Saturday, 17 May 2014

It doesn't make sense to invest scared. Despite the occasional bubble or risky valuations, stocks still go up over the long term.

Recently, the American Association of Individual Investors (AAII) sentiment survey revealed bullish and bearish sentiment fell, but neutral sentiment spiked.

Over the long term, the majority of investors surveyed were dead wrong.

Since 1987, the weekly AAII sentiment survey had the following average reading:

Bullish: 38.8%
Neutral: 30.7%
Bearish: 30.5%.

In that period, the S&P 500 has gone up 498%—a compound average growth rate of 7%, not including dividends—pretty much in line with historical averages.

Think about that for a minute.

Over a quarter of a century, despite some big moves up and down, stocks performed as they historically always have, averaging about 7% gains per year. And while stocks went along their usual course higher, at any given time, the majority of investors were, on average, not bullish.

Nearly two-thirds of investors, in fact, expected the market to go down or remain flat.

How is that possible? Have we become a world of glass-half-empty pessimists?

The news media certainly doesn't help. 

And, of course, the financial media needs to scare you in order to keep you hooked so you know what and when to buy and sell.

It doesn't make sense to invest scared. Despite the occasional bubble or risky valuations, stocks still go up over the long term.

If you're a long-term investor, I hope you won't be part of the majority that is constantly afraid. That's no way to live. And it's no way to make money.

- See more at:

Tuesday, 13 May 2014

Growth Investing versus Value Investing

Fisher stood out as one of the first money managers to focus on qualitative factors instead of quantitative ones.  He examined factors that were difficult to measure through ratios and other mathematical formulations:  the quality of management, the potential for future long term sales growth, and the firm's competitive edge.

Although Fisher focused on the qualitative characteristics of a company, he was first and foremost a growth stock investor.  He felt the greatest investment returns did not come from the purchase of stocks that were undervalued, since a stock that is undervalued by as much as 50% would only double in price to reach fair market value.

Instead, he sought much higher returns from those companies that could achieve growth in sales and profits greater than the overall market over a long period of time.

Furthermore, Fisher did not seek companies showing promise of short-term growth due to cyclical events or one-time factors.  He felt that the timing was too risky and the promised returns too small.  

Fisher penned his investment philosophy in his book: "Common Stocks and Uncommon Profits and Other Writings" by Philip A. Fisher.

Wednesday, 7 May 2014

Common Stocks and Uncommon Profits - "Scuttlebutt" method might be of value in seeking to make investments in smaller, local companies.

Common Stocks and Uncommon Profits

by Philip Fisher

Common Stocks and Uncommon Profits is one of the classic investment texts written for the lay person. The legendary investor, Warren Buffett, has credited Philip Fisher's investment strategy as strongly influencing him.

Rather than just seeking value, as the Ben Graham school of investment taught, Fisher realized that even a greatly "undervalued" company could prove a horrible investment. Sure, you might occasionally buy a stock for less than the company's cash-in-the-bank (back then, at least!). But what if the business is horribly run? It might not take long for the company to lose all that cash!

Even if the company returns to "fair" value, that ends the potential profit from investing in such a business. Holding an average company, because it was once undervalued, but is no more, makes little sense.
Fisher points out that the largest wealth via investing has been made in one of two ways. First, buying stocks when the markets crash and holding them until the markets recover. Secondly, with less risk and more potential return, you can also just invest in a small portfolio of companies which continue to strongly grow sales and earnings over the years. Then, if the company was correctly selected, you might never have to sell, while accruing a huge return on your initial investment.

Fisher pioneered the school of growth stock investing. In Common Stocks and Uncommon Profits, Fisher explains how he selects a growth company. He lists fifteen points which a company must have to be considered a superior investment.

Fisher's first point seems obvious: "Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?"

Fisher shows that some companies might have potential substantial sales increases for only a few years, but after that have limited potential due to some factor, such as market saturation. For example, Fisher mentions the growth in sales of TV's until the U.S. market was saturated.

He also wisely suggests looking behind the products to seek other superior investments. While many TV manufacturers were competitive and it was difficult to tell which was best, Fisher points out that Corning Glass Works was, by far, the company most capable of producing the glass bulbs used in TVs.

Fisher tries to clearly distinguish between companies which are "fortunate and able" and those which are "fortunate because they are able." The second kind, the superior investments, are highly innovative and create new products which have growth potential. Fisher uses Dow Chemical as one example of a "fortunate because they are able" company.

The second point wants to know if management has the drive to innovate new products. A man ahead of his time, Fisher wonders about how much of a company's future sales might come from products not yet invented.

A constant theme of Common Stocks and Uncommon Profits is examining what the company is doing to prepare for the future. Is the company spending wisely on Research and Development? Or, is the company just trying to maximize its current profit and reinvesting nothing for future growth?

Fisher explains why answering that question is difficult in practice. What different companies account for under R&D is one problem. Another is that some companies are more successful than others at turning money spent on R&D into future marketable products. Today, we must assume this question is far more difficult to answer!

In addition to questioning a company's R&D, Fisher wants to see a company with a strong sales organization and distribution efficiency. "It is the making of a sale that is the most basic single activity of any business," he writes.

Yet, why don't investors focus upon such key factors instrumental to a company's future growth? Fisher points out that certain issues are not quantifiable. That is why many investors tend to focus upon financial issues which can be expressed in a simple ratio.

How does the investor go about answering the "unquantifiable"? How does the investor know how well-managed the company is? Or, how does one evaluate the people factors, which Fisher says are the real strength of a superior growth company?

Fisher suggests the "scuttlebutt" method. This involves talking to suppliers, customers, company employees, and people knowledgeable in the industry, and, eventually, company management. From this information, an investor can get a good feel for the quality of the company as a growth investment. Fisher teaches us how to learn to ask the correct, company-specific questions.

Fisher acknowledges the "scuttlebutt" method is a lot of work. But, he asks, should it be easy to find such great companies, when finding only a few can easily lay the foundation for building huge future wealth?

I tend to think the average individual investor will not use the "scuttlebutt" method. And, for most investors and most companies, even if the investor had the desire to use this method, it would not be practical.
The average investor will not have access to all the people with whom Fisher suggests talking. Imagine trying to use this method on a larger company with tens of thousands of employees worldwide. What is said about the company in one area may differ greatly from what is believed about the company in another region. Applying such a method to evaluate a large, innovative company, such as 3M, for example, seems utterly impossible.

Yet, for investors seeking to make investments in smaller, local companies, the "scuttlebutt" method might be of value. For angel investors or mini-venture capitalists, reading Common Stocks and Uncommon Profits is probably also worthwhile. However, Fisher is quick to point out that such company evaluation is far more tenuous when the company hasn't any history behind it.

Entrepreneurs seeking to build companies should also give the book a quick read. The fifteen points are very important to company growth and success. And, encouraging these strengths from the perspective of a company's CEO trying to build the company is far easier than seeking to answer these questions from the perspective of an investor who is a company outsider!

Common Stocks and Uncommon Profits also has an excellent chapter titled, "Hullabaloo About Dividends" which tells us investing in growth stocks with smaller dividend payout ratios often leads to greater total future dividends because the dividends are growing, while high-yielding stock tends to grow far less, and hence, the dividends grow far less.

The book also has some excellent thoughts about buying-and-holding a stock and when to sell a stock. Fisher's thoughts on diversification are also well worth reading, although I would recommend more diversification than Fisher claims is adequate.

Overall, this is a great book for the individual investor. You will not be able to follow the "scuttlebutt" method in practice, for most investments, and, maybe, the complexity of today's companies and scientific research in many growth companies make Fisher's method less practical today than in the past, but there is much to learn about business and investing from this book.

Common Stocks and Uncommon Profits - One should buy stocks to hold them for the very long run.

Book: Common Stocks and Uncommon Profits
Author: Philip Fisher
This is easily one of the best books I have read on investing (big surprise, given that this is one of the classics). Here we go.
The biggest takeaway from the book is that one should buy stocks to hold them for the very long run (reminds you of Buffett’s philosophy?). Fisher’s take on it is that the one should continue to hold the stocks even if the stock appears overvalued at the moment as long as you can ascertain that its peak earning power hasn’t past, among other things. In the very first chapter, he talks about the era before 1913, when federal Reserve was established–the era when the business cycle was even more pronounced, and stock market gyrated even more. Fisher says that even in these time, people who bought and held stocks made more money than those who bet on the cycles. He says that the only times you should sell are (a) when a mistake has been made, or (b) when the next peak earning power adjusted for the business cycle activity will be less than what it is now/has been. He thinks its is not worth disturbing a position that could likely be a great deal worth more even if it is 35% overpriced because you risk losing the future returns and incur a capital gains tax liability.
He says that companies with truly unusual prospects for growth are hard to find because they’re so rare AND they can be differentiated from a run of the mill company 90% of the times. On the other hand, it is vastly more difficult to understand what the market or the business cycle will do in the next few months. Thus, it is much likely for one to be wrong when guessing the short-term changes for a stock than assessing long-term prospects of a company. This is why one should not be selling a position in anticipation of market downturns. He says that the EMH is true in the narrow sense that it is very hard to make money in and out of stocks by trading them, but as owners and investors, one can beat the theory.
The second biggest takeaway is the idea of ‘scuttlebut’–someone who gets information from industry contacts that one develops and speaks with a bunch of them to get a more colorful picture of the company so one can understand the competitive position of the industry and company better. I guess this is what we could call “channel checks” in today’s parlance.
Fisher provides fifteen points to look for in a common stock
This is a very well-curated list, but I don’t think that this is where the book pays for itself. Most investors already look for most of the items listed below, and the list is not as useful as it must have bee back in 1958. Nonetheless, it is a phenomenal checklist.
  1. Can the firm have potential for sizable increase in sales for years to come?
  2. Does the management strive to develop products that will compensate for stabilization decline of the sales of the existing products? (some large companies tend to interrupt regular R&D for pet projects, which is often not successful).
  3. How effective are firm’s R&D efforts? Also, need to better understand what companies mean by R&D. Sometimes market research, or simple sales engineering is bucketed under R&D, and doesn’t represent true developmental research.
  4. Does the company have an above-average sales organization? (Fisher says that this is the trait that is most difficult to evaluate)
  5. Does company have a decent profit margin or is it a marginal company?
  6. What is the company doing to improve margins? (this is something the management will freely talk about)
  7. Does the company have outstanding labor and personnel relations?
  8. … outstanding executive relations?
  9. … has depth in its management?
  10. How good is company’s cost analysis and accounting controls? (in most of the cases, if the company is good at most of the other things, it can be assumed that the company is good at this too).
  11. Are there any other aspects of the business (perhaps peculiar to the business) that will give a hint about the company’s standing vs. the competition?
  12. Does the company have a short-range or long-range outlook when it comes to profits?
  13. Will the foreseeable growth require equity financing?… if it is years ahead, it is not that important as it can be assumed that the prices will be at a much higher levels. (quite an assumption here)
  14. Does the management talk even when things are not going well?
  15. Does the company have management of unquestionable integrity?
Stocks vs bonds
Fisher makes a strong case for stocks over bonds using the following logic. He says that the way our laws are written, and our accepted beliefs about what to expect in a recession, makes one of the two things likely. One, either the business will remain good and stocks will outperform bonds, or a significant recession will happen, when for a while bonds will out-perform stocks, but the recessions will cause the Fed to intervene (causing inflation) and the Federal government to produce deficits that will together lower the value of fixed-income instruments. This, of course, does not apply in the 2008 recession, as that was brought by collapse of the financial system after an obscene amount of debt was built in the system, and the Fed very quickly hit the zero-bound line of interest rates, and banks made hardly many loans post-recovery, causing very little inflation.
When to buy?
Fisher says that people often rely too much on the business cycle to make this decision, but this is but one of forces; the others are (a) interest rates, (b) government attitude toward investment and private enterprise, (c) inflation trends, and (d) new inventions that affect existing industries–the most powerful force. He says that instead of relying on the business cycle and general stock market trend, people should buy when funds are available. He says that buying points do no necessarily come out of corporate troubles, but could be a case where significant capex has been spent to get a plant running and some incremental capex can improve the productivity by a lot, which would a very high ROIC when thought of as a project on its own.
What about dividends?
Fisher thinks that dividends are overhyped. The company should allocate assets to pursue maximum future cash flow growth. He says that the company in the end attracts the investor-base it wants to, as long it doesn’t change its dividend policy–more important than high dividends is a consistent dividend policy. He compares a company to restaurant. He says that a restaurant can’t succeed if it catered to different clientele every day; it must be somewhat consistent.
Some interesting tidbits from the book-
  • Industrial organizations used to have small R&D departments. Research activity increased for military purposes at first due to fear of Adolph Hitler.
  • Capex and D&A is an interesting area where accounting, which doesn’t account for time value of money, can confuse people. Capex is always spent in current $s but D&A is spent in old $s which have a higher value than the simple accounting rules shows them for. This needs to be kept in mind as one analyzes companies with long depreciation schedules. This is beneficial for growth companies as they’re spending capex so fast that the D&A is recent $s and hence they’re obfuscating less than what older slower-growth companies would have.
  • Don’t over-stress diversification
  • Fisher talks about one of the ways in which the leader always remains the leader. He talks about situations where the buyer comes back to leader because no one will criticize the purchasing manager for making a safe decision, unless there is a significant economic difference.

Tuesday, 6 May 2014

What's Investing Style?

Understand Investment Styles and Determine Which Fit Your Portfolio.

By Melissa Phipps

Successful investors and investments don't just pick companies on a whim. They narrow their focus on investment styles. They may target companies of a certain size, look at company fundamentals as a predictor of long-term value or annual growth, manage every stock move or set the investing on auto-pilot. Most mutual funds or ETFs have a pre-determined style that does not (or should not, sometimes funds get tricky) vary. Often, these investments target a combination of styles. So how do you make sense of it all? Learn the types of investment styles, and it can help you determine which investments best suit your style.

1. Investing by company size: Large Cap, Mid Cap, Small Cap

Companies perform in different ways at various times in their growth cycles. Investors focus on capturing companies at different points—when they are just starting, just starting to grow, in mid-growth, or well established. You can do this by focusing on market capitalization, or the number of outstanding shares multiplied by share price. Large capitalization or big cap companies are those worth more than $10 billion. Mid-caps or mid capitalization companies are about $2 billion to $10 billion. Small-caps or small capitalization companies, between $100 million and $2 billion. There are micro-caps below that, then nano caps, then... I guess angel investments. Fund managers typically choose a market capitalization to focus on. For example, "This fund seeks to generate capital appreciation by investing in small cap companies" or, more specifically, "This Fund seeks capital appreciation principally through the investment in common stock of companies with operating revenues of $250 million or less at the time of initial investment."
So what's the difference? Typically, small-cap companies offer more growth potential. If you get in at the right time (think early Microsoft, 1990s Apple), you can get a great investment return. But small-caps can be riskier than established large-caps. Only the strongest small companies survive. The risks increase as companies get smaller. Micro-, nano- and other tiny-capitalization investments could have serious potential, but unless you are a very agressive investor and can afford the loss, they shouldn't represent a huge part of your portfolio.
Large-cap companies move the market. They are the dominant players, produce consist returns over time, and may even return dividends to investors. They are also liquid companies, meaning it's easy to buy and sell their shares. There typically offer decent returns with less risk, and since they represent the larger market these companies should play a dominant role in your portfolio.
In between are mid-caps, which some investors think is a sweet spot where you can find companies with growth potential that act like value plays (more on growth vs value below).
Different-sized companies seem to perform differently, meaning when large caps are down, small move up. These are assets that are non-correlated, they don't move in the same way. Owning companies of each size helps to balance some of the risk of your portfolio.

2. Investing in company fundamentals: Growth Investing and Value Investing

Some investors use analysis of fundamentals to determine where a company is headed. Growth investors look for companies they think will increase earnings at least 15% to 25% a year on average, based on management, new products, competition, etc. Value investors look for companies that are selling cheap compared to intrinsic value or the value of tangible assets.
For many investors, the real win is a combination of growth and value. A good company with solid long-term prospects at a reasonable price. That's super investor Warren Buffett's way (he doesn't believe in the two separate strategies).

3. Investing with or without a manager: Active vs Passive

An actively managed fund is one with a manager or team of managers picking stocks in an attempt to beat the market. A passively managed fund, also known as an index fund, follows a set group of stocks to achieve its stated goals. Index funds perform like the index they follow, and because there is no one to pay the expenses are typically cheaper than actively managed funds.
Active managers can try to reduce risk when the markets are turbulent, but managers rarely beat the markets by enough to justify the extra expense of an actively managed fund. A recent study found that only 24% of actively managed funds beat their passive counterparts.

4. Investing in a market segment: Sector Investing

Some investors narrow their style to invest in a specific industry or sector, say technology, consumer goods or manufacturing. Sector funds are not diversified in and of themselves, but they can help balance out a portfolio that is heavily weighted in a certain sector because it contains a lot of company stock, for example.
balanced portfolio can contain a combination of the fund styles mentioned above. It really depends on your personal tolerance for risk, your goals, and the types of investments available to you through your 401(k) or individual retirement account. You can use an asset allocation calculator (this one from Bankrate) to figure out what's right for you. (Some people are just as well off putting everything in an index fund, which is just a cheap way to own the entire market, or a target retirement fund, which does the asset allocation for you.) Choose based on what works for your own investment style.

Common Stocks and Uncommon Profits - 15 Investment Secrets to Help Make You Rich

The Legacy of One of the Greatest Investors of All Time

Philip Fisher (1907-2004) was one of the greatest investment minds in history. Working from a modest office on the West Coast in the aftermath of the Great Depression, he developed a buy-and-hold value and growth model for investments that has been considered on par with Benjamin Graham’s The Intelligent Investor by no less a giant as Warren Buffett. In addition to teaching at the Stanford School of Business, he authored several books including the watershed Common Stocks and Uncommon Profits. It was this text that introduced the now-famous “scuttlebutt” approach that encouraged investors to develop a deep understanding of his or her investments by thoroughly analyzing the financial statements, interviewing managers, competitors, employees, vendors, and customers.
Philip Fisher was extremely successful at selecting a core portfolio of seven or eight stocks with above average potential at attractive prices. According to Andrew Kilpatrick in Of Permanent Value, “Fisher always said to think of the long-term and have low turnover in your portfolio. Fisher bought Motorola in 1955, back when mobile telecom signified radio systems for police cars. In the Investment course McDonald [the long-time resident value investor at Stanford] took in 1956, Fisher talked about Motorola as a ‘great growth company’ when Motorola’s market capitalization was $300 million. As a long-term investor, Fisher still owned Motorola 43 years later when he died in 2004.”
Going on, he said, “Fisher told McDonald’s class in 2000, ‘I believe strongly in diversification,’ and by that he meant seven or eight stocks – a concentrated portfolio in today’s parlance. Importantly, Fisher himself did the lion’s share of the investment research on companies owned by the clients of Fisher & Company, so that he had a high level of knowledge and conviction on each of the seven or eight companies … ‘I do not believe in over-diversifying … My basic theory is to know a few companies and know them really well – and be sure your diversification is real diversification. Having Ford and General Motors is not diversification. Diversification means owning companies that do not sell into the same markets – companies with real differences.”

The Investment Secrets in Common Stocks and Uncommon Profits

In his book, Fisher laid out fifteen things that a successful investor should look for in his or her common stock investments. Here’s a rundown of what they are. (Do yourself a favor. Run out to your local store or navigate to your favorite online book retailer and pick up a copy of Common Stocks and Uncommon Profits – this basic summary of the book can’t possibly do justice to all of the excellent information in its pages.)

  1. Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?
  2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potential when the growth potential of currently attractive product lines have largely been exploited?
  3. How effective are the company’s research and development efforts in relation to its size?
  4. Does the company have an above-average sales organization?
  5. Does the company have a worthwhile profit margin?
  6. What is the company doing to maintain or improveprofit margins?
  7. Does the company have outstanding labor and personnel relations?
  8. Does the company have outstanding executive relations?
  9. Does the company have depth to its management?
  10. How good are the company’s cost analysis and accounting controls?
  11. Are there other aspects of the business somewhat peculiar to the industry involved that will give the investor important clues as to how the company will be in relation to its competition?
  12. Does the company have a short-range or long-range outlook in regard to profits?
  13. In the foreseeable future, will the growth of the company require sufficient financing so that the large number of shares then outstanding will largely cancel existing shareholders’ benefit from this anticipated growth?
  14. Does the management talk freely to investors about its affairs when things are going well and “clam up” when troubles or disappointments occur?
  15. Does the company have a management of unquestioned integrity?
Fisher also had five “don’t” rules for investors, which were:
  1. Don’t buy into promotional companies
  2. Don’t ignore a good stock just because it is traded over-the-counter
  3. Don’t buy a stock just because you like the tone of its annual report.
  4. Don’t assume that the high price at which a stock may be selling in relation to its earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price?

Common Stocks and Uncommon Profits by Philip Fisher

Fisher has a fairly simple investment plan:  buy only outstanding companies and sell only when they are no longer outstanding.  Although many people try to time the market, this is the method that he has found will consistently return good results.  However, finding outstanding companies is a bit of a challenge and the book mostly concentrates on suggestions on how to find the good ones and avoid the bad.

Fisher discovered that his main method of discovering quality companies was through "scuttlebutt".  Detailed analysis of company financials simply cannot provide the necessary information;  one must talk to people who know the company.  These, of course, are quite varied individuals, from competitors to vendors and customers, and when used with caution, former employees.

After scuttlebutt clearly points to a promising company, then an evaluation can be made with a list of requirements.  The requirements did not seem much different that Graham and Dodd propounded in The Intelligent Investor, and certainly not nearly as elegantly as inGood to Great.  They are designed to answer the questions "is management good" and "is the company doing what it needs to in order to maintain and expand its market position".  The latter focuses largely on technology research, an area that Fischer feels is required for continued success.

The book concludes some advice to investors on what not to do, which can be fairly effectively summarized by saying "ignore what Wall Street thinks is important".

While no means a thorough treatment of investment, Fisher provides very practial guidelines to how the investor can realize consistently good profits.  Unfortunately, as a fund manager Fisher is able to talk to management of a company, a luxury not necessarily afforded to the individual investor and some of his points require this ability.  However, there is no way to be sure one's judgement is correct;  his guidelines merely significantly increase the probabilities, and if the individual investor must settle for slightly worse probabilities, following Fisher's methods should still produce significantly better than average results.


  • Buy only high quality companies
  • Find these companies by talking to competitors, customers, vendors, and if one factors in the inevitably strong bias, from former employees.  After scuttlebutt consistently suggests that the company is good, continue investigations.
  • Fifteen points to look for.  Require fourteen, perhaps thirteen if the others are strong.
  1. "Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?"
  2. "Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?"
  3. "How effective are the company's research and development efforts in relation to its size?"
  4. "Does the company have an above-average sales organization?"
  5. "Does the company have a worthwhile profit margin?"
  6. "What is the company doing to maintain or improve profit margins?"
  7. "Does the company have outstanding [superb] labor and personnel relations?"
  8. "Does the company have outstanding [superb] executive relations?"
  9. "Does the company have depth to its management?"  (i.e. more than just one or two people)
  10. "How good are the company's cost analysis and accounting controls?"  (i.e. ability for detailed cost analysis)
  11. "Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?"
  12. "Does the company have a short-range or long-range outlook in regard to profits?"  (the latter is desirable)
  13. "In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this accelerated growth?"  (An answer in the negative is desirable)
  14. "Does management talk freely to investors about its affairs when things are going well but 'clam up' when troubles and disappointments occur?"
  15. "Does the company have a management of unquestionable integrity?"
  • We do not know enough to guess market trends.
  • The best time to buy is when a superb company has just spent lots of money developing a new product and (inevitably) delays occur, causing investors to push down the prices.  This always happens with new products and if you can have confidents in the outcome, the stock is now selling at a discount.
  • "If the job [selecting a company] has been correctly done when a common stock is purchased, the time to sell it is--almost never" (p. 91).
  • "Perhaps the most peculiar aspect of this much-discussed subject of dividends is that those giving them the least consideration usually end up getting the best dividend return"  (The better stocks typically have a lower dividend, but the company grows faster than the stocks with the bigger dividend, so the end result is a larger total dividend, although it is a smaller percentage)
    • Ed:  This is not quite the view of Graham and Dodd (The Intelligent Investor);  they claim that stocks with dividends generally increase faster than those without and virutally mandate consistent and increasing dividends.  However, Graham and Dodd lack a theory of how to pick great companies.  I think their view is that consistent and increasing dividends is a trait of companies likely to do well.
  • Ten don'ts for investors:
  1. "Don't buy into promotional companies"  (ie. IPOs)
  2. "Don't ignore a good stock just because it is traded 'over the counter'"
  3. "Don't buy a stock just because you like the 'tone' of its annual report"
  4. "Don't assume that the high price at which a stock may be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price"  (i.e.  the high P/E might be an indication that the company will continue to grow at those rates)
  5. "Don't quibble over eighths and quarters"  (i.e. don't try to get get a stock for 50 cents cheaper;  it may never get there and you never buy an excellent stock)
  6. "Don't overstress diversification"
  7. "Don't be afraid of buying on a war scare"
  8. "Don't forget your Gilbert and Sullivan"  (i.e. don't give too much weight to things that don't matter, like the price of the company four years ago, or the historical earnings.  What matters is the state of the company now.)
  9. "Don't fail to consider time as well as price in buying a true growth stock"
  10. "Don't follow the crowd"

Saturday, 3 May 2014

Habits of Financially Successful People

Sometimes wealth comes to those who are lucky; they win the lottery or they decided to invest in Apple in 1981 when the share price was just $28.83. However, it’s far more likely their wealth came through good habits.

Wealthy people actually have a lot of the same traits and habits that enable them to persevere through difficult times and come out on top with millions (or billions) of dollars. It’s not a coincidence that the rich share these habits.

Of course, that doesn’t mean waking up early and reading more is guaranteed to make you a millionaire in 10, 20, or 30 years. However, there’s no denying the “rags to riches” story. Marketing firm NowSourcing reported that 68% of the Americans on Forbes’ Billionaires List are self-made billionaires—they didn’t inherit their fortunes.

Clearly the right habits can be a roadmap to success. Author Tom Corley interviewed 233 wealthy people and 128 poor people during a 5-year period. He found that the wealthy people had similar habits to one another and the poor people had similar habits, and there was a huge difference between the 2 groups.

The rich are definitely creatures of habit with 84% believing that good habits create opportunity and 76% believing that bad habits have a negative impact.

To-do lists
According to NowSourcing, 81% of wealthy maintain a to-do list and, more than that, they check off at least 70% of that list a day. In comparison, just 9% of people who struggle financially have a to-do list. Having goals and writing them down gives them a purpose, something to strive toward.

Don’t allow a list to overwhelm you, though. Financially successful people focus on accomplishing a specific goal at a time, and they make sure their daily actions are aligned with longer-term goals. While 80% of wealthy people focus on a specific goal, just 12% of poor people do the same.

In order to get through that list and actually accomplish what they want, successful people have learned how to manage their time effectively.

Wake up early
True, there isn’t an overwhelming majority of wealthy people who wake up early, but 44% of them get up 3-plus hours before work, which is far more than the 3% of poor people. In the hours before going to work, successful people focus on self improvement and reading educational material relating to their jobs.

Waking up early is also a common trait of the super wealthy. Many CEOs and business leaders are the type of people who wake up at 5 in the morning, read the paper, send out some emails, and fit in some time to exercise all before heading in to the office.

Keep healthy
Corley found that 70% of wealthy people ate less than 300 junk food calories each day. In comparison, 97% of poor people ate more than 300 junk food calories a day.

True, healthy foods aren’t cheap, but financially successful people try to eat healthy and stay fit because health issues can interfere with their ability to make money. Plus, staying healthy reduces medical expenses and lessens the strain on their finances.
Three-quarters of successful people are said to exercise aerobically 4 days a week compared to 23% of people who struggle financially.

Instead of relaxing in front of the TV, wealthy people gravitate toward books. Not only does 86% claim that they love to read, but 88% read at least 30 minutes each day and 63% listen to audiobooks during a commute.

According to Corley, the reading that wealthy people do is often for education or for career-related reasons. He also found that 76% read 2 or more education-related, self help-related books a month, which is something the poor don’t do.

Continue to learn
Related to their desire to read, wealthy people believe in the importance in continuing to learn throughout their lives. They put an emphasis on education, reading, and self-improvement and as a result wealthy people commonly adapt and evolve easily.

While 86% of successful people believe in lifelong educational self-improvement, just 5% of those who struggle financially agree.

Successful people stay successful because they aren’t afraid to change their minds or entertain other viewpoints. In their pursuit of knowledge, they allow what they learn to mold them. Continuous learning helps them develop new skills to keep them valuable to shareholders, clients, and consumers.

Surround themselves with other wealthy people
Wealthy people spend a lot of time around other successful people. In fact, 79% network 5 or more hours each month. They place importance on building relationships by returning phone calls, remembering personal information about the people they meet with, and, of course, networking regularly.

Successful people limit their exposure to negative people and naysayers and spend time with those who effect change and who will be a positive influence. They network to find people who can help them on their way to further success.

Even people who haven’t reached financial success should spend time with wealthy people. The best way to pick up their habits and traits is by keeping company with the people whose behaviors you want to emulate.

Do what is difficult
People with money work longer, harder, and smarter. They sacrifice today in order to reap the rewards further down the line. And they aren’t happy with the easy road. Instead, they usually make their money by finding the gaps in the market, by coming up with something no one else has before.

Furthermore, successful people are persistent. They don’t let failures keep them down, and, believe it or not, wealthy people usually have even more failures than most people. However, they learn from their mistakes. According to, while financially successful people use their mistakes to help them succeed the next time, only 17% of the middle class can say the same.

Successful people realize that mistakes are inevitable. It’s how they react and move forward that sets them apart from the rest of us.

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