There is no one way to pick stocks. Every stock strategy is a 'best guess' of how to invest.

Stock Picking 101

The Marketer's Manifesto

It’s time for fund managers to “return to their natural stock-picking tendencies,” said Citigroup chief global equity strategist Robert Buckland. “Just when the bear market (and subsequent rebound) has bullied us all into being very macro is the time when a good contrarian should be moving micro.” Over the last few years, the financial advisory business has been playing it close to the vest to protect as much of their clients’ investments as possible. They’re hesitant to move away from safe options because everyone is fearful of market fluctuations these days. However, some analysts say it’s precisely this strategy that’s holding us back. Stock picking is slowly but surely coming back into favor again, offering higher yields and better deals for people who know when to get in and when to get out.

Investors who are interested in stock picking have many different places to learn financial secrets, tips and trends. According to Forbes Magazine, some of these personal financial advisor “hot spots” include

ClearStation (www.clearstation.etrade.com), 
MSN Money (www.moneycentral.com/investor), 
Marketocracy (www.marketocracy.com), 
Reuters Investor (www.reuters.com/investing), 
MarketHistory (www.markethistory.com), 
Morningstar (www.morningstar.com), 
Sector Updates (www.sectorupdates.com), 
Stock Fetcher (www.stockfetcher.com), 
Stock Selector (www.stockselector.com), 
ValuEngine (www.valuengine.com) and 
Wall Street Transcript (www.twst.com). 

Over time, the consumers who watch market activity will begin to develop a fundamental understanding of the markets.

There are many different types of stock picking strategies. Some of the most common include

Fundamental Analysis, 
Qualitative Analysis, 
Value Investing, 
Growth Investing, 
GARP Investing, 
Income Investing, 
CAN SLIM, 
 Dogs of the Dow and 
Technical Analysis.

While there is limited space to delve deeply into these complex strategies here, more information can be found at Investopedia (www.investopedia.com/university/stockpicking/stockpicking1.asp). Even when consumers learn financial investment techniques, there is no guarantee, however. According to Investopedia: “The bottom line is that there is no one way to pick stocks. Better to think of every stock strategy as nothing more than an application of a theory; a ‘best guess’ of how to invest.”

Stock picking can be done by individuals or by professionals. Top financial advisors work to assist clients in selecting a winning stock portfolio. While these individuals are undoubtedly more experienced in watching economic market fluctuations, they are still human and ultimately fallible. One should not simply entrust an enormous sum of money with a financial advisor, without looking over the periodic statements and watching the DOW/NASDAQ activity. All investing is a gamble, so expectations should be clear when getting started. Perhaps the best advice is still “don’t put all of your eggs in one basket!”

Beth Kaminski is the co-author of Curing Your Anxiety And Panic Attacks which detailed anxiety or panic attacks as well as tips on the various anxiety attack medication available at anxietydisordercure.com.


http://www.supermoneymaking.info/home-business-ideas/stock-picking-101-2/4787

Donald Yacktman's Investment strategy and methodology. “A low purchase price covers a lot of sins.”

Donald Yacktman's Way (Part II)


Feb. 04, 2010


(GuruFocus, February 4, 2010)

This is the second and the last part of my attempt to analyze Donald Yacktman’s investment strategy and methodology. In this part, I want to deal with questions such as

• how the Yacktmans treats the big picture, 
• how they manage cash level, and 
• how they reach a sell decision, and finally, 
• I will summarize their comments on some individual stocks as examples for the methodology in practice.

If you have not done it, please read Part I before reading any further.

What about the Big Picture?

Consciously or not, investors always form their own opinion towards how the economy and the stock market might do in the near future and position their portfolio accordingly. The press is full of such predictions, and good careers have been made. The dilemma for investors is, in any given market, there are always at least two camps, the bulls and the bears, with seasoned and successful professional managers in each camp.

The Yacktmans are bottom-up guys. When asked, their initial response is that they are not distracted by big picture issues. This dialog is from the recent Q&A with GuruFocus users[2]:

Question 16. Although your focus (both) is stock-picking, do you occasionally get caught up with big pictures issues that distract you from your main goal of picking great stocks? How do you deal with it and why do you think it can happen to investors?

Don: I don’t get distracted by big picture issues but I think many others do. I think most people have trouble buying stocks that are in price decline either because of 

• lack of knowledge, 
• a short time horizon, or
• emotion. 

It is important to be objective.

And the Yacktmans think trying to predict the market is not only useless, it could also be harmful, as illustrated by this dialog in the same Q&A session:

Question 4. At this level of market valuation, how do you think the market will do in the next few years?

Don: We don’t predict the market. Frankly I think that most of the time it is a waste of time. Looking at individual businesses and buying them at good value is a much better use of time. If someone correctly predicted the market 10 years ago, they would have been in cash and not our funds. Who is better off?

• Indeed, knowing what we know now about how the market performed in the last decade, most of us would be better off to put money in cash in the past decade. 

• But knowing what the Yacktmans know about value investing, one is better off investing in stocks.

So the Yacktmans totally ignore the macro factors in their managing money? Wrong! The Value Investor Insight interviewer was rather persistent and direct on this point. Here is a quote from the interview [4]:

Speaking generally, do views on the broader economy make it into your analytical process at all?

SY (Stephen Yacktman): We spend almost 

• no time trying to forecast things like inflation, interest rates and the value of the dollar, but 
• we do try to pay a lot of attention to cycles in how we normalize earnings. 

If margins are at a peak, for example, we don’t necessarily assume they’ll stay there forever. That alone kept us out of a lot of the financials that got hurt the most in the meltdown.
Potential inflation, or the lack thereof, seems to be fairly top-of-mind for investors. What’s your take on that?

DY (Donald Yacktman): Over time, we’re very concerned about the risk of higher inflation, but we expect that the kinds of businesses we own – those that can re-price their products fairly flexibly and that are heavily exposed to currencies other than the U.S. dollar – will navigate an inflationary period fairly well.

So long term inflation finds its way to Expected Rate of Return in the Yactkmans’ world of investing.

Manage Cash Level

Keeping the right level of cash is a key decision for individual investors as well as for fund managers. It is important for individual investor, it is vital for active fund managers. When market crashes, the right thing to do is to buy and take advantage of the lower prices, typically what the fund managers have to deal with is all the redemption requests. It is just an inconvenience in a fund manager’s life that one has to deal with.

Fearing of lagging behind peers and benchmarks, many fund managers tend to be fully invested. In May of 2009, during the MorningStar meeting, Robert Rodriguez was very critical towards this practice in his speech:

Did the industry try and prepare for this tsunami of a credit debacle? I don’t think so. 

• Whether in stocks or in bonds, it seems as though the same old strategies were followed--be fully invested for fear of underperforming and don’t diverge from your benchmark too far and risk index tracking error. 
• The industry drove into this credit debacle at full speed. 
• If active managers maintain this course, I fear the long-term outlook for their funds, as well as their employment, will be at high risk. 
• If they do not reflect upon what they have done wrong in this cycle and attempt to correct their errors, why should their investors expect a different outcome the next time?

Since the beginning of 2007 Robert Rodriguez, Rodriguez kept an unusual amount of cash (as much as 45%) in his FPA Capital portfolio. The Yacktmans, on the other hand,

• had as much as 30% in cash at the market peak of 2007.
• In November 2008, they were “all in”. 
• They even had to swap out some high quality stocks to buy some more cyclical ones. 
• And as of November 30, 2009, they are back to 15% again.[4]

So what drives their cash position up and down?

• Why 15% now? 
• And why as much as 30% at market peak in 2007?
• Is it by design or by luck? 

Careful exam of the Yacktmans's thinking on the matter tells us that the high cash might be a build-in function of their investment methodology. Here we dig into the The Wall Street Transcript Interview[1]:
TWST: What triggers an exit from your portfolio? Do you set sell targets?
…

Donald Yacktman: Think of everything being priced against the long-term Treasury, and we want to see a large spread over what the long-term Treasury yield is.

Stephen Yacktman: But in the present environment the dollar is being deflated and the Treasury rate of return is very low. At some point we say, “Hey, the rate of return of an investment is not acceptable to us.” We walk away. It’s the hardest thing to do because we have to wait for something else to come along. We can’t create something out of nothing.


And in theValue Investor Insight interview [4]:

Are you much less active when markets are calm?

DY: We’re not inactive when markets are relatively calm – there’s always something creating opportunity somewhere – but we do tend to be a lot less active overall. Our turnover has fallen compared to this time last year.

We also don’t let cash burn a hole in our pocket when the number of good opportunities decreases. While we were all in last November, our cash position in the funds today is around 15%.



In another word, the cash level is a result of insisting on

• minimum Forward Rate of Return on the investments and 
• minimum spread between the rate of return and the Treasury yield. 

If the requirements do not meet, the Yacktmans would rather keep the money in cash.
Nowadays, with market recovered more than 60% from the March 2009 low, GuruFocus noticed that

• Robert Rodriguez’s fund is hoarding cash; 
• Bruce Berkowitz has upped his cash level to about 20%, more than historical normal level, which has been about middle teens.; and 
• the Yacktmans had about 15% in cash as of November 30, 2009. 

Since you have made so far in reading my article, I feel obliged to give away this observation. These three managers are not bears or market timers, rather, they are very constructive in managing their money through different market cycles.

When to Sell

Stephen Yacktman answered this one straight-forwardly in The Wall Street Transcript Interview[1]:



TWST: What triggers an exit from your portfolio? Do you set sell targets?

Stephen Yacktman: Many people set a price target by saying, “Okay, I think it is worth $X.” Well, we don’t think that way. We look at what the forward rate of return is, stack it up against other investments and determine which one is the highest and which one is the lowest and what risk we are taking to get that rate of return. We account for things like leverage, cyclicality of earnings, and the quality of the business. An investment that is going to make it into the portfolio with the lowest rate of return would be a company like Coca-Cola that has high predictability and good management. We can just go into autopilot. It becomes our AAA bond.

A sale is triggered by two things.

• If the rate of return is not sufficient or 
• if there is a better opportunity elsewhere with a larger margin of safety to get a similar or higher rate of return, we’ll sell it. 

The overall market dropped and consumer product names held up and the media companies got killed. 

• News Corp. went from the $20s to $5. 
• That drop opened up a huge rate of return gap and encouraged us to sell some of our Pepsi and buy News Corp. 
• We viewed that decision as going from a low teens rate of return to something that was going to make a 20% return. 

There’s no price target ever set, it’s just a function of the environment. 

• What ends up happening, unfortunately, in an environment where everything goes up, is fewer of these returns are satisfactory and we end up more heavily in cash. 
• It’s not that we’re trying to time the market; it’s just there’s nothing to buy.

That is the ideal world, in which every purchase is a win. What about if they made mistake and have to sell at a loss? Here is their perspective according to the GuruFocus Q&A [2]:



Question 14. How hard is it to admit a mistake on an investment thesis and what do you do to not repeat the mistake?

Don: It is important to be objective and not let our ego get in the way. As Will Rogers said, “Good judgment comes from experience and a lot of that comes from bad judgment”.

Brian: I agree. In addition, we can’t let our emotions get in the way. When a mistake has been made, you can’t cross your fingers and hope to recoup your losses. You have to ask yourself, where do I go from here?

• On this day, what are my best options, where are my highest yielding assets? 
• Where would this capital best be allocated now? 
• Once you’ve experienced a permanent loss of capital, there’s only one gear from here and that’s forward. 
• But the key in this business is to avoid the permanent losses. 
• And as my father has often said, “A low purchase price covers a lot of sins.”

Just be careful next time you place a buy order.

Comments on Individual Stocks

As illustrations of how the Yacktmans use the concept of Forward Rate of Return, I include a summary of their comments on some of their top holdings.

Much of this material is from of Value Investor Insight interview found on www.yacktmanfund.com website [4]. You might be better served to read the original document. The document was published on November 30, 2009 and the interview could have happened somewhat before that, so please keep the time elapsed since then when you read it.

1. News Corp. (NWS-A)

· Stock trades half of what it was at the beginning of 2007, yet the business mix and growth prospects are much better than they were back then.

· Company has eight different operating units. The most important business by far is cable network programming. Revenues and earnings in this business have more than doubled over the past five years, driven by increasing subscriber fees from cable and satellite companies, as well as higher rates on the advertising side. Plenty room for growth exists in this line of business.

· Non-U.S. operations is another engine for growth.

· Company is believed to be able to generate more than $1 per share in free cash flow. With the stock price at $11.50 (Now it is $13.67 on Feb. 3, 2009), the free cash flow yield is roughly 8.5%. (Now it is 7.3%).

· On the top of that, the Yacktmans expect a total of 6.5% annual growth on the current free-cash-flow yield.

· So the estimated Forward Rate of Return is in mid-teens per year, double what can be expected from S&P 500 (about 7%, see Part I).

· The age of Rupert Murdoch (78) is not of concern in the time horizon that matters here, especially when one paid no premium for him.

2. Viacom Inc. (VIA-B)

· This is more of a pure-play content company, which owns various cable networks, including Nickelodeon, MTV and Comedy Central, as well as the Paramount movie studio.

· As a content company, Viacom has an upside to demand higher carriage fees from the cable distributor companies over time.

· On the advertising side, Viacom’s advertising should more than bounce back when the economy improves

· Paramount is adding nothing in the valuation model as it is not generating any cash, but as a standalone company, it probably worth $5-7 per Viacom share.

· Cable networks alone will generate $2.50 per share in normalized free cash flow. That’s an 8% cash yield. Even if Viacom grew no faster than the average S&P 500 company – and the Yacktmans think it should do better – that produces an expected return of 12-13% per year.

· Internet delivery of content should not be destructive. As long as you have content, you should be able to sell it for something and make a profit.

3. PepsiCo Inc. (PEP)

· Somewhat distinct from Coca-Cola, Pepsi’s fortunes are much more driven by snack foods.

· The distribution and shelf space of Frito-Lay products create a very high barrier to entry.

· Frito-Lay now accounts for roughly half Pepsi’s overall business.

· The snack-food business is a good one. Buyers are not too price-sensitive, margins are high, and unit-volume growth is pretty strong as busy lifestyles prompt people to eat things on the run.

· The second big driver of the business will be continued global expansion.

· On a forward basis, the Yacktmans are estimating $3.85 per share in normalized earnings. They should keep roughly 85% of that, so free cash flow would be around $3.40. That’s a 5.5% free-cash yield, on top of which they are expecting 3-4% annual volume growth, primarily from increased snack-food sales and overseas expansion. Add in some pricing, largely to keep up with inflation, and the expected annual return is 12-13%, 5% better than S&P 500’s expected rate of return.

4. Comcast Corp. (CMCSK)

· Comcast stock performed poorly in recent history because there was never any cash generated. All the earnings needed to be invested for expansion or equipment upgrades.

· Operationally, Comcast is uniquely positioned because it can offer a full complement of television, Internet, and phone services. They’ve been quite successful in rolling out these bundled services in their territories and skimming off profit from phone companies like AT&T and Verizon.

· What sets Comcast apart as an investment is the fact that a lot of the enormous capital spending necessary to build that network is going away. The company now has a platform to meet customer demands well into the future at modest incremental cost.

· That will have a dramatic impact on free cash flow generation.

· Free cash flow should exceed net income by $1-1.5 billion per year as capital expenditures are much lower than depreciation and amortization. On a normal basis, we estimate free cash flow at more than $1.50 per share, resulting in a 11% cash yield. On top of that one would add inflation plus 2% or so, as they continue to take phone and Internet share. That yields an expected mid-teens return for a company that on a fundamental basis continues to perform extremely well.

· The recently announced proposal to acquire NBC Universal, even assumed overpaid, has limited impact on the company’s value and do not change the view that the stock is undervalued.
Conclusion

Central to the Yacktmans’ investment methodology is the concept of Forward Rate of Return, which is current free cash flow yield plus inflation and plus annual growth in free cash flow. Macro economy and business cycle find their way in the calculation of rate of return;

• when minimum rate of return is hard to get, the Yacktmans build a large cash position;  
• when the rate of return become less attractive comparatively, they sell the individual stock.

Finally, it should be noted that the adjective word for the Forward Rate of Return is “Estimated”. As the examples given above show, the Yacktmans do not calculate the rate to the fifth decimal (not even to the second decimal, for that matter). In investing, they also would rather be approximately right than precisely wrong.

As of now, the compass of Rate of Return points toward high quality companies at attractive valuations, and that is where the Yacktman park their money.

http://www.gurufocus.com/news.php?id=83444

Can you be brave, or Will you cave?

Many people stop investing precisely because the stock market goes down.  

Psychologists have shown that most of us do a very poor job of predicting today how we will feel about an emotionally charged event in the future.

Because so few investors have the guts to cling to stocks in a falling market, Benjamin Graham insists that everyone should keep a minimum of 25% in bonds.  That cushion, he argues, will give you the courage to keep the rest of your money in stocks even when the stocks stink.

One advice given is that you should not place 100% of your security portfolio money in stocks unless you....

1.  have set aside enough cash to support your family for at least one year.

2.  will be investing steadily for at least 20 years to come.

3.  survived the bear market that began in 2007.

4.  did not sell stocks during the bear market that began in 2007.

5.  bought more stocks during the bear market that began in 2007.

6.  have read chapter 8 of Graham's Intelligent Investor (human psychology emphasis).

The Best Strategy For Trading On Stock Market

The Best Strategy For Trading On Stock Market
By: Wall Street Window
Tuesday, February 02, 2010 11:59 AM


I've been a successful stock trader for over a decade now and thanks to the Internet my reputation has spread. I have a free email investment letter with over 50,000 subscribers in it and get questions from them all of the time.

Probably the most common question I get is what is the best strategy for trading on the stock market?

Well any strategy has got to incorporate some risk management principles and a real plan when it comes to making trading decisions.

Most people don't do this though.

They just turn on the TV and buy when some hot news comes out or read a story in a magazine and get in what looks like a hot stock.

But when you make money like this it is just look and odds are you are going to end up losing money. Even if your stock goes up you won't know what to do with it.

So first of all you need a good strategy when it comes to picking out stocks and making trades. Personally I've looked over decades of market data to figure out what chart patterns appear the most consistently before a stock goes up and then looked at the fundamentals that these stocks seem to have the most in common.

I call this combination the Two Fold Formula. I look for stocks that have both

• a low valuation and 
• high earnings growth. 

Most growth investors ignore valuation and just look for price, but I've found that when you usually find your best winners when you look at both.

One of my favorite indicators to do this is the PEG ratio. Unlike the P/E ratio, which just looks at one years worth of earnings the PEG ratio takes the price of a stock and compares it to its projected earning growth for the next five years.

So by using the PEG ratio you can make buy decisions based upon the price you are paying for earnings growth.

This can give you a great list of the 50 hottest stocks to keep an eye on.

After that l look for a specific chart pattern and technical condition that I've also found to be common to the biggest winners.

To me this is the best strategy for making money in the stock market and I spell it all out for you free in my Two Fold Formula guide. You can get it when you join my free email list.

I believe in providing maximum value for people on my list. This is not a list of pitches and hype, but real information that will make you money in the stock market.

 http://www.istockanalyst.com/article/viewarticle/articleid/3829746

Investing requires continuous learning from the market.

Lessons to learn from markets

Ashish Pai / New Delhi January 31, 2010, 0:19 IST

There is money to be made. But remember the basics.

Also Read

- Simple strategies for small investors
- The top 10 business bestsellers
- Be curious about companies
- News you should not use
- Time your stock sale
- The momentum psychology


The best way to learn your investment lesson is by investing in equities. Each occasion in the market teaches new lessons, which will empower you to achieve your ultimate goal of building wealth.

Often, it happens that you start putting money in equities and the market moves to new highs. Then you are tempted to put in more money, since you are getting higher returns. Suddenly, the market starts to slide down. Forget returns on investment, you are not even able to recover your capital. This is a common grouse of most investors. They either lose in equity investment or end up in a no profit-no loss situation. Why? Is it because you make wrong decision or because the market is only meant for speculators and gamblers?

No, that’s not true. We go through this pain again and again because we do not learn from our previous experiences in the market. Only the ‘smart investors’ survive the ups and downs in the market and make pots of money. Here are some lessons required to be learnt from the market.

Evaluate when you lose money in the market. Do not just shrug and say, “I am not going to invest any more!”. Investing does not mean making no mistakes, it means learning from experience. All of us made mistakes, when we started - such as going by tips from broker or buying penny stocks. As time passed by, we learnt that by not following the herd, we may have limited gains but our capital will be protected.

Be patient when investing in the market. Investors who show the right kind of patience make the most from the stocks they invest in.

• You need to be patient by not booking losses at the slightest market provocation or
• by not selling stocks before they have reached an optimum price.
• Also, be patient by not panicking when in a market downslide or
• by not buying stocks which you know are good but currently priced higher.

Look for opportunities to invest. There will be many opportunities to grab in the market, such as

• FII selling,
• global downturn,
• credit crisis,
• currency crisis, etc.

Each such occasion is to be looked at as an opportunity. ‘Smart investors’ will fill their pockets with the crème de la crème stocks in the equity market on such occassions. For example, blue-chip stocks like BHEL, HDFC, NTPC and ITC were quoting low prices in the first quarter of last calendar year due to the global credit crisis. It was an opportunity to buy these stocks.

Look for quality advice before investing. Do not follow the herd mentality. Always remember, quality stock picking will help you generate substantial wealth over a period of time. The quality picks can be large-cap, such as SBI, HDFC Bank and Tata Power or mid-caps such as Petronet LNG, Power Grid and Marico.

Learn to invest systematically. Getting into a systematic investment plan (SIP) in mutual funds or directly in an equity portfolio is the preferred mode of investing. At the end of five to 10 years, this portfolio is likely to appreciate by leaps and bounds. If the market is in a bullish phase, the money may even double in less than three years.

Learn the importance of diversification. You can better your returns and reduce risks by diversifying your portfolio. You can diversify across asset classes like gold, commodity futures, property, etc, as well.

A profit booking policy is advisable. The profit booking policy can be based on expectations from equities. Suppose an investor has put money in a stock and it rises by 100 per cent in a year, he may book profits either partially or fully. One strategy could be to book profits in a way that the initial investment is recovered and the profit portion continues to be invested in the stock.

Assess risks before investing in the market. Many a time, we invest in a particular stock or fund without assessing the risks involved with the stock. For example, sectors such as real estate or metals are riskier as compared to FMCG or power. If you don’t have a high risk taking ability, do not go for risky stocks or sectors.

Do not borrow to invest. In a sliding market, such investors are most impacted, as they have to offload stocks due to margin calls or liquidity issues.

Do not chase momentum stocks. In most cases, investors enter such stocks at the peak and are stuck with these for a long period or have to sell at a loss. Some of the momentum stocks in the recent past were Unitech, DLF, Jet Airways, Reliance Industrial Infrastructure and Jai Corp. The prices of such stocks reach a peak on sustained buying and then slide, roller-coaster, in a few sessions.

Conclusion :
Investing requires continuous learning from the market. Like driving a car, investment is more of learning practically and hands on. It requires discipline. When you are driving a car, what speed to drive and which lane to drive in are decided by the driver. Similarly, in case of investment, you must know how much to invest, where to do so and when to sell.

The best is to have a disciplined approach, combined with an investment philosophy. Some of the great investors like Warren Buffet or George Soros have been successful as they have a disciplined way of investing. There is no easy way to make money. All of us have to learn lessons in investing in the same market and in the same way. Each time, investors are put to different tests. Only the learned investors will succeed. Be a ‘smart’ investor.

In brief :
* Learn from your past experience
* Have a strategy to invest
* Iinvest systematically
* Look at your liquidity requirements
* Diversification is advisable
* You will need discipline and patience

The writer is a freelancer


http://www.business-standard.com/india/news/lessons-to-learnmarkets/384131/

****Strategies for long term investment as markets correct

Strategies for long term investment as markets correct
By Manish Misra on January 29, 2010

The rally in the equity markets has finally taken a breather. A bout of profit-booking was seen last week and it may be early to predict whether this is the start of the much-anticipated downturn in the equity markets. So, what should be your long term strategy to invest in such a scenario?



Investors remain concerned over the pace of the global economic recovery and have turned cautious in their approach to the markets, leading to profit-booking at every rise.

Although the results season was largely positive with most companies reporting earnings in line with or exceeding market expectations, it was weak global sentiment and consistent sell-offs by foreign institutional investor (FII) in last few trading sessions acted as a catalyst for the market correction.

The current rally in the domestic markets was driven mainly by liquidity owing to heavy inflows from FIIs who found the Asian markets poised for a recovery much ahead of their Western peers. While the domestic economy did not disappoint in terms of earnings numbers in the last two quarters, the current prices had already factored in the growth, thereby not leaving much room for a further upside. The market will now look for global cues to decide on the future direction.

The Reserve Bank of India (RBI) in the monetory policy, scheduled to be announced today (29/01/2010) afternoon, is expected to hike the CRR and Reverse Repo rates.

Over the short term, the markets could display increased volatility and this in turn could throw up attractive opportunities for medium to long term investors. While the long term growth story of the domestic economy remains intact, the short term will always be marred with uncertainty. Long-term investors would do well to use this uncertainty to their advantage.

Here are some strategies investors can adopt to ensure their portfolios remain aligned towards growth:

1. Review asset allocation
Investors should stick to their asset allocation across equity, debt and money market instruments depending on their overall investment profile. Reviewing the asset allocation when the markets peak gives an indication of whether to book profits in equity. As the markets correct, an asset allocation review will help investors decide on the amount which should be shifted back to equity in order to balance the asset allocation.

2. Maintain liquidity
Falling markets often present attractive opportunities but it can be made use of only if investors have money to invest. Re-balancing asset allocation can provide some liquidity to the investor and this can be used effectively to pick up desired stocks when the markets correct.

3. Selection of stocks
Stocks, especially in the large-cap category, had a major run-up in the past few months. For investors, it was a risky proposition to enter these stocks at the levels at which they looked more than fairly-valued. A correction in the markets has brought these stocks back to prices which are attractive for medium to long term investors. Hence, investors can identify their target companies and slowly start accumulating these stocks as the markets offer opportunities.

4. Stagger purchases
While the markets have been in a correction mode for the past two weeks, it is difficult to predict whether this phase is temporary or will continue for a while. Hence, it is important to stagger the purchases over a period of time rather than buying in one go. The expected volatility in the markets may give investors many opportunities to pick stocks at desired prices.

Conclusion
Follow these time tested strategies to invest in stock market. Investors who did not get a chance to enter the markets in the last rally can now make use of the opportunity to invest in select stocks at attractive levels to build a robust long-term portfolio.

http://www.personalmoney.in/strategies-for-long-term-investment-as-markets-correct/1458

3 Ways to Prepare for the Next Big Drop

3 Ways to Prepare for the Next Big Drop
By Dan Caplinger
January 19, 2010 | Comments (0)

This time last year, even a dart-throwing monkey could have made money in the stock market -- all you needed was the courage to buy at one of the scariest times in history. Now, though, financial markets of all sorts have risen sharply, and there's a lot more to making a winning investment than picking a stock ticker at random and buying shares.

It's a whole new ball game
If you're like many people, you've probably done your best to repress your memories of early 2009. Back then, the stock market was falling apart, after a failed attempt to put together a rally off the lows set during 2008's panic. Everyone was convinced that companies like MGM Mirage (NYSE: MGM) and Bank of America (NYSE: BAC) were just a few steps from bankruptcy, and even the prospects for healthier companies seemed grim.

Now, though, fear has given way to greed. Many of the stocks that seemed most likely to fail instead topped the performance charts for 2009. Stock markets around the world saw huge gains, with the U.S. market's rise relatively small in comparison to jumps in emerging markets like Brazil and China. Moreover, after a terrible end in 2008, commodities also regained much of their lost luster, as gold jumped to new highs and energy prices made a sharp recovery from their huge drop to $30 from nearly $150.

If those big gains make you nervous, you're not alone. If you think it's time for these roller-coaster markets to start another downswing and don't want to go along for the ride, then here are three things to think about for various parts of your portfolio.

1. With stocks, think quality
Amid all the big gains of last year, many stocks have gotten left behind, at least compared to the overall market. Johnson & Johnson (NYSE: JNJ), Procter & Gamble (NYSE: PG), and AT&T (NYSE: T) are among the big-name companies that haven't seen anything close to the gains of even the S&P 500, let alone the multibagger performance that dozens of stocks produced last year.

But there are two reasons to look for lagging sectors. First, as bull markets evolve, they tend to go through sector rotation, in which stocks that haven't performed as well catch up with the top performers. So if this is the beginning of a longer-term bull market, then you can expect large caps that have thus far been left behind to see some gains.

On the other hand, the stocks that have risen the most also have the furthest to fall. If the stock market's rally reverses itself soon, then you can expect stocks that are still value-priced to hold up better than highfliers without the fundamentals to back up their lofty valuations.

2. With bonds, think duration
Everyone's stretching for yield right now, as interest rates have remained low. When you need income from your portfolio to survive, times like these can lead you to take desperate measures.

But you need to resist the urge to buy longer-term bonds just to get higher yields. Rates show signs of rising soon, and if they do, falling prices could wipe out the higher interest you'll receive on long bonds. In contrast, short-term bonds won't pay as much income up front, but they also won't lose as much value per percentage-point move in a rising-rate environment.

Finally, just as speculative stocks may have gotten ahead of themselves, lower-quality corporate bonds have also jumped in front of Treasuries. Consider rebalancing your portfolio to get its risk profile back where you want it.

3. With alternative investments, be wary
Commodities and real estate are becoming more mainstream investments than ever. But while having some exposure can help your portfolio, now isn't the time to make huge bets on them.

Whether you use stocks like Freeport-McMoRan Copper & Gold (NYSE: FCX) and Precision Drilling Trust (NYSE: PDS) as proxies for metals and energy or invest in specialized ETFs with direct exposure to commodities, prices have jumped a lot over the past year. Hedging your holdings, either by selling some of those investments or with other strategies such as writing covered calls or buying puts, can take some risk off the table.

Watch your greed
Most investors are in much better shape now than they were this time last year. But you don't want to lose those hard-fought gains. By taking steps to secure your portfolio, you'll help to keep yourself from enduring the same trials you suffered through during the financial crisis.

With so many stocks seeing big gains, focusing on value stocks might seem hopelessly outdated. Jordan DiPietro takes a closer look at whether value investing is dead.

http://www.fool.com/retirement/general/2010/01/19/3-ways-to-prepare-for-the-next-big-drop.aspx

A reasonable strategy: Selling fairly valued stock to purchase one that is very undervalued

Is there something better you can do with the money? 

As an investor, you should ALWAYS be seeking to allocate your money to the assets that are likely to generate the HIGHEST RETURN RELATIVE TO THEIR RISK.

There is no shame in selling a somewhat undervalued investment - even one on which you've lost money - to free up funds to buy a stock with BETTER PROSPECTS.

Here is what one investor did.

In early 2003, he noticed that Home Depot was looking awfully cheap.  The stock had been sliding for almost three years, and he thought it was worth about 50% more than the market price at the time.  He didn't have much cash in his account, so he had to sell something if he wanted to buy Home Depot.  After reviewing the stocks he owned, he sold some shares of Citigroup, even though they were trading for about 15% less than what he paid for them.  Why?  Because his initial assessment of Citigroup's value had been too optimistic, and he didn't think the shares were much of a bargain any more.  So, he sold a fairly valued stock to purchase one that he thought was very undervalued.

What about his small loss on the Citi stock?  That was water under the bridge and couldn't be changed.  What mattered was that he had the opportunity to move funds from an investment with a very modest expected return to one with a fairly high expected return - and that was a solid reason to sell.

****Buffett Fundamental Investing: How to pick stocks like Warren Buffett

Buffett Fundamental Investing

How to Pick Stock Like Warren Buffett by Timothy Vick

1.  Intrinsic Value = sum total of future expected Earnings with each year's Earnings discounted by the Time Value of Money.

2.  A company's Growth record is the most reliable predictor of its future course.  It is best to average past Earnings to get a realistic figure.  Each year's Earnings need to be discounted by the appropriate discount rate.

3.  Is the stock more attractive than a bond?  Divide the 12 months EPS by the current rate of long-term Government Bonds e.g. EPS of $2.50 / 6% or 0.06 = $40.  If the stock trades for less than $40, it is better value than a bond.  If the share's earnings are expected to grow annually, it will beat a bond.

4.  Identify the expected Price Range, Projected future EPS 10 years out, based on average of past EPS Growth.  Multiply by the High and Low PE Ratios to find the expected Price Range.  Add in the expected Dividends for the period.  Compute an annualised Rate of Return based on the increase in the Share Price.  Buffett's hurdle is 15%.

5.  Book Value.  Ultimately, Price shoud approximate growth in Book Value and in Intrinsic Value.  Watch out the increases in Book Value which are generated artificially

• a) issuing more shares
• b) acquisitions
• c) leaving cash in the bank to earn interest, in which case ROE will slowly fall. 

Buffett is against the use of accounting charges and write-offs to artificially improve the look of future profits.

6.  Return on Equity.  ROE = Net Income (end-of-year Shareholders' Equity + start-of-year Shareholder's Equity/2).  Good returns on ROE should benefit the Share Price.  High ROE - EPS Growth - Increase in Shareholder's Equity - Intrinsic Value - Share Price.  A high ROE is difficult to maintain, as the company gets bigger.  Look for high ROE with little or no debt.  Drug and Consumer product companies can carry over 50% Debt and still have high ROEs.  Share buy-backs can be used to manipulate higher ROEs.  ROE should be 15%+.

7.  Rate of Returns.  15% Rule.  Collect and calculate figures on the following:

• current EPS
• estimate future Growth Rate of use Consensus Forecasts
• calculate historic average PE Ratio
• calculate Dividend Payout Ratio

-----
Tabulation in Table Format

Price:
EPS:
PE:
Growth Rate:
Average PE:
Dividend Payout:

Year ---- EPS
20-
20-
20-
20-
20-
20-
20-
20-
20-
20-
----------------
Total

Price needed in 10 years to get 15%:  $____

Expected 10-year Price (20--EPS* Av. PE):  $____
Plus expected Dividends:  $____

Total Return:  $____

Expected 10-year Rate of Return:   ____%

-----
Highest Price you can pay to get 15% return: $ _____

------



Stock Evaluation.  Can a company earn its present Market Cap.  in terms of future Profits?  Does the company have a consistent record of accomplishment?

Shares are Bonds with less predictable Coupons.  Shares must beat inflation, Government Bond Yields and be able to rise over time.  Shares should be bought in preference to Bonds when the current Earnings Yield (Current Earnings/Price) is at or above the level of long-term Bonds.

When To Sell:

• Bond Yields are rising and about to overtake Share Earnings Yields.
• Share Prices are rising at a greater rate than the economy is expanding.
• Excessive PE multiples, even allowing for productivity and low interest rates.
• Economy cannot get any stronger.

Takeover Arbitrage

• Buy at a Price below the target takeover Price.
• Only invest in deals already announced.
• Calculate Profits in Advance.  Annualised return of 20-30% needed.
• Ensure the deal is almost certain.  A widening spread may mean the worst.

General Criteria:

• Consistent Earnings Growth
• High Cash Flow and Low level of Spending
• Little need of long-term Debt
• High ROE 15%+
• High ROA (Return on Total Inventory plus Plant)
• Low Price relative to Valuation.

Buffett-Style Value Criteria and Filter.

1.  Earnings yield should be at least twice the AAA bond yield (which is about 5.9%)
2.  PE should be less than 40% of the share's highest PER over the previous five years.
3.  Dividend yield should be at least two thirds of the AAA bond yield.
4.  Stock price should be no more than two thirds of company's tangible book value per share.
5.  Company should be selling in the market for no more than two thirds of its net current assets.

To this, add Margin of Safety criteria:

1.  Company should owe no more than it is worth:  total debt should not exceed book value.
2.  Current assets should be at least twice current liabilities - in other words, the current ratio should exceed 2.
3.  Total debt should be less than twice net current assets.
4.  Earnings growth should be at least 7% a year compound over the past decade.
5.  As an indication of stability of earnings, there should have been no more than two annual earnings declines of 5% or more during the past decade.


Demanding a share price no more than two-thirds tangible assets is asking too much of today's market.  The basic search, therefore, used the following sieves:

1.  PE less than 8.5.  This is the implied multiple from the demand that the earnings yield should be more than twice 5.9%.  The inverse of an 11.8% earnings yield is a price-earnings multiple of 8.5.
2.  A dividend yield of at least 4% - two thirds of the 5.9% AAA bond yield.
3.  A Price to Tangible Assets Ratio of less than 0.8 - price less than four-fifths tangible assets.
4.  Gross Gearing of less than 100% -  the company does not owe more than it is worth.
5.  Current Ratio of at least two - in other words current assets are at least twice current liabilities.


http://www.docstoc.com/docs/7984050/Investment-Strategies (Page 91)

Investing Strategy - Growth Investing

Growth Investing


Look for three characteristics of Growth - superior brand, good management and superior technology.


Buying:

• A PEG less than 0.75
• Market Capitalization greater than GBP 20m
• PE less than 20
• High projected Earnings Growth 1 - 5 years.
• Highest 1, 3, and 5 year historical Earnings Growth
• High continuous EPS Growth, historical and current.
• Positive Earning Surprises.
• High Revenue Growth.
• Positive Cash Flow.  Cash Flow per share should be greater than Capital Expenditure per share.  Cash Flow per share should exceed EPS.  Low P/CF ratio.
• Positive Relative Strength over the last 1, 3, 6, and 12 months.
• Net Gearing less than 50%.  Interest Cover, Quick Ratio, and Current Ratio need to be healthy.
• Look for high Margins relative to the sector and a high ROCE.
• Pay attention to Directors' Dealings
• Check recent Brokers' Estimates

Entry

• TA signals

Exit: 

• If the PEG has doubled.
• Trailing Stop/Loss of 10%

http://www.docstoc.com/docs/7984050/Investment-Strategies (Page 96)

****Common Stock Investing Strategies

Common Stock Investing Strategies

This article aims to familiarize you with several investing strategies for common stocks. You can choose for yourself the ones that best meet your needs and financial goals.

Investing Strategy 1 - Buy and Hold
If you choose this investing strategy you will have to purchase a stock and be ready to hold it over a long period of time, since buy and hold strategy is based on the assumption that the price of the stock will rise with time. However, due to the dynamics of the market you can never be sure that this will happen. This investing strategy elaborates on the idea that the market will continue to expand due to its capitalist nature. As a result it assumes that the stock prices will continue to rise and shareholders will enjoy higher dividends.

The market fluctuations and inflation levels are smoothed over the long-term. The advantage of this investing strategy is that you pay less commission fees and taxes since you trade less. You hold the stocks for a long time and don't trade on frequent basis.

Investing Strategy 2 - Growth Investing Strategy
This strategy aims to identify the growth potential of a company. Companies with high earnings growth are very attractive to investors who believe that such companies will experience continuing rise in their stock price since more and more investors will want to take advantage of the regular and large dividend paying.

One of the most important factors for consideration in growth investing is the earnings per share of the company. Investors observe the changes in the earnings per share over the years not neglecting the revenue growth as well.

What is more, in order to get a clear view on the willingness of the market to pay for a given earnings growth, investors examine the relationship between the price/earnings ratio and the annual earnings growth.

Keep in mind that this strategy carries a certain degree of risk, since the target companies are usually young. However, as you know risk and reward go hand in hand, meaning the higher the risk the higher the potential reward from the investment.

Investing Strategy 3 - Value Investing Strategy
Value investors are often referred to as bargain seekers. This means that they search for stocks that are sold at a price that is below the real value of the company.

No matter what the current price of the stock is, be it $20 or $100, it should be below the real value of the company. Value stocks are those that have been overlooked by the market and as a result their price is lower. The latter may be caused by the chasing of the market after stocks that are currently considered to be more attractive.

Generally, growth and value investing are considered to be positioned in opposite sides of the investment spectrum.

Investing Strategy 4 - Timing the Market
The major idea behind market timing is the buying low and selling high. Market timers believe that they can successfully predict the behavior of the market regarding the price movement of stocks. This makes timing the market the opposite of the buy and hold strategy.

If you are to time the market, you should familiarize yourself with such tools as technical and fundamental analysis as well as even intuition.

Most financial experts are against timing the market because it is difficult to identify whether a particular stock price has reached its peak or bottom. It may eventually go even higher or lower.

Additionally, with the often trades that are executed under this strategy commission fees will greatly reduce your profits especially of you make frequent trades of small amounts.

Another disadvantage of timing the market is that in theory over the long-term the market goes up. Therefore, it is better to stay fully invested during the time in order not to miss the long-term stock rewards.

Investing Strategy 5 - GARP Investing Strategy
Growth at Reasonable Price (GARP) represents a combination between the value and growth investing strategies. Therefore, applying this strategy will involve the search of a stock that is both undervalued and has a potential for future growth. You may find it difficult to find such a stock due to the opposing characteristics of growth and value investing. However, it is not unattainable. Investors applying this strategy use the PEG (price-to-earnings-growth) ratio as an indicator for a stock that possesses a growth potential at a price that is below the real value of the company.


http://www.stock-market-investors.com/stock-strategies-and-systems/common-stock-investing-strategies.html

Successful Investing-Not Magic

Successful Investing-Not Magic


This is a guest article by Ray, the owner and primary author of Financial Highway, where he discusses investing, saving and practical money management concepts. You can check subscribe to his RSS feed or follow him on Twitter.

The past year and a half has been rough for investors, although many investors have grown tired for the financial advisers and have become DIY investors, others who have lost money are too frightened to do it themselves and have turned to financial advisors. Although nothing is wrong with having a good financial adviser, you have to understand that there is no magic to investing, the financial advisor doesn’t do anything you would be able to do yourself so why pay those hefty fees? A little while ago I provided some investing tips for successful investing, if you follow most of those tips you should be fine.

How to Become a Successful Investor?


There is no magic to investing, although the investment industry tries to confuse investors and make things look complicated, there is no reason to be worried. First step to becoming a successful investor is to keep things simple! I am a big fan of simplifying finances and investing, there are too many investment options available and too many contradictory opinions, the best thing you can do is keep your investment portfolio simple, here is how.

How to Simplify Your Investment Portfolio?


1. First find a good online discount broker, you can follow these tips to find the best discount broker for you. Discount brokers can save you a lot of transactions costs when it comes to investing.

2. Establish your asset allocation and investment policy statement. Asset allocation will help you determine how to allocated your assets between different asset classes. When you have your written investment policy statement ensure that you stick to it, only this way can you keep your emotions out of your investment and simplify your investing. You can download a sample investment policy statement from our site.

3. Purchase Index funds or ETFs, often investors purchase expensive mutual funds thinking active manager will perform better. The fact is that active managers lose to index funds, there is no point in paying hefty fees to mutual fund mangers when you can get better performs by investing in index funds and ETFs.

4. Ignore the Noise. Don’t pay attention to the media and so called experts, the media is known to exaggerate the reality and the so-called experts will only confuse you since most of them don’t agree with each other. Keep your focus on your long-term goal and ignore the noise.

5. Rebalance. Although I like passive investing, passive investing does not mean just leave things. Markets will fluctuate and your portfolio asset allocation will change you need to rebalance your portfolio along with market changes, this will ensure you are staying within your determined asset allocation.

Just following those five steps you will be able to dramatically simplify your investment portfolio, as I mentioned at the beginning there is no magic to investing, just keep things simple and follow some investing rules of thumb.

http://frugaldad.com/2009/10/13/successful-investing-not-magic/

How to buy stocks ? Buy stocks with confidence

Monday, January 19, 2009

How to buy stocks ? Buy stocks with confidence

Current stock market, as we all know, is in an uncertain situation with ups and downs in stocks every week. Every investor may be wondering about how to buy a stock as buying stocks for long term investment has become difficult when there are no clear market trends.

We advise investors to keep the following factors in mind in order to make safe and sensible investments.

Stock trades at cheap brokerage and buying stocks online or online stock trading have made stock trades a very frequent practice for normal investor, they should understnad that stocks mentioned here are for long term investing and will be fruitful if they hold for longer time durations.

1. Low Debt-Equity ratio stocks
This is the ratio shows that how much equity and debt is used by the company to finance its assets. Debt-equity ratio above one shows that the company has resorted to debt for financing its assets rather than equity. If the ratio is lower than one, it means the company has a lesser debt burden. The positives of such companies are that they need only a lesser amount to be kept aside to pay the interests that arise out of loans. The fluctuations in interest rates during high inflationary situations may have little impact on the financials of such companies. So companies that have zero debt should be targeted with a medium to long-term perspective.

2. Stocks trading below their book values
Another factor to be kept in mind while investing in shares is the book value. The book value of a company is the cost of an asset minus accumulated depreciation. In other words it is the total value of the company’s assets that shareholders would theoretically receive if a company is liquidated. So, if a stock is trading below its book value, then it is underpriced, and should therefore be seen as an opportunity to make an investment in that stock.

3. Buying ‘A’ group stocks
An investor with a medium to long-term perspective can, without any hesitation, go for stocks in the ‘A’ group, even if the situation is not very favourable. Once the markets consolidate and pick up, the first stocks to move up will be the ‘A’ group stocks as they form the index. When the index moves up, obviously these stocks will be the movers. One main thing to keep in mind is that, never make your whole investment in a single sector or a stock. Instead, investors should create a diversified portfolio including more than one stock belonging to different sectors.

4. Following the averaging pattern of investment
Investors should follow the averaging pattern of investment when the markets are volatile and not giving any trends. This will put the investors in a better position. The investor has to enter the market at three or four different times which will help the investor to reduce the per share price of his holdings.

E.g. if an investor is desirous of making an investment of Rs 40000, he should invest the money at three or four different times with an investment of Rs 10000 each. When the stock which the investor wants to invest in is trading at Rs 100, he can make his first entry by investing Rs 10000 and purchasing 100 shares of the stock. When the share price comes down to Rs 80, he can make his second entry by investing Rs 10000 and purchasing 125 shares. When the share falls to Rs 70 and then Rs 60, the investor can make his third and fourth entries by investing Rs 10000 each, and purchase 143 and 167 shares, respectively. When the market moves up from lows, the average rate of the stock in the investor’s portfolio will be Rs 74.7 which will be the investor’s BEP.

The following table shows the stocks that are trading below their book value and with zero debt. Investors also can go for stocks in the ‘A’ group segment which are/are not given in the table given below. Investment should be made in these stocks in the above said averaging pattern.


Source: Geojit Securtiy research house

http://www.indianstocksnews.com/2009/01/how-to-buy-stocks-buy-stocks-with.html

The difference between the buy and sell transactions is profit.

I. BUY LOW, SELL HIGH

The idea of "buy low, sell high" is as old as trading ownership of properties. It is the basis of all business. Buy a property at one price and sell it at a higher price. The difference between the buy and sell transactions is profit. To make a profit is the reason to buy and sell stock.

When the investor first heard about the takeover, it was already late in the game to make a play. Thinking for a day or two about buying or selling can sometimes be disastrous. The investor sold out the position without learning the details.

Once a strategy is put in play, an investor should not be so quick to change. The investor should have checked the background on the two companies. The 10 percent loss strategy is just that, a 10 percent loss. It has nothing to do with how a price will perform in the next few days. Some professional investors look for stocks that are down 10 to 15 percent and consider them buying opportunities. They know the 10 percent will be bailing out and the stock prices can become even better bargains. These investors will allow a 10, 15 or even 20 percent drop because the majority of buyers did not buy at the top.

If an investor is going to speculate on takeovers, it is important that he or she realize that the prices will tend to be volatile until the actual takeover occurs.

The axiom "buy low, sell high" should not be followed in reverse by the investor.


II. BUY HIGH, SELL HIGHER

Many individuals are attempting to "buy high and sell higher" when they buy a stock that is on the move. In fact, professional traders frequently use the strategy. Soaring prices are attractive to investors, who believe the prices will keep moving. As long as the momentum of the price swing attracts new buyers, the soaring stock price will continue to climb. It might run up for a couple of days, weeks or even months. Eventually, however, there is a hesitation, followed by a turn as the profit taking begins. The last buyers not only have the smallest gains from the run up, they will obviously also have the biggest losses. It is somewhat like a pyramid scheme where the losers are the last to join.

A severe market decline creates lower prices and large cash positions even though the earnings of stocks can remain unchanged. The bargains can be resisted for only a limited time. In a severe market decline, the climb back to former levels could take a few months or longer, but the recovery will come in time.

Where are the plays?

Individual investors can seek out stocks that are either in play by the institutions or are likely to come into play. Often they are stocks with strong fundamentals in earnings and revenues, found in industries with good growth potential. Medical products and devices can be exciting fast growth companies. Sometimes older products companies with strong growth records do well.

Enhancements

The strategy of buy high, sell higher can be enhanced by anticipated increases in earnings or by corporate takeover situations. Although anticipation of higher earnings creates unusually high ratios, when the earnings do increase, the ratios return to normal levels. If the earnings do not cause a return to normal levels, sellers will eventually force the return.

Takeovers

Corporate takeovers create a different situation. Professional arbitrageurs go on search missions in which they look specifically for companies likely to be bought out by some other company. The large leveraged buyout takeover can become a classic buy high, sell higher situation. For those companies who could arrange the deals, there was less risk with greater profits.

Long-term intention

Buying high and selling higher can be a visible way to make money in the stock market, but it is not without risk. The strategy usually calls for the intention of a longer term hold for example, when the earnings cannot catch up with the price or in a takeover, when the deal is finalized. Although it is possible to trade in and out during volatile times, the whip-saw effects of being on the wrong side can be devastating.

Corporate takeovers that fail to materialize are a different story. If a buyout does not occur, the stock price will probably fall to previous levels or below. Most often, investors would be prudent to sell and take the loss quickly, rather than hang on and hope for a recovery. A prudent play after selling out can be to attempt bottom fishing once the price gets hammered. Such activity should be based on the individual's belief that the stock can weather the storm and that the company is still capable of generating good earnings.

It would not be unusual for institutional or other experienced stock traders to play these stocks for small profits. They might sell short at the peaks and attempt to buy long at the lows. Such actions often end up to be momentum oriented. They watch the trades minute by minute to see if there is any strength as shown by volume. If strength is indicated by larger volume, they hold their position. If the volume declines, they close out their positions and plan their next strategy. Obviously, timing is everything in these speculative strategies.

Long or short term

Buy high, sell higher can work for either the conservative long-term or speculative short-term, strategy. But what either strategy needs is a stock that has a solid reason to go higher in price. Two of the main reasons for a stock price to go higher are anticipated higher earnings or a takeover plan.


III. SELL HIGH, BUY LOW

Sell short at a high price and buy back at a lower price. Wonderful, an investor can make money in a falling market.

Limited gain

A short position can profit only to the amount that a price drops. But in a short position, there is virtually unlimited risk because there is no limit to how high a stock price can go. Eventually, the shares must be bought back or if the investor currently owns the shares, delivered to cover the short position. The potential problem is that if the price does not fall, it might rise higher than the investor can afford to pay.


IV. SELL THE LOSERS AND LET THE WINNERS RUN

It is one of the most important understandings an investor can have about the stock market. It is prudent for an investor to sell stocks that are losing money, stocks that could continue to drop in price and value. It makes equally good sense to stay with stocks that show significant gains, as long as they remain fundamentally strong.

Any price drop is a losing situation. Price drops cost the investor money. They are a loss of profits. In some circumstances the investor should sell, but in other situations the investor should take a closer look before reaching a sell decision.

The determination of whether a stock is still a winner depends on the cause of the price correction. If a price drop occurs because of a weakness in the overall market situation or is the result of a normal daily fluctuation of the stock price, the stock can still be a winner.

If, however, the cause of the drop has long term implications, it could be time to take the loss and move on to another stock. Long term implications could be any of the following:

1 Declining sales

2 Tax difficulties

3 Legal problems

4 An emerging bear market

5 Higher interest rates

6 Negative impacts on future earnings

Any event that has a negative impact on the long term picture of earnings or earnings growth can quickly turn a stock into a loser. Many long and short term investors will sell out their positions and move on to a potential winner.


http://www.omniglot.com/info-articles/dallas/buy_market_price_sell_stock.html

The ways successful traders and investors think

The Twelve Commandments

I found that they are of general application to either trading or investing. Here are my renditions of his commandments:

1. It is important to be diversified as a trader or an investor. Never put more than 10% of your funds into one stock and no more that 20% into the one industry sector.

2. Regularly check how your investments are performing. Look at each one separately, ignoring the overall results for the last period. Be ruthless rather than hopeful.

3. Keep at least 50% of your funds in stocks that pay dividends.

4. Dividend yield is much less important that capital gain for investors as well as traders.

5. Close out losing trades and investments quickly. Be very reluctant to realise profits.

6. Never exceed 25% of you funds in speculative stocks, illiquid stocks or a stock about which information is not published regularly.

7. Never, ever invest on the basis of “inside information”. You can be sure you are the last to hear it.

8. Never ask advice about what stocks to buy or sell. Do your own work, based on facts, not the opinions of others.

9. Mechanical formulas and methods for trading, investing or analysing investments should be avoided. Thinking is hard work, but these things make you intellectually lazy.

10. In boom conditions, half your funds should be moved into short-term bonds.

11. Never borrow heavily to invest and only when stocks are depressed.

12. Consider putting a small proportion of your funds into long-term options (if available) in promising companies.

Finally, a direct quotation from Phil Carret’s The Art of Speculation, which contains one of the most important of the ways successful traders and investors think that is the exact opposite to the way losing traders and investors look at the problem:

If (the speculator) has 100 shares of a given stock, for example, which is selling at 90, he should disregard entirely the price that he paid for it and ask himself this question: “If I had $9,000 cash today and wished to purchase some security, would I choose that stock in preference to every one of the thousands of other securities available to me?” If the answer is strongly negative, he should sell the stock. It should not make the slightest difference in this connection whether the stock cost 50 or 130. That is a fact which is entirely beside the point, though the average individual will give it considerable weight.

http://www.bwts.com.au/download/redir/015-229cbe1fa45d50d9186c7357e9edddc4.pdf

5 Investing Adages That Are Still Relevant Today

5 Investing Adages That Are Still Relevant Today

Written By Soo L.

Being able to rely on long standing investing adages can help you keep a level head when investing. Human nature hasn't changed much since the birth of investing, which makes many adages relevant for years and years. If you're new or old to investing, here are a handful of adages that can help you stay on top of your game.

1. Bulls And Bears Get Rich, But (Greedy)Pigs Get Slaughtered
This is a classic investing adage with an important message. If someone is overly greedy, he/she will end up getting slaughtered. Greed can be a big problem if you let it control you. When greed makes your decisions, you can be hasty and uncareful in what you do, which can cost you big when making investments. If you don't do your homework and due diligence on your next investment and make an impulsive buy, you could easily get slaughtered.

The adage states that bulls and bears get rich, meaning those who don't succumb to greed get rich. This isn't true in all cases, but the message is still valid. If you stay disciplined and careful, it doesn't matter which side of the fence you're playing (either a bull or a bear), you can still make a handsome profit. To help put this adage to work in your investing life, remember to keep your your emotions and greed in check.

2. Be Fearful When Others Are Greedy, And Greedy When Others Are Fearful
When others are fearful, there is less demand, and when there is less demand, and prices are lower. This adage teaches that it is important to take advantage of these types of situations because, like greed and other emotions, fear can make people act irrationally. If you follow the crowd and are greedy when others are greedy and fearful when others are fearful, you'll just be following the trends and playing catch up with the crowd. This type of investing strategy is hardly effective because usually all of the profits are taken before everyone else learns about it.

The adage teaches to take advantage of opportunities in markets where fear has an unrealistic effect on the price of things. An example of this was on September 11th, 2001 where stocks plummeted so quickly that the US markets had to close. Fear had a tremendous effect on the entire stock market and there were certainly bargains for any investor.

As with any investment, there is no certainty in anything you do, Even if you are greedy when others are fearful won't automatically make you rich, but having a non-herd mentality can give you an edge. The first adage on this list gives a warning about the danger of greed, which is still relevant to this adage. Even though it recommends being greedy, it is still important to keep your greed under control.

3. Never Try Catching A Falling Knife
This adage is an important counter to the previous one. While it is important to not be another sheep in the herd, it is also important to not be too much of a contrarian. If you see other people are fearful over a certain investment and are selling, there is a chance that they're letting their fears get the best of them, or there is a very legitimate reason why people are selling. If you get involved in an investment that's plummeting and you try to catch it like a falling knife, you could get cut.

Again as the first adage states, it is always important to not be too greedy. You have to do your homework and research before getting into any investment. If you don't, you might as well gamble your money at the casino. By avoiding falling knife investments, you'll be able to protect yourself from seriously damaging your portfolio. Stay away from industries and sectors that really have no future. Investments are only successful if they increase in value, which is impossible in a dying industry or sector.

4. A Rising Tide Lifts All Boats
When the economy is doing well, most companies do well as a result. This is the reasoning behind this old adage. If you ignore rising tides in economies, industries, and sectors, you could miss out on big profits. Missing out on these types of profits can hurt you because trend following is one of the easiest and most reliable investing strategies (as long as you're not the last one that follows).

If you see trends forming early on in any market, and invest in that market, you can make a very nice profit. The important part again, is to do your homework to identify the most credible trends and take advantage of them before anyone else. The earlier you get in on an upward trend, the better off you'll be.

5. Let Your Winners Run, Cut Your Losers
When you invest, it is easy to sell your successful investments and keep your failing ones. This is what comes intuitively to most investors but can end up costing you a lot of potential profits. By selling your winners too early, you could miss out on huge gains. By keeping your losers too long, you could realize many losses. This isn't always true, but it makes mathematical sense; if you keep your money in losing investments instead of winning ones, you'll more likely end up losing money.

If you have an investment that has been performing consistently well, there is no good reason to sell it. As the adage states, it is important to let your winners run. By selling too early, you could miss out on a lot more than holding onto a losing investment for too long. When holding onto a losing investment too long, you can only lose the money you initially spent. If you sell too early, you could lose many times the amount of money you initially spent. By letting your winners run, and cutting your losers, you can do much better than doing the opposite. As with all investments, it is still important to do your homework.

http://www.manhelper.com/money_career/5_investing_adages_that_are_still_relevant_today

The Best Place to Find Promising Stocks

The Best Place to Find Promising Stocks
By Motley Fool Staff
June 25, 2009



Everybody loves getting in on a secret. It doesn't matter what it's about, whether it's who some politician went hiking the Appalachian Trail with or the identity of the leaker in the Watergate scandal. While some secrets cost you only the price of a grocery-store tabloid, some people will try to collect quite a bit more information.

Consider how much you would pay to learn the secrets of successful investing. Many well-known financial gurus have written books that try to explain their winning recommendations; several, such as Peter Lynch's One Up on Wall Street, have become best-sellers. Even now, many fund managers define their aspirations for success by seeking to become the next Peter Lynch or Bruce Berkowitz.

It turns out, however, that the secret of how successful fund managers pick investments isn't much of a secret at all. You don't have to buy a book or a magazine to find it. In fact, it doesn't take a lot of effort to find out all sorts of things about how the best fund managers are investing.

The worst-kept secrets of successful fund managers
Sounds like a good book title, doesn't it? In truth, fund managers aren't allowed to keep their investment choices secret for long because mutual funds are required to fully disclose their holdings. The Investment Company Act of 1940, which governs mutual funds, requires funds to disclose several types of information to fund shareholders at least twice a year, including financial statements of income and capital flows, fees charged by management, and lists of securities held. The SEC has considered requiring more frequent disclosure, and many funds voluntarily release information on a more frequent basis.

This means that if you identify a fund manager whose style you like, and whose results have been good, you can look at what investments have contributed the most to the manager's success. There are a few different ways of doing so.

Analyzing fund holdings
Some mutual fund managers choose to take large positions in a relatively small number of individual stocks. If the fund performs well, it's usually because those large positions do well. So, by looking at the largest holdings in a particular fund, you often identify individual stocks that have performed well.

For instance, in looking at the market-beating performance of the Fairholme Fund, you'll find that the top 10 holdings constitute over 60% of the entire fund. You can see that many of these holdings, including Sears Holdings (Nasdaq: SHLD), Pfizer (NYSE: PFE), and Forest Labs (NYSE: FRX), have held up relatively well over the past year, which helped contribute to the fund's overall performance.

Not all of a fund's top holdings have to be winners for the fund to perform well. For instance, a look at Longleaf Partners (LLPFX) shows that while investments in Sun Microsystems (Nasdaq: JAVA) and Level 3 Communications (Nasdaq: LVLT) have done well so far in 2009, the fund's shares of FedEx (NYSE: FDX) and Berkshire Hathaway (NYSE: BRK-A) have held the fund back from an even stronger performance. Sometimes, the best-performing choices won't even be among the top holdings.

If you're willing to do a little more research, you can look from quarter to quarter to see what changes a fund manager is making in the fund's holdings. If a company drops off the holdings list, then you know that the manager has lost confidence in that company. Similarly, if a new company appears, or holdings in an existing company increase dramatically, then the manager believes that company will do well.

Building your own fund
By looking at the best investments of successful fund managers, you can create your own portfolio, including the best of the best. One excellent way to build a well-diversified portfolio is to pick a few companies from each of your favorite funds in a variety of asset classes, thus quickly putting together a portfolio that includes companies across a wide spectrum of company sizes, regions, and industries.

Limitations of using fund data
But, like other investment strategies, using fund holdings data doesn't guarantee success. For one thing, many funds buy and sell stocks frequently, so a stock that appears on a list of holdings one day may be sold from the fund the next. As a result, you may buy a stock at exactly the time the fund has sold it. For funds with high turnover ratios, it's important to identify core holdings that the fund has owned for a long time.

Also, many funds own stock in a huge number of companies, so even the top holdings don't represent a large percentage of the portfolio. When such funds outperform their peers, it's more likely a result of more subtle differences in allocating money among similar companies. For instance, a fund might have 4% of its assets in a stock, while the index gives it only a 3% weighting. So, if that company does well, the fund will benefit from the larger position. You may not notice the impact of these subtle differences simply by looking at a fund's list of holdings.

However, if you're looking to understand how your favorite fund manager thinks, or if you're looking for good companies to consider, looking at a fund's list of holdings isn't a bad place to start. Keep in mind that you can always just buy the fund and let the manager do the work for you.



This article was originally published Sept. 1, 2006. It has been updated by Dan Caplinger, who owns shares of Berkshire Hathaway. Fairholme Fund is a Champion Funds recommendation. Berkshire Hathaway and FedEx are Motley Fool Stock Advisor recommendations. Berkshire Hathaway, Pfizer, and Sears Holdings are Motley Fool Inside Value picks. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy tells all.

http://www.fool.com/investing/mutual-funds/2009/06/25/the-best-place-to-find-promising-stocks.aspx