When is a bargain not a bargain?

Once you have assembled a list of likely bargain candidates, you have to determine

• which to put your money into and 
• which to avoid and move on.

Many of the companies in your initial list are cheap for a reason;; they have fundamental problems that make them decidedly not valuable.

On the list of value candidates whose stock price had fallen significantly in the past were Enron, Global Crossing, MCI, US Airlines and Pacific Gas and Electric.   These companies ended up filing for bankruptcy and shareholders lost a significant portion of their investment if not all their money.


To achieve your wealth-building goals, you have to determine 

• why a company's shares are cheap and 
• which ones have little chance of recovery.

1.  Too much debt

The first and most toxic reason that stocks become cheap is too much debt.  In good times, companies with decent cash flow may borrow large amounts of money on the theory that if they continue to grow, they can meet the interest and principal payments in the future.  UNFORTUNATELY, the future is unknowable, and companies with with too much debt have a much smaller chance of surviving an economic downturn.  

Ben Graham explained that he used a simple yardstick to measure health.  A company should own twice as much as it owes.  This philosophy can help you avoid companies that owe too much to survive.


2.  Company falls short of analysts' earnings estimates.

Analysts seem to be more focused on short-term earnings gains than future long-term success   These quarterly or yearly earnings estimates have been proven to be notoriously unreliable.  Routinely, large and good companies get pushed to new stock price lows because they missed the estimates of the thundering herd of Wall Street  Missing earnings is not fatal, and it tends to create opportunity for the value buyer; if the trend continues, however, the shares will likely continue to fall.


3.  Cyclical stocks

Some cyclical stocks may show up on your list of potential bargains.  They are highly dependent on how the economy is doing.  Industries like automobiles, large appliances, steel and construction will experience lean times and stock prices are likely to reflect this fact.   Although we have had recessions of varying lengths and depths, the economies of industrialised nations have always rebounded.  It is important to note that in the bad times, cyclical companies with heavy debt loads may well face insurmountable problems.  Adhering to a policy of avoiding overly leveraged companies will serve you well.


4.  Labour contracts

Stocks may also fall because of labour contracts.  During good times, some companies and industries cave into labour union demands that were affordable at the time.  Little did they realize that they were mortgaging their future.  As new competition unburdened by costly labour contracts enters their industries, their profits disappear.  In many cases, the unions have been unwilling to grant concessions.   It is never easy to give back something you have, even if not doing so threatens the very existence of the company you work for.  Although holding on to expensive contracts may or may not benefit management or the unions in the long run, the one person that most assuredly does not benefit is the stockholder.  

Many large corporations (old-line industrial companies) have pension liabilities - benefits promised to workers - that they simply will be unable to pay  Generally speaking, if a company has excessive pension liabilities or there exists a contentious labour environment, it may be best to put these companies' shares on the no-thank-you list.


5.  Increased competition

Highly profitable industries attract new competition.  The most serious form of this comes when an industry in one country has high-priced labour or expensive regulatory rules.  Other nations unburdened by such costs can often produce and export the same goods cheaper.  Think China.  Throughout the world, countries have seen foreign manufacturers of automobiles, appliances and other goods make significant inroads into their market.  If a company is facing strong competition from a more efficient competitor with lower costs, it is perhaps best to utter those comforting words "no, thank you" and move on to the next candidate.


6.  Obsolescence

Obsolescence is another potentially fatal cause for falling prices.

Although the last large scale manufacturer of buggy whips or hand-cranked automobile starters made a very fine product, there was simply no longer a need for its product.  There may be some small demand for these products, but a company that depended on them for most of its sales would soon be out of business

Consider the field of technology.  The rate of "creative destruction" has never been faster.  Newer and better products turn up every day making the older products obsolete  The new products are a boon to the consumer but the bane of the legacy company.  

Today, we can go online and order any movie from NetFlicks and never have to leave the comfort of your own home.  For this reason, you should avoid companies that are subject to technological obsolescence.  The world is simply changing too fast to depend on products and services that someone else can deliver better and for less cost.  Avoid these.


7.  Corporate or accounting frauds

These are perhaps one of the most dangerous reasons for share price drops is corporate or accounting fraud.

Although these crimes against investors are the exception and not the rule, and most CEOs are dedicated leaders who care about their companies and their shareholders, fraud does happen.  In recent years, the world has experienced some of the largest cases in history, Enron, Parmalat, Tyco, WorldCom and others.  Regulators have since done much to help prevent future occurrences but there will always be some form of shenanigans.

Criminals exist in every walk of life.  There is almost no way to uncover fraud before it becomes public.  By the time it is discovered, it is too late  The best the investor can do is to steer clear of financial reports that seem overly complicated.


8.  Companies you do not understand or are not comfortable with

If there is something you do not understand or are not comfortable with, put these in the no-thank-you pile.   If a company has too many problems - too much debt, union and pension problems, stiff foreign competition, they too go to the no-thank-you pile.  You have the luxury of filling your portfolio with stocks you are comfortable with and want to own for the long term wealth building it offers.



Summary

You should approach your list of investment candidates with a healthy dose of scepticism.

You should stick to businesses you understand and for which there is an ongoing need (products or services).

You should also like food, beverage, and consumer staples like detergents, toothpaste, pens, and pencils - the stuff you consume on a daily basis. Many of these products engender brand loyalty that keeps the same product day after day, week after week.  We are all creatures of habit, and we will usually repeat our consumer preference when we go shopping.

Your best friend in the whole investing world is your no-thank-you pile.  Knowing your no-thank-you pile gives you the value investing opportunities to build your wealth building portfolio.

Be rational, stay focus on the business of the company and not its share price

What Kills the Amateurs

Nothing is more fatal to amateur investors than thinking that a stock trading near a 52-week low is a good buy. They based this logic on the notion "what goes down must eventually comes up".

Suppose we have 2 companies
i. Co. A had recently gone down from $5 to $1. 
ii Co. B had recently gone up from $1 to $5.

Believe it or not, all things being equal, a majority of amateur investors will choose Co.A because they believe that it will eventually make it back up to those levels again. On the other hand amateur investors will think that chasing after Co.B is almost suicidal because the music will end soon. 

The point is that the stock price is a reflection of the company. If a great firm is run by excellent managers, there is no reason the stock won't keep on going up, vice versa.

Therefore dun said the falling knives killed you when actually you have performed hara-kiri yourselves.


Ref:
http://www.investlah.com/forum/index.php/topic,49773.msg972601.html#msg972601

Security Prices Move Up and Down for Two Basic Reasons: Business Reality or Supply and Demand

Security prices move up and down for two basic reasons:

• to reflect business reality (or investor perceptions of that reality) or 
• to reflect short-term variations in supply and demand. 

Reality can change in a number of ways,

• some company-specific, 
• others macroeconomic in nature. 

Company-specific factors

• If Coca-Cola's business expands or prospects improve and the stock price increases proportionally, the rise may simply reflect an increase in business value. 
• If Aetna's share price plunges when a hurricane causes billions of dollars in catastrophic losses, a decline in total market value approximately equal to the estimated losses may be appropriate. 
• When the shares of Fund American Companies , Inc., surge as a result of the unexpected announcement of the sale of its major subsidiary, Fireman's Fund Insurance Company, at a very high price, the price increase reflects the sudden and nearly complete realization of underlying value. 

On a macroeconomic level

These factors could each precipitate a general increase in security prices:

• a broad-based decline in interest rates, 
• a drop in corporate tax rates, or 
• a rise in the expected rate of economic growth.

Learn to love stockmarket falls

• 13 Aug 07

Most people are net buyers of stocks throughout their lives, which means that market falls should be welcomed rather than feared.

You could be forgiven for thinking that there had been some major ructions in the stockmarket over the past couple of weeks. There’s been talk of crashes, collapses and crunches, with well-known Wall Street pundits shouting and screaming (if only for effect). So far at least, though, we haven’t even seen the 10% drop that people arbitrarily consider is necessary for a ‘correction’ and the All Ordinaries Index is still above where it stood in March.


The truth is that fear and panic get people’s attention and the media is well aware of it. But it’s at times like this that investors need to stand back from the crowd and make a cold assessment of what’s going on. No doubt some companies are affected by recent turmoil in global debt markets, but some have, and/or will generate, all the cash they need for their future investing plans and have little to fear from a recession, which might in fact help them take market share from competitors. Yet these companies have been getting cheaper along with everything else and we’ve been licking our lips.


Only a few stocks have so far drifted into our buying range – Corporate Express, Ten Network and Servcorp (almost) – but we’re hopeful of bigger falls and further opportunities.


It’s a truism to say that, all things being equal, you’ll do better from stocks if you buy them cheaply. But what people forget is that for most of their lives, they’re net buyers, or at least holders, of stocks. And the ideal situation is to reach retirement with enough in your pot that you never have to become a net seller. So for most people, for most of their lives, stockmarket falls are good things.

Price and value


The crucial point to understand is that the price of a stock and its value are two different things. The market sets the former and we spend our days trying to estimate the latter. To make our life easier, we generally avoid poorly managed, debt-laden or cyclical businesses where predictability is poor, and we look for a margin of safety to protect us against an error of judgement – the more uncertain we are about a company’s value, the greater the margin of safety we require.
Most of the time, price is pretty close to value. But sometimes it gets out of whack, and occasionally by enough to give us a decent margin of safety. It’s these situations that present the greatest opportunities for canny investors and the greatest dangers for those who succumb to understandable but irrational mood swings. Preparedness makes all the difference.


Imagine you’re researching a company, Little Acorn Limited, which operates in a predictable industry, has decent management and pays no dividends. It reinvests all its profits, meaning that returns are entirely in the form of capital growth. You’ve done the work, and are as comfortable as you can be that Little Acorn will grow earnings per share (EPS) at 10% per year, from the current level of $1.00, with very little chance of variability.


Deeming Little Acorn to have all the right stuff, you buy the stock for $15 – a price-to-earnings ratio of 15. If your estimate of earnings growth is accurate, then EPS will grow from $1.00 to $2.59 over the next decade. If the market is still happy to pay a PER of 15 at that point, then the stock will trade at around $38.85, and you’ll have achieved an annual return of 10%, in line with the earnings growth.


The future is always uncertain


Of course, the stock might trade lower in a pessimistic market in 2017, giving you a lower annual return (but an underpriced stock that’s likely to do well in future years). Alternatively, it might trade higher, giving you a larger annual return (but an overpriced stock that you might choose to sell).


Which of those possibilities eventuates is of some importance. But what happens in the stockmarket over the next week, month or year doesn’t make a lick of difference as to how the market will view Little Acorn in ten years’ time.

Great oaks from little acorns grow
	Price in 2007	Price in 2017	Annual return
Expected	$15	$38.85	10.0%
outcome	$8	$38.85	17.1%
Lower	$15	$25	5.2%
outcome	$8	$25	12.1%
Higher	$15	$50	12.8%
outcome	$8	$50	20.1%

So let’s say that shortly after purchasing Little Acorn for $15, the market tanks and takes Little Acorn with it – down to $8. The talking heads everywhere go berserk over the ‘blood on the streets’ and you’re staring at a ‘loss’ of almost 50%. The emotional investor gets the chance to do some real and permanent damage here. Avoid this at all cost.


Assuming that Little Acorn is still as likely as ever to grow its EPS at 10% per year and arrive in 2017 with EPS of $2.59 and a stock price of $38.85, your forecast of its future is unchanged, and your expected return from yesterday’s investment is unchanged at 10% per year. You won’t get that return if you sell out now. But if you do nothing but hold, your eventual wealth will be just as great as if the share price followed a straight line from $15 to $38.85 over the course of a decade.


But wait there’s more


If you have some spare cash, though, you can actually improve your position, by going against the crowd and buying more shares in Little Acorn at $8. At that price, your additional investment will compound at 17% per year until the shares trade at $38.85 in 2017, dragging up your average return in the process. So the market tumble has actually provided an opportunity.


Of course, the real world isn’t so neat. Market crashes can hurt the economy, affecting company profits in the short and medium term. And the 2017 value of the stock will swing based on both the mood of the markets then, and the company’s growth in the intervening years. But that’s the case regardless of whether stocks are cheap or expensive today. Which brings us back to the trusim that the less we pay for our stocks, the greater the bargains they’ll prove to be.


So remember that when the market takes a tumble, it’s just changing the price that it’s setting for stocks. The value of those stocks, all things being equal, will remain the same. You don’t have to sell your stocks, but you can choose to buy, if you have the spare cash and can find something suitable. Viewed like this, market crashes won’t do any harm to long-term investors, but actually offer you the chance to compound your money at a greater rate.

http://www.intelligentinvestor.com.au/articles/230/Learn-to-love-stockmarket-falls.cfm

Handling stock price falls

• 30 May 03

When a stock price falls, do you sell, buy more or hold on? It all depends, but there are some techniques to help you with your thinking, and your emotions.

One of the questions we're frequently asked is how to handle a tumbling stock price. Should you cut your losses, buy more or sit on your hands nervously and do nothing?

Unfortunately, the Zen art of value investing doesn't lend itself particularly well to never-fail formulas, so absolute answers are impossible. There are, however, some basic principles that you can look to for guidance.

First of all, you should be looking to sell (or not buy) shares that look expensive and aiming to buy shares that look cheap. The direction in which a share price has recently travelled is not in itself an indicator of this.

When to hold

Secondly, too much trading will just hand the returns from your portfolio over to your broker. That means that there's usually a large grey area between buy and sell where you should be happy simply to hold.

Finally, you should always maintain a sensibly diversified portfolio so that your fortunes are not too closely tied to a few holdings.

If a share falls and you keep adding large chunks, then it might end up accounting for too much of your portfolio. That's not a happy situation even if you think it's the cheapest share on the market.

It's worth noting that all of this has just as much relevance if a stock in your portfolio has gone up in price, or even if it hasn't moved at all. What matters is the relationship between the price and the underlying value, subject to diversification and keeping your trading costs down. Putting this all together, we can get an idea of what to do in certain situations.

If a share has fallen by, say, 20%, but you estimate that its underlying value has fallen by less, or indeed grown, then generally we believe it makes more sense to at least consider buying more (subject to keeping sensibly diversified).

An example of this would be Macquarie Bank (see page 4), which we've consistently seen as being undervalued. As its price fell from above $30 last year, we continued to recommend buying and it became a strong buy in issue 114/Oct 02 (Strong Buy up to $21 - $20.39). The shares have now recovered to $27.70.

Time to sell

If a share has fallen by a certain amount but you estimate that its underlying value has fallen by more, then you certainly shouldn't be buying more. That would just compound the original mistake. Instead, you'd want to face up to the mistake and think about selling.

If a share has fallen and you estimate that its underlying value has fallen by a similar amount, then you'd sit on your hands and do nothing.

To avoid too much expensive trading, this should probably be your starting point. To either buy more or sell, your views should be very strongly held.

Our recommendations on AMP are an example of the sell and hold situations. At the beginning of last year, with its share price up near the $20 mark, we had it as a hold. But we were unimpressed by its results in March 2002 noting, in particular, that its 'international or bust attitude' was cause for concern.

So we downgraded it to sell in issue 98/Mar 02 (Sell/Switch to Suncorp - $19.12) and continued to recommend selling as the price fell (and as its underlying value evaporated).

We finally reverted to a hold in issue 113/Oct 02 (Hold while Unstable - $11.78), because we considered that the fall in the share price had finally caught up with the deterioration in the underlying value of the stock.

Since then, we've felt that the falling share price has been matched by a fall in business value (such as we're able to judge it) and have continued with the Hold while Unstable recommendation.

Different thinking

It can sometimes help to imagine that you don't actually own your downtrodden shareholding, but instead have its value in cash. If that was the case, would you use the cash to buy those shares at the current price or invest in something else?

If you find you get a definite no, then it might be time to sell. If you get a definite yes, then you'd think of buying more.

If you get a maybe, then you're probably in the area where the transaction and tax costs of taking any action would outweigh any potential benefits. In this case, it's usually best to to sit on your hands and hold on to your shares.

It's never easy to deal with a falling share price and there are no clear-cut rules to follow. But this approach, used advisedly, can be a useful way of addressing the issue. We hope it helps.

http://www.intelligentinvestor.com.au/articles/128/Handling-stock-price-falls-.cfm

Why don't smart investors, seeing others panic and sell stocks, step in to buy them up at a bargain?

First, it's very hard, in the midst of a crisis, to tell whether markets are acting rationally or irrationally. Buyers refused to enter credit markets this summer on fears about risky mortgage debt. It will take months, maybe years, to add up the full impact of losses on subprime loans.

It's also tough to think rationally yourself. "It's hard to keep your emotions in check when your money is on the line," Shefrin says.

And, even if you're confident the panicked market is giving you a buying opportunity, you're likely to want to wait until it hits bottom. If a market is in free fall, buying stocks on the way down is likely to give you instant losses.

Not only will buyers hold back. A falling market will bring many more sellers out of the woodwork. Leverage is one reason: Many investors buy stocks on borrowed money, so they can't afford to lose as much without facing bankruptcy.

This is one explanation for the temporary, sharp drops in many financial markets in the summer of 2007. Losses on leveraged mortgage debt prompted many hedge funds to dump all sorts of assets to raise cash.


Comment:  Only a few transactions occur at the lowest price.  It is not realistic to buy at the lowest price but one should start buying when the price is already low by your valuation.


Also read:  

Strategy during crisis investment: Revisiting the recent 2008 bear market

When Stock Prices Drop, Where's the Money?

To sum it all up, you can think of the stock market as a huge vehicle for wealth creation and destruction.

When Stock Prices Drop, Where's the Money?

by Investopedia Staff
Monday, March 16, 2009

Have you ever wondered what happened to your socks when you put them into the dryer and then never saw them again? It's an unexplained mystery that may never have an answer. Many people feel the same way when they suddenly find that their brokerage account balance has taken a nosedive. So, where did that money go? Fortunately, money that is gained or lost on a stock doesn't just disappear. Read to find out what happens to it and what causes it.

Disappearing Money

Before we get to how money disappears, it is important to understand that regardless of whether the market is in bull (appreciating) or bear (depreciating) mode, supply and demand drive the price of stocks, and fluctuations in stock prices determine whether you make money or lose it.

So, if you purchase a stock for $10 and then sell it for only $5, you will (obviously) lose $5. It may feel like that money must go to someone else, but that isn't exactly true. It doesn't go to the person who buys the stock from you. The company that issued the stock doesn't get it either. The brokerage is also left empty-handed, as you only paid it to make the transaction on your behalf. So the question remains: where did the money go?

Implicit and Explicit Value

The most straightforward answer to this question is that it actually disappeared into thin air, along with the decrease in demand for the stock, or, more specifically, the decrease in investors' favorable perception of it.

But this capacity of money to dissolve into the unknown demonstrates the complex and somewhat contradictory nature of money. Yes, money is a teaser - at once intangible, flirting with our dreams and fantasies, and concrete, the thing with which we obtain our daily bread. More precisely, this duplicity of money represents the two parts that make up a stock's market value: the implicit and explicit value.

On the one hand, money can be created or dissolved with the change in a stock's implicit value, which is determined by the personal perceptions and research of investors and analysts. For example, a pharmaceutical company with the rights to the patent for the cure for cancer may have a much higher implicit value than that of a corner store.

Depending on investors' perceptions and expectations for the stock, implicit value is based on revenues and earnings forecasts. If the implicit value undergoes a change - which, really, is generated by abstract things like faith and emotion - the stock price follows. A decrease in implicit value, for instance, leaves the owners of the stock with a loss because their asset is now worth less than its original price. Again, no one else necessarily received the money; it has been lost to investors' perceptions.

Now that we've covered the somewhat "unreal" characteristic of money, we cannot ignore how money also represents explicit value, which is the concrete worth of a company. Referred to as the accounting value (or sometimes book value), the explicit value is calculated by adding up all assets and subtracting liabilities. So, this represents the amount of money that would be left over if a company were to sell all of its assets at fair market value and then pay off all of liabilities.

But you see, without explicit value, implicit value would not exist: investors' interpretation of how well a company will make use of its explicit value is the force behind implicit value.

Disappearing Trick Revealed

For instance, in February 2009, Cisco Systems Inc. had 5.81 billion shares outstanding, which means that if the value of the shares dropped by $1, it would be the equivalent to losing more than $5.81 billion in (implicit) value. Because CSCO has many billions of dollars in concrete assets, we know that the change occurs not in explicit value, so the idea of money disappearing into thin air ironically becomes much more tangible. In essence, what's happening is that investors, analysts and market professionals are declaring that their projections for the company have narrowed. Investors are therefore not willing to pay as much for the stock as they were before.

So, faith and expectations can translate into cold hard cash, but only because of something very real: the capacity of a company to create something, whether it is a product people can use or a service people need. The better a company is at creating something, the higher the company's earnings will be and the more faith investors will have in the company.

In a bull market, there is an overall positive perception of the market's ability to keep producing and creating. Because this perception would not exist were it not for some evidence that something is being or will be created, everyone in a bull market can be making money. Of course, the exact opposite can happen in a bear market.

To sum it all up, you can think of the stock market as a huge vehicle for wealth creation and destruction.

Disappearing Socks

No one really knows why socks go into the dryer and never come out, but next time you're wondering where that stock price came from or went to, at least you can chalk it up to market perception.


http://finance.yahoo.com/focus-retirement/article/106739/When-Stock-Prices-Drop-Where

INVESTOR MISTAKE: TRYING TO "CATCH A FALLING KNIFE"

May 04, 2006

INVESTOR MISTAKE #9: TRYING TO "CATCH A FALLING KNIFE"

#9 Trying to "catch a falling knife"

There are probably almost as many investment strategies as there are investors. Some see a stock flying up, day after day, and think, "I've got to get me some of this." Others don't pay any attention to the price movements, rather have a great experience with the products or employees and think, "now this is a company that is well run. It's gotta do well." And many others fall into another camp that says, "Man, this stock used to be at eighty bucks a share, and now it's all the way down to $40. What a steal!"

This last group is attempting what we call, "trying to catch a falling knife." I didn't make up the allegory, but its meaning should be obvious. If you are not very, very careful, you are likely to get cut.



There are a few things to keep in mind if you are going to attempt to invest in a stock that has declined significantly in price.




1. Why has it gone down so much? Is there scandal afoot? Are the fundamentals deteriorating? Is the industry in a tailspin? Has a competitor proved excessively formidable? If any of these is the case, be very careful. You should probably think twice, thrice, and maybe even a fourth time before investing.

If none of these is the case, then determine if we are in a severe bear market dragging the good down with the bad. If that is so, act with caution, you don't know how long or how severe said bear market may be.

Last, maybe none of the above applies. Odds are what is then happening is that the stock has gotten overpriced and is coming down on valuation concerns or profit taking. If this is the case, you may have good fundamentals, good industry, good market, but a declining stock. Nonetheless, by buying now you are banking on the odds that it will go back to being overvalued once again. Still, be careful.

2. What makes you believe it has hit bottom? In other words, do your research. If you have reason to believe you have identified the likely bottom, whether via fundamentals, technicals, a combination of the two, or some other means, at least do your homework. Don't jump in because some stockbroker or pal at the office said, "man, this is a great company. It's like a sale!"

3. What are your goals in going in to the stock? This may sound like a silly question. "To make money," you are probably saying. But there's more to it than that. Are you buying strictly for capital appreciation, or are you looking forward to a nice dividend too? Do you think this is a good long term hold, and you have just been waiting for "your price"? Or are you playing it for a short term gain? Do you have an exit strategy? If it goes up, will you sell at the first sight of a 15% gain? or are you holding on for a double or better? If it continues down how far are you planning to hold? 10% loss? 50% loss? Ride it to Zero? Hey, it happens. Look at my list of Top Ten Defunct Companies. Nobody thought any of these would ever go out of business. Well, except maybe ZZZZ Best.

Bottom line is, this can be a risky way to invest. Do your homework.

Also, note the following disclosure: This is general advice. You should consult with your own financial advisor before making any major financial decisions, including investments or changes to your portfolio. You, alone, are responsible for any losses or damages that may and will likely result from your financial decisions.

http://itsjustmoney.blogs.com/its_just_money/2006/05/investor_mistak_1.html

How to remain rationale in a falling market?

Dow closed below the 10,000 mark.

Today, the KLSE is also sold down.

How to remain rationale in a falling market?

This is dependent on the investors' investment objectives, time horizon and risk tolerance.

In investing, the consequences should always dominate over the probabilities of an event occurring in their decision making.

How low and how long the market will stay low is not predictable. The market may even swings upwards soon catching everyone by surprise. Who knows? Who cares?

There will be those who will need to get out of the market for various reasons. The two strategies available to them to prevent large irreversible losses are to cut loss (when the losses are small) and/or to re-balance their portfolio.

However, for those who have been prudent value investors, it is an opportune time to review the stocks in their portfolio in the present market. They may find the falling market presenting better opportunities and rewards instead. The key is in understanding the difference between price and value.

To minimise the negative impacts of market timing on their returns, those who are buying into stocks may wish to take note of the following strategies: lump sum investing, dollar cost averaging and phasing in their investments. Another good strategy to keep in mind, is selling their fairly valued stocks to reinvest into deeply undervalued stocks.

Above all else, it is important to remain rationale. This may be easy at present when the market has corrected a few percentage points. Trust me, it will be harder (but definitely more rewarding) when the market is down by 20% to 50%, and especially so when the market is down over a prolonged period. In other words, when there is "blood flowing on the street." It is in these times, when the prudent investors should avoid the temptation of following the herd, but to stay true to their investment philosophy and strategy, to guide them through the ups and the downs of the market, over their long investing time horizons.

When to Buy and Sell Stocks

Sound stock decisions should be made on the basis of thorough company knowledge, not just on the basis of the price of the stock. A rising price most of the times means that the time to sell the stock is nearing. On the other hand, a falling price may signal that the time to purchase stocks is coming.

http://www.stock-market-investors.com/stock-strategies-and-systems/when-to-buy-and-sell-stocks.html

We explain why deflation (falling prices) could wreak havoc with your finances

From The Times
December 18, 2008

The party's over if deflation grips the economy
We explain why falling prices could wreak havoc with your finances


Inflation is tumbling and fears are growing that deflation, where prices actually start falling, may become a feature of the economy next year.
This week the Office for National Statistics reported that the consumer prices index (CPI), a key measure of inflation, fell to 4.1 per cent last month, down from a high of 5.2 per cent in September. Jonathan Loynes, chief European economist at Capital Economics, the consultancy, says: “November's CPI figures are another step along the path that is likely to lead to the first bout of deflation in the UK for almost half a century.”
While falling prices may sound great, deflation is actually considered bad for the economy. When prices fall, consumers defer purchases on the assumption that they will be able to buy the same goods cheaper at a later date. This damages demand which can undermine company profits, trigger unemployment and entrench a destructive economic cycle.
Here we explain what falling prices might also mean for your savings, investments, pension, house price and mortgage - and how to guard against the worst effects.

Related Links
Q&A: deflation
Spending power down in 70% of households

Savings
To some extent, deflation is good news for savers because it increases the size of deposits relative to prices, making them more valuable in real terms. However, the downside is that the rates on savings accounts are likely to tumble if deflation takes hold because the Bank of England would reduce the base rate to 0 per cent or close to it. Savings rates are already falling fast. At the start of October, when the base rate was at 5 per cent, you could lock in to accounts paying an impressive 7 per cent. But now, with the base rate at 2 per cent, the most you can earn is about 5.5 per cent.
Returns in Japan, which suffered a decade of deflation, are close to non-existant. Simon Somerville, of Jupiter Asset Management, says: “The most you can earn from a Japanese bank account is about 0.4 per cent, but most pay nothing in interest. It is no wonder that many Japanese savers have abandoned banks and put their cash in safes or under the mattress.”
Savers in the UK may not end up quite so badly off, but only because our banks desperately need to bolster their finances. Some may continue to offer decent rates, as it is one of the easiest ways for them to raise money. So the pitiful state of the UK's banking system could yet offer a silver lining for savers.
Kevin Mountford, of the comparison website moneysupermarket.com, says that the best way for savers to guard against falling returns is to lock in to a long-term fixed-rate account. He says: “The best one-year fixed rate is from Anglo Irish Bank, at 5 per cent, but be quick as such rates could disappear soon. It is probably safe to lock up savings for up to two years, but any longer and there is a risk that the base rate - and savings rates - will start moving higher again. Nationwide is offering a two-year Isa bond paying 4 per cent.”
Pensions
Deflation could wreak havoc with retirement plans, especially if the problem persists for years. As prices fall, so will corporate profits and stock market investments. Given that many individuals and companies rely on shares to fund pension growth, many savers will have their retirement plans cast into doubt. Tumbling share prices have already wiped nearly a quarter off the average personal pension fund in the past year.
Even investors in final-salary plans, which guarantee a pension based on income, could hit the skids. As companies struggle to finance their pensions, the remaining final-salary schemes could close en masse. Even the Government, which backs the biggest final-salary scheme of all for public sector workers, may be forced to take drastic action, perhaps closing it to new entrants.
Tom McPhail, of Hargreaves Lansdown, the independent financial adviser, says that anyone approaching retirement should consider locking into an annuity sooner rather than later. He says: “As long as your pension fund has not been decimated by the recent stock market turmoil now might be a good time to buy a retirement income because annuity rates could well fall over the coming year or so. If you can afford to do so, deferring your state pension could also help. Provided that you are prepared to take the longevity and political risk - by which I mean that you don't think that you will die any time soon and you trust the Government to meet its promises - then you can boost retirement income by 10.4 per cent for every year you defer taking your pension.”
Those who are already retired could be among the few winners. Benefits, including the state pension, are linked to the retail prices index and can't be cut if inflation goes negative. The worst that can happen is that benefits remain unchanged. Many pensioners have fixed incomes, so inflation erodes their spending power. If prices drop, they will be able to buy more with their pensions.
House prices and mortgages
Homeowners are already experiencing deflation, with the average house price having fallen by almost 15 per cent over the past year, according to the Halifax.
Deflation in the wider economy would be a further blow because mortgage debt would increase in real terms, by becoming more expensive relative to prices. Fionnuala Earley, Nationwide's chief economist, explains: “Inflation tends to be good for borrowers, as it shrinks the real size of debt. In inflationary periods, wages also tend to rise, making it easier to meet mortgage payments. If there were deflation, debt would hang around longer and even grow in real terms, as wages would not be increasing and prices in the shops would be falling.”
Sadly, there is little that borrowers can do to mitigate the effects of deflation. Melanie Bien, of Savills Private Finance, the mortgage broker, says: “The first step is to keep up with your repayments. The mortgage should be your priority; everything else should be paid after that. You can also help by reducing your mortgage by overpaying. If you are lucky enough to have a tracker mortgage, you could overpay by the amount you are saving from lower interest rates.”
Most lenders will let you overpay by up to 10 per cent of your mortgage each year without penalty.
Ms Bien adds: “If you have an interest-only deal, it is worth considering switching to a repayment mortgage to ensure that the capital is paid off by the end of the mortgage term. This will mean significantly higher monthly payments, but it will be worth it in the long run. Speak to your lender about switching - it is very straightforward and can usually be arranged over the phone.”
Recent housing market history gives no indication whether residential property would be viewed as an attractive investment during a sustained period of deflation. Mortgages would continue to be available but the miserable experience of overextended borrowers could result in widespread aversion to debt, particularly among members of the younger generation.
At the same time, the lack of any meaningful returns from savings might persuade some people with spare cash to put it into property because bricks and mortar would be a tangible asset in an unfamiliar and insecure environment.
Additional reporting by David Budworth
Japan still licking its wounds
The most recent guide to what deflation might mean for UK investors is to look at what happened in Japan in the 1990s, writes Mark Atherton.
When Japan's property and stock market bubble burst with a vengeance in the early 1990s, the country experienced a prolonged period of deflation.
With consumers reluctant to spend because of falling prices, the economy stagnated, company profits fell and the stock market tumbled. The Nikkei index stood at nearly 39,000 at the start of the 1990s but now stands at a lowly 8,500, even though deflation has been eradicated for the time being.
John Hatherly, of Seven Investment Management, says: “What happened was that everyone started to draw in their horns and conserve their cash, rather than put it into assets that were falling in value. Investors deserted shares and property for safer havens.”
One of these safe havens was government bonds. Mick Gilligan, of Killik & Co, the stockbroker, says: “Investors reckoned, correctly, that the Japanese Government would not go bust and that government bonds were a safe bet, even though the interest they paid was small.”
Corporate bonds, on the other hand, tend not to fare so well in deflationary times because, with profits falling, there is less money to cover the bond interest payments and there is always the possibility of defaults on the payments or a collapse in the value of the bond itself if the company goes bust.

http://www.timesonline.co.uk/tol/money/consumer_affairs/article5366383.ece