S&P 500 to be off by at least 20% before making a purchase. 
-  Or insist that a stock be on the new low list before loading up. 
-  Or wait for those magical times when the yield on normalized current earnings exceeds 15%
-  Or wait until your relatives or friends are asking if it would not be prudent to get completely out of the stock market, or – notwithstanding your esteem for the wisdom of the Mr. Market parable – you cannot help feeling a little queasy about your own equity holdings.

However you get there, limit your buying to the 10% of the time when stocks are really cheap. 



Otherwise, just sit still and prepare.




Reference:
Google: Steve Leonard, Pacifica’s website.

Saturday 22 January 2011

Learn Patience. Yes, patience is a virtue you must have as a value investor.

You can never count on stocks for short-term needs.  As long as you have at least 5 to 10 years and you have chosen a solid company, there's a good chance you won't have to take a loss on a stock.  But you must be patient and willing to wait for the market to turn around for that stock.

Yes, patience is a virtue you must have as a value investor.  To get a good bargain, you need the patience to wait for a stock to recover, as well as the risk tolerance that allows you to hang tough even if the stock has been beaten down.

How do you know if the company is still on the right track?  That comes with research and what Graham calls intelligent investing.

To be an intelligent investor, you must have the time and knowledge to carefully pick your stocks and then monitor your portfolio.  So if your time constraints won't allow you the time you'll need for the research, you may need to be a passive rather than active investor.  These differences will impact the type of portfolio you want to build as a defensive value investor.

You also need to know how you will react when the market takes a nosedive and drops 10% to 15%.  Are you the type of investor who will run for the hills and sell off all your stock?  If so, you do not have the risk tolerance to be an active investor; you need to develop a more passive portfolio with steady returns.  A down market is the time an active defensive investor looks for good buys.

Another question you must ask is, what will you do when the market is going up 10% to 15% or more?  If you think you're the type of investor that will jump on the bandwagon, you don't have the discipline to win as a value investor.  When the market goes up that dramatically, stocks are usually overpriced.  Active defensive investors might sell SOME winning holdings, but they would NOT likely buy any stock during this type of market unless they believe they've found a good beaten-down stock that the crowd missed.

While value investors need to learn patience, you should never hang tough if you believe you made a mistake and the company is performing much worse than you expected, or if you no longer believe in the company's management team.  Take your hit and get out before things get even worse.

Develop the Value Investing Mind-Set

Value investors must think long term and not think that making a quick profit is their first priority.  You must realize that you won't be investing in the same types of stocks as your friends, and you won't be able to compare quarter-to-quarter returns.

You'll also need to enjoy digging into the annual reports of the companies that interest you and be prepared to analyze everything you see.  Successful value investors are those who enjoy researching and learning everything about a company before diving in and investing.

The key tools you'll need as a value investor are:
  • Patience to wait for the market to realize you found a gold mind in a beaten-down stock.
  • Discipline to spend the time researching your choices and not get caught up in the mob mentality as people push stocks higher and higher above their true value.
  • Desire to learn all you can about choosing the right industries to explore, picking the right stocks within those industries that are unjustifiably beaten down, and then having the courage to wait until the market realizes what a great investment it is missing.
  • Ability to check your emotions at the door.  Don't get emotionally involved in your stocks.  Your value portfolio is way to make money.  Don't fall in love with it or the stocks in it.
  • Expectation of adequate profits but not extraordinary performance.  Historically the average annual return for stocks in any 20-year period is about 10 to 12 percent per year.  That doesn't mean you'll earn that amount each year:  some years will be higher, some lower, but that's the average return you should expect with a long-term stock portfolio.
  • Ability to calculate what a stock is worth, based on careful analysis of the business.  Don't gamble on how much the stock may go up because someone else is foolish enough to pay that.  Eventually, the fools disappear and you could be left holding the bag.
  • Ability to think for yourself.  Unless you've found a friend who is also dedicated to the idea of becoming a value investor, don't count on those around you for support.  You must learn to think for yourself.

In the preface to Benjamin Graham's The Intelligent Investor, Warren Buffet writes,  "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information.  What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."

Monday 25 October 2010

Intrinsic Value: The Right Price to Pay

A GREAT COMPANY AT A FAIR PRICE’
Nobody really knows the specific principles that Warren Buffett applies when deciding the price he will pay for a share investment. We do know that he has said on several occasions that it is better to buy a ‘great company at a fair price than a fair company at a great price’.
This tends to agree with the view of Benjamin Graham who often referred to primary and secondary stocks. He believed that, although paying too high a price for any stock was foolish, the risk was higher when the stock was of secondary grade.

PATIENCE

The other thing that Warren Buffett counsels, when deciding on investment purchases, is patience. He has said that he is prepared to wait forever to buy a stock at the right price.
 There is a seeming disparity of views between Graham and Buffett on diversification. Benjamin Graham was a firm believer, even in relation to stock purchases at bargain prices, in spreading the risk over a number of share investments. Warren Buffett, on the other hand, appears to take a different view: concentrate on just a few stocks.

WHAT WARREN BUFFETT SAYS ABOUT DIVERSIFICATION

In 1992, Buffett said that his investment strategy did not rely upon spreading his risk over a large number of stocks; he preferred to have his investments in a limited number of companies.
‘Many pundits would therefore say the [this] strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it.’

NO REAL DIFFERENCE BETWEEN BENJAMIN GRAHAM AND WARREN BUFFETT

The differences between Graham and Buffett on stock diversification are perhaps not as wide as they might seem. Graham spoke of diversification primarily in relation to second grade stocks and it is arguable that the Buffett approach to stock selection results in the purchase of quality stocks only.

BERKSHIRE HATHAWAY HOLDINGS

In addition, consideration of Berkshire Hathaway holdings in 2002 suggests that although Buffett may not necessarily believe in diversification in the number of companies that it owns, its investments certainly cross a broad spectrum of industry areas. They include:
  • Manufacturing and distribution – underwear, children’s clothing, farm equipment, shoes, razor blades, soft drinks;
  • Retail – furniture, kitchenware
  • Insurance
  • Financial and accounting products and services
  • Flight operations
  • Gas pipelines
  • Real estate brokerage
  • Construction related industries
  • Media

INTRINSIC VALUE

Both Warren Buffett and Benjamin Graham talk about the intrinsic value of a business, or a share in it.  That is, to buy a business, or a share in it, at a fair price. But, having regard to the possibility of error in calculating intrinsic value, the careful of investor should provide a margin of error by only buying the business, or shares, at a substantial discount to the intrinsic value.
Buffett is said to look for a 25 per cent discount, but who really knows?

DEFINING INTRINSIC VALUE

Buffett’s concept, in looking at intrinsic value, is that it values what can be taken out of the business. He has quoted investment guru John Burr Williams who defined value like this:
‘The value of any stock, bond or business today is determined by the cash inflows and outflows – discounted at an appropriate interest rate – that can be expected to occur during the remaining life of the asset.’ – The Theory of Investment Value.
The difference for Buffett in calculating the value of bonds and shares is that the investor knows the eventual price of the bond when it matures but has to guess the price of the share at some future date.

DISCOUNTED CASH FLOW (DCF)

This method of valuation is often referred to as the Discounted Cash Flow (DCF) valuation method, but, as Buffett has said in relation to shares, it is not easy to predict future cash flows and this is why he sticks to investment in companies that are consistent, well managed, and simple to understand. A company that is hard to understand or that changes frequently does not allow for easy prediction of future earnings and outgoings.

WHAT WARREN BUFFETT SAYS ABOUT PREDICTING FUTURE CASH FLOWS

In 1992, Warren Buffett said that:
‘Leaving question of price aside, the best business to own is one that over an extended period can employ large amounts of capital at very high rates of return. The worst company to own is one that must, or will, do the opposite – that is, consistently employ ever-greater amounts of capital at very low rates of return.’
It is well worth reading Buffet’s analogy relating DCF to a university education in his 1994 Letter to Shareholders.
So, it would seem that the intrinsic value of a share in a company relates to the DCF that can be expected from the investment. There are formulas for working out discounted cash flows and they can be complex but they give a result.

EXPLANATIONS OF DCF

The best explanation that we have read of DCF is by Lawrence A Cunningham in his outstanding book How to think like Benjamin Graham and invest like Warren Buffett.
A good online explanation is available here.

HOW WARREN BUFFET DETERMINES A FAIR PRICE

The real secret of Warren Buffett is the methods that he uses, some of which are known from his remarks, and some of which are not, that allow him to predict cash flows with some probability.
Various books about Warren Buffett give their explanations as to how he calculates the price that he is prepared to pay for a share with the desired margin of safety.

Mary Buffett and David Clarke pose a series of tests, based on past growth rates, returns on equity, book value and government bond price averages.

Robert G Hagstrom Jnr in The Warren Buffet Way gives explanatory tables of past Berkshire Hathaway purchases using a DCF model and owner earnings.
Ultimately, the investor must decide upon their own methods of arriving at the intrinsic value of a share and the margin of error that they want for themselves




www.buffettsecrets.com/price-to-pay.htm

Tuesday 13 April 2010

Why Hold Cash?

Liquidity brings opportunities.

Do not rush to invest in stocks as soon as you have additional cash available for investing.  Be patient and wait for good investment opportunities.

Holding cash or cash equivalents is not just for safety; it can help you earn more on your investments by enabling you to take advantage of opportunities that arise with brief windows in which to strike.  

From this perspective, keeping some cash or investments in liquid, low-risk securities may prove to be a high-return proposition in the long run.  

In some cases, it might be helpful to invest in convertible preferred stocks or convertible bonds, as long as you stay with established firms the way Buffett does.

Sunday 3 January 2010

Patience

The future is an uncertain place, after all, and if you wait long enough, most stocks will sell at a decent discount to their fair value at one time or another.

Stick to your philosophy and valuation discipline.  Be patient.

Stick to a valuation discipline: For every Wal-Mart, there's a Woolworth's

"If you don't buy today, you might miss the boat forever on the stock."

Sticking to a valuation discipline is tough for many people because they're worried that if they don't buy today, they might miss the boat forever on the stock.

That's certainly a possibility - but it is also a possibility that the company will hit a financial speed bump and send the shares tumbling.  The future is an uncertain place, after all, and if you wait long enough, most stocks will sell at a decent discount to their fair value at one time or another.

As for the few that jsut keep going straight up year after year - well, let's just say that NOT MAKING  money is a lot less painful than LOSING money you already have.  For every Wal-Mart, there's a Woolworth's,

Wednesday 30 December 2009

THE PAUSE AT THE TOP OF THE ROLLER COASTER

There is only one strategy that works for value investors when the market is high – patience. The investor can do one of two things, both of which require steady nerves.

· Sell all stocks in a portfolio, take profits, and wait for the market to decline. At that time, many good values will present themselves. This may sound easy, but it pains many investors to sell a stock when its price is still rising.

· Stick with those stocks in a portfolio that have long-term potential. Sell only those that are clearly overvalued, and once more wait for the market to decline. At this time, value stocks may be appreciating at slow pace compared with the frisky growth stocks, but not always.

But come the correction, be it sudden or slow, the well-chosen value stocks have a better chance of holding their price.

-----

http://myinvestingnotes.blogspot.com/2009/01/pause-at-top-of-roller-coaster.html

The portfolio of one value investor shows what can happen when markets stumble off a cliff. In early September 1987, Walter Schloss’s portfolio was up 53%. The market as a whole had risen 42%, after a DJIA peak of 2722.42. Then in October the market fell off the mountain and the Dow lost 504 points in a single day. The market struggled back and Schloss finished 1987 with a 26% gain while the overall market made only a 5% advance. Schloss followed one of the first rules of investing – don’t lose money. Making up for lost ground puts an investor at a serious disadvantage when calculating long-term average returns.


Schloss is an experienced investor, and not all value investors will do as well in a rising market. It takes patience, “At a guess I’d say that (the value investor) should do a good 20% better than the market over a long period – although not during the most dynamic period of a bull market – if he is rigorous about applying the method,” says author John Train.

As for the hot stocks, when they take a hard hit the investor is cornered. If the stock is sold, the loss becomes permanent. The lost money cannot grow. If the investor hangs on to the deflated stock, the long trail back to the original purchase price will deeply erode the overall return.