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.

Tuesday, 12 January 2010

Cheap Is No Longer Good Enough, Company must be Excellent too.

Cheap Is No Longer Good Enough
By Toby Shute
January 11, 2010 |

After a recent college reunion/homecoming, I had a chance to connect with fund manager Harry Long, the managing partner of Contrarian Industries. Long's company specializes in alternative asset management, algorithmic system research and development, and strategic consulting. Harry and I had a wide-ranging conversation about fundamental and systematic approaches to investing. Here's an edited portion of our exchange.

Toby Shute: You've described your investing approach as an attempt to marry the qualitative with the systematic. This reminds me of Warren Buffett's description of his investment strategy as 85% Benjamin Graham and 15% Philip Fisher. Let's start with Graham. What was his most important contribution to the investment field?

Harry Long: Graham's most important contribution to investing was the brilliant way he went about systematizing it. He gave very clear, mechanical rules, which outperform most discretionary human investors, even today.

If you look at services like Validea.com, the American Institute for Individual Investors, and countless other services, they have taken his dictates from The Intelligent Investor and put them into a screen, which beats the pants off just about everything else developed since.

I think Joel Greenblatt is trying to follow in that tradition. We'll see how he stacks up to Graham. It's a noble pursuit.

Shute: Phil Fisher is known for focusing on the characteristics of a great growth franchise, some of which are impossible to quantify. Importantly, though, he weeded out potential investments using a 15-point checklist that he applied pretty strictly. Are checklists an effective way of systematizing a qualitatively oriented investment process?

Long: When it comes to checklists, I've seen many, but very few good ones. It's really multiple simple rules, when applied in combination, that get you performance. For instance, if investors automatically sold, or had a rule against investing in, any company with earnings decreases of greater than 14% in any quarter, they should have sold almost all bank stocks in 2008.

In practice, you'll find that a well-designed system, using objective data, will often key in on companies that Fisher would have appreciated qualitatively. You have to do both, but I would encourage your readers to find businesses with great metrics and then ask "why?" rather than trying to find great stories which may or may not be executing.

Shute: What else can investors learn from Phil Fisher?

Long: Most investors would do best to stick to Fisher's basic tenet -- buy businesses with strong competitive positions. As Fisher pointed out, if you avoid companies with unhealthy profit margins, you save yourself a lot of money, sleep, and heartache. On the other hand, there are occasionally companies such as Wal-Mart (NYSE: WMT) that have low margins on purpose.

As for his focus on R&D, it's pretty hit-or-miss. Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) would be examples of great success stories. However, while the Intels (Nasdaq: INTC) of the world had great runs, they are still plowing billions into R&D and hitting a growth wall.

Investors should have a diversified portfolio of quality. Cheap is no longer good enough -- investors need to search for cheap and excellent. Competition is simply too brutal, unless you are in a position to take control of ailing firms.

Shute: Can you apply this advice to a particular sector?

Long: In the financial sector, rather than owning banks, which risk capital through lending and have infinite competition, [investors] could own something like MSCI, which gets fee income from its MSCI indices. It doesn't risk capital. Simple business -- you hand me money, I hand you information -- and it has very little strong competition in the index business. MasterCard (NYSE: MA) and Visa (NYSE: V) also don't have the same balance-sheet risk as an issuer like American Express.

I could go on and on. Just because you're investing in the financial sector, you don't have to be conventional.

[Michael] Bloomberg understood that the way to be successful is to sell the miners their picks and shovels. Why does everyone spend time studying banks, rather than his example? Why aren't people obsessed with studying FactSet Research Systems (NYSE: FDS)? Maybe it's a tabloid phenomenon where success is simply too boring.

Stay tuned as Toby's conversation with Harry Long continues tomorrow. Harry Long's comments are purely his personal opinions and should not be construed as financial or investment advice.

So, Fool, how do you weigh the quantitative and qualitative aspects of a business in your own investing decisions? Share your philosophy in the comments section below.

http://www.fool.com/investing/value/2010/01/11/cheap-is-no-longer-good-enough.aspx

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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)

Tuesday, 12 January 2010

Cheap Is No Longer Good Enough, Company must be Excellent too.

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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

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