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.

Thursday, 22 October 2009

How to Destroy Your Investment Portfolio

How to Destroy Your Investment Portfolio

This is a guest article by Ray, the owner and primary author of Financial Highway, where he discusses investing, saving and practical money management concepts. You can check subscribe to his RSS feed or follow him on Twitter.

The past 18 months have been difficult for most investors, the stock market has seen the biggest “correction” since the great depression, “blue chip” companies have cut dividends, had massive layoffs and even begged the fed to bail them up. Not to mention the investment frauds of Bernard Madoff and Ed Earl Jones costing investors their lifetime of savings. More and more investors have decided to become “Do it Yourself” (DIY) investors and often rightly so. There really is no magic to investing; anyone can do it as long as you follow simple rules. Previously we published 10 investing tips to become a successful investor to help DIY investors. Although there is no magic to investing if you are a new DIY investor you can easily fall into the common investing traps and ruin your portfolio – detailed below.

5 Fastest ways to destroy your investment portfolio

1. Short Term Trading

This is one of the best ways to destroy your investment portfolio. With online discount brokers it is very simple to just buy and sell securities with the click of a mouse, sit in front of your monitor and constantly watch your stock price. Of course when you see your stock take a little hit just click sell and it’s sold. Thank god you acted fast and only took a 2% loss; you do that a few times a month and got your self a 10% loss. We are not even talking about fees. Statistics show that short term trading fails over the long term in overwhelmingly majority of cases. Very few people can be profitable day traders. So if you want to destroy your investment portfolio, start with short term trading.

2. Buy the “HOT” stock – Get Rich Quick

A few weeks ago a friend of mine called and said a co-worker had given him a good tip on a stock and he should buy some, he was considering a $10,000 purchase. So I asked him some basic questions: “What does the company do”, “What do analysts say”, “What’s the management’s history?”… He did not know the answer to any of these, and decided to ask the person who tipped him…he had no clue either but was sure it’s a good investment his brother-in-law’s friend had said so. I advised him against the purchase and his colleague is now down 35% in 2 weeks …OUCH! There is almost no better way to demolish your portfolio than to follow the “hot” stock tips or the get rich quick stocks. Purchasing strong, stable companies is boring!

3. Buy Exotic Investments

The investment industry loves creating new investment products, every few months some new exotic investment is brought to the market. Investors jump at these investment vehicles without understanding the risks associated with them. A great way to destroy your investment portfolio: put a large chunk of your retirement fund into these exotic investments and watch them disappear.

4. Do not have an Asset Allocation

One of the first things any investor should do before investing is have an asset allocation and stick to it, well that is for anyone who wants to see their investment portfolio grow. Asset allocation ensures you are diversified among all asset classes (stocks, bonds, cash etc). Studies show that over 90% of your portfolios variability is due to your asset allocation – not sticking to your asset allocation is crucial to the destruction of your investment portfolio.

5. Ignore Diversification

Every investor knows or has at least heard of diversification, it’s the cornerstone of every good investment portfolio. Simple concept: don’t put all your eggs in one basket. Diversifying your investment portfolio will ensure that your investments are spread out and you are not taking more risk than you need to. Just ignore this important concept and your investment portfolio will surely vanish.

You combine these five tips and you are guaranteed to lose more money in the stock market than you have ever dreamed of.

What tips do you have for those who want to demolish their investment portfolios? Any bad investment decisions you have made in the past?

http://frugaldad.com/2009/09/15/how-to-destroy-your-investment-portfolio/

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)

Thursday, 22 October 2009

How to Destroy Your Investment Portfolio

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