Five Basic Fundamental Investing Principles

History has demonstrated that there are five basic principles that 
you should follow if you want to be truly successful.

Invest Regularly in the Stock Market

Reinvest all of Your Profits and Dividends

Invest for the Long Term

Invest Only in Good Quality Growth Companies

Diversify Your Portfolio

Long-Term Value of International Stocks. Europe is a value and dividend play, while emerging markets are a growth play.

Europe’s battered stock markets could fall more, and the emerging markets’ hot streak may be history, at least for a while.

 

Get out?

 

No, says Benjamin C. Sullivan, a certified financial planner and portfolio manager with Palisades Hudson Financial Group in Scarsdale, N.Y.

 

“While you can’t predict how foreign stocks will do in the short run, there’s long-term value there,” he says. “You need the right amount in your portfolio.

 

Europe is a value and dividend play, while emerging markets are a growth play, Sullivan says. And both help protect against a decline in the greenback.

 

Palisades Hudson invests 35% of its clients’ equity portfolios abroad, he says. That includes about 14% in Europe, 11% in emerging markets and 10% in other developed markets, including Japan, Australia, Singapore and Canada.

 

Latin American markets turned in a tidy 16% annual return for U.S. investors over the last 10 years, while Asian emerging markets returned 9% annually, compared to 2% for the EAFE index that tracks developed international markets and 3% for the U.S.

 

Despite that outperformance, emerging nations make up just 13% of global stock-market capitalization while producing 49% of global gross domestic product, Sullivan points out.

 

“There’s more room to grow in emerging markets,” he says. “In the next few years, more than 70% of world economic growth is predicted to come from those regions. By adopting best practices from the developed world — such as advanced technology, better infrastructure, and open markets — these countries will grow their middle class, and investors should benefit as a result.”

 

Active funds vs. index funds

Depending on what market you’re in, there are different investing strategies to rely upon. Use actively managed mutual funds for emerging markets, Sullivan says. Those markets are inefficient enough for a skilled fund manager to earn its fee by outperforming the index.

 

He likes the T. Rowe Price Latin America Fund, which has outperformed the Lipper Latin American funds average over the last 10 years. He also invests his clients’ money in the T. Rowe Price New Asia Fund and Matthews Pacific Tiger Fund.

 

Sullivan avoids Russia and other Eastern European markets, deeming them too risky due to the region’s historic disregard for property rights.

 

Western Europe, in contrast, offers high dividends and deep value. The Vanguard European Stock Index fund Sullivan uses is heavily weighted in big multinationals like BP, Anheuser-Busch, Novartis, HSBC and Royal Dutch Shell that sell their products worldwide. With share prices down, major markets like Germany, France and the United Kingdom sport 4% dividend yields compared to about 2% for the U.S.

 

Sullivan separately allocates 7.5% of equities to real estate investment trusts, including 5% to U.S. funds and 2.5% to an actively managed Morgan Stanley international fund that buys real estate investments in developed and emerging countries. Investing in global property markets boosts diversification, he says.

 

The rest of the world is too big and dynamic for American investors to ignore.

 

“Limiting your investments to the U.S. would be as arbitrary as choosing to invest in U.S. companies headquartered only in New York State,” Sullivan says.

 

But don’t invest in U.S. or foreign stock funds if you’ll need that money within five years, he adds. Equities should be a long-term investment.

Henry Stimpson, Tuesday, July 10th, 2012

Your Money

Investing for the Long Run

Introduction
The difference of only a few percentage points in investment returns 
or interest rates can have a huge impact on your future wealth. 
Therefore, in the long run, the rewards of investing in stocks can 
outweigh the risks. We'll examine this risk/reward dynamic in this 
lesson.

Volatility of Single Stocks
Individual stocks tend to have highly volatile prices, and the returns
you might receive on any single stock may vary wildly. If you invest
in the right stock, you could make bundles of money. For instance,
Eaton Vance EV, an investment-management company, has had the
best-performing stock for the last 25 years. If you had invested
$10,000 in 1979 in Eaton Vance, assuming you had reinvested all
dividends, your investment would have been worth $10.6 million by
December 2004.

On the downside, since the returns on stock investments are not
guaranteed, you risk losing everything on any given investment.
There are hundreds of recent examples of dot-com investments that
went bankrupt or are trading for a fraction of their former highs.
Even established, well-known companies such as Enron, WorldCom,
and Kmart filed for bankruptcy, and investors in these companies
lost everything.

Between these two extremes is the daily, weekly, monthly, and
yearly fluctuation of any given company's stock price. Most stocks
won't double in the coming year, nor will many go to zero. But do
consider that the average difference between the yearly high and
low stock prices of the typical stock on the New York Stock
Exchange is nearly 40%.

In addition to being volatile, there is the risk that a single company's
stock price may not increase significantly over time. In 1965, you
could have purchased General Motors GM stock for $50 per share
(split adjusted). In the following decades, though, this investment
has only spun its wheels. By June 2008, your shares of General
Motors would be worth only about $18 each. Though dividends


would have provided some ease to the pain, General Motors' return
has been terrible. You would have been better off if you had
invested your money in a bank savings account instead of General
Motors stock.

Clearly, if you put all of your eggs in a single basket, sometimes that
basket may fail, breaking all the eggs. Other times, that basket will
hold the equivalent of a winning lottery ticket.

Volatility of the Stock Market
One way of reducing the risk of investing in individual stocks is by
holding a larger number of stocks in a portfolio. However, even a
portfolio of stocks containing a wide variety of companies can
fluctuate wildly. You may experience large losses over short periods.
Market dips, sometimes significant, are simply part of investing in
stocks.

For example, consider the Dow Jones Industrials Index, a basket of
30 of the most popular, and some of the best, companies in America.
If during the last 100 years you had held an investment tracking the
Dow, there would have been 10 different occasions when that
investment would have lost 40% or more of its value.

The yearly returns in the stock market also fluctuate dramatically.
The highest one-year rate of return of 67% occurred in 1933, while
the lowest one-year rate of return of negative 53% occurred in 1931.
It should be obvious by now that stocks are volatile, and there is a
significant risk if you cannot ride out market losses in the short
term. But don't worry; there is a bright side to this story.


Over the Long Term, Stocks Are Best
Despite all the short-term risks and volatility, stocks as a group have
had the highest long-term returns of any investment type. This is an
incredibly important fact! When the stock market has crashed, the
market has always rebounded and gone on to new highs. Stocks have
outperformed bonds on a total real return (after inflation) basis, on
average. This holds true even after market peaks.

If you had deplorable timing and invested $100 into the stock market
during any of the seven major market peaks in the 20th century,
that investment, over the next 10 years, would have been worth
$125 after inflation, but it would have been worth only $107 had you
invested in bonds, and $99 if you had purchased government
Treasury bills. In other words, stocks have been the best-performing
asset class over the long term, while government bonds, in these
cases, merely kept up with inflation.

This is the whole reason to go through the effort of investing in
stocks. Again, even if you had invested in stocks at the highest peak
in the market, your total after-inflation returns after 10 years would
have been higher for stocks than either bonds or cash. Had you
invested a little at a time, not just when stocks were expensive but
also when they were cheap, your returns would have been much
greater.


Time Is on Your Side
Just as compound interest can dramatically grow your wealth over
time, the longer you invest in stocks, the better off you will be.
With time, your chances of making money increase, and the volatility
of your returns decreases.

The average annual return for the S&P 500 stock index for a single
year has ranged from negative 39% to positive 61%, while averaging
13.2%. After holding stocks for five years, average annualized returns
have ranged from negative 4% to positive 30%, while averaging 11.9%.
These returns easily surpass those you can get from any of the other
major types of investments. Again, as your holding period increases,
the expected return variation decreases, and the likelihood for a
positive return increases. This is why it is important to have a long term
investment horizon when getting started in stocks.


Why Stocks Perform the Best
While historical results certainly offer insight into the types of
returns to expect in the future, it is still important to ask the
following questions: Why, exactly, have stocks been the best
performing asset class? And why should we expect those types of
returns to continue? In other words, why should we expect history
to repeat?


Quite simply, stocks allow investors to own companies that have the
ability to create enormous economic value. Stock investors have full
exposure to this upside. For instance, in 1985, would you have
rather lent Microsoft money at a 6% interest rate, or would you have
rather been an owner, seeing the value of your investment grow
several-hundred fold?

Because of the risk, stock investors also require the largest return
compared with other types of investors before they will give their
money to companies to grow their businesses. More often than not,
companies are able to generate enough value to cover this return
demanded by their owners.


Meanwhile, bond investors do not reap the benefit of economic
expansion to nearly as large a degree. When you buy a bond, the
interest rate on the original investment will never increase. Your
theoretical loan to Microsoft yielding 6% would have never yielded
more than 6%, no matter how well the company did. Being an owner
certainly exposes you to greater risk and volatility, but the sky is also
the limit on the potential return.


The Bottom Line
While stocks make an attractive investment in the long run, stock
returns are not guaranteed and tend to be volatile in the short term.
Therefore, we do not recommend that you invest in stocks to
achieve your short-term goals. To be effective, you should invest in
stocks only to meet long-term objectives that are at least five years
away. And the longer you invest, the greater your chances of
achieving the types of returns that make investing in stocks
worthwhile.

Quiz 
There is only one correct answer to each question.
1 The average yearly difference between the high and low of the
typical stock is between:
a. 30% and 50%.
b. 10% and 30%.
c. 50% and 70%.

2 If you were saving to buy a car in three years, what percentage of
your savings for the car should you invest in the stock market?
a. 50%.
b. 70%.
c. 0%.

3 If you were investing for your retirement, which is more than 10
years away, based on historical returns in the 20th century, what
percentage of the time would you have been better off by
investing only in stocks versus a combination of stocks, bonds,
and cash?
a. 50%.
b. 100%.
c. 0%.

4 Well known stocks like General Motors:
a. Always outperform the stock market.
b. Are too highly priced for the average investor.
c. Can underperform the stock market.

5 Which of the following is true?
a. After adjusting for inflation, bonds outperform stocks.
b. When you invest in stocks, you will earn 12% interest on your
money.
c. Stock investments should be part of your long-term
investment portfolio.



http://news.morningstar.com/classroom2/course.asp?docId=142859&page=1&CN=COM

Why is investing confusing?

What is the Right Way? Delay gratification. Think long term. There are no short cuts in life.

Investing: As Easy as Taking a Shower?

By Brian Stoffel 
November 9, 2011 

For the beginning investor, entering the stock market can be a confusing experience. Too often, a newbie dips his or her toe into the water, gets burned, and lets the "pros" take care of money matters from there on out.

It doesn't have to be this way; but first, we need to examine why investing can be such a difficult task.

Peter Senge in his best-seller The Fifth Discipline offers us a simple framework to explain the pitfalls of investing.

It's all about a feedback delayLet's pretend it's the morning, and you've jumped in the shower. Of course, the water temperature isn't going to be perfect right away; you need to adjust the knob. In the most basic sense, your feedback loop would look like this.

Now let's change things up: You have a defective shower. Instead of the water temperature adjusting almost immediately to a turn in the knob, it takes 10 seconds after turning the knob for any noticeable change to occur.

Now the feedback loop looks like this.

That delay is a pretty big deal, especially if you aren't used to dealing with it. Your first time in the shower might go like this: turn the knob to make it mildly hot, not feel a change, and turn the knob to scalding hot. Ten seconds later, while you're burning your skin off, you turn it to mildly cold. Not feeling a change, you adjust it to frigid cold, and then...

Well, you get the idea.

Applied to investingThe inclusion of a delay causes many a self-inflicted wound, and this explains why some beginners run into trouble.

Enticed into the stock market by opportunities for riches, investors may become frustrated when they don't see immediately results from their decisions. This leads them to constantly move money in and out of certain stocks, never allowing time for their thesis to play out.

In reality, an investor's feedback loop looks like this:

How long of a delay are we talking here?Fool founders Tom and David Gardner have always espoused the view that when investing, the average person should have a three-year time limit, minimum. That doesn't mean that you can't sell a stock before the three-year minimum. If it's crystal clear that your original thesis for investing in a company no longer holds true, then it's best to part ways sooner rather than later.

Being "crystal clear," however, isn't as easy as it sounds. Separating a company's performance as a business from its performance as a stock is essential. As Warren Buffett attributed to mentor Ben Graham in a letter to shareholders, "In the short run, the stock market is a voting machine, but in the long run, it's a weighing machine."

A few choice examples...To illustrate the importance of understanding this delay, I went back and looked at some well-known companies and how they've performed since three years ago, in November 2008. Here's a look:

Company	3-Year Return	Change at Lowest Close vs. Starting Price
Whole Foods (Nasdaq: WFM  )	612%	(15%)
Sirius XM (Nasdaq: SIRI  )	530%	(78%)
Green Mountain Coffee (Nasdaq:GMCR  )	1,200%	0%
Rosetta Stone (NYSE: RST  )	(72%)*	(72%)

Source: Yahoo! Finance. *Since going public in April 2009.

All four of these examples reveal a slightly different lesson for investors in how they should approach the market with a long-term time horizon.

When the Great Recession hit, investors behaved as if the organic food movement were dead. Adding to the negative sentiment, competition was coming from all sides: Even Wal-Mart (NYSE: WMT  ) began offering some organic food. Investors with a three-year horizon, however, realized that eventually, our economy would recover. And if they were following the broader move toward organic food, they knew the trend was undeniable.

Sirius XM, on the other hand, seemed to be on the brink of bankruptcy in early 2009. Believers in the company, however, were confident that the company wasn't going to be going anywhere, anytime soon. When they were bailed out by Liberty Media (Nasdaq: LCAPA  ) , life (and cash) was injected back into the company.

I included Green Mountain (maker of the ubiquitous Keurig coffeemakers) to show that there's really no telling how long a delay will be. Sometimes it will be a year, sometimes just one day. In this case, Green Mountain climbed immediately. The bigger point is that three years isgenerally long enough for any delay to work its way out of a system.

Finally, Rosetta Stone is an excellent example of the fact that it is OK to sell a stock before three years if your investment thesis changes dramatically. Just last month, I sold my sharesin this company because of the constant turnover in the executive suite.  

http://www.fool.com/investing/beginning/2011/11/09/investing-as-easy-as-taking-a-shower.aspx

The short-term and long-term perspectives on an investment can diverge.

In a rising market, many people feel wealthy in the short run due to unrealized capital gains, but they are likely to be worse off over the long run than if security prices had remained lower and the returns to incremental investment higher.

Long Term Stock Picks For Investing Beginners

If there is one thing that the recent recession has taught us, it is that everyone should be responsible for their personal finances and investments. Despite the fact that you are paying professionals for their stock pick advice and their inside track on hot stock picks, how many of them really have your best interest at heart or actually know what they are doing? How many Ponzi scheme stories do we have to hear on the news about people being robbed of their life savings? For some retirees, this is a devastating blow. For others, there is still time to make it back with long term stock picks on the horizon.

After suffering a financial set back, it might be hard for some investors to rebuild their fortune but the same investment advice can be applied to those who are beginning investors. Before you begin to invest, you need to have your personal finances in order. This means you need to have your emergency funds in place so you won’t feel obligated to sell your best stock picks because you need the money. It is generally regarded that you should put away enough money in your savings account for six months to a year if something goes wrong and you are out of a job. As an investment tip, it is recommended that you only invest with money you won’t need for a period of five to ten years. Even though you can make fast money in the stock market, you can also easily lose money too. The way to reduce these risks is if you think for the future with long-term stock picks. You want to invest in growth stocks that are trading cheaply for their future potential as opposed to hot penny stocks that are more erratic and risky.

To be honest, any stock picking advice can be reduced to one golden rule: buy low and sell high. However, it is important to note that it doesn’t cover the time line. You can make money on the stock market within a few minutes or you can make money over a period of years. Perhaps this is why famed billionaire investor Warren Buffett has his number one rule of investing as well: never lose money. His second rule of investing is never forget rule number one. Warren Buffett’s investment advice might sound glib but surprisingly, so many people do lose money in the markets. This is because while they might have a few winning stock picks, the vast majority of them were losers. So they understand the concept of buying low and selling high but they don’t do it consistently to make money in the stock market. And perhaps this is due to their time horizon.

If there is one person you should take investment advice from, it is Warren Buffett. He has an incredible financial mind and yet he can distill concepts to teach investing for beginners. So while you can make money from day trading, foreign exchange arbitrage, shorting stocks, buying and selling options and warrants, Warren Buffett does it the old fashion way with long term stock picks. Buffett’s investment strategy simply reduces the risk by buying good companies at a fair price. Again, this might seem like a very simplistic stock tip but it is amazing that so many people cannot understand the concept.

According to Buffett, price is what you pay, but the value is what you get. For example, a company’s share price might be the lowest that it has been in a year but is it worth it to begin with? There have been lots of stock market bubbles in the past with certain sectors being overvalued only to come crashing down again. When looking for best stocks to invest, it is important to look past the hype and realize a company’s intrinsic value. You should also invest in something you understand as well. If you don’t understand a business, how can you do your stock analysis? You need to do your stock pick research by going through a company’s annual reports and financial statements. This is called fundamental analysis. If you can identify top stock picks that are trading below their intrinsic value, you can keep them in your portfolio for the long term. And if you can find cheap stocks that are mispriced you will have the luxury of time for the long term horizon which gives you a margin of safety. Therefore, let this be another stock pick advice: when a company is overhyped, its stock price is probably overvalued. When a company’s stock is trading below its intrinsic value and the pundits are tell the public to sell, that is when you should go against the grain and buy. Again, the point of making money investing is to buy low and sell high. Therefore, even though a lot of people are scared to invest in the stock market because of the economic crisis, this is the best time to invest in recession stock picks.

If you follow Warren Buffett’s stock picks advice of applying a margin of safety when buying a few good companies and waiting patiently for the price to go up again, you will make money in the stock markets. The Warren Buffett strategy is also called focus investing. You put your focus on finding a few winning long-term stock picks. For some people, this might seem risky as it goes against the popular thinking of diversification. However, the point of diversification is because you want to reduce risks but what are the risks if you do your due diligence? This is very important advice for beginning investors to adhere to as well. It is easy to make money on a few hot stocks but it is hard to make money consistently in the stock market so always do your research.

As a final word of advice for stock market beginners, if you don’t have time to learn how to invest in the stock market, the next best thing is to invest in index funds instead of managing a stock portfolio yourself. An index fund is a low cost mutual fund that tracks a particular stock market index by buying the same companies that make up the index. Since markets rise over the years, this takes care of your long term investments. Of course, you will only do as well as the market and you won’t have the fun of watching break out stocks but the truth is most mutual funds are closet index funds anyway. If you look at the mutual fund stocks, most funds will be a duplicate of some index so why pay the extra management costs that eat away at your return? And for those high profile money managers, do you really trust them with your money after all that’s happened in the news with the financial scandals? While there are undoubtedly honest money managers out there, how do you separate the good ones from the bad? The bottom line is that no one will have your best interest at heart and care about your long term investments more than you. You might as well learn about investing for yourself.

http://warrenbuffettstockpicks.com/long-term-stock-picks-for-investing-beginners/

The Othmers' Story

The Othmers' Story

James K. Glassman | July 14, 1998

The Washington Post, Tuesday, July 14, 1998; Page A15

Donald Othmer, a professor of chemical engineering in Brooklyn, died three years ago. His wife Mildred, a former teacher and a buyer for her mother's dress store, died in April. Both were in their nineties. They lived quiet, unpretentious lives -- which is why it came as a shock to their friends to learn that their combined estates were worth $800 million and that they had given nearly everything to charity.

How did the Othmers get so rich? Like many other Americans, they simply put their money into sound stock market investments and left it there for a long time.

This they had in common with a woman named Anne Scheiber, who worked as a government drone, never making more than $4,000 a year. In 1944, she put a total of $5,000 into stocks such as Coca-Cola and Merck, and when she died in 1995, she left her estate to Yeshiva University. It was worth $22 million.

As for the Othmers: In the early 1960s, they turned $25,000 each over to Warren Buffett, an old family friend from their hometown of Omaha. "They just rode along," Buffett told the New York Times. The investment "never changed their lives."

In 1970, when the Othmers received stock in Buffett's new company, Berkshire Hathaway Inc. (which invests in other companies such as Gillette and American Express), it was trading at $42 a share. Last week, it was $77,000 a share. Mildred Othmer's 7,500 shares alone are worth $578 million. Donald's, which were sold on his death when the price was lower, were worth $210 million.

The Othmers were smart -- or lucky -- to pick Buffett to manage their money, but that's not the lesson of this story. After all, even if they had simply put their funds into the broad market, they still would have ended up with a fortune of between $50 million and $100 million.

No, the lesson is to live modestly, invest sensibly, don't touch the money and grow rich. This lesson is at the heart of the current debate over transforming Social Security.

Today, it is a government-run plan by which Americans retiring over the next few decades will get minuscule (or even negative) returns on a lifetime of payroll contributions. But reformers, including New York Democratic Sen. Daniel Patrick Moynihan, want instead to create a system of private accounts by which retirees can get the returns that the stock market has been generating for the past century.

Why shouldn't every worker be able to get the returns -- and build the nest eggs -- that Anne Scheiber and the Othmers built? They can -- but only if they have money to save. Currently, 10 percent of every worker's pay is going to taxes to fund Social Security retirement benefits. No wonder Americans are strapped.

William Beach of the Heritage Foundation has calculated that the average single black woman born in 1960 will receive lifetime benefits from Social Security totaling $173,000. But, Beach found, if the woman invests the same money that now goes to Social Security taxes in a mixed portfolio of stocks and bonds instead, she will accumulate $414,000.

Blacks, in particular, are victimized by the Social Security retirement system, since they don't live as long as whites -- and thus don't collect benefits for as long. Under a private retirement plan, they could pass assets on to their heirs.

There are other lessons in the Othmers' story:

(1) Frugality pays. Donald Othmer was a smart scientist who contributed to more than 40 patents at Eastman Kodak. But his wealth came from following the simple virtues. The Times wrote that as a boy "he developed a lifelong frugality as he earned money picking dandelions from neighbors' lawns [and] delivering newspapers." He and his wife "lived comfortably but not ostentatiously and rarely talked about their money."

Thomas Stanley and William Danko, authors of the surprise bestseller "The Millionaire Next Door," came to similar conclusions about the rich people they studied for their book. They wrote that "frugal" is the best adjective to describe millionaires. More own Fords than any other car, and only 25 percent of the men studied paid more than $600 for a suit in their lives.

(2) Saving pays. This is a notion that should be drummed into the head of every young person. Put away money early, and don't touch it. If you can leave it undisturbed in a decent investment for a long time, it will grow to immense proportions through the miracle of compounding.

Savings can also be eroded by capital gains taxes, but both Scheiber and the Othmers managed to avoid them by not selling their stocks, then passing them on to their heirs. Still, the cut in capital gains from 20 percent to 15 percent that Congress just passed is a move in the right direction that will boost savings.

(3) Philanthropy will boom. The Othmers' estates will provide $190 million to Brooklyn Polytechnic University, where Donald taught, $160 million to Long Island College Hospital, $75 million to Planned Parenthood and so on.

Rich people, more and more, are giving back what they've earned in an effort to make society better. They would rather make these choices themselves than leave them to Uncle Sam, so they are preserving their estates against taxes.

Eliminating the estate tax entirely could touch off a philanthropic flood. But, even without that change, generous Americans like Scheiber and the Othmers are turning frugality into wealth into good deeds. They deserve attention and praise.

http://reason.com/archives/1998/07/14/the-othmers-story/singlepag
e