This is a very good thing.

Keeping a long-term perspective will continue to be the key to success.

As long as you have picked a long-term strategy that makes sense and you believe in.

Investing for long term is a better strategy

3 Oct, 2010, 05.56AM IST,
Ashish Gupta,ET Bureau

Investing for long term is a better strategy

With the breaching the 20,000 mark and looking good for 21,000, what should be the strategy of individual investors? Should they take the plunge? Normally, during times like these, everything sells. Look at the number of IPOs hitting the market in such a short span of time and demanding huge premiums. And most were a running success.

The fast-growing economy has pushed the growth process. The most important factor has been the sustained foreign institutional investor (FII) interest in the markets that gave the Sensex its big thrust. Inflow of foreign capital and strong economic are behind the optimism in the markets.

FII factor

Although bull phases are good, need to be cautious. A bull run is good news for investors. However, some analysts expect a correction. A deep correction could create panic among investors who may resort to booking profits. Such a situation is more likely as the index rise has been rapid and unexpected. Moreover, as the bull run is largely due to foreign capital flows, the market direction is highly unpredictable.

This is because FII sentiment is impacted by global developments and trends. Many factors may trigger a fall. A slowdown in growth, political developments, employment data, inflation -anywhere in the world -could have an impact. In case the start pulling out, it may lead to a financial concern. It is better for small investors to be cautious lest there is a deep correction.

Go by fundamentals

Further, investors should invest in and stick to fundamentally-strong companies. The stocks of these companies are normally stable and grow at a steady pace. They are neither affected by booms nor by falls. They tend to weather volatile times well. Investors should ideally invest in large-cap stocks. These are less risky than small-cap stocks. Although small-cap stocks have tremendous growth potential, they carry a higher potential of downsides.

Diversify portfolio

You should also diversify your portfolio. There should be a mix of debt and equity. A reasonable portion should be invested in debt, offering secured returns. The entire funds should not be parked in equity. Although it has the potential to provide higher returns, the equity route also carries with it the inherent risks of a downside as well. Also, borrowed funds should not be used to invest in the markets. One should look at strong, growing sectors that hold potential for growth. Even in these growing sectors, you should choose the fundamentally-strong companies.


http://economictimes.indiatimes.com/features/financial-times/Investing-for-long-term-is-a-better-strategy/articleshow/6672767.cms

Historical Investment Data of KLSE 1993 to 2010 (6.6.2010)

Historical Investment Data of  KLSE 1993 to 2010
http://spreadsheets.google.com/pub?key=tVCJOWP_2GLeToC9ioAeuZw&output=html


Here are some interesting observations:

KLCI Index 
Beginning of 1994:   1275.32
Beginning of 2010:   1259.16  :-(

Market Returns
During the period, the average annual capital appreciation of the stock market was 4.26%.  Assuming a DY of 3%, the total return of the market was 7.26%.

Of the 17 years from 1994 to 2010:

• There were 5 Bear Markets when the market index went down >20% from the beginning of the year.
• There were 4 Bull Markets when the market went up > 20% from the beginning of the year.
• The rest of the period (8 years), the market fluctuated between +/- 20%; there were 6 positive years and 2 negative years.
• The market was very volatile at times.  For example, the KLCI was down 53.19% in 1997 and was up 55.91% in 1999.  In the year 2008, it was down 36.52% and in 2009, it rebounded 42.37%.

What can we learn from studying the KLCI?

What investment strategies can be employed to safeguard your investments in the local stock market?  What investment strategies can be used to maximise your investment gains?

Investment Strategies and Theories You Must Know for Greater Investment Success!

Warren Buffett once said, "To invest successfully over a lifetime does not require a stratospheric I.Q., unusual business insight or inside information.  What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."

Posted here are some basic foundations to help you develop your own investment strategy and to help you make better investment decisions.  These are also the investment strategies and theories you must know for greater investment success!


Investment Styles
"Your 'Basic Advantage' is to be able to think for yourself."  Wisdom from Benjamin Graham.

Different Investment Styles
Value Investing
Growth Investing
Core/Blend/Market-oriented
Stock Pickers
Market Capitalisations
Value and Small Cap Stocks
Top-down Approach
Bottom-up Approach
Benchmark Investing vs Absolute Return Investing

Methods of Securities Selection
Fundamental Analysis
Technical Analysis
Techno-fundamental Analysis
Limitations of Fundamental and Technical Analysis

----

Investment Strategies and Theories
"You need a strategy and sound approach before you invest."  Anonymous

Short-term Strategies
Short Selling
Margin Investing
Momentum Investing - "Buy High, Sell Higher"
Sideway Trends

Long-term Strategies
Buy and Hold
Dollar-cost Averaging
Ladder Investing

Managing Risk 
Diversification
Danger of Owning Too Many Stocks
Modern Portfolio Theory
Limitations of the Modern Portfolio Theory
Asset Allocation
Criticism of the Asset Allocation Strategy

-----

Portfolio Management Strategies
"Successful investing is more than buy, hold and forget."  Anonymous


Static Asset Allocation
(i) Buy-and-Hold
(ii) Strategic Asset Allocation

Flexible Allocations
(i) Tactical Asset Allocation
(ii)  Dynamic Asset Allocation

Core-satellite Portfolio Management

Alternative Strategy - A Trader's Approach
Short Term Trading

----

Limit Your Losses
"Survive first and make money afterwards."  George Soros


The Evolution of Buy-and-Hold Advice
Efficient Market Hypothesis
Random Walk Theory
Merits of the Buy-and-Hold Method
Weaknesses of the Buy-and-Hold Method

Forgotten History of a Sideways Market
Futile Asset Allocation Strategies

The Easy Way Out?
Transaction Costs
Limitation of Traditional Investment Funds

Market Anomalies
Value Investing
Neglected Stocks
Low-priced Stocks
Small Cap Stocks
Investors' Irrationality

How to Prevent Big Losses
Rule No. 1 - Set and Apply Stop-Loss Rules
Rule No. 2 - Do Your Homework
Rule No. 3 - Look for Margin of Safety
Rule No. 4 - Do Not Bet Too Much at One Go
Rule No. 5 - Do Not Over Diversify
Rule No. 6 - The Trend is Your Friend, Until It Bends
Rule No. 7 - Avoid Deadly "Price Bubbles" When They Pop


Ref:  How to Be a Successful Investor by William Cai

Stock market strategy for the winners

Stock market strategy for the winners
by Tejinder Singh Rawal

The recent fall of indices resulted in many speculators and day traders losing their shirts. Crores of rupees worth of capitalisation was lost in a week. The momentum investors who were jubilant at the rising charts during the last six months were suddenly cornered, and many of them lost a substantial part of the gain that they had made. This has prompted me to write about the strategy that most successful investors have followed to beat the street irrespective of which way the indices were going. An investor who plans his investment prudently, keeping a long-term horizon in mind, will succeed even if the indices go down. Here are the suggestions.

Invest for the long term: When Keynes said, in the long run we are all dead, he was certainly not referring to the stock market. The success in stock market largely depends upon your ability to stay invested for a long period. It is strange few people heed this advice! Most investors in Indian markets continue to be short-term investors, and speculators. Day trading is an important characteristic of Indian stock markets. Short-term investment is nothing more than a speculation, and you can rather try your luck at horse races, or at casinos where the probability of success is higher!

Do not time the market: A long-term investor does not try to predict the direction the market is going to take. You should not wait for the market to rise or fall before you decide to invest. Since as a long-term investor you will be focussing on the value of individual share, rather than the frenzy of the market, market direction should not be a cause of concern, as long as you are sure that the investment you are making is attractive, and has a sufficient margin of safety built into it. As a long-term investor, you should not hold your cash, waiting for the market to fall, so that you can invest when the prices are low. You should know the time value of money, which means that the early you invest the higher will be your return. Moreover, if you invest regularly, you are able to take advantage of 'rupee averaging', which takes care of market fluctuations.

Do your homework: As a long-term investor you should know the fundamental value of the share you are buying. Remember that PE ratio is not the acid test of investment. Low PE ratio does not on its own make a particular company worthy of investment, and high PE, per se, does not make a share less attractive. Other factors like the quality of management, break-up value of the share, debt-equity ratio, interest coverage ratio are equally important.

Do not invest in penny stocks: Penny stocks and junk scripts look attractive to the investor when the indices are rising, since the price of these shares usually rise faster than the rise in prices of other shares. However, when the market falls, the investor is left with junk, which has no value. As a matter of principle, you should invest in stock of the only such companies whose fundamentals are known to you. Do not depend on tips, however reliable the source of tip may be. Most of the tips are generated by people with vested interest. Even when the source of the tip is genuine, the time frame the issuer has in mind may be different. If you are tempted to act on a tip, study facts before you decide to go ahead.

Do not panic: This is very important. More money is made in stock market by remaining inactive. It is foolish for a long-term investor to be excited or subdued by the market ticker. CNBC channel is for the short-term traders and day-traders, do not let the opinions expressed there affect your investment decision. If you are confident your investment is fundamentally strong, every fall should give you an opportunity to buy rather than sell. Of course, while you do that keep in mind the principle I have narrated in the next paragraph.

Don't pull your flowers and water your weeds: This strong advice comes from Warren Buffet, the most successful disciple of Ben Graham. The greatest mistake most investors make is to sell the shares that have appreciated, and hold the ones, which are giving a negative return. The investment strategy should be the other way round; you should sell the losers and let the winners ride. I do not mean that you should sell every share that has depreciated. The right course is to keep pruning your field regularly to identify the weed so that they could be removed, and to identify the flowers that should be watered as long as their fundamental value is below the prevailing market price.

Do not invest in the company and sector whose business you do not understand: If you can understand a business and you find value there, invest. Do not be tempted to invest in industry about which you do not have much idea. While there is so much money to be made in technology shares, yet if you do not understand the business, it is better you do not go into it. My personal investment philosophy is to invest in the business, which I would be comfortable running on my own. I apply the same principles even when my investment is as low as 10 shares.

Do your own research: Security analysis is not as difficult as it may seem. You do not have to be a qualified analyst to do the analysis. A basic book on reading the financial statements of a company will be a great investment. When I say that more money is made by being inactive in the market, I certainly do not mean that you should invest and forget. On the other hand, you should keep reviewing the performance of the company you have invested in. If there is a fundamental change in the situation of your company, which has altered the premise based on which you had bought the shares, decide if the change warrants a change in your portfolio.

These principles have been perfected by masters and are time-tested technique for long-term investment in the market. While this is not the only way one can invest, this method is more scientific and if applied consistently, it would make the process of investment a less risky proposition with higher margin of safety.

You can reach him at: tsrawal@tsrawal.com


http://news.indiainfo.com/columns/tejinder/040105investment-strategy.html

'The risk of losing money in the short-term is high'

'The risk of losing money in the short-term is high'

The stock market, that maddening babble of millions of differing points of view, has done it again.

By Ian Cowie
Last Updated: 1:07PM BST 11 May 2009

Just when many people decided never to have anything to do with shares, prices took off.

This is good news for millions of people hoping endowments will repay mortgages, pensions will fund retirement and unit or investment trusts will prosper. Even if it is also rather galling for anyone who shunned their individual savings account (Isa) or annual pension allowances last month.

So the index of Britain's biggest shares soared by 25pc in two months. When you consider how many "experts" have produced books on economic meltdown in recent weeks, you would need a heart of stone not to laugh.

Perhaps the market will be higher still by the time the more ponderous pessimists have published. Nor is the Footsie's progress being driven by obscure stocks which few people hold. Barclays Bank, for example, has seen its share price rise more than six-fold this year from 47p, when doom-mongers feared bankruptcy, to 291p this week.

Nobody knows if this will last but I draw comfort from the fact that so many experts remain bearish. The same people were bullish before the crash.

It is human nature to assume that the future will be like the immediate past. But, as the bar chart on this page demonstrates, a longer term view is more encouraging. M&G looked at 20 years' returns from the British and global stock markets, measuring hundreds of periods starting at the beginning of each month.

What comes through loud and clear is that the risk of losing money in the short term is high. Where shares were held for only one year, losses were suffered a quarter of the time. However, where holdings were extended to five years, the risk of loss fell to one in five.

Most reassuringly, where shares were held for a decade, losses were suffered less than 1 per cent of the time. That illustrates what an extraordinarily dire decade we have lived through, since the FTSE peaked at 6,930 in December 1999.

It even suggests, dare I say it, that we may make further progress before that decade is complete. Most importantly, it illustrates that long-term investors are not taking the same risks as short-term speculators.

http://www.telegraph.co.uk/finance/personalfinance/comment/5305053/The-risk-of-losing-money-in-the-short-term-is-high.html

Making A Winning Long-Term Stock Pick

Investopedia
Making A Winning Long-Term Stock Pick
Wednesday April 29, 11:33 am ET

Chris Seabury



Many investors are confused when it comes to the stock market; they have trouble figuring out which stocks are good long-term buys and which ones aren't. To invest for the long term, not only do you have to look at certain indicators, but you also have to remain focused on your long-term goals, be disciplined and understand your overall investment objectives. In this article, we tell you how to identify good long-term buys and what's needed to find them.

Focusing on the Fundamentals
There are many fundamental factors that analysts inspect to decide which stocks are good long-term buys and which are not. These factors tell you whether the company is financially healthy and whether the stock has been brought down to levels below its actual value, thus making it a good buy. The following are several strategies that you can use to determine a stock's value.

Consider Dividend Consistency
The consistency of a company's ability to pay and raise its dividend shows that it has predictability in its earnings and that it's financially stable enough to pay that dividend - the dividend comes from current or retained earnings. You'll find many different opinions on how many years you should go back to look for this consistency - some say five years, others say as many as 20 - but anywhere in this range will give you an overall idea of the dividend consistency.

Examine P/E Ratio
The price-earnings ratio (P/E) ratio is used to determine whether a stock is over- or undervalued. It's calculated by dividing the current price of the stock by the company's earnings per share (EPS). The higher the P/E ratio, the more willing some investors are to pay for those earnings. However, a higher P/E ratio is also seen as a sign that the stock is overpriced and could be due for a pullback - at the very least. A lower P/E ratio could indicate that the stock is an attractive value and that the markets have pushed shares below their actual value.

A practical way to determine whether a company is cheap relative to its industry or the markets is to compare its P/E ratio with the overall industry or market. For example, if the company has a P/E ratio of nine while the industry has a P/E ratio of 14, this would indicate that the stock is a great valuation compared with the overall industry.

Watch Fluctuating Earnings
The economy moves in cycles. Sometimes the economy is strong and earnings rise; other times, the economy is slowing and earnings fall. One way to determine whether a stock is a good long-term buy is to evaluate its past earnings and future earnings projections. If the company has a consistent history of rising earnings over a period of many years, it could be a good long-term buy.

Also, look at what the company's earnings projections are going forward. If they're projected to remain strong, this could be a sign that the company may be a good long-term buy. Alternatively, if the company is cutting future earnings guidance, this could be a sign of earnings weakness and you might want to stay away.

Avoid Valuation Traps
How do you know if a stock is a good long-term buy and not a valuation trap (the stock looks cheap but can head a lot lower)? To answer this question, you need to apply some common-sense principles, such as looking at the company's debt ratio and current ratio. Debt can work in two ways:

During times of economic uncertainty or rising interest rates, companies with high levels of debt can experience financial problems.

In good economic times, debt can increase a company's profitability by financing growth at a lower cost.

The debt ratio measures the amount of assets that have been financed with debt. It's calculated by dividing the company's total liabilities by its total assets. Generally,the higher the debt, the greater the possibility that the company could be a valuation trap.

But there is another tool you can use to determine the company's ability to meet these debt obligations: the current ratio. To calculate this number, you divide the company's current assets by its current liabilities. The higher the number, the more liquid is the company. For example, let's say a company has a current ratio of four. This means that the company is liquid enough to pay four times its liabilities.

By using these two ratios - the debt ratio and the current ratio - you can get a good idea as to whether the stock is a good value at its current price.

Economic Indicators
There are two ways that you can use economic indicators to understand what's happening with the markets.

Understanding Economic Conditions
The major stock market averages are considered to be forward-looking economic indicators. For example, consistent weakness in the Dow Jones Industrial Average could signify that the economy has started to top out and that earnings are starting to fall. The same thing applies if the major market averages start to rise consistently but the economic numbers are showing that the economy is still weak. As a general rule, stock prices tend to lead the actual economy in the range of six to 12 months. A good example of this is the U.S. stock market crash in 1929, which eventually led to the Great Depression.

Understand the Economic Big Picture
A good way to gauge how long-term buys relate to the economy is to use the news headlines as an economic indicator. Basically, you're using contrarian indicators from the news media to understand whether the markets are becoming overbought or oversold. A good example of this occurred in 1974, when Newsweek had a bear on the cover showing the pillars of Wall Street being knocked down. Looking back, this was clearly a sign that the markets had bottomed and stocks were relatively cheap.

In contrast, a Time magazine cover from September 27, 1999, included the phrase, "Get rich dot com" - a clear sign of troubles down the road for the markets and dotcom stocks. What this kind of thinking shows is that many people feel secure when they're in the mainstream. They reinforce these beliefs by what they hear and read in the mainstream press. This can be a sign of excessive optimism or pessimism. However, these kinds of indicators can take a year or more to become reality.

Conclusion
Investing for the long term requires patience and discipline. You may spot good long-term investments when the company or the markets haven't been performing so well. By using fundamental tools and economic indicators, you can find those hidden diamonds in the rough and avoid the potential valuation traps.

****Stock selection for long term investors

Overview of the the market and stock selection for long term investors

The Market

There is much volatility in the market. This is due to trading activities. The majority of trades are short term trading. Trading has increased in the market due to various factors:

• Increase turnover rates of mutual funds, hedge funds, off shore funds and pension funds.
• Decrease cost of trading.
• Speed of trading facilitated by technology innovations.
• Investing institution and managers are acting more as agents rather than as investors on behave of their clients.

A minority invests based on fundamentals.

Trading can be in derivatives. The nature of derivative securities is based on price or action of another security. Trading in derivatives has too increased.

Is trading a good thing? It does increase liquidity to the market and this is good. However too much trading and speculation has its downsides. This is akin to breathing 21% Oxygen (life-sustaining) versus breathing 100% Oxygen (too much oxygen has the associated danger of spontaneous combustion).

In this market downturn, questions we have been hearing the most recently are:

• Is it different this time?
  
• How long will it last?
  
• Have we seen the bottom yet?
  

Who knows? These questions are important but not knowable, therefore don’t waste time pondering on these.

The questions long term investors should ask are:

• Are you investing in an easy to understand, wide moat and well run business?
  
• Does that business generate consistent cash flows and has a clean balance sheet?
  
• Finally, are you buying at a large discount to what the business is worth?
  

Strategies for selecting stock for the long term investor

Benjamin Graham: "Investment is best when it is business like. "

However, long term investing is not the only way to make money, there are other ways too.


These 4 strategies should aid one’s investment into equities:
1. Select the business that is long term profitable and giving good return on total capital (ROTC).
2. The business should have managers with talent and integrity in equal measures.
3. Understand the business reinvestment dynamics.
4. Pay a fair price for the business.

1. The business to invest in must make money over time.

• Examine how its revenues and profits are generated. 
• How do its products or services contribute to the value of its business? 
• What are its costs? 
• Look for a business that gives good RETURN ON TOTAL CAPITAL (ROTC), not just those with high ROE. 
• Be aware that high ROE can be due to taking on too much debt. 
• Avoid IPOs, start-ups and venture capitals.

2. Look for managers with a good balance of talent and integrity.

• Those with integrity but lack talent are nice people to have as friends, but they may not be able to deliver good results for the business. 
• Those with talent but lack integrity will harm your business and longer term investment objectives.

3. Is the company able to reinvest its money or capital at a better rate over time?

Basically, be conscious of the reinvestment dynamic of the company.

(a) There are companies giving good return on total capital and able to reinvest their capital at better incremenetal rates over time.

• Invest in these companies as they are effectively compounding your money year after year. 
• This is the powerful concept of REINVESTMENT COMPOUNDING seen in some companies, best illustrated by Berkshire Hathaway. (Reinvestment Compounding)

(b) Some companies have good return on total capital but can’t reinvest this at better rate over time.

• For example, a restaurant business may be dependent on the personal touch of the owner. 
• Expanding the business to another restaurant may not generate the same return on capital. 
• In such cases, the worse approach is to grow the business of the restaurant. This is unlike McDonald. 
• Those investing into such businesses should understand that their RETURNS ARE FROM DIVIDENDS and from RETURN OF TOTAL CAPITAL.

(c) Avoid those businesses with no return on total capital but use more capital all the time.

• An example of this is the airline industry. AVOID such investments.

4. Determining the fair price to pay for the ownership of the business is important.

• For the outside shareholder, the investment should earn the same returns as the company’s business returns.
• If the company earns 10% or 12% or 15% per year for 5 years, the outside shareholders should likewise aim to earn a return of 10% or 12% or 15% per year for 5 years by paying a fair price. 
• Paying a PE of 40 for this company may mean not earning such return as the price paid was too high. 
• On the other hand, paying a PE of 10 – 15 gives the investor a better odd of getting this fair return.
• Paying a fair price for owning a business is important. The company earnings maybe as expected but then your returns failed to match these as you have paid too much to own the business.

What about other factors?


The economy, interest rates, fuel prices, commodity prices, foreign exchange, price of gold and geopolitical situations; should not these influence your investing?

Yes, these are hugely important factors. However, they are not predictable and largely out of our control. They are not knowable in advance. It is better to distance oneself from thinking about them when assessing the business to invest in.

Therefore, the approach adopted should generally not be a top-down macroeconomic one, but a bottom-up microeconomic one. “The implication is with the passage of time, a good business over a long period of time produce results to the investor over time.”


Summary

Identify the company that is in a profitable business giving good return on total capital (ROTC).

The managers should be talented and honest, and have the interest of the shareholders.

The business should be able to reinvest capital at higher incremental rates of returns and with discipline. (Reinvestment compounding).

Also, acquire the company at fair price to ensure a fair return. Avoid paying too much for the current prospect of the company, look long term.

-----
-----


Effectively the above is the same as the QVM approach.


Quality: A good quality company has consistent and/or increasing revenue, profit, eps, and high ROE or ROC.


Value: This is dependent on the price paid to acquire the business. Using earnings yield or PE enables one to determine the fair price to pay for this business.


Management: Look for businesses where the managers have these 2 qualities in the right balance - talent and integrity.


Search out for companies with high ROE or ROTC and low PE or high earnings yield (indicating "cheapness"). Relate the ROE or ROTC to the PE or earnings yield of the business.


A fair price to pay for the business will be the price that guarantees at least a return equivalent to the returns generated by the business you invest in.


Owning a good quality company with talented and honest managers at a good price (fair or bargain price) incorporates all the elements of investing preached by Benjamin Graham, namely the safety of capital considerations, reward/risk ratio considerations and the margin of safety considerations.

Also read: ROE versus ROTC

Long-term investing doesn't work!

Don't Invest Like Jon Stewart's Mom
By Tim Hanson
March 13, 2009 Comments (15)

Hey, that was a lot of awkward fun, wasn't it?For those of you who missed The Daily Show with Jon Stewart last night, you'll have to turn to one of a million or so links on the Internet to see the rousing conclusion to "Basic Cable Personality Clash Skirmish '09," a.k.a. the weeklong feud between TheStreet.com's (Nasdaq: TSCM) Jim Cramer and Comedy Central's Jon Stewart. For those who would rather waste that 22 minutes of their life on Minesweeper or NCAA basketball, here's what we learned.
1) Yes, Jim Cramer is a manic clown.2) Jim Cramer's nephew writes the Mad Money show while wearing his pajamas.3) CNBC is not good at hard-hitting reporting.4) Jon Stewart's pretty peeved about all this and ready to drop a few f-bombs to let folks know it.5) Long-term investing doesn't work.
Wait, what?As a practitioner of long-term investing here at The Motley Fool, I was pretty shocked by this revelation. But there it was as the interview was wrapping up. Let's go to the transcript:
Jon Stewart: My mother is 75. And she bought into the idea that long-term investing is the way to go. And guess what?
Jim Cramer: It didn't work.
[Jon Stewart assents with some Arthur Fonzarelli-type hand motion and concurrent clicking noise.]
We'll assume that was an assent Now, I'm not going to pull a Rick Santelli and call Jon Stewart or his mother a loser because that would bring down the wrath of The Daily Show and Dora the Explorer (who my nephews envy, and if they saw her swearing at me in Spanish it would absolutely kill them) upon me. But even if Jon Stewart's mom -- like all of us long-term investors -- has lost a great deal of money over the past 16 or so months, that's not evidence that long-term investing doesn't work.
In fact, long-term investing is the only way to protect yourself from the manipulations, machinations, and generally idiocy that drive stock price movements on a day-to-day basis. And if Jon Stewart's mom truly is/was a long-term investor, then she should have come through this current calamity relatively ok provided she has been a long-term investor for the long-term and had been sticking to a disciplined multi-decade asset-allocation game plan. That means keeping a mix of stocks and bonds, and within that stock allocation having a mix of asset classes. It doesn't mean simply loading up on General Motors (NYSE: GM), Eastman Kodak (NYSE: EK), and Bear Stearns because Jim Cramer told you "Bear Stearns is fine!" -- and only those three stocks -- and throwing up your hands because it doesn't work.

Here's why
Let's assume Jon Stewart's mom started investing 30 years ago, in 1979, at age 45. Let's further the following simple allocation strategy:
She invested simply in the Vanguard 500 Index (Nasdaq: VFINX), a low-cost market-tracker that holds giants today such as ExxonMobil (NYSE: XOM), General Electric (NYSE: GE), and Wal-Mart (NYSE: WMT).
At age 55, she realized that she was nearing retirement and should be increasing her allocation to principal-protecting bonds, using the rule of thumb that her bond allocation should be equal to her age.
Finally, let's assume that she invested the same amount of money, be it $1, $100, $1,000, or $10,000, at the beginning of each and every year.
Where would she be today following a greater than 50% collapse in the stock market?
I realize that's a lot of assumptions
Now, portfolio simulations like this are tricky to pull off and don't account for all the details -- such as, in this example, frictional costs or dividend yields which I'm assuming canceled out -- but they are illuminating. And according to my conservative math, for every $1 that Jon Stewart's mom put in over the trailing 30-year period, she would have $1.63 today. So, if all told, she had deposited $500,000 over the years (in annual $16,667 increments), she would have $815,000 today.

Now, let's be honest, that's not great.
It's not 10% or 20% annual returns, it's not turning thousands into millions, and it's not an enormous stock market success story. But it is certainly enough to live on and evidence of how long-term investing -- provided it's practiced with discipline and an eye toward asset allocation -- can protect your wealth and give you the opportunity to make money.
Because let's be honest, though the stock market is down today, it will rebound. Commerce around the world is too strong for it to be otherwise. And the worst thing Jon Stewart's mom could do today is -- at her son's behest -- give up faith in long-term investing as the market stands at a 10-year bottom.

In sum
Numbers, jokes, and snarky comments aside, what I'm saying is this: Rather than be angry, let's recognize that the stock market, like most human endeavors, is flawed. There will be disasters and blow-ups from time to time, just as there will be bubbles. Let's use this as an opportunity to educate more Americans about how to take control of their finances and ignore the market's manic day-to-day movements.The solution is not to scare Americans into thinking the stock market is some Ponzi scheme controlled by immoral cretins that can never work for them. See, over time, those cretins are found out. And over time, everyone can make money in the stock market and enjoy a more secure retirement by having a long-term investing timeline and sticking to a disciplined asset allocation plan. That means not abandoning bonds when stocks are outperforming and not abandoning stocks when bonds are outperforming.


Read/Post Comments (15) Recommend This Article (21)

http://www.fool.com/investing/general/2009/03/13/dont-invest-like-jon-stewarts-mom.aspx

Buffett-Style Buy And Hold

Investing Strategies
Buffett-Style Buy And Hold



Drew Tignanelli, 01.22.09, 03:52 PM EST


Buy good values, hold them until they're fully priced and move along, unless the business keeps improving.


Warren Buffett is not a buy-and-hold investor, so why are you?


The concept of buy and hold is nothing more than a sales pitch that was created by the financial services industry in the last secular bull market preparing for the next secular bear market (what we are currently experiencing). The industry is the only one making money on the buy-and-hold myth. They even use Buffett as the poster boy for this philosophy, but when you read his biography Snowball and study his investment moves, he certainly is not a buy-and-hold investor.
Yes, Buffett started buying Geico in 1950 and owns the whole company today. Yes, he has owned The Washington Post (nyse: WPO - news - people ) for 30-plus years. He also owned Freddie Mac (nyse: FRE - news - people ) and sold it after 15 years. He has owned Petro China (nyse: PTR - news - people ) and sold it after three years. He even owned Hospital Corp. of America and sold it in less than a year.
The truth is that Warren is a risk manager and buys what he believes is a good value. Value can arise from income, assets, economic expectations, company expectations or intrinsic values. He wants to own a good company run by good people and buy it for a good price. He then constantly monitors his thesis for owning the property and will sell when he admits his assessment was wrong, the situation has changed or the value has been extravagantly realized. Sometimes that happens in a few days, a few weeks, a few years or a few decades, and he has not been investing long enough to say if it would be a few centuries.
Risk, in fact, is wrongly assessed as the volatility of an asset. The emerging markets are assumed risky, because the past trading range can be up or down double digits. When China declines as it did in 2008 by 65%, I would suggest that there is less risk today in China's market than in the U.S. market, which went down only 38% in 2008. American investors have a false belief that our markets are more developed and therefore less risky, but I would say due to our economic and demographic landscape the general U.S. market is riskier, especially considering the significant discount difference that took place in 2008. As a shopper I would not be attracted to a DVD player marked down 30% as compared to the latest iPhone 3G marked down 60%. This is in essence what is happening in the mature U.S. vs. the upcoming China.


Special Offer: Economist and Forbes columnist Gary Shilling warned in 2005 of the housing crash, the credit crunch and the deep recession to follow. Think the problems have passed? Click here for advice to keep your wealth with Gary Shilling's Insight.


Risk is about the price you pay and what you get for that price. If I know what I own for the price I paid, then the daily price other investors are willing to pay is irrelevant. The flip side of buying a solid asset at a good price is selling that solid asset at an irrational price. It may also mean selling an asset when the economic conditions have shifted, reducing future value.
Risk managers focus on not losing money and not on making money (although you have to wonder what at all they were doing at the big Wall Street firms these past few years). The most ridiculous concept young people have learned is, "I am young so it is OK if my account goes down 50%, because I have time for it to come back." A young Buffett would consider that foolish. Buy a great asset at a great price so that it is less likely to go down, but if it does you know for sure it will come back. If you buy a mediocre asset at a bad price, it may never come back, or it may take many years for it to recover. This defines the average American investor trying diligently to be a long-term buy-and-hold investor, but after 10 years of losing money their patience is running thin. American markets are currently mediocre assets at a fair price but certainly not a cheap price.


Comment On This Story




It is true you cannot time the market, but you can tell in general when the risk reward ratio is not in your favor. You can also tell where the price decline of a good long-term asset is reflecting value and lower risk due to the price decline. Great examples of these value opportunities today are the Asian tigers and commodity companies. If you buy into these ideas, then make sure you understand why so that you can be ready to sell in the future when new investors and economic shifts have consumed the opportunity.




Related Stories
Wisdom From The Value Crowd
Holding A Candle To Buffett
Investing Books For The Stockings
Buying Stocks On The Way Down
Out Of Treasuries And Boldly Into The Fire
Related Videos
Microsoft's Surprise
BAC Kicks Out Thain
Apple Beats, Intel Cuts
Green Energy Train Wreck
Small Will Be Big In 2009
Stories
Videos




The sell decision is the key of a great investor, more so than the buy decision. Buffett knew it was time to unload Freddie Mac because things changed. He also knew that Geico was still a great company after 50 years.
Many professional and amateur investors want a simple investment concept that takes minimal effort, but great investing takes work and requires an understanding of some concepts that are worth learning.
It's important to have a good understanding of economics and how governmental policy, currency movements, tax policy, interest rates and monetary policy impact the risk of a country's market for stocks and bonds. You also need to understand the drivers of investment values and where market prices stand in relation.
Also keep in mind that market movements are both rational and irrational. The market you see daily is the inefficient market that is irrational, emotional and psychologically driven by investors overcome with greed and fear. The invisible, efficient market is driven by smart investors who seek value and buy assets priced right for a solid risk-reward opportunity. This efficiency can take days, weeks, months or years to be realized.
You need to be a risk manager like Buffett.


Drew Tignanelli is president of The Financial Consulate, a financial advisory firm in Hunt Valley, Md.



http://www.forbes.com/2009/01/22/buffett-value-investing-fan-is-in_dt_0122investingstrategies_fan.html?partner=alerts



My comment: Buy, hold and selective selling

Good fundamental stocks always give steady returns

Wednesday January 14, 2009
Good fundamental stocks always give steady returns

IN a stock market, there is a small group of investors who seem to have the wrong mindset on long-term investment.

To them, long-term investment via the “buy and hold” strategy cannot give higher returns than short-term trading.

They feel that even though the former may provide higher returns, they need to wait for a long time before they can enjoy the good returns.

According to Peter L. Bernstein in his article The 60/40 Solution: “In investing, tortoises tend to win far more often than hares over the turns of the market cycle ... placing large bets on an unknown future is worse than gambling, because at least in gambling you know the odds.”

Good fundamental stocks always give good and steady returns over the long term.

However, investors need to hold them for long term.

Besides giving higher returns, investors will also face lower risks when they invest in these good fundamental stocks compared with speculative stocks.

In this article, we will look at the performance of Warren Buffett’s investment company, Berkshire Hathaway Inc versus the performance of S&P 500.

The table summarises the historical performance for Berkshire versus the S&P 500 from 1965 to 2007 (a total 43 years) based on the latest available 2007 annual report.

Based on the annual report, the yearly compounded gain for Berkshire was 21.1%, which outperformed the 10.3% returns generated from S&P 500 over the same period.

In general, in most periods, the returns from Berkshire were higher than those from the S&P 500. However, we need to understand that Buffett did not generate 21.1% every year.

There were 23 years in which his returns were lower than 20% (we used the nearest 20% as the benchmark).

Nevertheless, during the bull markets, Berkshire was able to generate annual returns of 40% to 60% for five years whereas there was not a single year in which S&P 500 charted above 40% returns per annum.

In terms of losses, Berkshire only reported one year of negative return versus S&P 500, which has 10 years of negative returns.

To quote one of Buffett’s most important investment principles: “If you want to win, you don’t lose.”

To Buffett, as long as you can reduce the losses incurred in the bear market and increase the percentage of high returns during the bull market, your performance should be higher than the overall market performance.

In short, we cannot expect to generate high returns every year. We have to accept that there will be certain years we need to protect our capital from incurring losses rather than thinking of how to generate high returns.

Almost all investment gurus or analysts say that 2009 will be a tough year. As long as we can avoid incurring losses and have the patience to wait for the next bull market, we should be able to outperform the overall market over the long term.

Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2009/1/14/business/3013544&sec=business

Comment: I agree. :)

Under 50? Do This, or You'll Regret It!

Under 50? Do This, or You'll Regret It!
By John Rosevear December 8, 2008 Comments (1)

I know, I know -- the stock market is crazy and unpredictable right now.

I know that sitting in cash or doing nothing until things settle down seems like a sensible course of action.

But I also know this: 10 or 15 years from now, the market will be up. Way up from here, in all likelihood.

If you're under 50, and you're trying to figure out what to do with the wreckage of your retirement portfolio, there's only one good answer: Buy great stocks.

Here's why.

When the game is rigged, bet with the house No, the stock market isn't "rigged" in the sense of being manipulated. It is, however, inherent in the market's nature to go up over the long term, scary bear markets notwithstanding.

Check out these 15-year returns, which assume purchase on Dec. 8, 1993 and include reinvested dividends for those stocks that have them:

Stock-----15-Year Gain

McDonald's (NYSE: MCD)
430%

Apple (Nasdaq: AAPL)
1,110%

Southern Company (NYSE: SO)
804%

Nokia (NYSE: NOK)
541%*

Qualcomm (Nasdaq: QCOM)
1,945%

Johnson & Johnson (NYSE: JNJ)
573%

Target (NYSE: TGT)
612%

Source: Yahoo! Finance.
Figures as of market close on Dec. 5, 2008. *Nokia return since Apr. 25, 1995.

Those returns are despite the dot-com bubble bursting and despite the recent market crisis. As Richard Ferri, an investment manager and author of several books on asset allocation and indexed investing, argues in this month's issue of Rule Your Retirement, there are strong reasons to believe that the market is naturally prone to going up over time -- and that average annual returns near 10% over the next 15 years are extremely likely.

His methodology and reasoning are a little too elaborate to lay out here -- check out the complete article for specifics -- but his recommendations for those under 50 are crystal-clear:

• Your portfolio should be 100% in stocks.
  
• Continue to add to your retirement accounts, and use that money to buy stocks.
  
• Be aggressive -- as aggressive as you can stand.
  
• Ignore performance. Don't look at your statements.
  

That last one might seem weird -- how will you know how you're doing if you don't look at your statements? -- but Ferri has a point. He argues that they're "completely irrelevant" -- following short-term price movements just doesn't give you any useful information. In fact, it's more likely to give you something to worry about, needlessly.

I'd add this caveat: This only works if you have very long-term investments! Not all portfolios are built to run 15 years or longer with no more maintenance than the occasional trade or rebalance -- in fact, most aren't.

How do you do that?

Construct a long-haul portfolio

Ferri is a proponent of indexing -- of using index funds and ETFs in your retirement portfolio. That’s one way to build a long-term investment strategy. Another way, one likely to yield far greater returns if done right, is to buy great stocks -- the blue-chip dividend monsters and future giants that will keep delivering rewards year after year. (Can you guess which method I favor?)

Of course, "buy stocks" isn't a complete to-do list. To maximize your gains over the long haul, you need a solid asset-allocation plan -- one that gives you exposure to all the key corners of the stock market. Your 401(k) provider can probably help you come up with a decent one -- though as a rule, those computer-generated templates tend to be more conservative than is appropriate for most young investors.

A far better set of asset allocation roadmaps for retirement investors -- one of the best I've seen, and one that works well whether you're using mutual funds in a 401(k) or stocks in an IRA, or a combination of the two -- are the ones maintained by the team at Rule Your Retirement. They're available to members by clicking on "Model Portfolios" under the Resources tab after you log in.

What do the unfolding financial crisis and ongoing market volatility mean for your money? The Fool's here with answers. Fool contributor John Rosevear owns share of Apple. Southern Company and Johnson & Johnson are Motley Fool Income Investor selections. Nokia is a Motley Fool Inside Value pick. Apple is a Motley Fool Stock Advisor recommendation.

http://www.fool.com/personal-finance/retirement/2008/12/08/under-50-do-this-or-youll-regret-it.aspx

Greater Fool Theory

Greater Fool Theory

One of the assumptions of the discounted cash flow theory is that people are rational, that nobody would buy a business for more than its future discounted cash flows. Since a stock represents ownership in a company, this assumption applies to the stock market. But why, then, do stocks exhibit such volatile movements? It doesn't make sense for a stock's price to fluctuate so much when the intrinsic value isn't changing by the minute.

The fact is that many people do not view stocks as a representation of discounted cash flows, but as trading vehicles. Who cares what the cash flows are if you can sell the stock to somebody else for more than what you paid for it? Cynics of this approach have labeled it the greater fool theory, since the profit on a trade is not determined by a company's value, but about speculating whether you can sell to some other investor (the fool). On the other hand, a trader would say that investors relying solely on fundamentals are leaving themselves at the mercy of the market instead of observing its trends and tendencies.

This debate demonstrates the general difference between a technical and fundamental investor. A follower of technical analysis is guided not by value, but by the trends in the market often represented in charts. So, which is better: fundamental or technical? The answer is neither. Every strategy has its own merits.

In general, fundamental is thought of as a long-term strategy, while technical is used more for short-term strategies.