Ignore shares and get poorer.

Diary of a private investor: ignore shares and get poorer
Our private investor is back - and he says that savers who are prepared to take some risk will prosper.

Despite the Gulf of Mexico oil spill last year, BP shares are doing well Photo: PA

By James Batholomew

10:51AM BST 06 Jun 2011

After the glorious year of 2010 - for the stock market anyway - this year has, so far, been a damp squib. First it was up, then it relapsed, then it rose once more before retreating again. As I write, it is within 2pc of where it started.

As Lady Bracknell said in The Importance of Being Earnest, "this shilly-shallying is absurd". Which is it to be? Will shares finally rise or fall?

On the bearish side, I'm told, by people who ought to know, that Greece is bust, whatever the politicians say. Another well-placed individual has the same opinion about Ireland.

If either is right, shares could fall heavily on the day the default is announced. Some people say "it is already in the price", but I doubt it.

On the other hand, shares still look good value. I own some in BP which, at 458p, stands at a mere 6.8 times forecast earnings for 2011.

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Its adventures in Russia do worry me a bit and, of course, the shadow of the disaster in the Gulf of Mexico still hangs over it. But rarely in its history have the shares been treated with such disdain.

Professional and lifelong investors are now generally back in the stock market. But many private individuals are still holding back.

Over the past few years, I've talked to quite a few people about their investments and found they can be divided into four sorts.

The first thinks shares are too risky. They remain almost entirely in cash. In some cases they have good reason. Some have a limited amount of money and a very specific thing - such as school fees - which they want to be sure they can pay.

Others argue that shares are unpredictable and they don't know anything about them. Better to keep the money safe in the bank. These people have their reasons. But over the long term, I've seen so many of this sort, who were once well off, become very gradually much less so. I knew the daughter of a Seventies multi-millionaire who inherited her fair share. She kept the money in a building society and is now, frankly, just getting by. It's frustrating. She could have stayed rich.

The second group consists of those who have made quite a bit of money but have not had much time or interest in managing it. They were then persuaded by persistent, charming salesmen to invest in certain funds. For these salesmen, nothing was too much trouble. They visited them in their homes. They brought wonderful, sophisticated brochures and "personalised" recommendations.

The untold story which the salesmen never quite got around to explaining in detail was the full extent of the commissions and expenses involved. The people in this group have generally had a pretty thin time of it over the past dozen years.

The FTSE 100 is still rather lower than it was in January 2000, and all those commissions have eaten a substantial hole in the dividend income.

The third sort are thrill-seekers. To be honest, I know only one person in this group. There was a time when he got very excited about shares and was dealing on an hourly basis, following recommendations from a broker. After initial success, he lost a bundle and decided to give it all up.

Long-term, persistent portfolio investors are the fourth group. They have built up experience and understanding. They tend to have done best.

But where does that leave the sort of person who has other things to do and does not want to spend time building up experience in shares?

My flippant answer would be "poorer". You make your choices and live with the consequences. Trying to be more helpful, let me suggest this: how about putting, say, 15pc of free cash in a selection of lowest-possible-cost tracker funds? And then increasing the amount each year up to a level with which you are comfortable?

This way, you will not give away a fortune in commission. You will keep most of the dividends. You will not have to worry about selecting individual shares. And you are likely - though not guaranteed - to be richer in 10 years than otherwise. You could go for a mixture of, say, half of the invested amount in a FTSE 250 shares fund, a fifth in a Far East fund, another fifth in a US fund and a 10th in an emerging markets fund.

http://www.telegraph.co.uk/finance/personalfinance/investing/shares/8558975/Diary-of-a-private-investor-ignore-shares-and-get-poorer.html

Warren Buffet's strategy on technical analysis

Warren Buffet's strategy on technical analysis
Apr 05 '00

After much research and experience in investing I've discovered a simple strategy which works very well for profitable investing. It's a composite of Charles Schwab's and Warren Buffet's strategy. As you may know, Warren Buffet started with a little investment decades ago and now he's the third richest man in the world with over $30,000,000,000 in stock in the company he built. Charles Schwab is the genius who began the most successful off-price brokerage in the world. Here's what they say about investing and technical analysis:

Rule number one: Buy a company you'd be willing to hold for a lifetime.

When you put your money in a stock, you become an owner of that firm. You're essentially buying part of it and you reap the profit from the shares you buy in terms of earnings per share. Then the company may pay out those earnings per share in dividends or invest back into the company for growth. Make sure that you're buying a firm that you can depend on, even when the market is down. Investing isn't about the quick in-and-out schemes that lose most day-traders money. That's called gambling. Investing is putting your trust and your resources into a firm which you're willing to commit your hard-earned money to. This leads to my next point.

Rule number two: Ignore technical analysis.

Technical analysis is used to predict whether or not a stock will go up or down in the short term. Some people think that they can ignore the fundamentals of the companies they buy based on technical analysis and end up losing large amounts of money. Yet, no responsible financial advisor would recommend or practice buying based solely or largely on technical analysis. That practice is used for what I defined to be gambling. Essentially relying on technical analysis involves looking at the volume of trading, advances/declines in the share price, and trying to determine whether or not the price will continue upward or reverse. For example, a lot of people buy or sell based on momentum. They jump on the bandwagon or abandon ship with the rest of the crowd. Yet, these fluctuations based on the herd mentality do less for those playing on technical analysis and more for the investor who looks for good value in shares. For, often people selling on technical analysis overshoot and cause a stock's value to be worth less than its fair value. Thanks to people who get burned on these losses, investors find unique opportunities to snatch up great comanies at bargain-basement prices.

Rule number three: Focus on the Fundamentals.

You cannot accurately predict the short term price fluctuations of stocks. Let me repeat myself: You CANNOT accurately predict the short term price fluctuations of stocks. If you could, those stock experts working at Merrill Lynch and Goldman Sachs wouldn't be working. Believe me: they've got a lot more experience than you or I do, and they're not gambling. So, instead of "investing on luck" or momentum, take control and do your research. Find out whether the company is consistantly outpacing the industry. See what the price to earnings ratio is and whether it's being undervalued. Find out whether earnings per share has been increasing or decreasing. See what the financial community thinks by examining analyst opinions covering the firm. All this information is easily accessable over the internet and free of charge. IF you do your homework your gains will be all but certain OVER TIME and you'll feel satisfied and proud with your investment choices. You may even become attached to your company and become well acquainted with it.

Rule number four: Buy long term

Besides your liklihood of making money going up, there are tax advantages to holding stocks long term. For one thing, if you simply hold onto your stock, you won't be taxed until you pull out and your investment can continue to compound, without erosion, until you sell. But, if you constantly buy and sell, then you're taxed on all your gains and you don't get to pay the lower capital gains tax. Instead, it's taxed as regular income, which is a higher tax rate. For most daytraders, tax erosion is one of the biggest problems with making any profit. But, if you do sell make sure it's because your company has been consistently underperforming. This leads to the next point:

Rule number five: Buy low sell high.

Lots of people buy stocks and when the price dips they get scared and sell. Other people see the price of their stock go up and buy more. But, this seems like reverse logic, right? If you own a good company, short-cited investors can drive down a stock price temporarily because of one below-expected earnings report or a bit of bad news. Let these be times for you to take advantage of other people's hysteria and buy at an attractive price.


Be smart in your investment decisions. Warren Buffet didn't find himself where he is today by buying on momentum or following technical analysis. Instead, it took research, patience, and commitment. If you can commit yourself to these same principles, you too will enjoy financial success.

http://www.epinions.com/finc-review-1935-D65AB19-38EAE41E-prod2

How to Never Lose Money in the Stock Market

Now that’s a pretty controversial heading, isn’t it?  It reminds you of Will Rogers’ line:  “I’m more interested in the return of my money than the return on my money.”

Losing money seems to be as big of a part of stock market investing as wealth building.  Losses and their devastating results certainly draw more attention.  In fact, the U.S. Securities and Exchange Commission, as well as other stock market watchdog agencies, require a warning to investors that losses are possible.

So how can I get away with that heading?  Simple:  Because it’s true!  A man named Benjamin Graham first wrote about the system in the ‘50s.  Warren Buffett and his Berkshire Hathaway company followed these rules and became the most successful stock market investor of all times.  These are their rules, and their system.  And here it’s presented in easy-to-follow terminology.

You must have a hook, and the acronym I use for this system is this: D.A.B.L.  (Don’t dabble in the markets, DABL instead). Each letter of the acronym stands for a part of investing; a rule if you will.  Follow these four rules and you will never lose money in the market.  Break even once, and you’re gambling.  There’s an old time Brooklyn comedian, named Myron Cohen, who said this about gambling:

“Here’s how you come out ahead in Las Vegas:  When you get off the plane, walk into the propeller!” So don’t walk into the propeller, follow the D.A.B.L. and build your wealth as sure as sunrise.

“D” Stands for Diversification.  To be properly diversified you need thousands of stocks encompassing all descriptions.  Large Caps, Mid-Caps, Small Caps, International, Growth, Value, Growth and Income, etc.  When you have a widely diversified portfolio, individual stock losses are swallowed by individual gains.  The “Enrons” will be offset by the “Microsofts” and “Exxons.”  In our practice, we use 54 mutual funds to achieve this.  Each fund owns hundreds and thousands of stocks.  Diversification upon diversification.  Now you might ask, “But what if I’d bought Microsoft and Exxon 20 years ago? Wouldn’t I have made much more?”  Yes you would have.  But what if you’d bought Enron?  Before it crashed and burned, Wall Street analysts wouldn’t shut up about what a great buy Enron was. You’d have lost everything, and it wouldn’t have recovered the same as the rest of the market when times got better.   In short, diversification removes the gambling aspect of stock market investing.

“A” Stands for Asset Allocation.  This goes hand in hand with diversification.  This is simply allocating investments in varied sectors of the economy to minimize market downturns and profit on the inevitable upswings.  Here’s a conservative asset allocation for all seasons:

Small Cap Growth funds               5%

Mid Cap Growth funds                 5%

Large Cap Growth funds               5%

Small Cap Value funds                 10%

Mid Cap Value funds                   10%

Large Cap Value funds                 10%

Value Blend funds                        10%

Aggressive Growth funds             10%

High Yield Bonds fund                   5%

Investment Grade Bonds                5%

International Global Bonds             5%

Global Emerging Markets               5%

International Growth                       5%

International Value                        10%

The word “cap” refers to Capitalization – the size of the stocks the fund purchases.  “Blend” means the fund invests across all styles and sizes in its area.  International usually means outside the U.S., while global includes U.S. investments.  This allocation uses strictly mutual funds.  Software like Morningstar places each fund in the “style boxes” described in this allocation.  If you don’t have enough assets to buy all those funds, start with “value” and “growth,” and leave “aggressive” and “emerging” markets for last.  If you’re investing in your 401(k) and don’t have all those options, do the best you can to duplicate this allocation with emphasis on “value.”

“B” Stands for Buy and Hold.  Buy and hold works, as proven repeatedly by the likes of Benjamin Graham and Warren Buffett.  Buying and selling securities results in losses or minimum gains for most investors.  It does generate lots of commissions, which is why the brokerage industry hates that one fact.  However they’re coming around with fee-wrapped account, tacitly encouraging buy-and-hold.

“L” Stands for Long Term Goals.  The minimum holding period is five to seven years.  Diversified buy-and-hold investments have achieved this goal in every seven-year period since 1969.  Stock market investments should always be held for the long term.  Anything else is gambling.

Now here’s a question that always comes up:  “I will be retiring next year.  Shouldn’t I be invested mostly in safe investments like treasury bonds and CDs?”

Well that depends on how much money you have for retirement.  The D.A.B.L. system is strictly to make money grow – make the pie bigger.  Most retirees have enough funds to leave a certain amount alone for seven years.  That’s the amount that should be invested for growth.  It’s going to vary for everyone.  There’s no pat answer – you’ve got to analyze your own situation.  Remember, this system is for growth, and every retirement portfolio needs growth – a certain amount of money targeted to get much larger in a given number of years to offset the ravages of inflation.

So go ahead, D.A.B.L – just don’t dabble.

By Patrick Astre

http://www.myarticlearchive.com/articles/8/224.htm

Message:  If you do not diversify, do not asset allocate, do not buy and hold, and do not keep your stocks for 5 to 7 years ... you are NOT investing but gambling. 

Warren Buffett on Gambling

Warren Buffett, CEO of Berkshire Hathaway, Inc., and one of America's most respected financial experts, talks about gambling in a fireside chat with Tom Grey. Buffett describes the impact of casinos and slot machines on people's lives and the economy; as well as the cynical nature of government sponsored gambling.

It’s also important to see some sort of upward trend in revenues and earnings growth.

It’s also important to see some sort of upward trend in revenues and earnings growth.

Value Line Investment Survey is found in most libraries and does a nice job showing long-term company trends. No one likes a company that constantly does worse than the year before, no matter what the value is! Every company needs some sort of “curb appeal” for you to profit from your investment. At some point, you need to sell in order to make money from your investment.

Upward trends help on the resale side of your investment.

Many investors find it hard to distinguish between “cheap” stocks and value stocks. Most times, stocks are low because they deserve to be low. There is nothing wrong with buying a “cheap” stock as long as you know and understand the risks. There are many stocks out there that have large annual losses, high debt levels and no equity. That does not necessarily mean you can’t make money on them, but you should call it gambling rather than investing.


http://myinvestingnotes.blogspot.com/2010/07/characteristics-of-value-stocks_23.html

Confusing Investing with Trading

Failure of a 'foolproof' gambling system

Calculating the true odds is quite complicated, but once every 28 or so times you begin the betting sequence on a 37-number wheel, you should expect to lose your entire capital base. I've dubbed this ''the Fairstar principle'':


Risk & reward

Consistent small wins can disguise the true relationship between risk and reward. 

A lack of appreciation of this principle has cost investors billions over the past three years. Funds run by the likes of Basis Capital, as well as the implosion of RAMS Home Loans can be linked back to the Fairstar principle.

Why? Because the business models were based on strategies that involved regular small wins (and, in the case of the funds, accompanying performance fees) until, one day, the unlikely event (or ''black swan'') turns up and calls ''time'' on the party.


http://www.smh.com.au/business/failure-of-a-foolproof-gambling-system-20100428-trch.html



Here is a good comment:

Any roulette system which starts with observing the behaviour of the wheel and when some particular pattern is observed, such as the "three consecutive same colours" commences operation, supposes that the wheel (or the ball) has a memory, which it does not.

Each spin is an event in itself, and what happened before is of no matter.

There could have been 100 consecutive reds and on the next spin red and black still have an exactly equal chance of occurring, assuming that the wheel is not rigged in some way.

"Common sense" might suggest otherwise, and that after 100 reds black MUST be overdue but common sense isn't common at all!

Doubling up to chase losses is a very risky business, if Bill Gates and Warren Buffett tossed a coin for a dollar a time and went "double or quits" after each loss one would eventually bankrupt the other.

And it would only take something in the order of 36 consecutive "double ups" for it to happen.

In fact, this is why casinos have table limits. Many people think they exist to protect the punter, but in fact they are to protect the casino from a punter with sufficient resources and nerves from continually doubling up until he wins.

If more punters studied elementary probability they would lose a lot less.

Reformed Gambler | Canberra - April 28, 2010, 2:01PM

To quote Albert Einstein, who knew a thing or two about maths: "The only way to win in Roulette is to steal from the croupier when he is not looking."

Reformed Gambler | Canberra - April 28, 2010, 5:58PM

Read also:
Behavioral Finance: Key Concepts - Gambler's Fallacy

You will find a lot of reasons why people purchase stock

Buy Stock – Are You Ready to Make a Killing?

All investors, when they decided to enter the world of money and risks, asked themselves whether or not they will buy stock. To buy or not to buy stock, that is the question of those business people who would want to reap more than their initial money’s worth. Most of them opt to buy stock in a company and can be one the wisest decisions they ever make since buying stocks, however meager is the investment means that you have power over the company.

To buy stock in a company means that you have a certain level of authority on the business. The more stocks you own, the more power you have when it comes to decision making and re- structuring. By buying more stocks, the longer you will stay on the company and reap its financial gains. Stocks can also determine ownership on the company, so if you buy stocks, a certain portion of the company belongs to you.

Aside from money and power as visible advantages when you buy stock, people also purchase them because they are enthusiasts of the services or products that the company provides. They believe that since they have personally experienced the service or the product and the end results are above satisfaction and quality that their investment will be safe and wise.

They also put faith and buy stock because they believe that the company will gain and will continuously hold their ground on the business world. The money will continue to be generated so they buy stock on established companies operating for years. Aside from the company being able to establish its own name, some people buy stock based on the stability of the company. They consider that for the next 10-20 years that the company will continue its operation, so for the next 20 years, they have money growing in their accounts.

Day traders buy and sell stocks with the ultimate goal of making money and nothing more. Basically, people buy in the hopes that their investment will provide substantial revenue returns. However, buying stocks doesn’t really mean immediate returns unlike day trading where you have to actually wait for payoffs that can finance your impending retirement days.

You will find a lot of reasons why people purchase stock and with the market right now, it appears that a lot are trying to get involved in this game of money. You have to keep in mind that once you buy, the risk is already on. Unfortunately, there are no magic formulas for success with the stock market involved. All you can do is to prepare yourself for the possible losses and lessen the risks of failure with bonds.

Once you have decided that you would like to buy stock, be proactive and learn as much as you can about the concept and what involved it. Have a feasible financial plan and strategy with a financial adviser that would help you build a promising financial portfolio.

Author: Jake Fields
Source: ezinearticles.com

http://sellingstock.fretail.com/buy-stock-are-you-ready-to-make-a-killing/

Comparing Investing And Gambling

Going All-In: Comparing Investing And Gambling

 

by Stephan Abraham (Contact Author | Biography)

 

How many times during a discussion with friends about investing have you heard someone utter: "Investing in the stock market is just like gambling at a casino"? Is this adage really true? Let's examine these two activities more closely and see if we can point out some of the key differences and also some surprising similarities.

 

Investing and gambling both involve risk and choice. Interestingly, both the gambler and the investor must decide how much they want to risk. Some traders typically risk 2-5% of their capital base on any particular trade. Longer-term investors constantly hear the virtues of diversification across different asset classes. This, in essence, is a risk management strategy, and spreading your dollars across different investments will likely help minimize potential losses.

 

Gamblers must also carefully weigh the amount of capital they want to put "in play." Pot odds are a way of assessing your risk capital versus your risk reward: the amount of money to call a bet compared to what is already in the pot. If the odds are favorable, the player is more likely to "call" the bet. Most professional gamblers are quite proficient at risk management. In both gambling and investing, a key principle is to minimize risk while maximizing profits. (To learn more, see Measuring And Managing Investment Risk.)

 

Throwing It in the Pot
Sports betting is probably one of the most common "gambling" activities in which the average person engages. From the weekly football office pool to the Final Four, sport betting is an American tradition. Only by thinking about your betting habits will you realize that you have no way to limit your losses. If you pony up $10 a week for the NFL office pool and you don't win, you lose all of your capital. When betting on sports (or really any other pure gambling activity), there are no loss-mitigation strategies.

 

This is a key difference between investing and gambling. Stock investors and traders have a variety of options to prevent total loss of risked capital. Setting stop losses on your stock investment is a simple way to avoid undue risk. If your stock drops 10% below its purchase price, you have the opportunity to sell that stock to someone else and still retain 90% of your risk capital. However, if you bet $100 that the Jacksonville Jaguars will win the Super Bowl this year, you cannot get part of your money back if they just make it to the Super Bowl. Betting on sports is truly a speculative activity which prevents individuals from minimizing losses.

 

Another key difference between the two activities has to do with the concept of time. Gambling is a time-bound event while an investment in a company can last several years. With gambling, once the game or hand is over, your opportunity to profit from your wager has come and gone. You either have won or lost your capital. Stock investing, on the other hand, can be time-rewarding. Investors who purchase shares in companies that pay dividends are actually rewarded for their risked dollars. Companies pay you money regardless of what happens to your risk capital, as long as you hold on to their stock. Savvy investors realize that returns from dividends are a key component to making money in stocks over the long term. (For more, see Dividend Facts You May Not Know.)

 

Playing the Odds
Both stock investors and gamblers look for an edge in order to help enhance their performance. Good gamblers and great stock investors study behavior in some form or another. Gamblers playing poker typically look for cues from the other players at the table, and great poker players can remember what their opponents wagered 20 hands back. They also study the mannerisms and betting patterns of their opponents with the hope of gaining useful information. This information may be just enough to help predict future behavior. Similarly, some stock traders study trading patterns by interpreting stock charts. Stock market technicians try to leverage the charts to glean where the stock is going in the future. This area of study dedicated to analyzing charts is commonly referred to as technical analysis. (To learn more, see our Technical Analysis Tutorial.)

 

Another difference between investing and gambling is the availability of information. Information is a valuable commodity in the world of poker as well as stock investing. Stock and company information is readily available for public use. Company earnings, financial ratios and management teams can be studied before committing capital. Stock traders who make hundreds of transactions a day can use the day's activities to help with future decisions. Nonetheless, stock information is far from perfect, otherwise, there would not be insider trading or the Securities and Exchange Commission (SEC).

 

If you sit down at a Blackjack table in Las Vegas, you have no information about what happened an hour, a day or a week ago at that particular table. You may hear that the table is either hot or cold, but that information is not quantifiable.

 

Conclusion
The next time you hear someone say that stock investing is the same as playing in a casino, remind them that in fact there are some similarities and some major differences.

1. Both activities involve risk of capital with hopes of future profit.
2. Gambling is typically a short-lived activity, while stock investing can last a lifetime.
3. Some companies actually pay you money in the form of dividends to go along with an ownership stake.
4. In general, most average investors will do better investing in stocks over a lifetime than trying to win the World Series of Poker.

(To learn more, check out our Investopedia Special Feature: Investing 101.)
by Stephan Abraham, (Contact Author | Biography)

 

Stephan Abraham graduated from University of Florida with a degree in economics. He has traded part time for about eight years with an emphasis on technicals. In his spare time, Abraham enjoys golfing, outdoor sports, photography and reading.

 

 

http://www.investopedia.com/articles/basics/09/compare-investing-gambling.asp?partner=ntu10