Warren Buffett once said, "To invest successfully over a lifetime does not require a stratospheric I.Q., unusual business insight or inside information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."
Posted here are some basic foundations to help you develop your own investment strategy and to help you make better investment decisions. These are also the investment strategies and theories you must know for greater investment success!
Investment Styles
"Your 'Basic Advantage' is to be able to think for yourself." Wisdom from Benjamin Graham.
Different Investment Styles
Value Investing
Growth Investing
Core/Blend/Market-oriented
Stock Pickers
Market Capitalisations
Value and Small Cap Stocks
Top-down Approach
Bottom-up Approach
Benchmark Investing vs Absolute Return Investing
Methods of Securities Selection
Fundamental Analysis
Technical Analysis
Techno-fundamental Analysis
Limitations of Fundamental and Technical Analysis
----
Investment Strategies and Theories
"You need a strategy and sound approach before you invest." Anonymous
Short-term Strategies
Short Selling
Margin Investing
Momentum Investing - "Buy High, Sell Higher"
Sideway Trends
Long-term Strategies
Buy and Hold
Dollar-cost Averaging
Ladder Investing
Managing Risk
Diversification
Danger of Owning Too Many Stocks
Modern Portfolio Theory
Limitations of the Modern Portfolio Theory
Asset Allocation
Criticism of the Asset Allocation Strategy
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Portfolio Management Strategies
"Successful investing is more than buy, hold and forget." Anonymous
Static Asset Allocation
(i) Buy-and-Hold
(ii) Strategic Asset Allocation
Flexible Allocations
(i) Tactical Asset Allocation
(ii) Dynamic Asset Allocation
Core-satellite Portfolio Management
Alternative Strategy - A Trader's Approach
Short Term Trading
----
Limit Your Losses
"Survive first and make money afterwards." George Soros
The Evolution of Buy-and-Hold Advice
Efficient Market Hypothesis
Random Walk Theory
Merits of the Buy-and-Hold Method
Weaknesses of the Buy-and-Hold Method
Forgotten History of a Sideways Market
Futile Asset Allocation Strategies
The Easy Way Out?
Transaction Costs
Limitation of Traditional Investment Funds
Market Anomalies
Value Investing
Neglected Stocks
Low-priced Stocks
Small Cap Stocks
Investors' Irrationality
How to Prevent Big Losses
Rule No. 1 - Set and Apply Stop-Loss Rules
Rule No. 2 - Do Your Homework
Rule No. 3 - Look for Margin of Safety
Rule No. 4 - Do Not Bet Too Much at One Go
Rule No. 5 - Do Not Over Diversify
Rule No. 6 - The Trend is Your Friend, Until It Bends
Rule No. 7 - Avoid Deadly "Price Bubbles" When They Pop
Ref: How to Be a Successful Investor by William Cai
Showing posts with label Stock Strategies. Show all posts
Showing posts with label Stock Strategies. Show all posts
Thursday, 3 June 2010
Thursday, 25 June 2009
How We Tripled Our Money in a Year
How We Tripled Our Money in a Year
By Tim Hanson
June 24, 2009
This past year was an exciting one to be an investor. At one point in March, stocks were down well more than 50% from their 2008 highs. Yet amid this chaos, we at Motley Fool Global Gains identified a promising small company with a strong and growing core business that was selling for a dirt cheap 4.5 times earnings.
Since we recommended that stock to our members in October 2008, it's returned more than 200%. During that time, it has also listed on a major exchange and vastly expanded its production and distribution capacity. Thus, even though it's not quite the deal we got back in October, the stock remains on our Best Buys list.
But before I get to the stock, I want to tell you how we found it and provide a few points that can help you identify similar things for yourself.
You find what you're looking for
You may have heard (sometime, somewhere) that the market is efficient. That means that at any moment, all of the available information on a stock has been incorporated into its price. While I believe that's generally true, I don't believe it's true all the time. What's more, it's less true in certain market segments than others.
For example, take a popular U.S. megacap like Apple (Nasdaq: AAPL). It's tracked by 45 sell-side analysts, has earned a rabid following of fans and detractors, and everything from its products to the health of its CEO are reported on every day in the media. This, in other words, is a stock whose price is largely efficient. If you choose to buy or sell Apple stock, you're likely not doing so with any kind of informational advantage over your counterparty.
That, however, is less likely to be the case if you're buying and selling stocks that most other market participants aren't even paying attention to. Specifically, that's small stocks, foreign stocks, and especially small and foreign stocks.
Which brings me back to my story
The stock we discovered at Global Gains that's more than tripled in less than one year is a small Chinese fertilizer company called China Green Agriculture (AMEX: CGA). In hindsight, at less than 5 times earnings last October, it looked like a clear winner. The company's organic fertilizers were coming into favor as the government encouraged farmers to increase food production without a destructive environmental impact. Further, government efforts to aid rural farmers were giving those farmers -- China Green's customers -- increased purchasing power. Finally, there was a clear catalyst in the new 40,000-metric-ton manufacturing facility that the company planned to open with the capital it raised in a private placement.
Yet the market either wasn't paying attention here, or it was far too focused on the perceived risks of investing in China Green Agriculture. Those included a very short track record as a public company, an over-the-counter stock listing, and no permanent CFO.
How, then, were we able to get comfortable with recommending China Green's stock?
Elementary, my dear Watson
The simple fact is that we traveled to Xi'an, China, last June, and spent two days visiting with the company and touring its R&D and production facilities. We talked extensively with management about their plans for the future and their perceived market opportunities. And we got answers to every question we had about the company.
This doesn't mean we walked away 100% confident. After all, a company visit, while an important part of our research process at Global Gains, will never reveal the full story. But the visit enabled us to get comfortable enough to recommend that our members buy shares at less than 5 times earnings within the context of a diversified portfolio.
And the result speaks for itself. Not only is it up more than 200%, but it's outperformed other well-known China plays, such as PetroChina (NYSE: PTR), Baidu (Nasdaq: BIDU), and China Mobile (NYSE: CHL), as well as other well-known fertilizer plays, such as PotashCorp (NYSE: POT) and Mosaic (NYSE: MOS).
Your takeaway
Now, you may not have the resources to travel to China to check up on all of the small, cheap, and fast-growing companies there that you may be interested in owning. But short of that, the lesson is that the only way you're going to be able to take advantage of the inefficiencies that exist in the stock market is by doing an extraordinary level of due diligence. That means going through the filings with a fine-toothed comb, checking up on a company's auditor to make sure it has a good reputation, and doing extensive analysis of the numbers to make sure they're good, but not too good to be true.
Yet if you can make company visits a part of your research process, I encourage you to do so. We travel to China each and every year with Motley Fool Global Gains and have found that it's the best way to identify both the most promising ideas as well as potential disasters.
In fact, we're headed back to China in July to meet with more than a dozen promising names in cities such as Shanghai, Xi'an, and Harbin. While we may not find another company that will triple our money in less than a year, we do believe our intelligence from the ground gives us -- and can give you -- an advantage in the market.
Tim Hanson is co-advisor of Motley Fool Global Gains. He does not own shares of any company mentioned. China Green Agriculture is a Global Gains recommendation. Apple is a Stock Advisor pick. Baidu is a Rule Breakers selection. The Fool's disclosure policy is Zen.
http://www.fool.com/investing/international/2009/06/24/how-we-tripled-our-money-in-a-year.aspx
By Tim Hanson
June 24, 2009
This past year was an exciting one to be an investor. At one point in March, stocks were down well more than 50% from their 2008 highs. Yet amid this chaos, we at Motley Fool Global Gains identified a promising small company with a strong and growing core business that was selling for a dirt cheap 4.5 times earnings.
Since we recommended that stock to our members in October 2008, it's returned more than 200%. During that time, it has also listed on a major exchange and vastly expanded its production and distribution capacity. Thus, even though it's not quite the deal we got back in October, the stock remains on our Best Buys list.
But before I get to the stock, I want to tell you how we found it and provide a few points that can help you identify similar things for yourself.
You find what you're looking for
You may have heard (sometime, somewhere) that the market is efficient. That means that at any moment, all of the available information on a stock has been incorporated into its price. While I believe that's generally true, I don't believe it's true all the time. What's more, it's less true in certain market segments than others.
For example, take a popular U.S. megacap like Apple (Nasdaq: AAPL). It's tracked by 45 sell-side analysts, has earned a rabid following of fans and detractors, and everything from its products to the health of its CEO are reported on every day in the media. This, in other words, is a stock whose price is largely efficient. If you choose to buy or sell Apple stock, you're likely not doing so with any kind of informational advantage over your counterparty.
That, however, is less likely to be the case if you're buying and selling stocks that most other market participants aren't even paying attention to. Specifically, that's small stocks, foreign stocks, and especially small and foreign stocks.
Which brings me back to my story
The stock we discovered at Global Gains that's more than tripled in less than one year is a small Chinese fertilizer company called China Green Agriculture (AMEX: CGA). In hindsight, at less than 5 times earnings last October, it looked like a clear winner. The company's organic fertilizers were coming into favor as the government encouraged farmers to increase food production without a destructive environmental impact. Further, government efforts to aid rural farmers were giving those farmers -- China Green's customers -- increased purchasing power. Finally, there was a clear catalyst in the new 40,000-metric-ton manufacturing facility that the company planned to open with the capital it raised in a private placement.
Yet the market either wasn't paying attention here, or it was far too focused on the perceived risks of investing in China Green Agriculture. Those included a very short track record as a public company, an over-the-counter stock listing, and no permanent CFO.
How, then, were we able to get comfortable with recommending China Green's stock?
Elementary, my dear Watson
The simple fact is that we traveled to Xi'an, China, last June, and spent two days visiting with the company and touring its R&D and production facilities. We talked extensively with management about their plans for the future and their perceived market opportunities. And we got answers to every question we had about the company.
This doesn't mean we walked away 100% confident. After all, a company visit, while an important part of our research process at Global Gains, will never reveal the full story. But the visit enabled us to get comfortable enough to recommend that our members buy shares at less than 5 times earnings within the context of a diversified portfolio.
And the result speaks for itself. Not only is it up more than 200%, but it's outperformed other well-known China plays, such as PetroChina (NYSE: PTR), Baidu (Nasdaq: BIDU), and China Mobile (NYSE: CHL), as well as other well-known fertilizer plays, such as PotashCorp (NYSE: POT) and Mosaic (NYSE: MOS).
Your takeaway
Now, you may not have the resources to travel to China to check up on all of the small, cheap, and fast-growing companies there that you may be interested in owning. But short of that, the lesson is that the only way you're going to be able to take advantage of the inefficiencies that exist in the stock market is by doing an extraordinary level of due diligence. That means going through the filings with a fine-toothed comb, checking up on a company's auditor to make sure it has a good reputation, and doing extensive analysis of the numbers to make sure they're good, but not too good to be true.
Yet if you can make company visits a part of your research process, I encourage you to do so. We travel to China each and every year with Motley Fool Global Gains and have found that it's the best way to identify both the most promising ideas as well as potential disasters.
In fact, we're headed back to China in July to meet with more than a dozen promising names in cities such as Shanghai, Xi'an, and Harbin. While we may not find another company that will triple our money in less than a year, we do believe our intelligence from the ground gives us -- and can give you -- an advantage in the market.
Tim Hanson is co-advisor of Motley Fool Global Gains. He does not own shares of any company mentioned. China Green Agriculture is a Global Gains recommendation. Apple is a Stock Advisor pick. Baidu is a Rule Breakers selection. The Fool's disclosure policy is Zen.
http://www.fool.com/investing/international/2009/06/24/how-we-tripled-our-money-in-a-year.aspx
Saturday, 13 June 2009
Dollar Cost Averaging Stock Strategy
Stock Strategies
Dollar Cost Averaging Stock Strategy
by InvestorGuide Staff
Investors have three major concerns when buying stocks:
Ideally, there would be windfall profits in record time with no risk.
In the real world, investors must use stock strategies that match both their resources and skill level. The dollar cost averaging stock strategy is a great approach for people new to stock investing that minimizes risk and trends towards sound profitability - especially the longer it is used.
Basics of Dollar Cost Averaging
The dollar cost averaging stock strategy minimizes risk because it reduces the difference between the initial investment and the current market value over a long enough timeline. This is accomplished by making fixed investment amounts at predetermined times. Now this investment could be in a specific stock or perhaps even an index fund. The point is to remain committed to this investment for years and not to allow fluctuations in price to affect your buying strategy.
Knee jerk responses are common with stock investments, especially for beginners. One bad earnings report can send stock prices tumbling and cause investors to panic. This causes a sell-off that further lowers prices. But; if a person were to keep their stock and still continue buying at regular intervals, the average price of the stock should continually approach the current market value at the time of purchase at each interval. Temporary fluctuations in pricing should even out. While the stock price may be lower than the initial investment value, the ability to acquire more shares at a lower price means that the short-term decrease in average stock price should be balanced out when the share price increases. However, never confuse dollar price averaging with simple averaging.
For instance, let's say an investor purchased 1,000 shares of Microsoft stock at $40 per share at the first interval and another 1,000 shares of stock at the next for $25 a share. That would make the total investment $65,000 and the average stock price $32.50. However, this is not dollar cost averaging - it is simple averaging.
The average cost of the stock will not trend towards the current market value if you do not remain consistent in your investment strategy. Using dollar cost averaging, a person would invest a fixed amount - say $33,000 per interval. Thus, when buying the same Microsoft stock at the first interval, a person would end up with 825 shares of stock at $40/share and 1320 shares at $25 each. This adds up to 2,145 shares and an average cost of $30.75 - closer to the current market value of $25 than the simple averaging strategy.
From the example above, the one drawback to the dollar cost averaging strategy is revealed:
Dollar Cost Averaging Stock Strategy
by InvestorGuide Staff
Investors have three major concerns when buying stocks:
- making a profit on their investment,
- minimizing risk, and
- the actual rate of return they will receive (including any dividend income).
Ideally, there would be windfall profits in record time with no risk.
In the real world, investors must use stock strategies that match both their resources and skill level. The dollar cost averaging stock strategy is a great approach for people new to stock investing that minimizes risk and trends towards sound profitability - especially the longer it is used.
Basics of Dollar Cost Averaging
The dollar cost averaging stock strategy minimizes risk because it reduces the difference between the initial investment and the current market value over a long enough timeline. This is accomplished by making fixed investment amounts at predetermined times. Now this investment could be in a specific stock or perhaps even an index fund. The point is to remain committed to this investment for years and not to allow fluctuations in price to affect your buying strategy.
Knee jerk responses are common with stock investments, especially for beginners. One bad earnings report can send stock prices tumbling and cause investors to panic. This causes a sell-off that further lowers prices. But; if a person were to keep their stock and still continue buying at regular intervals, the average price of the stock should continually approach the current market value at the time of purchase at each interval. Temporary fluctuations in pricing should even out. While the stock price may be lower than the initial investment value, the ability to acquire more shares at a lower price means that the short-term decrease in average stock price should be balanced out when the share price increases. However, never confuse dollar price averaging with simple averaging.
For instance, let's say an investor purchased 1,000 shares of Microsoft stock at $40 per share at the first interval and another 1,000 shares of stock at the next for $25 a share. That would make the total investment $65,000 and the average stock price $32.50. However, this is not dollar cost averaging - it is simple averaging.
The average cost of the stock will not trend towards the current market value if you do not remain consistent in your investment strategy. Using dollar cost averaging, a person would invest a fixed amount - say $33,000 per interval. Thus, when buying the same Microsoft stock at the first interval, a person would end up with 825 shares of stock at $40/share and 1320 shares at $25 each. This adds up to 2,145 shares and an average cost of $30.75 - closer to the current market value of $25 than the simple averaging strategy.
From the example above, the one drawback to the dollar cost averaging strategy is revealed:
- while it reduces risk and lowers the difference between the average stock price and the current market value, it will not eliminate the possibility of a loss if the average price does not move fast enough.
- In fact, if an investor were to pick a stock that was on its way down and continued investing in regular intervals as advised by the dollar cost averaging strategy, the losses could add up rapidly.
While the investor may be buying more shares at each interval due to lower prices, having more shares of continually declining stock simply adds insult to injury. For this reason, an investor must have a cutoff point at which he/she ceases purchasing the stock at regular intervals. Fluctuations in market price can be absorbed and an investor can still make a healthy profit using the dollar cost averaging stock strategy but a declining stock is just a loser. Unfortunately, the dollar cost averaging strategy is most profitable on stocks that were underperforming at the time the investment plan was initiated. Therefore, the best stocks to make the most profits on are also the ones that are more likely to recover and continue trending upwards in share price. Prudent research is necessary before initiating any dollar averaging stock strategy.
Implementing a Dollar Cost Averaging Strategy
The very first step in planning to use this strategy is determining how much you can realistically afford to invest over an extended period of time. This is very important because the strategy will not reduce risk of loss effectively unless the investment amount is consistent. You will not insulate yourself against losses as effectively when a large initial investment is made and then followed by increasingly smaller amounts. In such a scenario, the gap between the average stock price and current market value will be larger and the risk for loss greater.
The next step in this or any other stock strategy should be to choose your investment carefully. Remember, you need to stay with this investment for many years for the strategy to be effective. An investor will get killed if they purchase an underperforming stock that does not recover. For this reason, combining the benefits of dollar cost averaging strategy with the diversification and reduced risk of an index fund is a prudent approach when choosing an investment.
An index fund is like a mutual fund in that it is designed to mimic the returns of prominent benchmarks such as the Dow Jones Industrial Average or the S&P 500. Investors own a fraction of each stock that makes up the index. The principle difference and benefit to investors in an index fund is that their management fees are a fraction of those charged for actively managed mutual funds. This is because index funds are passively managed. By combining the dollar cost averaging strategy with the increased diversification and reduced management/transaction fees of an index fund, an investor can maximize the profit potential and minimize risk.
Finally, pick an interval that you can be consistent with for years into the future. A weekly interval will work but it is probably best to make it monthly or even quarterly. Longer intervals are better because they reduce the expense of multiple transaction fees and also allow you to buy larger numbers of stock with each purchase.
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