Showing posts with label investment tips. Show all posts
Showing posts with label investment tips. Show all posts

Monday 18 May 2020

Generating Ideas

The value investing model needs to be fed stock ideas. These ideas can come from different sources, some of which are more fruitful than others. I look at seven.


1.  The first source is bad news. 

Stories about companies often emphasize an extreme element of an event. These extremes get amplified in headlines. Headlines drive human reaction, sometimes too far. This can cause stock price
swings deeper than would a more sober take on the facts.


Overreactions don’t just come from individual investors. They come from professional money managers as well. For example, a hedge fund doesn’t want to scare off its limited partners when it reports holdings at the end of a quarter.  As such it may dump a perfectly good company going through some passing embarrassment.


Sometimes a news-driven stock price drop may be warranted, but overdone. Take Anheuser-Busch, the maker of Budweiser beer. In 2005, newspaper articles appeared suggesting that beer’s days were over. Alternatives like vodka with Red Bull were gaining ground with younger drinkers. I analyzed AnheuserBusch and found it to still have a thriving core business. But the stock price dropped anyway.

As I was turning this over, dad invited me to the baseball game in San Francisco. I can’t remember who the visiting team was, or who won. But I do remember what I saw:
people drinking a lot of beer.

My observation hardly qualified as advanced market research. Plus it happened in an American ballpark, a natural context for beer drinking. But it was real. Beer’s days weren’t over. Shortly afterward I paid $45 per share for 
stock in Anheuser-Busch.

Three and a half years later, in November 2008, the company was acquired for $70 per share. Including dividends, that investment delivered an average annual return of around 15 percent. I neither sought nor liked the buyout. 
 But taxes on gains are the preferred kind of financial pain.

Other times a news-driven stock price drop is fully justified. For example, Volkswagen’s share price plunged following an emissions scandal that emerged in September 2015. 
 While the situation is still playing out as of this writing, it  appears that there was in fact an organized effort within the company to skirt regulations. That’s bad. Plus, Volkswagen didn’t register as good before the crisis. Its ROCE was underwhelming. To the astute investor hoping to hold for decades, the situation presented little opportunity.

On rare occasions a news-driven stock price change is totally unjustified. This can happen because a story affecting one company leads to trading in the stock of another. For example, online messaging company Twitter chose TWTR as its stock ticker symbol in preparation for its November 2013 IPO. This caused a wild surge-and-crash cycle in TWTRQ, the common stock of bankrupt electronics retailer Tweeter Home Entertainment Group.


Bad news can involve real tragedies. Security breaches compromise privacy, train crashes cause injury, and foodborne bacteria spark illness. No investor of conscience wishes for these mishaps.

But sensationalist reporting can trigger dislocations that don’t make sense. The gap between price and value yawns. The astute investor is meant to bridge it. Good investing has no friend like bad journalism.


2.  A second source of ideas is
spin-offs. 
A spin-off is the public listing of a company that was  previously part of another listed company.

The spin-off process generally starts with a distribution of shares in the newly independent entity to the old parent’s shareholders in the form of a dividend. Then those new shares start trading.


Often, some of the old parent’s shareholders are institutional investors. When their spin-off shares start trading, they may sell them automatically. This is because the new stock doesn’t meet their formal investment criteria, such as a minimum market cap. This forced selling can depress the price of shares in companies that, if they’re both understood and good, are worth owning.


3.  A third source is regulatory filings. 

Many governments require large investors to periodically report their holdings. These filings are public. One can compare reports between periods to see which stocks talented professionals bought. 

In America, money managers with at least $100 million in assets under management are required to file a quarterly report that lists—with some exceptions—their U.S. stock holdings. Called a 13F, the report is due 45 days after the close of a quarter. They’re posted at www.sec.gov. Check midway through February, May, August, and November.

Mining 13Fs has many limitations. Understanding them helps to make the tactic work.


The first limitation is that one has to know which professionals are worth following. Outperforming mutual fund managers are easy to spot, since their track records are public and clear. But private fund managers may share their records only with clients. And professionals that run portfolios inside larger companies—even listed ones—may never detail their histories.

One can’t really know if a professional is worth following before seeing a track record. Fame is not a proxy for performance. I am routinely struck by the high profile of some perennial laggards, and the anonymity of some total stars.


A second limitation is that 13Fs disclose only long positions. 

They don’t disclose short positions. This makes them useless for studying managers that pair long and short positions in what are effectively single bets. It’s potentially dangerous to mistake the visible long half of such a bet as the full bet.

Third, 13Fs don’t disclose the prices paid for shares. 

One can research the low for a quarter and safely conclude that the price paid was not below that. But greater specificity isn’t available.

A fourth limitation is the time lag. 

In the 45 days since the end of the quarter, stocks just bought could already have been sold. Correspondingly, positions sold could have been reestablished.

Fifth, the filing itself can drive the price of a stock up

When a well-known professional buys something, many blindly follow. This can end any inexpensiveness that once helped to make the stock attractive.

Sixth, a stock appearing for the first time on a 13F may not have actually been bought. 

It may have been received in a spin-off. A money manager may even have started selling it between the date of receipt and the date of the filing.  It could be the opposite of an idea worth considering.

Seventh, the authority bias can push one to play copycat. 

A psychologically undisciplined investor can unthinkingly mimic a master. But masters make mistakes. It’s better to view the debut of a stock on a 13F as an invitation to analyze from scratch.

A different cognitive bias can push one away from reading 13Fs. It’s the peculiarity bias. It can make 13F mining seem parroty. Dirty, even. But that’s 
misguided. Consider an analogy.

Imagine a restaurateur with a downtown restaurant. Every quarter, the restaurateur receives in the mail a letter from a trusted authority. The letter discloses the major actions taken by the most successful restaurant in the country. One quarter it might say that the exemplary establishment raised soft drink prices by 5 percent. The next quarter, it bought a new fryer. And so forth.


Would the restaurateur throw out the letter without reading it? Of course not. It’s informative and accurate, and might contain a useful idea. It’s like the best trade magazine imaginable, free and errorless. Plus the restaurateur accepts no obligation to do whatever the better establishment did just by reading.


An investor ignoring 13Fs is like the restaurateur throwing out the letter. It’s an odd, limiting act. A better approach is to read select 13Fs fully aware of their shortcomings, secure in the knowledge that autonomy is not sacrificed. One isn’t required to replicate a hero’s trade any more than the restaurateur is required to buy a new fryer. A disclosure is not a directive.


4.  The fourth idea source is
reorganizations. 
Often shortened to reorg, a reorganization is a transformative event in a company. It could be 

  • a merger, 
  • a big change in capital structure, or 
  • the sale of a major division. 
It often involves complications that only an investor comfortable with complexity would care to sort out.

Such complications repel many. This limits the universe of potential buyers. A lower share price can result.


5.  A fifth source is
small capitalization stocks
Also called small-caps, these issues generally have market caps under $2 billion.

Companies this size can be hard for institutional investors to buy, for two reasons. 


  • For one, they may be prohibited by charter from buying stocks with a market cap below some threshold. 
  • Second, even if they’re allowed to buy small-caps, it might not be useful for them to do so.


Picture a $50 billion mutual fund that sees promise in a $500 million market cap firm.  Even if it buys
 10 percent of the company, and that stake doubles in price, the needle on the fund’s overall performance would barely budge. So the investment wouldn’t be worth making.

These two factors leave many small-cap stocks untouched by a big part of the asset management universe. The result can be lower share prices worth pursuing for those running smaller amounts of capital.


Small-cap investing can take on some of the characteristics of
activism. Activism is agitating for change in owned companies. It can come with small-cap investing for two reasons. 

  • First, sometimes it’s necessary. Small-cap company management teams may take advantage of the absence of big institutional investors to do things that they wouldn’t with greater oversight. 
  • Second, it’s possible. Small-cap executives may be more accessible than large company executives. Presidents quickly returning e-mails is not unusual. 
In short, small-cap investing can occasion a deeper involvement with holdings, something that the astute investor readies for.

6.  A sixth source is
stock screeners
Stock screeners are Internet tools that filter stocks according to quantitative parameters. They’re often based on valuation metrics. One might fetch a list of stocks ranked by their price to book ratio, for example.

Stock screeners aren’t my favorite source. To the long-term holder interested in first understanding a business and seeing if it’s good, starting with valuation is putting the cart before the horse. Additionally, stock screeners can call attention to companies in outlying financial situations that wouldn’t interest someone looking to hold for life. Nonetheless, many strong investors get good at tapping this source for ideas.


7.  Seventh is
serendipity
Serendipity is the mental preparedness to receive tips from everyday life. It requires being engaged with the world. While driven by chance, it doesn’t strike randomly. It favors the open mind.

I first became interested in the Swedish company Clas Ohlson when I noticed that every time I went into one of their Stockholm hardware stores, there seemed to be
a lot of customers buying a lot of things. I analyzed the company and found it to be good. Had I not been receptive to ideas that crop up unexpectedly, I might not have noticed it.

Incidentally, this particular find didn’t play out perfectly. The stock never got inexpensive enough for me to buy. Plus, I got a little overzealous in my search for disconfirming evidence.


During travels around Sweden, I would pop into stores just to make sure that the chain’s appeal wasn’t limited to Stockholm. It wasn’t. They all had customers. Then late one afternoon at the end of a weekend in the city of Helsingborg, I walked into the Clas Ohlson store on the main pedestrian mall.  Empty.
Gotcha, Clas Ohlson. As I was peeking down the aisles to make sure that  I hadn’t missed anyone, a woman called over from behind a counter, “Pardon, but we’re closed.”

Serendipity is also useful in reaching conclusions about companies already under consideration. In 2012 I was analyzing Tesco, the British grocer. Investors I admired owned it. Also, I’d recently been floored by its express store on 
Monck Street in London. It had everything that I’d come for, all located right where I expected.

Serendipity intervened the next month, back in California. I noticed an ad for a new chain of supermarkets called Fresh & Easy. It turned out to be owned by Tesco. I visited the store closest to my house, in the city of Mountain View. Product quality was high, prices were fair, and the staff was attentive. Of course the staff was attentive—
I was the only customer. I stopped my analysis. Since then Tesco’s stock price has plunged, due in part to a drop in same-store sales to which my neighborhood Fresh & Easy clearly contributed.  It’s closed now.

Serendipity is great with consumer-facing industries like retail. They’re exposed. But one may be familiar with other, less universally visible industries because of a job or background. It works there, too.


Serendipity has the pleasant effect of boosting the relevance of ordinary environments. Everything is evidence. The logos on people’s shoes, the number of passengers on the plane, the brand on the broken escalator—all can inform judgments about what people buy, what companies make, and what products work. This doesn’t condemn one to a life at a heightened state of alert. Rather, it offers a spigot of ideas whose handle the astute investor controls.





#The seven sources are mere inspirations for the model. 

None of them credential an idea to pass through with preferential treatment. In fact, once one feeds an idea into the model, it’s best to forget where it came from.

The advantages of this practice are clear. When we forget that we’re looking at a company because it’s a spin-off, it’s owned by a hero, or its stock price plunged, we keep a whole raft of cognitive biases at bay. We get raw material worth processing, plus the clear mind needed to process it well.




Summary

Promising sources of investment ideas include:

1. Bad news
2. Spin-offs
3. Regulatory filings
4. Reorganizations
5. Small-caps
6. Stock screeners
7. Serendipity

Thursday 7 May 2020

Dangerous traps to be avoided

Temptation from friends, office colleague or neighbors

“Hey bro, today I made 10,000 from the stock market”! You may find similar kind of statement from your friends or office colleague or neighbors. During bull market, such comments are quite common. The fact is that your friend won’t share the incident when he lost 10,000 from stocks. It gives us immense pleasure in sharing our achievements. On the contrary, sharing failure is shameful and hard.

Similarly in the stock market, it is a matter of immense pride to “earn 10,000”. Sharing such statement gives us much more delight than to earn it. On the other hand, nobody wants to share or accept his failure.

So, a statement like “I made 10,000” is just a single part of the story. Don’t jump into the stock market just because of such “partial information”. Don’t get excited with your friend’s success story. Don’t follow stock recommendations based on such stories over social media (Facebook, Whatsapp etc)


Temptation from your broker –

Your broker will offer reduced brokerage for frequent trading or large volume trading and is always ready to offer high margin money for trading. They may try to convince by saying “You have 20,000 in your trading account. Not an issue, you can buy shares worth 50,000 and sell it within 3 days to pocket more profit. Planning for intraday, well you can trade worth $$  – many brokers offer such terms. What they don’t mention is “earning for them” not “earning for you.” Apart from these, you may also receive SMS alerts or email alerts as trading tips from your broker. Have you ever seen, your broker offering any investment idea that is for 2-3 years holding period? They can’t offer because their broking business will dry up if you buy today and hold them for 2-3 year. On the contrary, wealth can only be created over the long run. In the short run, frequent trading can only increase your chances of losing money and increase broker’s earning.


Temptation from so-called analysts –

During bull market (while the market goes up) any Tom can consider themselves as an equity analyst. With the advent of internet, you will find thousands of self-claimed analysts over social media (Facebook, Whatsapp etc)  Whenever the market goes up, you will find television, newspapers, websites flooded with stock tips. Almost every analyst will draw a rosy picture and encourage you to invest in stocks. Surprisingly, the same analysts elope during a bear market (when the market goes down). The worst part is that during bear market these analysts will even mention avoiding stock market, fearing that it may fall further. The reality is that during the bear market, quality stocks are available at a cheap rate, and thus it is one of the best times to invest. Moreover, if you select quality stocks then overall market movement rarely matters. High quality businesses are always poised to do well in any  market situation. Don’t get carried away by any analysts.


Temptation from stock tips provider –

Nowadays, it is common to get phone calls, SMS alerts from various stock tips provider. Eye catching advertisements are so popular.  Remain alert whenever you notice high return promises. Many trading tips provider claim 50%+ monthly return from their trading strategy. If that would be the case then today every billionaire would be creating their fortune from stock trading. Reality says something different.



Overconfidence-

Suppose, you started investing during a bull market and successfully earned 45% return at the end of first year. All your purchased stocks were performing well. In such a situation, you may start thinking that you have mastered the subject very well. As the market moves up, so moves your confidence level, you keep on increasing your investment amount. You are now too aggressive. Suddenly market crashes and there comes a prolonged bear market. It is the bear market that separates intelligent investors from others. Don’t get lured and invest aggressively if you find your portfolio giving above average return during a bull market. The stock market doesn’t move linearly. It’s quite easy to make money during the bull run but difficult during the bear period. To become a successful investor, you need to learn the art of making money across all market situations.




Why paid trading tips are sometimes more dangerous?


Why paid trading tips are sometimes more dangerous?

You can lose your investment amount from free trading tips but what about paid tips. Surprisingly paid tips can make you suffer more because in this you not only lose your invested amount but also your subscription amount.

Just conduct a basic Google search. You will find several trading tips provider showcase fabulous past performance, promise 50%-100% monthly return and offer 2-3 days free trial.


Any stock tips provider can trap you from offering 4 days free trial tips.

Now, let’s see how this scam actually works. Initially I had 5,000 subscribers. I divide them into two groups (2,500 each) – Group A and Group B. I send “Buy” call to Group A and “Sell” call to Group B. Now, either the stock price will move up or down. So, one of them will be surely correct. I already noted which one is correct. The stock moved up, so “Buy” call to Group A was correct. I retain Group A and discard Group B. Now I have 2,500 subscribers (Group A) and repeat the process. Divide the 2,500 into two groups, send “Buy” call to one and “Sell” call to another. One must be correct. I again retain the correct one and discard the group that received wrong trading call. I repeat the same process for 4 consecutive days and end up with a group of 312 people who received all 4 correct tips. You may be the one among those 312 people.

Now, you can imagine how people get trapped into this scam. 

I can easily reach out to those 312 “Target” subscribers over phone call for follow-up and final subscription payment. Out of 312 even if 50% i.e. 156 subscribers finally opt for paid 6 months subscription, then also I can easily earn their huge fees. So, earning big money  based on nothing rather simply cheating others is a serious deal and an easy task. The beauty of this strategy is after getting 1 wrong call the same person is not receiving further calls. Out of the 5,000 group 312 subscribers are getting right on every occasion and it becomes very easy to trap them.



In real life you will find many trading tips provider claiming 90%- 95% success ratios. 

Interestingly all of them are claiming 90%-95% or even 100% success ratio and showcasing fabulous past performance. Subscription fees are always on higher side.

Next time onwards, if anyone mentions such bullshit like “90%-95% accurate trading tips for 50%+ monthly gain with 2 days trial”, simply ask why you guys don’t trade on your own. If your calls are so accurate then what’s the necessity of selling tips. If they still keep on talking rubbish, simply disconnect the call.

Sunday 11 December 2011

Share market investment strategies: General planning tips

Share market investment strategies:  General planning tips

Never buy shares on tips or rumours alone.  Try and understand the type of business the company is involved in before you invest.

Remember, the higher the potential return, the greater the risk.  Real rates of return (i.e. adjusted for tax and inflation) average around 4 percent to 5 percent per annum over the longer term (seven to ten years).  Don't be misled by apparently impressive historical investment statistics:  past performance is no indication of things to come.

Keep your portfolio manageable by concentrating on a relatively small number of quality investments.  To do this, avoid acquiring lots of speculative stocks.

Check the liquidity of each investment (how long it takes for your money to be returned if you decide to cash out).

Understand all transaction cost, including early withdrawal penalties and tax implications.

Always maintain an adequate cash reserve to cover unexpected expenditures, emergencies and new investment opportunities.

To minimise risk and maximise growth, you should assess how much risk you are prepared to take and spread your investments across several investment types and different companies.



http://www.asx.com.au/courses/shares/course_09/index.html?shares_course_09

Saturday 10 July 2010

What to do with a "tip"? Do not Ignore, however study and scrutinise this further.

From my chatbox:

6 Jul 10, 11:38 PM
STOCK WATCH: Hi guys,tips of the year.....CRESBLD.....syndicate will goreng this stock soon...BEWARE!!!!!!!!
7 Jul 10, 08:26 AM
bb: stockwatch gave a "tip". My approach to tip is not to act on it. However, one may wish to study the stock further.
7 Jul 10, 08:26 AM
bb: Often when the "tip" reaches your ear, it is often at a late stage in the game.
7 Jul 10, 08:30 AM
bb: Don’t believe everything you hear In a market full of various news and hearsay, it is difficult to differentiate between facts and rumours.
7 Jul 10, 08:31 AM
bb: There are many instances where owners and syndicates who want to see higher stock prices purposely fabricate various news on potential contracts, corporate exercise, etc to analysts and reporters with
7 Jul 10, 08:31 AM
bb: .... with the intention to mislead investors.
7 Jul 10, 08:32 AM
bb: Every piece of news must be scrutinised to determine the authenticity and its impact on the earnings.
7 Jul 10, 08:32 AM
bb: Although this could be difficult in many cases, effort is still needed to avoid falling prey to unwarranted predators.
bb: One advice for investors is to only believe events which are more likely to happen, and only on those stocks where the management can be trusted.

Sunday 18 October 2009

Ten top investment tips from Dr Mark Mobius



June 30, 2009
Ten top investment tips from Dr Mark Mobius





Dr Mark Mobius is one of the most experienced fund managers in the industry.

He has been managing the Templeton Emerging Markets Investment Trust since its launch 20 years ago. In that time the value of an investment in the trust has multiplied more than eleven times.


Here Dr Mobius draws on his years of experience to offer ten investment tips to Money Central readers.



1. Keep an eye on value

Is a share selling for below its book value? What is the relationship between the earnings and the price?


2. Don’t follow the herd

Many of the most successful investors are contrarian investors. Buy when others are selling and sell when others are buying.

3. Be patient

Rome was not built in a day and companies take time to grow to their full potential.

4. Dripfeed your money into the market

No one knows exactly where markets are going so dripfeed your money into the market by making regular investments. That way you will average out the ups and downs of the market.


5. Examine your own situation and your appetite for risk

You should not go into equities if you are the type of person who is nervous every time you read a stock market report.


6. Diversify your portfolio

You must never put all your eggs in one basket unless you have a lot of time to watch that basket - and most of us don’t.


7. Don’t listen to your friends or neighbours when it comes to making investment decisions

Your own situation is different from everyone else’s so you should be making the decisions.


8. Don’t believe everything you read in newspapers, because things tend to be exaggerated

Don’t be swayed by headlines and look at what is going on behind the scenes.


9. Go into emerging markets because that is where the growth is

Emerging markets have consistently grown much faster than the developed countries in virtually every year since 1988.


10. Look at countries where populations are relatively young

Countries with young populations are going to be the most productive in future years.

http://timesbusiness.typepad.com/money_weblog/2009/06/mark-mobius-ten-top-investment-tips.html