Companies to avoid

Avoid these companies described below.  That is not to say there are no good investments to be found, but the chances of this happening are much lower, increasing the risk of us running into a dud.

Some examples are as follows

1,  Companies with an excessive growth focus.

Growth is good and beneficial if it is the result of a job well done, which generates resources over time which are reinvested increasing the strength of the company, but this tends to be more the exception than the rule.  The obsession with high growth targets is extremely dangerous.   Once again there is an agency problem:  who are the company's management working for - themselves or the shareholders?  Growth is only a good thing if it is healthy.


2.  Companies which are constantly acquiring other companies.

If the acquisition is not focused on increasing the competitive advantage of the main business, it can end up becoming a rueful folly, or what Peter Lynch calls 'diworsification', diversifying to deteriorate.
Growth ca also ring with it two other problems:  first, more complex accounting can more easily conceal problems; and second, each acquisition eds up becoming bigger than the last, increasing the price and therefore the level of risk.

It is worth reiterating ow detrimental it can be when some mangers feel the pressure or the desire - after selling a substantial part of the company - to buy another of a similar size, instead of returning the money to the shareholders.


3.  Initial public offerings

According to a study, companies who float on the stock market via an IPO post 3% lower returns than similar companies after 5 years. 

There is a simple reason for this:  there are clear asymmetries in the information available to the seller and what we know as purchasers.  The seller has been involved with the company for years and abruptly decides to sell at a time and price of their choosing.  The transaction is so one[sided that there can only be one winner.

4.  Businesses which are still in their infancy.

Old age is an asset: the longer the company has been going, the longer it will last in the future.  A recent study shows that there is a positive correlation between the age of a company and its stock market returns.  It takes a  certain amount of time for a business to get on to a stable footing, depending on the level of demand and competition.  Until this happens, we are exposed to the high volatility inherent in any new business, with an uncertain final outcome.

5.  Businesses with opaque accounting.

Whenever there's significant potential for flexible accounting, being ale to trust in the honesty of the managers and/or owners is essential.

Long-term contractors in the construction sector, or in infrastructure or engineering projects, are examples where there is scope for flexible accounting, with latitude to delay accounting for payments or being forward income.

We can include banks and insurance companies in this category, where the margin for accounting flexibility is very significant and it is relatively simple to cover up a problem for a while, compounded by having highly leveraged balance sheets.

Prior to investing in these types of businesses, it is absolutely imperative to be certain we can trust the mangers or shareholders.  No one forces us to invest in them, so the burden of proof is on the company.

6.  Companies with key employees.

These are companies where the employees effectively control the business, but without being shareholders (the latter could even be positive).  For example,, many service companies reportedly have very high returns on capital, ut only because capital isn't necessary:  investment banks, law firms, some fund managers, consultancy companies, head-hunters, etc.

The creation of value in these businesses benefits these key employees, while the opportunities for external shareholders to earn attractive returns are limited, despite supposedly high returns on capital employed.

7.  Highly indebted companies.

"First give me back the capital, then return something on it."

Buffett also remarks that the first rule of investing is not losing money and the second and the third ..

Excess debt is one of the main reasons why investments lose value.  We do not need to flee from debt at every opportunity, when it is well used it can be very helpful, but it should not have much weight in a diversified portfolio. 

By contrast, markets don;t particularly like companies to hold cash rightly fearing that such financial well-being might lead to bad investment decisions. 

{To sleep well and to make the most of incorrect market valuation, ensure that over half of the companies in the portfolio have ample cash.  Do not be worried about excess cash, provided that capital is reliably allocated.}

8.  Sectors which are stagnant or experiencing falling sales.  

While it is not worth paying over the top for growth, on the flipside, falling sales can be very negative.  Quite often these companies can cross our radar because of the low prices at which they are trading but over the long term, time is not on our side with them..  Sometimes sales will recover but mostly the opportunity cost is to high, given that the situation can persist for sometime.

9.  Expensive stocks.

It is obvious but worth spelling out.  In reality, expensive companies have historically obtained the worst results, because good expectations are already priced in and because it is less likely that the price will jump from - say- a P.E ratio of 16 to 21 than from 9 to 14.

That is not to say that good results cannot be obtained from buying the above types of stocks, but it is an additional hurdle which some may preferred to avoid.


The above are not the only examples of companies to avoid,, but they are a good starting point.

In investing, it is just as important to know which companies to avoid.

In investing, it is just as important to know what are the companies you do not wish to invest in.

This is very important and if you are able to identify these companies that are not going to do well or that are going to do badly in their businesses, you can prevent yourself from a lot of future heart-aches and losses.

Being able to identify these companies that are going to do poorly over the long term, means you have the ability to also:

1.  identify those companies with good long term prospects, which you may choose to dwell in deeper into to prospect for your long term portfolio of stocks.

2.  identify those companies that are fundamentally poor which are presently exhibiting temporarily a period of exceptionally good results, so that you may avoid them.

These assessments are based mainly on the businesses of the companies.  Do not look at the stock prices for guidance, especially in the initial stages of your analysis of the companies prospects.

It is better to assess the quality of the business and the quality and integrity of the management first.

When you like what you analyse, then do a valuation of its intrinsic value.

Then determine at what price you will be willing to buy at with a margin of safety and a promise of satisfactory return.

Then look at the market price.  Looking at the market price to get guidance may bias you in your intrinsic value calculation.

How to find “conservative” investments? The ones with the greatest probability of preserving your purchasing power and with the least amount of risk.

Buffett resisted buying large and popular companies because he thought this category was valued irrationally by investors. But then, he was not in favour of buying small, unproven companies as well. As he wrote in his 2010 letter…

At Berkshire, we make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it.

Instead, we try to apply Aesop’s 2,600-year-old equation to opportunities in which we have reasonable confidence as to how many birds are in the bush and when they will emerge (a formulation that my grandsons would probably update to “A girl in a convertible is worth five in the phonebook.”).

Obviously, we can never precisely predict the timing of cash flows in and out of a business or their exact amount. We try, therefore, to keep our estimates conservative and to focus on industries where business surprises are unlikely to wreak havoc on owners.

Even so, we make many mistakes: I’m the fellow, remember, who thought he understood the future economics of trading stamps, textiles, shoes and second-tier department stores.

This reiterates Buffett’s key definition of conservatism over these years – conservatism depends on how you choose and not what you choose.

In other words, investing conservatively is not about simply identifying large well-known businesses, but going through a process that identifies why a particular company qualifies as a conservative investment.

As Buffett would want you to understand, there is one simple way to look at a conservative investment.

Conservative investment = Preservation of capital

A conservative investment is one that has the greatest probability of preserving your purchasing power and with the least amount of risk.

This probability can in turn arise from the process that you follow to identify such opportunities that will preserve your purchasing power in the future.

So, where most investors fail in attempting to invest “conservatively” is blindly assuming that by purchasing any security that qualifies as a conservative investment, they are in fact, conservative investors.

In other words, such investors are thinking conservatively, but not acting conservatively.

If you indulge in such things, it could prove to be a costly affair.

Here is what Buffett wrote in 1965…

Truly conservative actions arise from intelligent hypotheses, correct facts and sound reasoning. These qualities may lead to conventional acts, but there have been many times when they have led to unorthodoxy. In some corner of the world they are probably still holding regular meetings of the Flat Earth Society.

We derive no comfort because important people, vocal people, or great numbers of people agree with us. Nor do we derive comfort if they don’t. A public opinion poll is no substitute for thought. When we really sit back with a smile on our face is when we run into a situation we can understand, where the facts are ascertainable and clear, and the course of action obvious. In that case – whether other conventional or unconventional – whether others agree or disagree – we feel – we are progressing in a conservative manner.

The above may seem highly subjective. It is. You should prefer an objective approach to the question. I do. My suggestion as to one rational way to evaluate the conservativeness of past policies is to study performance in declining markets.

http://www.safalniveshak.com/wit-wisdom-warren-part5/

Are You Making These Investing Mistakes?

by MMARQUIT

One of the ways that you can build wealth, and live a little more abundantly is to invest. Investing can provide a way for you to put your money to work on your behalf. While there are risks involved in investing, and the possibility of loss, you can reduce some of that chance of loss by avoiding some of the more common investing mistakes.

As you consider investing, and how to build a portfolio that works for your situation, here are some common mistakes to avoid:

1.  Panicking with the Crowd

It’s easy to get scared and panic — especially when everyone else is doing it. However, you need to be careful about when you sell investments. While there are some very good reasons to sell a stock, it’s rarely a good idea to sell a stock just because everyone is in panic mode.

Instead, take a step back and look at the big picture. Are assets losing ground because the whole market is tanking? If so, you might not want to pull the trigger too quickly. Instead, consider the fundamentals. If the fundamentals are still solid, there is a good chance that your assets will recover in time.

2.  Trading Too Often

This can be tied with panicking, but it can also be its own problem. Too many of us get caught up in to day to day movements, and think that we need to trade a lot. While there are day traders who manage to make good money on regular market movements, it’s important to realize that these traders are dedicated to what they do.

Most of us regular folks are better off trading at wider intervals, or employing a dollar cost averaging strategy. Trading too often can cost you in terms of transaction fees, and there is a bigger chance that you will lose out.

3.  Lack of Diversity

If you want to reduce the overall risk of your portfolio, you need to remember to diversify to some degree. You need to make sure that your investments are diversified in terms of asset class, as well as across different sectors and industries. It also doesn’t hurt to diversify geographically and include investments from other countries. Avoid investing heavily in your company’s stock.

It’s fairly easy to start investing, and to diversify. There are index funds and ETFs that allow you to diversify easily, while at the same time helping you avoid some of the bigger risks that can come with investing.

4.  Failure to Understand What You're Investing In.

One of the reasons it’s good to start with stocks and bonds, and investments that are based on them (like index funds and ETFs), is because they are fairly easy to understand. You shouldn’t invest in things that you don’t understand. Take a few minutes to learn how different asset classes are traded, and how different investments work. It is also worth to learn what factors influence different investments. Get a handle on how different investments work, and you will be far more likely to find success and avoid some of the pitfalls that bring down investors.


http://couponshoebox.com/tips/are-you-making-these-investing-mistakes/

Warren Buffett How to Turn 40 into 5 Million

Buy an attractive business.
My biggest mistakes are those of omissions.
Better to learn from other people's mistakes.
Disagree but never argue.
Live life forward.
Important and knowable.
Important but not knowable.
Buffett's buying is not affected by macroeconomic factors.

The 100 Things I've Learned in Investing

By Anand Chokkavelu, CFA | More Articles 
June 29, 2012 | Comments (7)

As you'll see in No. 47 on my list, it's very important to step back and gain perspective. In an attempt to stop making the same mistakes over and over, here's my attempt to codify the 100 lessons I've learned in my investing career so far.

1. Most of this list is dedicated to insight on beating the market, but know this: It's darn hard to beat the market. Ninety-nine percent of people are best served steadily buying and holding low-cost index funds at the core of their portfolios -- and I may be understating that 99% figure.

2. Looking for a one-stop index-fund core? For a very reasonable 0.2% in fees a year,Vanguard target date retirement funds will automatically diversify and balance the stock and bond portions of your portfolio -- just pick your retirement date. The Vanguard family of index funds is what I recommend to just about everyone who asks.

3. Being contrarian doesn't just mean doing the opposite. The "contrarian" street-crosser gets run over by a truck.

4. In any financial matter, find out what the other person's incentives are. Discount accordingly.

5. Even a gut investment call should have some numbers to back it up.

6. Mistakes made in your 20s are better than mistakes in your 50s. Mistakes involving $100 are better than mistakes involving $100,000.

7. My all-time favorite Warren Buffett quote: "We like things that you don't have to carry out to three decimal places. If you have to carry them out to three decimal places, they're not good ideas."

8. Never buy stocks on margin, no matter how "can't miss" the opportunity is. That blend of leverage and arrogance is exactly what gets Wall Street in trouble. The difference is that we're not too big to fail.

9. Don't waste time mastering things that simply don't work (see lessons 10 through 12).

10. Example No. 1: day trading. Like playing roulette, you'll have some victories, and you may be able to fool yourself into thinking you're skillful. The house just hopes you keep playing.

11. Example No. 2: technical analysis. The only chart pattern worth noting is the jagged, but likely downward-sloping line of your savings if you follow this technique.

12. Example No. 3: leveraged ETFs. Bastardized ETFs like the Direxion Daily Financial Bull 3X (NYSE: FAS  ) are another great way to lose money. Even if you guess right on direction, the mathematics of the daily reckoning mean these instruments are long-term losers.

13. Stock stories about growth potential (e.g., tech stocks) are sexier than stock stories about track record (e.g., consumer goods stocks). Only the latter are verifiable today, though.

14. Having a strong opinion (let alone acting on it) is overrated. Knowing 20 stocks cold beats being able to challenge Jim Cramer in the lightning round.

15. Albert Einstein allegedly declared compound interest "the most powerful force in the universe." High-interest credit card debt aims that force at your wallet. To get compound interest pointed in the right direction, save (and invest) early and often!

16. A casino makes us use chips in lieu of cash, partially because we forget that the chips represent real money. Stocks may act in screwy ways and invite us to play games, but as investors we can't lose sight of the fact that stocks represent real companies. As Peter Lynch puts it using a different gambling analogy, "Although it's easy to forget sometimes, a share is not a lottery ticket ... it's part-ownership of a business."

17. When talking to other investors, have your BS detector handy. When you hear their "big fish" stories, know that their brilliant track records likely have more to do with selective memory and poor scorekeeping than skill.

18. A great Buffett reason not to fudge our taxes: "We'll never risk what we have for what we don't have and don't need."

19. Those who know what they're doing make complexity seem simple. Folks who don't (or are trying to sell you something) make simplicity complex.

20. A clear sign of the latter: jargon.

21. Asset allocation is more important than stock picking. A silly example: Say you're holding a race among five horses and five human beings. Many investors spend their time trying to rank the five human beings, when they're better off just betting on the five horses.

22. If you don't understand it, don't buy it until you do.

23. Sigh -- hard work is required to beat the market. Per Peter Lynch: "The person that turns over the most rocks wins the game. And that's always been my philosophy."

24. On the plus side, the results of hard work can be breathtaking. In his book Outliers, Malcolm Gladwell gives example after example of people we term "geniuses" who are really hyper-dedicated people who work at their craft relentlessly. Among the examples he uses are Bill Gates and the Beatles. He argues that both got to where they got because of the opportunity (and inclination) to hone their skills for 10,000 hours. That's the equivalent of five full years of work -- or 1,000 weeks of practicing 10 hours a week.

Gates had access to an ultra-high-end computer terminal because his exclusive middle school started a computer club. In high school, his access went up a notch as he gained access to the computers at the University of Washington. He talks of getting 20 to 30 hours of programming time in each weekend. On weeknights, he'd slip out of his house to take advantage of the open time-sharing slots from 3 a.m. to 6 a.m. And the Beatles were just as obsessed. By the time they broke out on the Ed Sullivan show in 1964, the Beatles had played an estimated 1,200 shows, some lasting eight hours!

25. None of the time spent checking and rechecking Yahoo! Finance portfolios counts toward those 10,000 hours. And here's the real kick in the groin: 10,000 hours is a prerequisite for mastery -- not a guarantee.

26. Common sense is as uncommon in investing as it is in real life.

27. One of my favorite lessons from the poker table: Action is overrated. The best players (and investors) are constantly weighing the opportunities, but rarely are they moved to act.

28. A similar sentiment by Vanguard founder Jack Bogle: "Time is your friend; impulse is your enemy."

29. Selling is overrated. Reason No. 1: We often sell potential multibagger winners that would more than make up for our losers. The greater the quality of the business, the greater the danger of selling too early.

30. Selling is overrated. Reason No. 2: Outside of retirement accounts, selling kicks in voluntary taxes.

31. Selling is overrated. Reason No. 3: Fees.

32. In the hands of a good storyteller, almost every stock looks like a winner. Assume you're not hearing the whole story.

33. A question to ask before buying a stock: "What's my competitive advantage on this stock? Do I really know something the market doesn't?" The more specific the advantage, the better.

34. Sweat the big stuff.

35. Most of us are too enamored with "so you're saying there's a chance" opportunities. A Hail Mary belongs on the gridiron or in the pew -- not in the brokerage account.

36. A great rule of thumb for buying a house (the biggest single investment most of us will ever make), from fellow Fool Buck Hartzell back in 2005: "If a home is selling for 150 times the monthly rent (or less), it's generally a good deal. If it's selling for more than 200 times the monthly rent of a comparable property, you're better off renting."

37. One of the toughest facts about investing is that a proper track record takes decades. Charlatans can do quite well for years and years. This is potentially dangerous for our assessment of ourselves and of others. Focusing on process, rather than results, helps.

38. Price matters. A great company can be a great big loss for you if you pay too much.

39. When applicable, use the tax system to your advantage. Retirement accounts like 401(k)s and IRAs can be huge boons.

40. It is twice as easy to sound intelligent being pessimistic about the future as it is being optimistic.

41. Greater risk theoretically yields greater reward, but a stupid investment is just a stupid investment.

42. Sir John Templeton's quote: "'This time it's different' are the four most expensive words in the investing language." The details change, but the basic storylines remain the same.

43. Investing shouldn't be improv. Take the time to write a thoughtful script.

44. A key Buffett quote to understand: "Time is the friend of the wonderful company, the enemy of the mediocre." Why is this so? Partially because "you only find out who is swimming naked when the tide goes out." I really struggle to abide by this advice. I am often the Statue of Liberty when it comes to investing in inferior companies on the cheap: "Give me your tired, your poor, your huddled masses," etc.

45. Options promise big gains in short time periods. The problem? About three out of every four expire worthless. Contrast that with a stock, which doesn't expire.

46. Sorry, market timers: Take it from Peter Lynch, who said, "If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes." Or fellow investing great Ralph Wanger: "If you believe you or anyone else has a system that can predict the future of the stock market, the joke is on you." Or the godfather of value investing, Benjamin Graham: "It is absurd to think that the general public can ever make money out of market forecasts."

47. Keep a journal (or spreadsheet) of your stock picks, complete with your rationale for each move. Then look back on it to see if you were right. We may think we're good dressers, but all it takes is a high-school yearbook to prove otherwise.

48. Step aside, high blood pressure: Inflation is the silent killer.

49. Diversification doesn't entail making a whole bunch of dangerous investments and hoping they cancel out. That's the financial equivalent of stabbing your leg to cure your flu.

50. 13 Steps to Investing Foolishly is excellent.

51. Index ETFs may be the most wildly misused products in the stock market. They are excellent tools for ultra-low-cost buy-and-hold diversification, but many use them to day-trade the market (and sectors thereof).

52. Somewhere around 80% of actively managed mutual funds (as opposed to broad index funds) don't beat the market.

53. The more we learn about investing, the more we want to start doing exotic things (naked straddle options, anyone?) and buying stock in obscure companies no one has heard of. Maybe it's boredom, maybe arrogance, or maybe the desire to impress people at parties. Or perhaps it's seeking the glory of being right when few saw it coming. I'm guilty as charged on all counts. When I'm at risk of going off the deep end, I try to remember that stock picking isn't diving. As Buffett has noted, there are no extra points (or returns) for degree of difficulty.

54. This Einstein maxim is spot-on for stock analysis: "Everything should be made as simple as possible, but no simpler." Both clauses are crucial.

55. Just because a company or industry is set to change the world doesn't mean it's a great investment. Beyond looking at valuation, there tends to be a Wild West of players until a few winners emerge. In fact, market beater Ralph Wanger says, "Since the Industrial Revolution began, going downstream -- investing in businesses that will benefit from new technology rather than investing in the technology companies themselves -- has often been the smarter strategy."

56. Jumping from one flavor of the day to the next isn't continuous learning.

57. Long-tail events (a.k.a. black swans) are highly underrated. Nassim Nicholas Taleb explains it best in his book, Fooled by Randomness.

58. Every time I start getting cocky (which is often), I am unceremoniously reminded there are no sure-thing stock picks. As master investor T. Rowe Price noted: "No one can see ahead three years, let alone five or ten. Competition, new inventions -- all kinds of things -- can change the situation in twelve months."

59. I personally get way too excited when a stock hits its 52-week lows or falls 50%. Many sins are washed away in my mind when I see a bargain, but price movement by itself is not a sufficient reason to buy (or sell). Falling knives can be death -- especially when they're rusty and gross.

60. A related point: No one consistently times the bottom or top of a stock's price (let alone the market of stocks!).

61. Don't let the false modesty of investing greats fool you into false confidence.

62. My three strikes against gold. Strike one: Its value can't be estimated with basic math (since it just sits around producing nothing). Strike two: Wharton professor Jeremy Siegel showed that going back to the 1800s, the return on gold has barely kept up with inflation and is left in the dust by stocks and bonds. Strike three: Gold as a doomsday investment doesn't make much sense. If the apocalypse (financial or otherwise) actually comes, you're probably screwed regardless.

63. Discount cash on a company's balance sheet. Managements are brilliant at squandering it.

64. Done properly, value investing -- e.g., focusing on low-P/E, low-P/B, low-TEV/EBITDA stocks for ideas -- has proven to work quite well. But as successful growth-investor Bill O'Neil warns, "What seems too high and risky to the majority generally goes higher, and what seems low and cheap generally goes lower."

65. You may be too smart to be rich.

66. Know thyself. Know your weaknesses and strengths. Here's a specific example from Joel Greenblatt: "For most people, stocks should represent a portion of their investment portfolio because I still believe that over the long term they will provide superior returns relative to most alternative investments. However, whether that portion of an investment portfolio devoted to stock investments should be 40% of an investor's portfolio or 80% is a very individual decision. How much are you willing (or able) to lose before you panic out? There's no sense investing such a large portion of your assets in a long-term strategy if you can't take the pain when your chosen strategy doesn't work out for a period of years."

67. For some help on getting to know yourself, study the common mistakes behavior finance experts have uncovered.

68. Folks say that "success has many fathers, while failure is an orphan." Combine that with our willingness to overvalue streaks owing to one event, and I start to wonder: Do we overvalue managers that leave a successful organization to turn around a woeful organization?

69. If you just heard of the company yesterday, don't buy its stock today.

70. The Internet and better regulations have largely eliminated data advantages. The problem now is isolating which data is actually meaningful. Better results stem from increasing the signal-to-noise ratio.

71. Even if you rely on advice from others, heed the words of bond fund legend Bill Gross: "Finding the best person or the best organization to invest your money is one of the most important financial decisions you'll ever make." As with stocks, familiarity alone isn't protection. Check out our seven-part special report on financial advisors.

72. Stuff that leads to suckerdom: greed, laziness, unearned trust, ignorance, and shortcuts. When in doubt financially, do the opposite of your favorite athlete.

73. Make sure to get the right odds. There should be a vast difference between what we pay for a has-been or never-was and what we pay for a potential superstar company. As George Soros puts it, "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."

74. Initial valuation matters, but generally, over longer periods of time (decades, not years), stocks have returned more than bonds. The more decades you have left, the more of your portfolio should be in stocks to stave off inflation.

75. In theory, well-timed share buybacks are better than dividends. They save on taxes and allow the people who know the company best to buy up shares when the market acts crazy. In practice, I'll take dividends. (A tangential bonus fact: Dividend stocks have historically beaten non-dividend stocks).

76. Some of the most misinterpreted words in investing: Peter Lynch's "Buy what you know." It's more like "Research what you know and then consider buying."

77. Don't be an Enron baby. Overweighting your investments in the company you work for is a double-down bet we don't need to be taking. On the other hand, your company's 401(k) match is free money.

78. There are many paths to the top of the investing mountain, but some are more fraught with peril -- and there are very few trailblazers.

79. Numbers frequently lie -- especially in isolation. Say you spot a P/E ratio of eight. Sounds darn cheap! But is that industry's profitability rapidly deteriorating? Was there a one-time item that temporarily juiced the bottom line? Is an upstart competitor hungrily eyeing its lunch? Are new regulations threatening its livelihood? Is it a cyclical industry? Is it in a country that has a really poor reputation for accounting fraud or government interference? You get the idea.

80. Mergers and acquisitions are overrated. Somewhere between 50% and 85% of mergers fail to boost value. The frequency of achieving promised "synergies" should be filed somewhere between unicorns and no-hitters.

81. It's hard to be an independent thinker when the pressures to conform are daily and good investment theses can look ugly for years before paying off. Ben Graham said it this way: "Even the intelligent investor is likely to need considerable willpower to keep from following the crowd." Famed investor John Templeton talked of his defense against crowd-following: "When asked about living and working in the Bahamas during his management of the Templeton Group, Templeton replied, 'I've found my results for investment clients were far better here than when I had my office in 30 Rockefeller Plaza. When you're in Manhattan, it's much more difficult to go opposite the crowd.'" The digital equivalent today is turning off real-time news and Internet feeds and reading more thoughtful analysis.

82. The best book I've ever read on the basics of stock picking: Joel Greenblatt's The Little Book That Still Beats the Market. It's literally written so that a small child can understand it. It also does a great job of explaining why return on capital is a measure to pay attention to.

83. It's not the rewards you don't understand that'll burn you, but the risks you don't understand.

84. The guy who invented the P/E ratio (James Slater) on small caps: "Most leading brokers cannot spare the time and money to research smaller stocks. You are therefore more likely to find a bargain in this relatively under-exploited area of the stock market." Of course, because there is less interest and less Wall Street coverage, doing your own due diligence is that much more important. The same holds for other underfollowed areas of the market, like special situations.

85. If you can learn quickly from your own mistakes, you're ahead of the game. If you can learn quickly from others' mistakes, you've won the game.

86. Jim Sinegal of Costco on why you can't pay too much attention to Wall Street: "You have to recognize -- and I don't mean this in an acrimonious sense -- that the people in that business are trying to make money between now and next Thursday. We're trying to build a company that's going to be here 50 and 60 years from now."

87. If it seems too good to be true...

88. Buffett's concept of the "circle of competence" is important: "There are all kinds of businesses that I don't understand, but that doesn't cause me to stay up at night. It just means I go on to the next one, and that's what the individual investor should do." Also consider Steve Jobs' quote: "Focus is about saying no." For a great book on saying no, read Seth Godin's tiny book The Dip.

89. The stock moves I've made based solely on the advice of others -- e.g., "He's a good energy analyst and he loves this oil stock," or "This famous stock picker is buying X!" -- have generally been disasters.

90. If you can read a dissenting opinion without resorting to an ad hominem attack, you're at an advantage.

91. Downer alert: We like control, but we can't control everything. Life and luck can (and will) trump investment plans. You can do everything right and still die penniless. All we can do is give ourselves a better chance to succeed.

92. That said, if you're reading this article, there's a good chance the genetic lottery has smiled favorably upon you.

93. Here's something to think about the next time you get antsy to buy immediately into the latest must-act-now opportunity (e.g., a hot IPO). The year 1986 marked Coca-Cola's 100-year anniversary. If you had bought shares to commemorate the occasion, you'd be sitting on something like 15 to 20 times your initial investment. Time waits for no man -- but stocks will.

94. How can we get rich? Per Ohio State economics professor Jay Zagorsky: "Staying married, not getting divorced, [and] thinking about savings." To those, I would add having the proper insurance coverage.

95. There are more than 5,000 stocks on major U.S. exchanges. A great stock picker finds one great stock idea a year. Don't let the ones that got away frazzle you into buying the ones you should have ignored.

96. The Pink Sheets and over-the-counter markets are where sketchy penny stocks live. Do yourself a favor and stick to stocks on major U.S. exchanges -- preferably ones with market caps of more than $200 million. And never, ever heed penny stock spam emails.

97. When I learned to drive, I nervously focused on each upcoming parked car. My father told me to focus down the road and the parked cars would take care of themselves. Perhaps my first lesson in investing.

98. Do not buy low and sell high; rather, buy low and don't sell often.

99. For the penultimate lesson, let's turn once more to Warren Buffett, who briefly said in his 2004 shareholder letter what took me 98 bullet points to say:

Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous.

There have been three primary causes: first, high costs, usually because investors traded excessively or spent far too much on investment management; second, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long under way) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.

100.  Despite my best efforts, I will repeatedly and thoroughly fail to heed these lessons. Let's hope you're better at No. 85 than I am.

http://www.fool.com/investing/general/2012/06/29/the-100-things-ive-learned-in-investing.aspx#.T-4jVReO2rs

10 Common Mistakes People Make When Investing

Almost everyone makes investment mistakes. Yet, these mistakes may benefit us in the future, as we utilize our knowledge to make better and more informed business and investing decisions even if they cost us money the first time around. Like the advice from our parents, we must often experience it ourselves before we truly learn from them. However, if we know about our tendencies before we make them, it is much easier to recognize the problem and learn from it. Here are 10 common mistakes that people make when it comes to investing.

1. Blinded by Reward
Being blinded by the possible rewards of an investment can lead us astray when it comes to the associated risk of that same investment. Hearing others speak of amazing dividends, huge returns, and immense profit taking can leave us chomping at the bit to jump into an investment without considering the risks involved. You must often step back for a moment and consider just why the payoffs are so high for a particular investment, and then decide whether the risks of such payoffs are worth what might only be a fleeting reward.

2. Impatience
Impatience has been the killer of many wise investments. Not waiting out a downturn in the economy or assuming a stock has seen its prime and selling it too soon, even though it’s a well-known and stable investment, could leave you with regrets.

As an example, one investor (he shall remain nameless for the purposes of this article) was once invested in Hilton Hotel Corporation stock. This same investor had bought his shares at $10. When the stock reached $14 and stabilized for several months, the investor lost faith even though he knew the stock was a rock solid investment. He didn’t need the money, but became inpatient and dumped the stock, took his profits and several years later Hilton was bought out, their stock selling for over $40 a share. Impatience got the better of him and he lost out big time.

3. Missed the Train
Missing the train when it comes to a hot investment can leave you frustrated and angry that you didn’t get on board with everyone else. Rather than chalking it up to a learning experience and looking for a new investment, you may decide to chase the train and jump on just as everyone aboard is jumping off. This can leave you holding the bag while others are taking their profits.

4. Bubble Bursting
A bursting investment bubble can leave a lot of people losing a lot of money. Not seeing the fall of a particular investment or investment area in time can leave you in a precarious position. During the last decade, areas such as real estate and technology have shown us just how dangerous bursting bubbles can be. When people start saying an investment is fail-safe or bound to make you money, it’s a good idea to start questioning the soundness of such advice. Remember the old adage, “If it sounds too good to be true, it probably is.”

5. Influence of the Masses
It can be easy to get caught up in the excitement of an investment. When everyone around you is telling you how great a particular investment is and how much money they are making off of it, it can be difficult to ignore the opportunity. However, as with bursting bubbles, that same herd of charging cattle that leads you to water can lead you off the side of a cliff when it comes to your investment decision. Listening to the masses rather than your own good sense (i.e. housing bubble, tech bubble) could be an investing mistake you’ll kick yourself over down the road.

6. Taking Investing Personally
Sure, it might seem like big business is out to get you and the oil companies raise gas prices every time you head to the pump to fill up your car, but taking investing personally can be a big mistake. Making investment decisions based upon personal preferences or because you’re angry about losses may only leave you angrier because you didn’t base your decision on factual information and sound investing practices.

7. Uncomfortable Investments
Some people find that they are unable to stop thinking about their investments because they are worried about losing money. Even though their investment decisions may be good ones, they are unable to stop fixating on the investments and lose sleep over the fact that their money is at risk. Sometimes investments just aren’t worth the fear that comes with them and for some people certain risk-involved investments may be considered a mistake due to the loss of peace of mind they are suffering.

8. Heightened Expectations
Heightened expectations of investment returns can result in poor decisions. Often influenced by Wall Street analysts or our financial advisors, many are no longer satisfied with four or five percent returns on their investments. Heightened expectations due to constantly being led to believe returns of eight, nine, or ten percent are a regular occurrence can lead to skewed decision-making regarding where and how money is invested.

9. Low Capital Investments
Sometimes it’s not that we don’t make the correct decisions, but when we do, we don’t put enough money into the pot to make the decision worthwhile. Purchasing 10 shares worth of stock when the stock price is $10 a share, even if the investment takes off, might not make a significant difference in your overall portfolio.

10. Investing Before Debt is Reduced or Eliminated
Sometimes we make the mistake of putting the cart before the horse in our investing. By making investments, even if they result in higher returns, before reducing or eliminating debt, means taking a much higher risk than necessary. Even if a particular investment returns 10% annually, if you are paying credit card interest on a similar amount at 20%, your investment choice might not be a wise one.

This post was written by Tom Becker who writes for Money Choices where he reviews high interest savings accounts and other investment vehicles.

http://moneyning.com/investing/10-common-mistakes-people-make-when-investing/?utm_medium=feed

• 28 Jul 11

Six classic investing mistakes

Successful investing is as much about avoiding costly errors as it is about finding cheap stocks. Here are six of the best ways to go about losing money.

Done well, value investing is a successful, proven, and safe way to invest. The logic of the approach—buying an asset for less than its underlying value—is irrefutable, and the records of those that practice it are convincing (see Warren Buffett’s essay, The Superinvestors of Graham-and-Doddsville).

However, an understanding of the principles of value investing isn’t enough. In investing, mistakes are inevitable, and the key is to learn from them and avoid repeating them. Moreover, we can try and learn vicariously; through the experience of others.

Over the past 12 years, we at the Intelligent Investor have made plenty of mistakes, and have also had more than our fair share of successes. We’ve learnt from both. What follows is your opportunity to do likewise in six key areas.

KEY POINTS

• Value investing is successful but mistakes will be made
• Six of the most common ones explained
• Illustrated with recommendation case studies

1. Focusing only on the numbers

One of the most common investing mistakes, especially for the inexperienced, is to concentrate only on a stock’s financial data. Applying a price-to-earnings ratio, a book value multiple, or a discounted cash flow analysis can provide very precise estimates of value. But that’s not all there is to analysing stocks, as Gareth Brown’s cover story made clear with the return on equity measure (see ROE: Plusses and pitfalls).

The big four banks, for example, all carry forecast dividend yields of about 6% to 7%, and price-to-earnings ratios of around 10 to 12. Looking at the numbers, they’re closely matched.

Big four bank PERs and dividend yields

	PER	Dividend yield
Commonwealth	12.6	6.1%
NAB	12.7	6.6%
ANZ	11.9	6.5%
Westpac	10.6	7.1%

When you consider the risks entailed by ANZ’s Asian expansion and NAB’s aggressive push for market share however, suddenly the numbers don’t seem to tell the whole story. These qualitative factors are the reason we favour Commonwealth Bank andWestpac over ANZ and NAB.

So, before looking at the numbers, make sure you truly understand the business that’s generating them.

2. Mistaking permanent declines for temporary ones

In the hunt for value, it’s often necessary to buy stocks with a few fleas. When businesses hit rough patches and earnings temporarily decline, it can be a great time to buy. This strategy led to successful Buy recommendations on Cochlear at $19.04 on 18 Mar 04, and Leighton Holdings at $7.83 on 11 May 04.

We have a positive recommendation on Aristocrat Leisure today for the same reason. While mismanagement, a poor product line-up, the strong Aussie dollar, and cyclical headwinds are all hurting Aristocrat in the short term, we expect this business to perform well in the long run.

The risk is if its current problems aren’t temporary. If Aristocrat’s profits stay permanently depressed, we'd have overpaid for this business, and be guilty of having mistaken Aristocrat’s structural decline for a cyclical one.

3. Buying low quality businesses

Owning high quality businesses over the long run is the key to successful investing. Our Masterclass special report on Warren Buffett details his incredible success employing this approach.

Unfortunately, high quality businesses are seldom cheap. Value investors therefore often end up with portfolios full of cheap but low quality stocks, entailing greater risk, more stress, and higher stock turnover.

In the past, Intelligent Investor also fell into this trap, covering too many small and dubious businesses. But with our new focus on blue chips and wonderful businesses trading at fair prices (see Christmas trimmings: introducing the nifty 50/50), you can now fill your portfolio with high quality businesses, especially if you’re patient and buy opportunistically.

4. Neglecting economic considerations

‘If you spend more than 13 minutes analysing economic and market forecasts, you’ve wasted 10 minutes.’ Ever since uttering that sentence, legendary fund manager Peter Lynch gave value investors a free pass to ignore the economy. Or so they thought.

Lynch’s advice does not mean that you can completely ignore the economy. It means that the success of your investments should never rely on specific, short-term economic forecasts. What’s the difference?

An investment in Rio Tinto, for example, hinges largely on the continued strength of China’s economy and its building and infrastructure boom. That’s an economic forecast we’re not willing to gamble on.

On the other hand, we’re aware that weak global economies and low stock prices are currently depressing Platinum Asset Management’s earnings to less than their long term average. That’s why it’s cheap. We don’t need to know when or why, but it’s a near certainty that stock prices, and Platinum’s profits, will rise eventually. An appreciation of cycles, rather than economic predictions, should underpin your stock purchases and disposals.

5. Ignoring the market

As a value investor, a healthy scepticism of the market’s wisdom is a necessity; whenever you buy something, it should be because you think the market is pricing it incorrectly.

When you’re right, the rewards of ignoring the market can be enormous. As our special report RHG: A value investing case study explains, the market wrote this stock down from $0.95 to $0.05 before our positive recommendations were vindicated.

Horse Sense

‘There are two requirements for success in Wall Street. One, you have to think correctly; and secondly, you have to think independently.’ – Benjamin Graham

But when you’re wrong, it can be a disaster. Backing ourselves over the market explains why we were far too late in pulling the pin on Timbercorp.

Share price movements should never influence your analytical process. But it is necessary to be aware of them; they can offer a timely prompt to reconsider your thinking, as we did recently with our downgrade of Harvey Norman. The market is often right. When you’re going against the grain, make sure you know why you disagree with the market and have good reason for doing so.

6. Mistaking price and value

If you’re aiming to buy stocks for less than their intrinsic value, a lower price can only mean better value, right? Wrong.

Shoptalk

Value trap: A value trap is a stock that has fallen in price and is thus mistakenly believed to be undervalued.

Consider Telstra, which is trading close to its lowest ever price. By that simple logic, it should be more attractive than ever. But the decline of its traditional fixed-line business means it’s just not worth the high of $9.20 it hit more than a decade ago, nor the $4.80 or so it traded at in 2008.

It’s tempting to anchor to previous prices (see How anchoring sets you adrift). But they offer no clue regarding today’s value. The fact that a stock has fallen does not in itself make it cheap; only the difference between its intrinsic value and the price at which it trades does.

Avoiding these classic value investing mistakes will do wonders for your returns. In order to get the most out of this article, use this 6-point checklist to sift out these mistakes in your own portfolio. Moreover, ask yourself: 'Do I own quality stocks? Do I have an understanding of how various economic changes may impact my holdings? Do I own stocks where I don't fully understand its underlying businesses?'

Disclosure: Staff members own many of the stocks mentioned above. For a full list of holdings, see the Staff portfolio page of the website.

http://www.intelligentinvestor.com.au/articles/325/Six-classic-investing-mistakes.cfm

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