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.

Saturday, 6 February 2010

Invest wisely or get flattened by elephants

Invest wisely or get flattened by elephants

Anybody can buy or sell shares and if that's the case it is not the most accurate method of assessing value that matters but the most popular.
And the most popular method is - regrettably, or should that be thankfully - dealing in shares without employing any valuation method of all.

MARCUS PADLEY
February 6, 2010

Archie had his birthday this week. Seven. He is a wonderful kid having inherited all the best bits of his Mum and Dad with his everlasting smile, impartial consideration for others, dazzling good looks, the ability to talk the hind leg off a donkey, and his obsession with money - only one of which he got from me.

He is also a dedicated inquisitor, incessantly bombarding us with questions such as "Dad, what goes faster, a big jet or a small jet", "Dad, if you ditch the ants, are there more animals or humans in the world", "Dad, what would you prefer, to be sat on by an elephant, or poked in the eye by a baboon", "Dad, how many people are fishing in the world right now" and "Dad, how much money do you have in the bank".

We used to argue the relevance of the questions or the connection between the alternatives he presented but after four years of barrage we have now just learnt to answer "Animals","Big jets", "Sat on by an elephant" or "64,675,432", which unfortunately is not the amount of money I have in the bank.

So you can imagine the attack when Archie saw his first share price chart.

"What's a chart",
"What's a share price",
"Why does it go up and down",
"Why don't you know what the price is?",
"If it was a scooter it would always be $99.95".

Ah, the clarity of youth.

And why indeed don't we know what the share price is?
That would be nice, if someone could simply tell us.

As rumour would have it, the most popular method of telling you what a share price should be is some form of Buffettology. Its reach is universal. There is hardly a man on the street who would not profess some ability and intention to invest on the sensible and highly publicised principles of value assessment and patience that "the Warren Buffett Way" supports. But allow me to let you in on a sharemarket secret.

Anybody can buy or sell shares and if that's the case it is not the most accurate method of assessing value that matters but the most popular.
And the most popular method is - regrettably, or should that be thankfully - dealing in shares without employing any valuation method of all.

Scary, but that's how shares prices move most of the time, without anyone doing any assessment of value.

How else could the share price of the Commonwealth Bank more than halve from $62 to $24 in the global financial crisis and then more than double to $58 last month if the biggest driver of the share price was the rational assessment of the company's value.
There is no way the bank's value fell 60 per cent and then rose 140 per cent, and it didn't, but the value of the shares did and this mismatch reveals the plain truth about shares.

There are two very different things going on in the market and every time you put on an order you have to choose to exploit one or the other with nothing in the middle.

Either you are trading in shares and hoping the price will go up, or
you are investing in companies and waiting for the value to surface.

Both are OK, both have intellectual pull, neither has the moral high ground (although many think they have) and you can do both at the same time. But as a buyer and seller of shares you do need to ask yourself every time an order goes on the screen "Just what am I doing?" because perhaps one of the most prevalent and enduring mistakes among clients and advisors alike is the use of the language of rational value investment as the pretence for disorderly trade. It is everywhere.

So what are you going to do?
Because I can guarantee that until you stop kidding yourself that

you are investing in companies
when you are in fact trading share prices

and until you choose to

either devote yourself to a value approach
or learn to trade with discipline

it will not matter what fantasy you have concocted for yourself,

things will not improve and
you will continue to be sat on by elephants and poked in the eye by baboons.

Marcus Padley is a stockbroker with Patersons Securities and the author of the daily stockmarket newsletter Marcus Today.

http://www.smh.com.au/business/invest-wisely-or-get-flattened-by-elephants-20100205-nilc.html

Also read:
Paying the price of a new Mercedes to buy a new Proton! Beware of manipulators in the market place

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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)

Saturday, 6 February 2010

Invest wisely or get flattened by elephants

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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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