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.

Monday 23 March 2009

Is It Time To Abandon Buy And Hold Investing?

ETFguide.com

Is It Time To Abandon Buy And Hold Investing?

Wednesday March 18, 12:15 pm ET

By Simon Maierhofer

Just because you have access to water, sugar and food coloring doesn't mean you know how to make Coca Cola. The right mix is priceless. The right mix of asset classes, also called diversification, used to be considered priceless as well.
Diversification was a popular subject of discussion leading up to the 2007 stock market peak and started to lose its luster early 2008 when commodities began their freefall. Many are led to believe that holding tight will be the only option to make back their money while some die-hard diversification junkies and asset allocation aficionados are still trying to figure out the 'perfect mix.'
How did the 'perfectly allocated buy-and hold portfolio' fair from the October 2007 peak to the March 2009 bottom?
To see how a diversified portfolio stacks up against the broad U.S. equity market, we've put together a hypothetical portfolio with exposure to all main asset classes. Of course, we realize that this cookie cutter portfolio pales in comparison to some tailor-made diversification models. Nevertheless, there are only so many asset classes, all of which (with the exception of certain bonds and gold) were down.
An equal weighted mix of the Vanguard Total Stock Market ETF (NYSEArca: VTI - News), iShares Barclays Aggregate Bond ETF (NYSEArca: AGG - News), iShares Dow Jones US Real Estate ETF (NYSEArca: IYR - News), iShares MSCI EAFE (NYSEArca: EFA - News), iShares MSCI Emerging Markets ETF (NYSEArca: EEM - News) and the iShares S&P GSCI Commodity ETF (NYSEArca: GSG - News) would have lost 48.12% from the market peak (October 9th, 2007) to the March 9th, 2009 lows.
As a point of reference, the S&P 500 (AMEX: SPY - News) lost 55.19% in the same period while the Dow Jones (AMEX: DIA - News) was down 52.32%. Even though a 7% advantage helps, neither result should be acceptable to investors.
Unless a diversified portfolio was disproportionally weighted in either bonds or gold, the results were quite similar. The SPDR Gold Shares (NYSEArca: GLD - News) gained 23.91%, yet the broad iShares S&P GSCI Commodity ETF (NYSEArca: GSG - News), which sports a 10% allocation to gold, lost 47.20%.
The iShares Barclays 20+ Year Treasury Bond (NYSEArca: TLT - News) saw a gain of 21.90% while the iShares iBoxx High Yield Corporate Bond ETF (NYSEArca: HYG - News) melted by 32.87%.
In the aftermath of the dot.com bubble burst induced bear market, many sectors boomed while others laid dormant. The Financial Select SPDRs (NYSEArca: XLF - News) for example gained 25% in 2000 while the Technology Select Sector SPDRs (NYSEArca: XLK - News) lost 42%. Yes, diversification worked back then.
The ETF Profit Strategy Newsletter was a step ahead already in 2008. Very early on, it identified the bear market as a deflationary depression. The 'red across the board' performance of nearly all asset classes is indicative of a deflationary environment. Whether we find ourselves technically in a depression right now or not is irrelevant. Fact is that we'll end up there.
Of course, the government doesn't set the trend, it follows it. The official statement: 'we are in a recession' wasn't released until after the stock market lost some 40% in December 2008.
Quite to the contrary, the ETF Profit Strategy Newsletter recommended short ETFs until November 2008 and once again in January 2009.
In fact, on December 14th, 2008 we forecasted the following: 'Range-bound trading, as we've seen over the past several weeks, grinds and tests the patience of investors. More importantly, it gives the stock market a chance to calm extreme levels of investors' pessimism. Conversely, optimistic sentiment, which should be more visible above Dow 9,000, gives way to further declines. These should draw the indexes close to or below their November 21st lows of 7,445 for the Dow and 740 for the S&P.'
This was followed up with this statement on February 13th, 2009: 'The best target for a temporary low is 6,700 for the Dow and 700 for the S&P 500. Extreme pessimistic sentiment may drive the indexes even towards Dow 6,000 and S&P 600'. On March 9th, the Dow reached an intraday low of 6,440.
Rather than diversification, the newsletter promoted using short ETFs either to hedge long positions or simply as profit centers. Such Short ETFs included the UltraShort Financial ProShares (NYSEArca: SKF - News), UltraShort Real Estate ProShares (NYSEArca: SRS - News) and UltraShort S&P 500 ProShares (NYSEArca: SDS - News). From the January 6th 2009 highs to the March lows, those ETFs gained between 80% - 150%.
This bear market has humbled many investment gurus, stock pickers and asset allocation wizards. Yesterday a peacock, today a feather duster. If you don't want to get your nest egg scrambled, it might be time to take action and review your portfolio. The brand new issue of the ETF Profit Strategy Newsletter includes reliable short, mid and long-term forecasts for the U.S. equity markets along with winning ETF profit strategies. If you keep doing what you're doing, you'll get what you've got. Are you ready for more?

http://biz.yahoo.com/etfguide/090318/209_id.html?&.pf=retirement

No comments:

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)

Monday 23 March 2009

Is It Time To Abandon Buy And Hold Investing?

No comments:

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

Interesting Blogs