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, 3 July 2010

To stop stock loss, neither a gambler nor a holder-on be

To stop stock loss, neither a gambler nor a holder-on be

MARCUS PADLEY
July 3, 2010

I RECENTLY wrote an article declaring that the biggest mistake a private investor can make is not selling. Since then I have been bombarded with questions about my own stop-loss selling strategy. So I'll tell you.

But before I do, you should know that I am possibly a little different to most of you. I have learnt to sell as easily as I buy. I am regularly in 100 per cent cash. I don't need to be in the sharemarket.

I don't need the sharemarket for a dividend income and I long ago got over the philosophy that you hold stocks forever - utopian crap - and that you can't time the market - a lazy professional's excuse for doing nick all for his money.

So, with that disclaimer, here are a few of my stop-loss strategies that you might consider for yourself.

THE HOLIDAY STOP-LOSS

I sell everything before I go on holiday. I once ruined a holiday by fretting about some dumb stock position when I should have been chasing my wife and kids around. Never again. Of course, I'm not suggesting you do that. It's just that when you have your head in the sharemarket all day every day, a holiday isn't a holiday unless you get it out.

THE INSOMNIA STOP-LOSS

I sell anything that could possibly keep me awake tonight. Sorry, but I reckon it's really dumb to be worrying about what Wall Street's going to do overnight. Let's face it. If that's your concern, then you are gambling, not investing. Utter luck is a cruel mistress and if that's what you are relying on, you have gone astray. Unless, of course, you use the sharemarket to gamble, for creating a rush. That's fine. But don't dress it up as anything clever. There's nothing clever about going to bed with your fingers crossed.

THE ANXIOUS STOP-LOSS

I sell anything that is disturbing me. I put a high value on my frame of mind. With only 252,522 days left to live, of course you can't really afford to waste any time being miserable, especially not about money, which ultimately, is all that stocks represent. Biting the heads off the kids or blowing your window of opportunity with the missus because of some dodgy stock is about as stupid as it gets. Those windows are pretty small. So if in doubt, get out.

THE OBJECTIVITY STOP-LOSS

I used to operate a stop-loss that triggered when a loss was so big I felt I wouldn't be able to tell Emma. But when I confronted her with one once it turned out she had a bigger risk appetite than I did. Embarrassing as it is, my wife has the bigger kahunas. I bottle it before she does. So that little system has become redundant. But for you, it may not be. If in doubt, discuss it with someone. When things are about as bad as they can get, you need objectivity, which means you need to talk to someone. Use someone else as your stop-loss.

THE PUNCHING THE AIR STOP-LOSS

I sell anything that provokes me to stand up at my desk and punch the air in delight. As any stockbroker will tell you, euphoria means ''Sell''. It has exceeded your expectations and asking for more is simply greed. You have to book the wins some time. This is as good a moment as any.

THE DENIAL STOP-LOSS

I sell anything I get wrong. Stocks analysis is not a science. You cannot pin down certainty. And there are so many variables and so much sentiment that getting it wrong is to be expected, is inevitable, and when you do get it wrong you have to act, not deny. There is no room for pride in stock decisions. Advisers telling clients not to sell because they couldn't admit they got things wrong in the financial crisis (pride and denial) cost billions of dollars and thousands of client relationships. We all get things wrong. Accept that and half the game - not losing money - is won.

THE SCHOOL FEES STOP-LOSS

Paying essential bills takes priority over trading, I'm afraid.

THE DIVORCE STOP-LOSS

Only triggered it once and if you can exercise the ''engagement ring thrown at you'' stop-loss effectively you'll never actually need it.

I could go on.

Marcus Padley is a stockbroker with Patersons Securities and author of the daily sharemarket newsletter Marcus Today. For a free trial, go to marcustoday.com.au

Source: The Age

Comment:
On the other hand, there is a person I know who "lost" money each time he sold, as his sold stocks continue to go higher subsequently.

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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, 3 July 2010

To stop stock loss, neither a gambler nor a holder-on be

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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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