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

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

Sunday 29 March 2009

Finding out what financial freedom is to you

Finding out what financial freedom is to you
By Yap Ming Hui

2009/02/07

IN this article, I will elaborate on the definition of financial freedom and share a few points to help you define your own financial freedom. When you ask people what financial freedom is to them, chances are that you are going to get different answers from different people. Some may say that financial freedom means having RM1 million in the bank. For some financial freedom means no more debts and loans, and for others it means having enough money to do whatever they want.

I define financial freedom as "a controlled financial position whereby there are sufficient financial resources to meet your financial needs and wants at any time and in any circumstances".

From this definition, we can see that there are two main components to manage in attaining financial freedom.

The first involves the management of your financial resources. The second involves the management of your financial needs and wants.

The management of financial needs and wants should not be viewed only in the financial context. You need to view it at a higher context of your life. You need to identify your financial needs and wants that will give you a good life based on your definition.

This type of financial freedom planning helps you to stop chasing financial freedom defined by the society at large.

For example, having a bungalow with swimming pool, driving a luxurious car, wearing branded clothes, and so on. This definition challenges you to define your own financial needs and wants.

Normally, the first component is the component where most people understand and would focus their attention and effort on.

Most people start their life with little or no financial resources. They are very sure that they don't have sufficient financial resources to meet all their financial needs and wants. As a result, they won't bother to define their financial needs and wants in detail. They will focus their attention on making more money. That is not entirely wrong. However, you cannot achieve true financial freedom by just generating more financial resources without considering what your financial needs and wants actually are.

Remember that money is only a means to achieve an end. It is used to support an ideal or good life that we want.

The component of your financial needs and wants is whereby you translate you self-defined good life into financial terms and measurements.

Without defining your own financial needs and wants, it is likely that you will take other people's definition of financial freedom as your own. That's why there are so many people out there who just want to keep up with the Jones.

Based on this definition, the amount required to achieve financial freedom will vary from one person to another because different persons have different needs and wants.

For someone who has fewer needs and wants, he will require less money to achieve his financial freedom. For someone who has more needs and wants, he will require more financial resources to achieve his financial freedom.

Therefore, a multi-millionaire may not have achieved his financial freedom if his needs and wants are more than what his millions can meet.

On the other hand, someone who is not a millionaire may still be able to achieve financial freedom if his financial resources are more than enough to meet his needs and wants.

Key steps to attain financial freedom

The following are the key steps to follow to achieve financial freedom:

- Define what is a good life to you.

- Find out the financial needs and wants to support your good life.

- Test if you have sufficient financial resources to meet all your financial needs and wants. If you have enough, congratulation, but if you don't then have a plan to increase your financial resources and re-look and re-prioritise your financial needs and wants

- Test again if you have sufficient financial resources to meet your adjusted financial needs and wants. If you have enough then you are on your way to achieve your financial freedom. But if you don't, then you have to continue to increase your financial resources and re-look and re-prioritise your financial needs and wants.

As we can see, true financial freedom attainment is not only about money or financial management. It is also about managing your financial needs and wants.

Essentially, financial freedom attainment is about balancing your financial resources with your financial needs and wants. You can increase your financial resources to meet your high financial needs and wants but you will have a certain price to pay.

You may have to take more risks. You may have work longer hours and harder.

On the other hand, to re-prioritise your financial needs and wants, you will also have to pay a price. You may have to change your lifestyles or give up some of your expensive hobbies. The upside of it is that you get to have more time for yourself and family, less stress and more health.

Francis, one of my clients, is a business owner. He and his wife like to enjoy a luxurious life. He knows that he has to work very hard and take a lot of risks to have enough money to support his expensive lifestyle. However, he is happy to do so.

Another client of mine, Joshua, is also a business owner. He knows that he will need to spend a lot of time and undergo a lot of stress to make more money. As a result, he does not mind lowering his financial needs and wants to match his financial resources.

To Joshua, a good life is having peace of mind and more time for himself and family.

From the example of Francis and Joshua, we know that a person can either increase his financial resources or reduce his financial needs and wants depending on his values and definition of a good life. There is no right or wrong in either case.

Each individual will have his own unique financial freedom goal, depending on his financial needs and wants.

Financial freedom is never about becoming a millionaire or billionaire like most people would assume.

The biggest challenge to achieving financial freedom is finding out what financial freedom really means to you. Once you find that answer, the issue of how to achieve it would not be so difficult.

Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia

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© Copyright 2009 The New Straits Times Press (M) Berhad. All rights reserved.

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2471848/Article/pppull_index_html

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My 18 points guide to Successfully compounding your money in Stocks

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

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

11 Lessons From Peter Lynch

Peter Lynch taught me:

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

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

Capital Expenditure

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

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

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

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

Less is better.

Benjamin Graham's 113 Wise Words

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

Philip Fisher's Wise Words

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

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

(Common Stocks and Uncommon Profits)

The Ultimate Hold-versus-Sell Test

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

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

No equivocation. Yes or no?

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

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

Some thoughts on Analysing Stocks (KISS)

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

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

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

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

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

A single quote by Graham on page 516 struck me:

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

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

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

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

Sunday 29 March 2009

Finding out what financial freedom is to you

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All equity security investments present a risk of loss of capital

The Ultimate Hold-versus-Sell Test

Some thoughts on Analysing Stocks (KISS)

Benjamin Graham

Sell the losers, let the winners run.

Investment Style

Warren Buffett

Political and Economic News

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