Showing posts with label buy and hold. Show all posts
Showing posts with label buy and hold. Show all posts
Wednesday 21 July 2010
Saturday 17 July 2010
Tuesday 13 July 2010
Understand Your Risk Capacity and Risk Tolerance
You must stay invested in the securities markets to earn market risk premiums
The securities markets pay risk premiums. You have to have your money invested and at risk to be paid a risk premium.
Attempting to avoid risk or losses by jumping in and out to "time the markets" does not work. Scientific finance studies demonstrate the both amateurs and professionals are lousy at market timing.
Historically, U.S. securities markets have paid substantial risk-adjusted returns or risk premiums to investors. While risk premiums have been substantial, they have occurred irregularly. There have been intervening periods of losses, some of which were substantial. (See: How stable have common stock equity risk premiums been over time?)
To earn market risk premiums, your assets must be invested and exposed to potential risk or loss. The more risk you can tolerate, then the higher your potential return and perhaps the rougher the investment road you may travel. Those who have better emotional tolerance for asset volatility can more easily weather market sell-offs.
Practical considerations will also affect your tolerance of investment risk.
In difficult times, whether you need to liquidate risky assets at depressed prices will depend on your expenses and on your other other holdings of less risky, salable assets. Paying necessary living expenses and taxes are good reasons to withdraw funds. Trying to time the markets for a better return is not a good reason.
If you do not need to take out money during a market retreat and recovery cycle, then risk tolerance is solely emotional. For a risk tolerant investor with stable earned income, the recent bubble crash was just a few years of unpleasantness, if he or she was fully diversified and, therefore, not heavily loaded with technology and communications equities. The same, however, could not be said for those who were poorly diversified and also found themselves to be highly risk averse, when risk actually happened. This is especially true, if job loss forced the liquidation of assets at depressed values.
To some degree, all sane individual investors are averse to risk, so risk tolerance is a relative rather than absolute issue.
Therefore, you need to judge your preference or tolerance for risk relative to other investors. While very few people like investment risk, those who can tolerate it better are those who will be less uncomfortable when risk happens from time to time and market values decline by a little or a lot. Tolerating the potential for loss is the cost that investors occasionally pay so that they are always at the table, when the markets deliver their positive rewards.
The vast bulk of individual investors’ publicly traded investment assets are held in the primary cash, fixed income, and equity financial asset classesin the form of individual securities or funds. Your relative investment risk tolerance should influence how your assets are allocated among these primary financial asset classes. If your actual asset allocation is more risky than your risk tolerance, you may not be able to handle the downturns. You might panic, when you should stand firm. If your asset allocation is less risky than your risk tolerance, then you are likely to need to spend less and save at a higher rate to reach your goals.
Nothing is certain about this process, and that is the nature of investment risk. However, the scientific investment literature is relatively clear on certain points. Amateur and professional investors are just not good at timing changes in the markets. Active strategies that attempt to time market turns have under-performed continuous investment strategies. Consistently and profitably calling serial market turns correctly has been a skill beyond mere mortals and certainly beyond the skill of even the most proud of professional and individual investors.
It is better to buy into the asset markets in proportion to your preferred asset allocation and risk tolerance and to stay in the securities markets through thick and thin.
Trying to sit on the sidelines and jump in when things seem safe simply does not work. When things seem safer, they also seem safer to others. In this situation, securities prices will have already reflected this confidence. Most of the "upside juice" or risk premium will already be reflected in current asset prices and only current securities holders will have been paid. (See: Introduction to investment valuation and securities risk)
The converse of trying to jump out to avoid the downturns also does not work. Real-time securities markets are auctions about the expected value of future securities returns. Particularly toward the downside, markets can react extremely rapidly. Getting out in time does not work, because it is usually too late when you realize you should have sold. Worse, however, you might jump out too early and be absent from the table when the market moves upward. Staying in the markets just tends to work better.
If you are more highly risk averse, it is more appropriate for you to select an asset allocation that reflects your relatively higher risk aversion.
You would hold a relatively small portion of your assets in the more risky equity asset class. Therefore, you might be more comfortable and more able and likely to keep your smaller equity allocation invested at all times. Having a smaller, but sustained exposure to equity assets tends to work much better for the more risk averse investor, compared to jumping in and out of the equity markets in larger proportions.
If you stay out of the markets due to such fears, then you are likely to need to save far more to reach your goals. Over-cautiousness is not a free ride. There is never a safe time to be in the markets, because investing is always inherently risky. There is never a safe time to be out of the markets, because you cannot earn investment risk premiums on the cash under your mattress. (See: VeriPlan helps your to compare investment risk-return tradeoffs)
Finally, you should periodically rebalance you assets back toward your planned asset allocation proportions.
To minimize the negative impacts of investment transactions costs and taxes, you should rebalance infrequently and in a planned manner that anticipates deposit and withdrawal transactions that you would need to do anyway for other reasons.
If you want to understand your personal asset allocation and risk-return tradeoffs over your lifetime, VeriPlan provides powerful, automated "what-if" planning facilities. You can rapidly develop and analyze a range of fully personalized scenarios to see whether your asset allocation strategy would achieve your objectives with a level of risk that is acceptable to you. VeriPlan provides five adjustable and fully automated mechanisms to determine your preferred lifecycle asset allocation. VeriPlan gives you full control over rates of asset returns and asset return variability, and it automatically rebalances your assets annually. It even projects the annual expense coverage by your safer cash and bond assets throughout your lifecycle.
___________________________________________________________________
http://www.theskilledinvestor.com/ss.item.174/you-must-stay-invested-in-the-securities-markets-to-earn-market-risk-premiums.html
The securities markets pay risk premiums. You have to have your money invested and at risk to be paid a risk premium.
Attempting to avoid risk or losses by jumping in and out to "time the markets" does not work. Scientific finance studies demonstrate the both amateurs and professionals are lousy at market timing.
Historically, U.S. securities markets have paid substantial risk-adjusted returns or risk premiums to investors. While risk premiums have been substantial, they have occurred irregularly. There have been intervening periods of losses, some of which were substantial. (See: How stable have common stock equity risk premiums been over time?)
To earn market risk premiums, your assets must be invested and exposed to potential risk or loss. The more risk you can tolerate, then the higher your potential return and perhaps the rougher the investment road you may travel. Those who have better emotional tolerance for asset volatility can more easily weather market sell-offs.
Practical considerations will also affect your tolerance of investment risk.
In difficult times, whether you need to liquidate risky assets at depressed prices will depend on your expenses and on your other other holdings of less risky, salable assets. Paying necessary living expenses and taxes are good reasons to withdraw funds. Trying to time the markets for a better return is not a good reason.
If you do not need to take out money during a market retreat and recovery cycle, then risk tolerance is solely emotional. For a risk tolerant investor with stable earned income, the recent bubble crash was just a few years of unpleasantness, if he or she was fully diversified and, therefore, not heavily loaded with technology and communications equities. The same, however, could not be said for those who were poorly diversified and also found themselves to be highly risk averse, when risk actually happened. This is especially true, if job loss forced the liquidation of assets at depressed values.
To some degree, all sane individual investors are averse to risk, so risk tolerance is a relative rather than absolute issue.
Therefore, you need to judge your preference or tolerance for risk relative to other investors. While very few people like investment risk, those who can tolerate it better are those who will be less uncomfortable when risk happens from time to time and market values decline by a little or a lot. Tolerating the potential for loss is the cost that investors occasionally pay so that they are always at the table, when the markets deliver their positive rewards.
The vast bulk of individual investors’ publicly traded investment assets are held in the primary cash, fixed income, and equity financial asset classesin the form of individual securities or funds. Your relative investment risk tolerance should influence how your assets are allocated among these primary financial asset classes. If your actual asset allocation is more risky than your risk tolerance, you may not be able to handle the downturns. You might panic, when you should stand firm. If your asset allocation is less risky than your risk tolerance, then you are likely to need to spend less and save at a higher rate to reach your goals.
Nothing is certain about this process, and that is the nature of investment risk. However, the scientific investment literature is relatively clear on certain points. Amateur and professional investors are just not good at timing changes in the markets. Active strategies that attempt to time market turns have under-performed continuous investment strategies. Consistently and profitably calling serial market turns correctly has been a skill beyond mere mortals and certainly beyond the skill of even the most proud of professional and individual investors.
It is better to buy into the asset markets in proportion to your preferred asset allocation and risk tolerance and to stay in the securities markets through thick and thin.
Trying to sit on the sidelines and jump in when things seem safe simply does not work. When things seem safer, they also seem safer to others. In this situation, securities prices will have already reflected this confidence. Most of the "upside juice" or risk premium will already be reflected in current asset prices and only current securities holders will have been paid. (See: Introduction to investment valuation and securities risk)
The converse of trying to jump out to avoid the downturns also does not work. Real-time securities markets are auctions about the expected value of future securities returns. Particularly toward the downside, markets can react extremely rapidly. Getting out in time does not work, because it is usually too late when you realize you should have sold. Worse, however, you might jump out too early and be absent from the table when the market moves upward. Staying in the markets just tends to work better.
If you are more highly risk averse, it is more appropriate for you to select an asset allocation that reflects your relatively higher risk aversion.
You would hold a relatively small portion of your assets in the more risky equity asset class. Therefore, you might be more comfortable and more able and likely to keep your smaller equity allocation invested at all times. Having a smaller, but sustained exposure to equity assets tends to work much better for the more risk averse investor, compared to jumping in and out of the equity markets in larger proportions.
If you stay out of the markets due to such fears, then you are likely to need to save far more to reach your goals. Over-cautiousness is not a free ride. There is never a safe time to be in the markets, because investing is always inherently risky. There is never a safe time to be out of the markets, because you cannot earn investment risk premiums on the cash under your mattress. (See: VeriPlan helps your to compare investment risk-return tradeoffs)
Finally, you should periodically rebalance you assets back toward your planned asset allocation proportions.
To minimize the negative impacts of investment transactions costs and taxes, you should rebalance infrequently and in a planned manner that anticipates deposit and withdrawal transactions that you would need to do anyway for other reasons.
If you want to understand your personal asset allocation and risk-return tradeoffs over your lifetime, VeriPlan provides powerful, automated "what-if" planning facilities. You can rapidly develop and analyze a range of fully personalized scenarios to see whether your asset allocation strategy would achieve your objectives with a level of risk that is acceptable to you. VeriPlan provides five adjustable and fully automated mechanisms to determine your preferred lifecycle asset allocation. VeriPlan gives you full control over rates of asset returns and asset return variability, and it automatically rebalances your assets annually. It even projects the annual expense coverage by your safer cash and bond assets throughout your lifecycle.
___________________________________________________________________
http://www.theskilledinvestor.com/ss.item.174/you-must-stay-invested-in-the-securities-markets-to-earn-market-risk-premiums.html
Wednesday 7 July 2010
Why stay invested during market declines
Click here for an enlarged version
Stay Invested
For long-term investors, staying invested makes more sense than moving in and out of the market at the first sign of bad news.
Over the past 60 years, bull markets have lasted longer (42 months on average) than bear markets (14 months on average) and have more than made up for the periodic market declines.
Bull markets have begun during economic recessions and expansions and at all level of rates. And while it is impossible to predict when a bull market will begin, it is possible to miss one by waiting on the sidelines.
Federal fund rates
The interest rate at which private banks lend money for overnight loans. The Fed generally raises the target federal funds rate to slow economic growth and lowers the rate to facilitate growth.
Saturday 19 June 2010
Be a stock picker: Buy GREAT companies and hold for the long term until their fundamentals change
All the above are GREAT companies.
NEVER buy these GREAT companies at HIGH prices.
You can often buy them at FAIR prices.
On certain occasions, you have the chance to buy them at slightly BARGAIN prices.
Rarely, for example during the recent 2008 Crash, you had the chance to buy them at GREAT prices.
It is better to buy a GREAT company at a FAIR price than to buy a FAIR company at a GREAT price.
It is safe to hold these stocks for the long term since these companies have competitive advantages, selling only when their fundamentals change.
The present prices of these stocks are near or above their previous high prices.
Those who bought regularly into these stocks would have capital gains, through dollar-cost averaging.
Further comments:
- Warren, on the other hand, after starting his career with Graham, discovered the tremendous wealth-creating economics of a company that possessed a long-term competitive advantage over its competitors.
- Warren realized that the longer you held one of these fantastic businesses, the richer it made you.
- While Graham would have argued that these super businesses were all overpriced, Warren realized that he didn't have to wait for the stock market to serve up a bargain price, that even if he paid a fair price, he could still get superrich off of those businesses.
- In the process of discovering the advantages of owning a business with a long-term competitive advantage, Warren developed a unique set of analytical tools to help identify these special kinds of businesses.
- Though rooted in the old school Grahamian language, his new way of looking at things enabled him to determine whether the company could survive its current problems.
- Warren's way also told him whether or not the company in question possessed a long-term competitive advantage that would make him superrich over the long run.
- By learning or copying Warren, you can make the quantum leap that Warren made by enabling you to go beyond the old school Grahamian valuation models and discover, as Warren did, the phenomenal long-term wealth-creating power of a company that possesses a durable competitive advantage over its competitors.
- In the process you'll free yourself from the costly manipulations of Wall Street and gain the opportunity to join the growing ranks of intelligent investors the world over who are becoming tremendously wealthy following in the footsteps of this legendary and masterful investor.
Related:
The Evolution of Warren Buffett
Learning and Understanding the Evolution of Warren BuffettLi Lu sharing his Value Investing Strategies (Video)
The Three Gs of Buffett: Great, Good and Gruesome
The GREAT company has long-term competitive advantage in a stable industry. This company:
- takes a one time investment capital and
- pays you a very attractive return (dividend + capital appreciation),
- which will continue to increase as years pass by;
Here are the golden words of Buffett on the GREAT businesses to own:
1. On 'Great' businesses, Buffett says, "Long-term competitive advantage in a stable industry is what we seek in a business.
- If that comes with rapid organic growth, great.
- But even without organic growth, such a business is rewarding.
- We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere.
- There's no rule that you have to invest money where you've earned it.
- Indeed, it's often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can't for any extended period reinvest a large portion of their earnings internally at high rates of return."
Thursday 3 June 2010
Investment Strategies and Theories You Must Know for Greater Investment Success!
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
-----
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
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
-----
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
Wednesday 2 June 2010
20 Questions to Focus the Hold versus Sell Decision
Key to Investment Success
20 Questions to focus the hold versus sell decision
http://spreadsheets.google.com/pub?key=txuLCrK4TZX_7uR7KDlLE7A&output=html
20 Questions to focus the hold versus sell decision
http://spreadsheets.google.com/pub?key=txuLCrK4TZX_7uR7KDlLE7A&output=html
Saturday 29 May 2010
Diary of a Private Investor: how the pros make money from turbulence
Diary of a Private Investor: how the pros make money from turbulence
Unfortunately there is no foolproof system to deal with these sort of situations. When a panic occurs, it is usually right to buy.
By James Bartholomew
Published: 9:49AM BST 27 May 2010
What a daunting few weeks this has been in the stock market. In normal times, one or two worries present themselves. Recently they have had to form a queue.
It was bad enough when we were just worrying about Greece and its budget deficit. One of the scary numbers I came across was that German financial institutions hold $37bn in Greek bonds. That, I presume, is not counting money lent in forms other than bonds. If Greece defaulted, some major German banks would take a big hit. Think through all the consequences of that and you get to higher lending costs around Europe and renewed recession.
My shares quoted in Hong Kong were probably not too worried about that but they spiralled down for a different reason. China has tightened lending to quieten down property prices. And what are my biggest holdings in that area? Why, property companies of course.
Back home, growing anguish about the coalition government's apparent aim to tax capital gains more heavily in future is encouraging people to sell sooner rather than later. On Friday last week, I myself sold some Healthcare Locums (at 223p) held by one of my children to use up the tax free allowance under the current rules. The fear must be that many people will decide not to reinvest after selling if the new regime is harsh.
Then came news that the North Korean dictator has taken it into his head to prepare for war. Next came a crisis among Spanish banks. For those of us who are pretty fully invested, the bad news has been relentless. It has been like the charge of the light brigade: "Cannon to the right of them, cannon to the left of them, cannon in front of them … into the mouth of hell rode the six hundred"
Unfortunately there is no foolproof system to deal with these sort of situations. When a panic occurs, it is usually right to buy. But sometimes it is better to get out because the fears will turn out to be justified. As concerns about an uprising in Russia increased in 1917, I expect prices of Tsarist bonds fell back. It probably looked clever to buy on the dip. Unfortunately, as it turned out, when the communists took over, the bonds lost all their value except as wallpaper. So it all depends on how things actually turn out. Right now, if Greece and Spain do not default and if North Korea thinks better of starting a war, shares are cheap. On the other hand …
Investment obliges you to take a view on how things will turn out in politics and all sorts of other things. That is one of the things that makes it so interesting. Another aspect of investment is the influence of personality. I tend to be optimistic and that is probably key to why I think that we will probably muddle along. In any case, it occurs to me that even if North Korea attacks, this will probably not stop people going to have a drink at the pubs owned by one of my companies, Enterprise Inns. Some things you can rely on.
Last week I was even sanguine enough to buy more shares in Paragon, a mortgage lender, which came out with good results and made hopeful noises about restarting active lending. The purchase turned out to be horribly timed. I bought at 151p and, after the market falls, they are licking their wounds, as I write, at 133p. On Monday, my fears about Greece increased, and I wanted to reduce my exposure to further market weakness without selling any of my favoured companies. So I tried something I have never done before. I bought a few shares in an Exchange Traded Fund (ETF) designed to go up if the stock market goes down. It has the strange name, DB X-trackers FTSE 100 Short, and I bought at 938p.
Incidentally, I was astonished to see how big this fund is. The market capitalisation is an amazing £1.4bn. I had not realised just how big the business of being bearish on shares has become. This is just one of a number of such funds. But on Tuesday, the market fell so far and so fast – with Enterprise Inns down 10pc for example – that I decided the bearish trend had gone too far. I sold my bearish ETF for a little profit at 981p.
Unfortunately this bit of good timing was with only a tiny amount of money. Overall, I have been nearly fully invested and my portfolio had taken a bit of a battering.
-----
Some comments:
Thank you Jo.
Padraig, I am sorry but you are wrong in so many ways. Long term 'investing' is just as risky as short term trading. It's all a 'gamble' as you put it, I prefer the term 'bet' as it is all about calculated risk. You're right in that gambling loses in the long run but proper trading is not gambling. You are also right that it is impossible to pick market movements correctly all the time. One does not need to and I am often wrong, but I manage my risk effectively and ensure I capitalise on the times when I am right so that I make money. I do this over and over and over. The stock market is not the only thing to money on and markets do not go up all the time. How can you say that the only way to make money is in a strong bull market,just sell futures!
And yes as you have all pointed out Warren Buffet is succesful, but he not the only one in the world. Please measure your success your own way. Mr Buffett is not the only succesful investor in the world. There are thousands. Mr Buffet has done extrememely well but I could not replicate his success with his style as my personality is not suited for the long term approach. In reality I will not be as rich as him because the volumes in the market will not accommodate my short term approach and that is fine by me. I make money and so do many others.
---
Don't see your point, Paul. Stock or currency, bull or bear, you can make money. Day trading is fine if you're after 5% gains here and there, but most of us are here for 5 years or so, therefore long positions on shares are a much better idea.
I too am mostly all-in, James. It’s been a pretty stressful year or two, hasn't it? I've gone from 50% up to 35% down since Xmas, crazy times.
I agree entirely with you on the topic of your post, probably one of the most important lessons for any new PI for that matter.
Confident in Sarkozy talking tosh, I managed to pull out a blinding FTSE short (a proper CFD short, not an ETF) following the brief rally last week. It's shooting up today, but that was a lot of resistance on the 5k line it broke through on Tuesday, so I'm not too confident s/term - any any ideas for next week??!
http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/7767939/Diary-of-a-Private-Investor-how-the-pros-make-money-from-turbulence.html
Unfortunately there is no foolproof system to deal with these sort of situations. When a panic occurs, it is usually right to buy.
By James Bartholomew
Published: 9:49AM BST 27 May 2010
What a daunting few weeks this has been in the stock market. In normal times, one or two worries present themselves. Recently they have had to form a queue.
It was bad enough when we were just worrying about Greece and its budget deficit. One of the scary numbers I came across was that German financial institutions hold $37bn in Greek bonds. That, I presume, is not counting money lent in forms other than bonds. If Greece defaulted, some major German banks would take a big hit. Think through all the consequences of that and you get to higher lending costs around Europe and renewed recession.
My shares quoted in Hong Kong were probably not too worried about that but they spiralled down for a different reason. China has tightened lending to quieten down property prices. And what are my biggest holdings in that area? Why, property companies of course.
Back home, growing anguish about the coalition government's apparent aim to tax capital gains more heavily in future is encouraging people to sell sooner rather than later. On Friday last week, I myself sold some Healthcare Locums (at 223p) held by one of my children to use up the tax free allowance under the current rules. The fear must be that many people will decide not to reinvest after selling if the new regime is harsh.
Then came news that the North Korean dictator has taken it into his head to prepare for war. Next came a crisis among Spanish banks. For those of us who are pretty fully invested, the bad news has been relentless. It has been like the charge of the light brigade: "Cannon to the right of them, cannon to the left of them, cannon in front of them … into the mouth of hell rode the six hundred"
Unfortunately there is no foolproof system to deal with these sort of situations. When a panic occurs, it is usually right to buy. But sometimes it is better to get out because the fears will turn out to be justified. As concerns about an uprising in Russia increased in 1917, I expect prices of Tsarist bonds fell back. It probably looked clever to buy on the dip. Unfortunately, as it turned out, when the communists took over, the bonds lost all their value except as wallpaper. So it all depends on how things actually turn out. Right now, if Greece and Spain do not default and if North Korea thinks better of starting a war, shares are cheap. On the other hand …
Investment obliges you to take a view on how things will turn out in politics and all sorts of other things. That is one of the things that makes it so interesting. Another aspect of investment is the influence of personality. I tend to be optimistic and that is probably key to why I think that we will probably muddle along. In any case, it occurs to me that even if North Korea attacks, this will probably not stop people going to have a drink at the pubs owned by one of my companies, Enterprise Inns. Some things you can rely on.
Last week I was even sanguine enough to buy more shares in Paragon, a mortgage lender, which came out with good results and made hopeful noises about restarting active lending. The purchase turned out to be horribly timed. I bought at 151p and, after the market falls, they are licking their wounds, as I write, at 133p. On Monday, my fears about Greece increased, and I wanted to reduce my exposure to further market weakness without selling any of my favoured companies. So I tried something I have never done before. I bought a few shares in an Exchange Traded Fund (ETF) designed to go up if the stock market goes down. It has the strange name, DB X-trackers FTSE 100 Short, and I bought at 938p.
Incidentally, I was astonished to see how big this fund is. The market capitalisation is an amazing £1.4bn. I had not realised just how big the business of being bearish on shares has become. This is just one of a number of such funds. But on Tuesday, the market fell so far and so fast – with Enterprise Inns down 10pc for example – that I decided the bearish trend had gone too far. I sold my bearish ETF for a little profit at 981p.
Unfortunately this bit of good timing was with only a tiny amount of money. Overall, I have been nearly fully invested and my portfolio had taken a bit of a battering.
-----
Some comments:
Thank you Jo.
Padraig, I am sorry but you are wrong in so many ways. Long term 'investing' is just as risky as short term trading. It's all a 'gamble' as you put it, I prefer the term 'bet' as it is all about calculated risk. You're right in that gambling loses in the long run but proper trading is not gambling. You are also right that it is impossible to pick market movements correctly all the time. One does not need to and I am often wrong, but I manage my risk effectively and ensure I capitalise on the times when I am right so that I make money. I do this over and over and over. The stock market is not the only thing to money on and markets do not go up all the time. How can you say that the only way to make money is in a strong bull market,just sell futures!
And yes as you have all pointed out Warren Buffet is succesful, but he not the only one in the world. Please measure your success your own way. Mr Buffett is not the only succesful investor in the world. There are thousands. Mr Buffet has done extrememely well but I could not replicate his success with his style as my personality is not suited for the long term approach. In reality I will not be as rich as him because the volumes in the market will not accommodate my short term approach and that is fine by me. I make money and so do many others.
---
Don't see your point, Paul. Stock or currency, bull or bear, you can make money. Day trading is fine if you're after 5% gains here and there, but most of us are here for 5 years or so, therefore long positions on shares are a much better idea.
I too am mostly all-in, James. It’s been a pretty stressful year or two, hasn't it? I've gone from 50% up to 35% down since Xmas, crazy times.
I agree entirely with you on the topic of your post, probably one of the most important lessons for any new PI for that matter.
Confident in Sarkozy talking tosh, I managed to pull out a blinding FTSE short (a proper CFD short, not an ETF) following the brief rally last week. It's shooting up today, but that was a lot of resistance on the 5k line it broke through on Tuesday, so I'm not too confident s/term - any any ideas for next week??!
http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/7767939/Diary-of-a-Private-Investor-how-the-pros-make-money-from-turbulence.html
Wednesday 24 March 2010
Dividend-paying companies: major shareholders must be willing to share their profits with their investors through good dividend payments.
Wednesday March 24, 2010
Dividend-paying companies
Personal Investments - By Ooi Kok Hwa
Despite investing in profit-making companies, a lot of investors have been complaining that they are not getting the desired returns from the companies that they have invested in.
One of the main reasons is that these companies usually pay very low dividends or no dividends to their investors.
Hence, even though these companies make good profits from their businesses, they are not sharing the profits with their minority investors.
Companies that pay good dividends to their investors imply that the major shareholders of these companies are willing to share their wealth with minority investors.
Given that minority investors have no control over these companies, they have only two sources of returns from their investments, namely
- dividend returns and
- capital gains.
If the companies refuse to reward their investors with good dividends, then investors need to make sure that they buy low and sell high in order to get capital gains.
Warren Buffett proposes one concept, which is called the one-dollar premise - for every dollar profit that a company makes, it either pays one dollar dividend to its shareholders or if that dollar is being retained, it needs to bring additional one dollar market value.
Companies with good management will always try to maximize the wealth of their investors.
The following table will show the importance of dividends to an investor.
Assuming you have invested in Company A with an average cost of RM15.
Company A generates earnings per share (EPS) of RM1.00 with price-earnings ratio (PER) of 15 times and pay out 80% of its profits as dividends or dividend per share of RM0.80.
Hence, with the purchase price of RM15, the dividend yield (DY) is 5.3%.
We also assume that Company A has a constant PER of 15 times and dividend payout ratio of 80% for the next 20 years.
Annual growth rate of EPS is 8% based on our country’s average nominal GDP growth rate of 8%.
For the first 10-year period, given that our original cost of investment is fixed at RM15, our dividend yield will be getting higher and higher.
For example, first year DY of 5.3% is computed based on DPS of RM0.80 divided by RM15.
And second year DY of 5.8% is calculated based on DPS of RM0.86 (RM0.80 x 1.08) divided by the same original purchase price of RM15.0.
As the company’s businesses continue to grow and generate higher profits, as long as the company practices a fixed dividend payout policy (our example is based on a fixed dividend payout ratio of 80%), investors’ DY will increase.
At Year 10, given that our purchase price remains the same at RM15, with a DPS of RM1.60, our DY is 10.7% (1.60/15.0).
Thus, the average DY for the first 10-year period is 7.7%.
Coupled with the annual capital gain of 8% (the share price has grown by annual growth rate of 8% from RM15 to RM29.99), investors will generate an annual total returns rate of 15.7% (7.7% + 8%)!
If we keep this stock for another 10-year period, our next 10-year annual total return is 24.7% (16.7% + 8%)!
From here, we can see that if we have invested in good companies that always reward their investors with very high dividend payments, our returns will be huge if we hold it long term.
Normally, consumer-based companies and companies that do not need high capital expenditures will be able to reward shareholders with good dividend payments.
Besides, major shareholders must be willing to share their profits with their investors through good dividend payments.
Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.Also read:
*****Long term investing based on Buy and Hold works for Selected Stocks
Monday 22 March 2010
Strategies to Make Money in The Stock Market
One great way to grow your money is to invest into the stock market. But deciding how to invest into it can be a bit tricky. Everyone is different, but there are 5 strategies that all traders use to make money in the market.
1. Buying and Holding for the Long Term
Everybody knows what buy and hold is. In fact the vast majority of market participants buy stocks and hold onto them for the long term. And it does make sense, stocks do go up over the long term, so buying and holding can be a passive way to grow your money.
2. Trading The Trend
One other strategy is called trend trading. It involves buying stocks that are going up and selling stocks that are not going up. While it might sound like it was invented by a 5 year old it really can work if you get the hang of it. Sometime the simplest answer is the best.
3. Swing Trade
Swing traders use technical indicators to buy and sell stocks in the short term in order to make profit when all is said and done. Any trade that takes over 1 day and has a profit target as well as a stop loss can be considered to be a swing trade.
4. Options
Stock options give investors a way to leverage their money and to make huge returns from the stock market. There is only one problem; they can also give traders huge losses. For that reason it is best to only consider options after you are already profitable trading stocks.
5. Day Trading Stocks
Day trading is exactly what the name suggests. You buy and sell stock within one day in order to make money on the small moves that occur throughout the day. Day traders are not always profitable, but over the long term it can be a great way to make money.
Every strategy has its ups and downs. But it is up to the individual trader to determine which one fits them the best. Learning the basics of each and experimenting with them can help you determine how you want to approach the market.
http://www.freefinancialtoday.com/2010/03/20/strategies-to-make-money-in-the-stock-market/
Buy and hold or Buy and sell: there is a difference in what you look for when you do each type of strategy
Stock Market Training Course
So, you’re ready to buy the first stock and want a stock market training course. The first step in stock trading is finding the right stock to purchase; you need to do research for this. Before you begin looking you need to decide whether you’re going to buy and hold or buy and sell. There’s a difference in what you look for when you do each type of strategy.
Buy and hold is a long-term strategy. You look for stock that gives either dividends or one that has continuous growth. Some examples of the type with dividends are bank stocks. Bank stocks usually do well during times of recession. These stocks, like other value stocks offer dividends that offer better returns than many fixed income instruments. They also offer stability in a time that the economy is not performing it’s best. If you purchase value stocks during a healthy growing economic time, you can get a bargain. Because they are so stable, often purchasers overlook these stocks in favor of stocks that are more glamorous and promise new and rapid growth, like technology stock.
If you pick stocks during a recession where the economy is low and under performing, growth stocks are usually bargains. Be sure that you know the company and the management when you select a stock. Some companies aren’t healthy or strong enough to make through bad times. If the stock you select is a retail store, shop there. See what the store interior looks like and check the number of shoppers. There are many clues that tell you a company is in trouble if you just take the time to look. Many experts that pick winners, sample the products before they buy. Remember, retail stocks and stocks with products you use daily offer that opportunity. If you like what they produce, get excellent customer service or choose their brand over another, chances are you’re not alone. This additional information is not solely the basis for astock pick but help in narrowing the playing field.
Short-term investors buy and sell, just need to look for opportunity when they select stocks. Depending on the style of short term investing you choose, your strategy also varies. The short-term investor that expects a company to increase in value over the next few months, selects stock differently than the day trader that looks for changes in the charts of the stock’s price. If you choose to do very short, day trading type of investing, you need to understand the signs that indicate a favorable purchase or closely track a multitude of stocks and find one that has a reoccurring pattern of predictable dips and rises.
It all sounds very complicated and a lot of work. It is. Most people that do short term trading tie themselves to their computer if the market is open, and spend the evening studying for the next day. That is, unless they use a service that does it for them. There are several stock picking services that analyze the charts and help you pick. Some use very scientific methods and others use a system known only by them. One of the more scientific services uses a stock-picking robot. It’s a program that studies the penny stocks, almost unheard of, and makes recommendations based on the tracking of their prices.
Once your homework is complete and you have stocks to buy, decide the price to dump it. If you do short term investing, releasing the stock is part of the program. Find a percentage that you want to earn and when the price hits that is the equivalent to that percent, sell. Also, choose a price that you sell on the bottom end. This is more difficult since you didn’t enter the market to loose money. Most people that do well in investing cut their losses at appropriate times instead of riding the stock to the grave.
Tuesday 9 March 2010
*****Long term investing based on Buy and Hold works for Selected Stocks
It sure beats FD rates and it is safe too.
http://spreadsheets.google.com/pub?key=tWENexpUrXS_RMxB7k73RgQ&output=html
Click: Dividend Yield Investing - Stock Selection is still the Key
http://myinvestingnotes.blogspot.com/2010/03/dividend-yield-investing.html
Click also:
How can the average investor improves his investment returns in stocks?
and here too:
http://spreadsheets.google.com/pub?key=tWENexpUrXS_RMxB7k73RgQ&output=html
Click: Dividend Yield Investing - Stock Selection is still the Key
http://myinvestingnotes.blogspot.com/2010/03/dividend-yield-investing.html
Click also:
How can the average investor improves his investment returns in stocks?
and here too:
Dividend-paying companies: major shareholders must be willing to share their profits with their investors through good dividend payments.
Thursday 4 March 2010
Buying and holding can be very profitabe until the facts change
Buy and Hold Isn't Extinct, But It Needs to Evolve
It can be very profitable if investors execute it with the mindset of buying and holding until the facts change.
At a recent CFA market outlook dinner, the guest speakers concurred that long-term buy and hold will under-perform in 2010 and will continue be a difficult strategy to employ in the future.
This is by no means revolutionary. Buy-and-hold naysayers emerged immediately following the financial crisis and housing bubble crash that caused disarray throughout capital markets.
But it was a shocking message coming from a panel at a CFA affair. As a candidate in the program, I am familiar with the CFA Institute’s intense focus on fundamental analysis.
On the one hand, there is some value to this proposition. Throughout the decade, technology has changed the playing field of the market and allowed short-term strategies to succeed. The ability for new news to be almost instantaneously priced into the market upon announcement can cause stock prices to fluctuate irrationally, sometimes based on just numbers or speculation alone rather than the actual analysis of a company.
Further, more frequent and intense bubbles and collapses have caused drastic market-wide swings that cause mass divergence between a company’s intrinsic value and its stock price. The 2008 global financial crisis is a solid case in point.
However, suggesting that buy and hold is dead essentially means that the fundamentals of a company are worthless. The thought of that notion is ludicrous.
(See also, Five Investing Myths Debunked)
In many cases, investors are extremists. One group believes in solely analyzing fundamentals and buys a stock to hold forever. Another group covers up the name of the company andtrades only on quantitative factors.
But extremism tends to fail. I witnessed it first-hand in the investment industry during employment at my last firm. Die-hard buy-and-hold-forever investors refused to let go of overvalued companies they believed in for the long run and snubbed macro event market movement only to eventually end up deep in the red.
Like anything, investment strategies need to change. And they need to be modernized to remain relevant. Finding great stocks to hold for a long time combined with trading on macro news and changing valuations seems more realistic than holding a stock forever.
This is precisely why Warren Buffett and his Berkshire Hathaway (BRK.A) holding company have remained so successful. As one of the greatest buy-and-hold investors of all times, Buffett’s philosophy has been studied and talked about extensively. Interestingly enough though, his strategy is widely misunderstood.
(See also, What Buffett Got Wrong)
Buffett undoubtedly focuses on fundamental values of a company and purchases stocks with a buy-and-hold mindset. He looks for companies with strong brand names, like Coca-Cola(KO), Kraft (KFT), Goldman Sachs (GS), and General Electric (GE). But he still trades on macro news and sells when investments become overvalued. In the past, he soldMcDonald's (MCD) and Disney (DIS) when he no longer felt they were worth his capital.
In other words, buy and hold can be a very profitable investment strategy provided investors execute it with the mindset of buying and holding until the facts change.
Purchasing a fundamentally strong company when its price is attractive works. Loading up on more of that stock if the price slips on short-term news works. When either a company becomes overvalued or its business model begins to negatively change, selling works.
Exact market timing isn’t necessary. The strategy is simply picking solid stocks and using common sense.
The bottom line is that the buy-and-hold portfolio is not extinct. It just needs to evolve.
http://www.minyanville.com/businessmarkets/articles/buy-hold-sell-strategies-warren-buffett/3/3/2010/id/27112
Basic Steps on How to Find Profitable High Performance Stocks
Basic Steps on How to Find Profitable High Performance Stocks
March 2, 2010
Stock picking can be a extremely perplexing procedure and investors have very different ideas on how to achieve the desired outcome. Nevertheless, it may be very wise to follow some basic steps which will assist you to minimize the risk of the investments that you end up choosing.
This article will outline some basic steps for picking those high performance stocks that we all aspire to find.
You must have firmly placed in your mind exactly the time frame and the general strategy of the stock. This step is very important because it will influence as to the type of stocks you buy.
We shall presume that you have decided to be a long term investor. Therefore you would then be wanting to locate stocks that possess sustainable,good competitive advantages along with stable or increasing growth for the future.
The way to locating these High Performance stocks is by considering the historical performance of each stock over the past couple of years.Once you have found a likely stock you would then need to do a simple business S.W.O.T.analysis on the company. Swot basically means: Strength-Weakness-Opportunity-Threat.)
If you have decided instead to become a short term investor, it might be a good idea to a stick to one of the following couple of strategies:
1. Momentum Trading.
This useful strategy is to keep an eye open for stocks that have increased in both price and volume over the recent days trading or two. You would most likely find that momentum fluctuates rapidly to begin with and tends to lessen off as traders lose interest. Mind you nothing is guaranteed particularly in today’s market place
Usually most technical analysis will support this trading strategy. But my advice on this strategy is to look only for stocks that have exhibited stable and consistent rises in their share price. We are presuming that the idea is that when the stocks are not so volatile, we can merely ride the up-trend until the trend breaks.
2. Contrarian Strategy.
This second useful strategy is to be on the look for over-reactions that occur in the stock market from time to time. Past research has shown that the stock market is not always efficient as we are led to believe. This basically means that share prices do not always accurately reflect the true value of the stocks. This can be used very much to our advantage.
Take for example when a company has just recently announced bad news,like a predicted downturn in future profit.This is exactly is what is happening here and now. All you have to do is follow the daily stock market news to see this occurring.
Trades who trade with their emotions become disillusioned, become fearful, then panic and sell. As so often happens the share price often drops below the stocks actual fair value.
But before you decide whether to purchase the stock which has over-reacted to a bad news announcement, you should always take into consideration the possibility of recovery from the impact of the bad news.
For example, if the stock price had dropped by 20% after the company had just lost a legal case, but no permanent damage to the either the business’s reputation or the product had occurred, you can then be realistically confident that the market over-reacted. And given time the share price would no doubt rise again to its former level thereby rewarding you with a comfortable profit.
It would be prudent on using this strategy to find a list of stocks that have suffered a recent drop in share prices You could then analyze the potentiality of a reversal occurring by utilizing the well known technical indicator of candlestick analysis).
If the charts did confirm candlestick reversal patterns in the stocks in question, It would then be advisable to look through the recent news to analyze the exact causes of the recent price drops to ascertain that the over-sold opportunities actually existence.
Always do researches that will give you a choice of stocks that fits into to your own personal investment time frames and strategies. It is pointless trading in something you are not happy with or unsure of.
Once you have compiled a list of stocks to possibly purchase in the future, you would then need to diversify them in such a way that gives you the greatest reward/risk ratio. One way of achieving this is to employ a Markowitz analysis for your portfolio. This analysis will give you the exact proportions of money you should then apportion to each stock.
Hopefully these basic steps will get you started in your continuous quest to consistently make good profits in the stock market. Plus they will also broaden your knowledge about how the financial markets perform and react. Ultimately it will provide you with a sense of confidence that will enable you to make better trading decisions and therefore greater profits.
I wish happy profitable trading.
Author: Chris Strudwick
Source: ezinearticles.com
http://sellingstock.getherb.com/tag/stock-picking/
March 2, 2010
Stock picking can be a extremely perplexing procedure and investors have very different ideas on how to achieve the desired outcome. Nevertheless, it may be very wise to follow some basic steps which will assist you to minimize the risk of the investments that you end up choosing.
This article will outline some basic steps for picking those high performance stocks that we all aspire to find.
You must have firmly placed in your mind exactly the time frame and the general strategy of the stock. This step is very important because it will influence as to the type of stocks you buy.
We shall presume that you have decided to be a long term investor. Therefore you would then be wanting to locate stocks that possess sustainable,good competitive advantages along with stable or increasing growth for the future.
The way to locating these High Performance stocks is by considering the historical performance of each stock over the past couple of years.Once you have found a likely stock you would then need to do a simple business S.W.O.T.analysis on the company. Swot basically means: Strength-Weakness-Opportunity-Threat.)
If you have decided instead to become a short term investor, it might be a good idea to a stick to one of the following couple of strategies:
1. Momentum Trading.
This useful strategy is to keep an eye open for stocks that have increased in both price and volume over the recent days trading or two. You would most likely find that momentum fluctuates rapidly to begin with and tends to lessen off as traders lose interest. Mind you nothing is guaranteed particularly in today’s market place
Usually most technical analysis will support this trading strategy. But my advice on this strategy is to look only for stocks that have exhibited stable and consistent rises in their share price. We are presuming that the idea is that when the stocks are not so volatile, we can merely ride the up-trend until the trend breaks.
2. Contrarian Strategy.
This second useful strategy is to be on the look for over-reactions that occur in the stock market from time to time. Past research has shown that the stock market is not always efficient as we are led to believe. This basically means that share prices do not always accurately reflect the true value of the stocks. This can be used very much to our advantage.
Take for example when a company has just recently announced bad news,like a predicted downturn in future profit.This is exactly is what is happening here and now. All you have to do is follow the daily stock market news to see this occurring.
Trades who trade with their emotions become disillusioned, become fearful, then panic and sell. As so often happens the share price often drops below the stocks actual fair value.
But before you decide whether to purchase the stock which has over-reacted to a bad news announcement, you should always take into consideration the possibility of recovery from the impact of the bad news.
For example, if the stock price had dropped by 20% after the company had just lost a legal case, but no permanent damage to the either the business’s reputation or the product had occurred, you can then be realistically confident that the market over-reacted. And given time the share price would no doubt rise again to its former level thereby rewarding you with a comfortable profit.
It would be prudent on using this strategy to find a list of stocks that have suffered a recent drop in share prices You could then analyze the potentiality of a reversal occurring by utilizing the well known technical indicator of candlestick analysis).
If the charts did confirm candlestick reversal patterns in the stocks in question, It would then be advisable to look through the recent news to analyze the exact causes of the recent price drops to ascertain that the over-sold opportunities actually existence.
Always do researches that will give you a choice of stocks that fits into to your own personal investment time frames and strategies. It is pointless trading in something you are not happy with or unsure of.
Once you have compiled a list of stocks to possibly purchase in the future, you would then need to diversify them in such a way that gives you the greatest reward/risk ratio. One way of achieving this is to employ a Markowitz analysis for your portfolio. This analysis will give you the exact proportions of money you should then apportion to each stock.
Hopefully these basic steps will get you started in your continuous quest to consistently make good profits in the stock market. Plus they will also broaden your knowledge about how the financial markets perform and react. Ultimately it will provide you with a sense of confidence that will enable you to make better trading decisions and therefore greater profits.
I wish happy profitable trading.
Author: Chris Strudwick
Source: ezinearticles.com
http://sellingstock.getherb.com/tag/stock-picking/
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