It is conventional to speak of good bonds as less risky than good preferred stocks and of the latter as less risky than good common stocks.
From this is derived the popular prejudice against common stocks because they are not "safe."
The words "risk" and "safety" are applied to securities in two different senses, with a resultant confusion in thought.
A bond is clearly proved unsafe when it defaults its interest or principal payments.
Similarly, if a preferred stock or even a common stock is bought with the expectation that a given rate of dividend will be continued, then a reduction or passing of the dividend means that it is unsafe.
It is also true that an investment contains a risk if there is a fair possibility that the holder may have to sell at a time when the price is well below cost.
Nevertheless, the idea of risk is often extended to apply to a possible decline in the price of a security, even though the decline may be of a cyclical and temporary nature and even though the holder is unlikely to be forced to sell at such times.
These chances are present in all securities, other than United States Savings Bonds, and to a greater extent in the general run of common stocks than in senior issues generally.
But we believe that what is here involved is not a true risk in the useful sense of the term.
$$$$
The man who holds a mortgage on a building might have to take a loss if he were forced to sell it at an unfavourable time. That element is not taken into account in judging the safety or risk of ordinary real-estate mortgages, the only criterion being the certainty of punctual payments.
In the same way the risk attached to an ordinary commercial business is measured by the chance of its losing money, not by what would happen if the owner, were forced to sell.
We would emphasize our conviction that the bona fide investor does not lose money merely because the market price of his holdings declines; the fact that a decline may occur does not mean that he is running a true risk of loss.
$$$$$
If a group of well-selected common-stock investments shows a satisfactory over-all return, as measured through a fair number of years, then this group investment has proved to be "safe".
During that period its market value is bound to fluctuate, and as likely as not it will sell for a while under the buyer's cost.
If that fact makes the investment "risky" it would then have to be called both risky and safe at the same time.
$$$$$
This confusion may be avoided if we apply the concept of risk solely to a loss of value which either:
(a) is realized through actual sale or
(b) is ascertained to be caused by a significant deterioration in the company's position.
Many common stocks do involve risks of such deterioration.
But it is our thesis that a properly executed group investment in common stocks does not carry any substantial risk of this sort and that therefore it should not be termed "risk" merely because of the element of price fluctuation.
Benjamin Graham
The Intelligent Investor
Showing posts with label market fluctuations. Show all posts
Showing posts with label market fluctuations. Show all posts
Saturday 17 January 2015
Thursday 15 January 2015
Extreme vicissitudes
Undoubtedly, the largest theoretical gains in the stock market are to be made not out of the continuously prosperous companies but out of those which experience wide vicissitudes - by buying their stocks at their depths and selling at their heights.
Profits of such amplitude are realized only in the paper calculations of hindsight. Yet these examples have practical significance for the intelligent investor.
They should confirm his conviction that outstanding characteristic of stock market is its tendency to react EXCESSIVELY to favourable and unfavorable influences.
The word "excessive" applied to the stock market's reactions indicates that they create many sound counter-opportunities for the investor with sense and courage.
Benjamin Graham
Profits of such amplitude are realized only in the paper calculations of hindsight. Yet these examples have practical significance for the intelligent investor.
They should confirm his conviction that outstanding characteristic of stock market is its tendency to react EXCESSIVELY to favourable and unfavorable influences.
The word "excessive" applied to the stock market's reactions indicates that they create many sound counter-opportunities for the investor with sense and courage.
Benjamin Graham
Price Changes of common stocks with highly stable earnings.
The stability of annual earnings per share of a selected common stock is extraordinary.
Record of earnings and dividends of S.H. Kress for 1924 - 45 and the more extreme price variations during that period.
It may properly be concluded that this record at no point showed any definite indications of permanent change for either the better or the worse in the company's affairs or prospects.
Hence the variation in market price must have been entirely psychological in their origin. They offer a fairly accurate measurement of the breadth of price change a scribble to the mere vagaries of the stock market - while the "article valued" changed its character not at all.
Under the circumstances, the range of price changes must be considered extraordinary.
It's price rose from 12 to 62, a fall to 9, a rise to 48, a fall to 20, and a rise to 49. For the 5 years 1933 - 37 the earnings varied between $2.11 and $2.31 per share, whereas the price ranged from 13 1/2 to 47 1/2. In the 6 years 1939- 45 the earnings varied between $1.93 and $2.25, but the price ranged from 19 1/2 to 40 1/2.
Reference
The Intelligent Investor, by Benjamin Graham
Record of earnings and dividends of S.H. Kress for 1924 - 45 and the more extreme price variations during that period.
In 16 out of 22 years, the earnings per share varied only between $1.93 and $2.32. In the other 6, including the boom and deepest depression years, the range widened only to $1.38 - $2.88.
It may properly be concluded that this record at no point showed any definite indications of permanent change for either the better or the worse in the company's affairs or prospects.
Hence the variation in market price must have been entirely psychological in their origin. They offer a fairly accurate measurement of the breadth of price change a scribble to the mere vagaries of the stock market - while the "article valued" changed its character not at all.
Under the circumstances, the range of price changes must be considered extraordinary.
It's price rose from 12 to 62, a fall to 9, a rise to 48, a fall to 20, and a rise to 49. For the 5 years 1933 - 37 the earnings varied between $2.11 and $2.31 per share, whereas the price ranged from 13 1/2 to 47 1/2. In the 6 years 1939- 45 the earnings varied between $1.93 and $2.25, but the price ranged from 19 1/2 to 40 1/2.
Reference
The Intelligent Investor, by Benjamin Graham
Sunday 4 January 2015
Either you ignore market fluctuations or you buy and sell based on value.
It is people generally who make high and low markets, because they are optimistic (and greedy) in high markets and pessimistic (and disgusted) in low markets.
How can you - a member representing the public at large - be expected to act otherwise than the public acts?
Does not this mean that you are doomed, by some law of logic, to buy when you should be selling and to sell when you should be buying?
This point is vital. The investor cannot enter the arena of the stock market with any real hope of success unless he is armed with mental weapons that distinguish him in kind - not in a fancied superior degree - from the trading public.
(1) One possible weapon is indifference to market fluctuations; such an investor buys carefully when he has money to place and then lets prices take care of themselves.
(2) But, if the investor intends to buy and sell recurrently, his weapons must be a frame of mind and a principle of action which are basically different from those of the trader and speculator. He must deal in values, not in price movements. He must be relatively immune to optimism or pessimism and impervious to business or stock-market forecasts.
In a word, he must be psychologically prepared to be a true investor and not a speculator masquerading as an investor. If he can meet this test, he will be a member not of the public at large but of a specialized and self-disciplined group.
Returning to the matter of the market's cyclical swings,we must point out that the duration or frequency of these swings has changed considerably since 1921. This is an added obstacle to the pleasing project of investing regularly in low markets and selling out in high ones. Between 1899 and 1921 the industrial average made five well defined highs and five definite lows, an average cycle of about four years. Since then there have been only two clean-cut swings and the intervals between low points have been eleven years and ten years, respectively.
An investor nowadays is likely to grow uneasy and impatient while waiting for his cyclical buying opportunity to reappear. In the meantime, also, his funds will bring him no interest in the bank and only a negligible rate if placed in short-term securities. Thus he can lose more in dividends foregone than he can ever gain from buying at eventual low levels.
Summary
Either buy carefully and then ignore the market fluctuations or if you intends to buy and sell recurrently, deal in values.
Should you patiently wait for your cyclical buying opportunity to reappear? The low-points of the market maybe 10 or 11 years apart. While waiting for these hoping to buy at eventual low levels, you can lose more in dividends foregone; earning little income from your cash holdings.
How can you - a member representing the public at large - be expected to act otherwise than the public acts?
Does not this mean that you are doomed, by some law of logic, to buy when you should be selling and to sell when you should be buying?
This point is vital. The investor cannot enter the arena of the stock market with any real hope of success unless he is armed with mental weapons that distinguish him in kind - not in a fancied superior degree - from the trading public.
(1) One possible weapon is indifference to market fluctuations; such an investor buys carefully when he has money to place and then lets prices take care of themselves.
(2) But, if the investor intends to buy and sell recurrently, his weapons must be a frame of mind and a principle of action which are basically different from those of the trader and speculator. He must deal in values, not in price movements. He must be relatively immune to optimism or pessimism and impervious to business or stock-market forecasts.
In a word, he must be psychologically prepared to be a true investor and not a speculator masquerading as an investor. If he can meet this test, he will be a member not of the public at large but of a specialized and self-disciplined group.
Returning to the matter of the market's cyclical swings,we must point out that the duration or frequency of these swings has changed considerably since 1921. This is an added obstacle to the pleasing project of investing regularly in low markets and selling out in high ones. Between 1899 and 1921 the industrial average made five well defined highs and five definite lows, an average cycle of about four years. Since then there have been only two clean-cut swings and the intervals between low points have been eleven years and ten years, respectively.
An investor nowadays is likely to grow uneasy and impatient while waiting for his cyclical buying opportunity to reappear. In the meantime, also, his funds will bring him no interest in the bank and only a negligible rate if placed in short-term securities. Thus he can lose more in dividends foregone than he can ever gain from buying at eventual low levels.
Summary
Either buy carefully and then ignore the market fluctuations or if you intends to buy and sell recurrently, deal in values.
Should you patiently wait for your cyclical buying opportunity to reappear? The low-points of the market maybe 10 or 11 years apart. While waiting for these hoping to buy at eventual low levels, you can lose more in dividends foregone; earning little income from your cash holdings.
Price Changes as Measuring Investment Results
When the general market declines or advances substantially ....
.... nearly all investors will have somewhat similar changes in their portfolio values.
Benjamin Graham, in his book Intelligent Investor, wrote that the investor should not pay serious attention to such price developments unless they fit into a previously established program of buying at low levels and selling at high levels.
The investor is neither a smart investor nor a richer one when he buys in an advancing market and the market continues to rise.
That is true even when the investor cashes in a goodly profit, unless either
(a) he is definitely through with buying stocks - an unlikely story - or
(b) he is determined to reinvest only at considerably lower levels.
In a continuous program no market profit is fully realized until the later reinvestment has actually taken place, and the true measure of the trading profit is the difference between the previous selling level and the new buying level.
The INVESTMENT SUCCESS of the investor may be judged by a long-term or secular rise in market price, without the necessity of sale.
The proof of that achievement lies in the price advances made between successive points of equality in the general market level.
In most cases this favourable price performance will be accompanied by a well-defined improvement in the average earnings, in the dividend, and the balance-sheet position.
Thus in the long run the market test and the ordinary business test of a successful equity commitment tend to be largely identical.
SUMMARY
Most of us are invested for the long run.
Even if you manage to sell your investment for a profit from your previous buying price, no market profit is fully realized until you have reinvested this amount back into the market.
Your trading profit is the difference between the previous selling level and the new buying level.
.... nearly all investors will have somewhat similar changes in their portfolio values.
Benjamin Graham, in his book Intelligent Investor, wrote that the investor should not pay serious attention to such price developments unless they fit into a previously established program of buying at low levels and selling at high levels.
The investor is neither a smart investor nor a richer one when he buys in an advancing market and the market continues to rise.
That is true even when the investor cashes in a goodly profit, unless either
(a) he is definitely through with buying stocks - an unlikely story - or
(b) he is determined to reinvest only at considerably lower levels.
In a continuous program no market profit is fully realized until the later reinvestment has actually taken place, and the true measure of the trading profit is the difference between the previous selling level and the new buying level.
The INVESTMENT SUCCESS of the investor may be judged by a long-term or secular rise in market price, without the necessity of sale.
The proof of that achievement lies in the price advances made between successive points of equality in the general market level.
In most cases this favourable price performance will be accompanied by a well-defined improvement in the average earnings, in the dividend, and the balance-sheet position.
Thus in the long run the market test and the ordinary business test of a successful equity commitment tend to be largely identical.
SUMMARY
Most of us are invested for the long run.
Even if you manage to sell your investment for a profit from your previous buying price, no market profit is fully realized until you have reinvested this amount back into the market.
Your trading profit is the difference between the previous selling level and the new buying level.
Saturday 11 October 2014
Ignore the noises that rattle the markets. A conclusion about the economy does not tell us if the stock market will rise or fall.
In 75% of those years (from 1965 to 2008), the S&P stocks recorded a gain. You can guess that a roughly similar percentage of years will be positive in the future too.Can you predict the winning and losing years in advance? I don't think anyone can.
The economy was in shambles throughout 2009, but that did not tell us whether the stock market will rise or fall.
A conclusion about the economy does not tell us if the stock market will rise or fall.
The economy was in shambles throughout 2009, but that did not tell us whether the stock market will rise or fall.
A conclusion about the economy does not tell us if the stock market will rise or fall.
Friday 10 October 2014
Analysing the substance and character of a business is the holy grail of investing. Guessing a price that someone else is willing to pay, is not.
By 1969, the stock market had reached new highs, and the Buffett Partnership continued to beat its returns. As the market continued to climb even higher, Buffett announced that he would close his partnerships. He told the partners that the speculation-driven stock market didn't make sense; he wanted no part of the folly.
Buffett sold everything in the portfolio except for shares in Diversified Retailing, Blue Chip Stamps, and Berkshire Hathaway, which now included insurance and banking businesses as well as equity investments. Avoiding the speculative market, Buffett continued to hunt for attractive underated businesses. In 1971, he bought a controlling interest in See's Candies.
By early January 1973, the Dow had climbed to an all time high of 1,051 points. But only $17 million of Berkshire's $101 million insurance portfolio was invested in stocks; the rest was in bonds. Not long after this high, the market swooned. The it racheted down further. By October 1974, it hit a low of 580 points. Investors panicked but Buffett rejoiced. He was in his elements once again.
Over the following years, Buffett bagged big game at bargain prices, adding Wesco Financial and buying large blocks of stocks in The Washington Post and Geico. In 1977, Buffett bought The Buffalo News.
Buffett's belief that analysing the substance and character of a business was the holy grail of investing. Guessing a price that someone else was willing to pay - irrespective of fundamentals - was not.
Ask yourself this ONE question, every time a stock price goes up or down.
Every time a stock goes up or down, you should ask yourself:
Is this price movement based on changing fundamental or changing sentiment?
Sometimes the answer is not so obvious.
In such a situation, here is a good guiding principle.
It is better to be approximately right than to be exactly wrong.
Is this price movement based on changing fundamental or changing sentiment?
Sometimes the answer is not so obvious.
In such a situation, here is a good guiding principle.
It is better to be approximately right than to be exactly wrong.
Saturday 14 September 2013
How worried are you when the stock market goes down 50%? Ask Charlie Munger who reveals the secrets to getting rich.
Published on 13 Jul 2012
http://www.charliemunger.net -- Charlie Munger, the long-time business partner of famed investor Warren Buffett, talks with the BBC. If you know anything about Charlie Munger, he's famous for his quick wit, plain spokeness and absolute genius. He has helped shareholders of Berkshire Hathaway amass untold forunes.
Wednesday 21 August 2013
Investors exit Asian economies as US builds up steam
- Shamim Adam
Asia's role as the world's growth engine is waning as economies across the region weaken and investors pull out billions of dollars.
The Indian rupee fell to a record low this week, Thailand is in recession and Indonesia's widest current account deficit pushed the rupiah to its lowest since 2009. Chinese banks' bad loans are rising and economists forecast Malaysia will post its second straight quarter of sub-5 per cent growth this week.
The clouds forming in Asia as liquidity tightens and China slows down are fuelling a sell-off of emerging market stocks, reversing a flow of money into the region in favour of nascent recoveries in the US and Europe. Emerging markets from Brazil to Indonesia have raised borrowing costs this year to try to help their currencies as the prospect of reduced US monetary stimulus curbs demand for assets in developing nations.
''The eye of the storm is directly above emerging markets now, two years after it hovered over Europe and four years after it hit the US,'' said Stephen Jen, co-founder of hedge fund SLJ Macro Partners in London and former head of foreign exchange strategy at Morgan Stanley. ''This could be serious for Asia.''
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Almost $US95 billion ($105 billion) was poured into exchange-traded funds of American shares this year, while developing-nation ETFs got withdrawals of $US8.4 billion. Signs of a stronger US economy may prompt the Federal Reserve to begin paring back its $US85 billion in monthly bond purchases as soon as next month.
''The pendulum is swinging back in favour of the advanced countries,'' said Shane Oliver, head of investment strategy at AMP Capital Investors.
Indian policy makers are battling to stem the rupee's plunge, attract capital to bridge a record current account deficit and revive growth.
The currency has weakened about 28 per cent against the US dollar in two years, reviving memories of the early 1990s crisis, when the government received an International Monetary Fund loan as foreign reserves waned.
''It seems now the pain is going to be in the emerging markets,'' said Nitin Mathur, an analyst in Mumbai at Espirito Santo Investment Bank. ''The problems in India are not temporary blips. The problems are much more serious, which will take a lot of effort to get resolved.''
In Thailand, the economy entered recession last quarter for the first time since the global financial crisis. Toyota said car sales in Thailand would fall 9.5 per cent this year. The government cut its 2013 growth forecast as exports cooled and local demand weakened. Higher household debt restricts scope for monetary easing.
Last week, Taiwan cut its 2013 growth and exports forecasts and said the global outlook for the second half was worsening.
''We are seeing a turning point,'' said Freya Beamish, an economist with Lombard Street Research, who says China's competitiveness has been hurt by labour costs that are 30 per cent too high.
Sentiment is also being subdued by the prospect of a decline in US stimulus, which often finds its way to export-based countries.
Investors will be looking for clues on how quickly the US Federal Reserve will trim its monthly asset purchases when the federal open market committee's July meeting minutes come out on Wednesday.
The $US3.9 trillion of cash that flowed into emerging markets over the past four years has started to reverse since Fed chairman Ben Bernanke talked about a tapering in quantitative easing this year.
''The emerging Asia story is crumbling and dollar is once again the king,'' said Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai.
India's moves to tighten cash supply, restrict currency derivatives and curb gold imports since July failed to arrest the rupee's slump to a record low of 63.23 against the US dollar. The deficit has widened to 4.8 per cent of gross domestic product. The government plans to narrow the gap to 3.7 per cent, or $US70 billion, this year.
India's slump is worse than elsewhere because the country has failed to carry out long-overdue structural changes to the economy.
''We have great policies on paper but the gap between the what's on paper and the implementation is unduly large,'' said R.C. Bhargava, chairman of Maruti Suzuki India, the nation's biggest carmaker. ''If we just implement what's already there, we can get back on track in the next two to three years.''
One bright spot is Japan, where the economy has bounced back on Prime Minister Shinzo Abe's fiscal and monetary stimulus.
The Topix stocks index has risen 34 per cent this year. Abe has yet to show he can sustain the recovery by restructuring company and labour laws and taming the nation's debt, which topped 1 quadrillion yen ($11 trillion) in June.
''Some Asian countries, especially India, have their own significant domestic challenges,'' said economist Jim O'Neill. ''But China is slowing primarily to improve its growth model and, at 7 to 7.5 per cent annual growth, is still delivering $US1 trillion nominal GDP. And Japan … is looking better than it has done for a very long time.''
The slowdown in Indonesia and Thailand was part of global weakness, World Bank chief economist Kaushik Basu said. The US recovery ''was so slow that even the slightest pick-up is looking like a pick-up'', he said. ''I don't think the Asian situation is any worse. In fact, if anything, Asia is probably better off than the rest of the world.''
But that may not help markets in Asia, as money continues to flow back to Europe and the US.
Bloomberg
Read more: http://www.smh.com.au/business/world-business/investors-exit-asian-economies-as-us-builds-up-steam-20130820-2s9a1.html#ixzz2cYvjWmvb
Friday 16 August 2013
Chuck Carlson - Stock Market and Investment Opportunities
Published on 29 Apr 2013
The power of process will be essential for unemotional investing in this age of turbulence. Investors will learn about profit opportunities in 2013 and the power of dividends.
Friday 26 July 2013
Market Fluctuations and Your Emotions
The stock market can fluctuate widely. Prices of stocks are determined by various factors. It is better for you to focus on the fundamentals of the stocks. However, the prices of stocks can be driven very high and pushed very low by sentiments of the players which may not have anything to do with the underlying fundamentals.
As a rational investor, what should you do in such situations? Let's assume you own good quality companies with durable competitive advantage which you plan to hold for the long term. You rightly have chosen these companies to be in your portfolio due to their earnings power, mainly gauged from their historical performances.
Firstly, you should be able to compute the intrinsic values for the companies, using conservative estimates in your valuation. This ability is important as it is the strength you will have over the other players. It is not uncommon for your stock prices to fluctuate 50% above or the equivalent 1/3rd below its average market price over a 52 weeks period. Check these out to confirm this statement in your local press of the listings of the various companies' stock prices.
If you hope to buy and sell to profit from these market fluctuations in the prices of your stocks, believe me that to make money consistently and to grow your portfolio value at a meaningful rate, though possible for a few, is not easy. Frequent trading incurs costs and expenses, and also your time, which can be better employed to pursue some better, more productive and healthier activities. Rather than hoping to profit from trading these prices, focus on profiting from the long term returns you can expect with a high degree of probability from holding these stocks with great earning power.
How then should you approach these market fluctuations of the prices of your stock?
When the price of the stock is higher than your calculated intrinsic value, don't buy to add to your portfolio. Do you sell based on valuation? Often, you need not have to. There are times when you may consider selling some (perhaps 20%), but not all, should the stock be too overpriced Selling your winners to lock in a gain, may not mean that you will be able to buy the same back at lower prices in the future. Moreover, the gain that you locked in at the time of selling, you may realise that you have missed out on the even bigger gains that these stocks deliver over the long term. (Just to emphasize, this is different from stocks which fundamentals have deteriorated permanently. These should be sold urgently to prevent harm to your portfolio.)
Great companies can often be bought at fair prices and still be very profitable over the long term in your portfolio. You should be greedy when such companies are available to you at low prices, especially during a general market correction or a bear market, when even these good stocks are sold down by the less savvy investors, due to fear, during such periods.
As a rational investor, what should you do in such situations? Let's assume you own good quality companies with durable competitive advantage which you plan to hold for the long term. You rightly have chosen these companies to be in your portfolio due to their earnings power, mainly gauged from their historical performances.
Firstly, you should be able to compute the intrinsic values for the companies, using conservative estimates in your valuation. This ability is important as it is the strength you will have over the other players. It is not uncommon for your stock prices to fluctuate 50% above or the equivalent 1/3rd below its average market price over a 52 weeks period. Check these out to confirm this statement in your local press of the listings of the various companies' stock prices.
If you hope to buy and sell to profit from these market fluctuations in the prices of your stocks, believe me that to make money consistently and to grow your portfolio value at a meaningful rate, though possible for a few, is not easy. Frequent trading incurs costs and expenses, and also your time, which can be better employed to pursue some better, more productive and healthier activities. Rather than hoping to profit from trading these prices, focus on profiting from the long term returns you can expect with a high degree of probability from holding these stocks with great earning power.
How then should you approach these market fluctuations of the prices of your stock?
When the price of the stock is higher than your calculated intrinsic value, don't buy to add to your portfolio. Do you sell based on valuation? Often, you need not have to. There are times when you may consider selling some (perhaps 20%), but not all, should the stock be too overpriced Selling your winners to lock in a gain, may not mean that you will be able to buy the same back at lower prices in the future. Moreover, the gain that you locked in at the time of selling, you may realise that you have missed out on the even bigger gains that these stocks deliver over the long term. (Just to emphasize, this is different from stocks which fundamentals have deteriorated permanently. These should be sold urgently to prevent harm to your portfolio.)
Great companies can often be bought at fair prices and still be very profitable over the long term in your portfolio. You should be greedy when such companies are available to you at low prices, especially during a general market correction or a bear market, when even these good stocks are sold down by the less savvy investors, due to fear, during such periods.
Remember, ALWAYS be ready for a stock market correction!
Remember, ALWAYS be ready for a stock market correction!
Do not participate in the business of predicting what the stock market is going to do over short periods of time.
Very simply, you cannot predict an irrational system and emotional investors.
Warren Buffett's quote: "The stock market is nothing more than an excuse to see what people are willing to do foolish today."
One of the keys to successful INVESTING is buying into quality companies and continuing to do so over time, not the "stock market."
Of course, there are risks when you invest in a company. The fundamentals may change. The value of the company may decrease over time.
This is why one must diversify appropriately based on one's investment objectives and tolerance for market volatility and investment risk.
At the end of the day, bull market or bear market, who or why care?
A MAJOR KEY TO SUCCESSFUL INVESTING HAS ALWAYS BEEN AND WILL ALWAYS BE, THE PROCESS OF INVESTING IN QUALITY COMPANIES AND TAKING ADVANTAGE OF MARKET VOLATILITY TO CONTINUALLY INVEST IN COMPANIES ON SALE OVER TIME.
Link: investingwithclarity.com/2012/08/09/bull-bear-why-care/
Do not participate in the business of predicting what the stock market is going to do over short periods of time.
Very simply, you cannot predict an irrational system and emotional investors.
Warren Buffett's quote: "The stock market is nothing more than an excuse to see what people are willing to do foolish today."
One of the keys to successful INVESTING is buying into quality companies and continuing to do so over time, not the "stock market."
Of course, there are risks when you invest in a company. The fundamentals may change. The value of the company may decrease over time.
This is why one must diversify appropriately based on one's investment objectives and tolerance for market volatility and investment risk.
At the end of the day, bull market or bear market, who or why care?
A MAJOR KEY TO SUCCESSFUL INVESTING HAS ALWAYS BEEN AND WILL ALWAYS BE, THE PROCESS OF INVESTING IN QUALITY COMPANIES AND TAKING ADVANTAGE OF MARKET VOLATILITY TO CONTINUALLY INVEST IN COMPANIES ON SALE OVER TIME.
Link: investingwithclarity.com/2012/08/09/bull-bear-why-care/
Sunday 24 March 2013
Benjamin Graham: Three Timeless Principles
Legendary Investor
Benjamin Graham: Three Timeless Principles
Daniel Myers, Investopedia, 02.23.09, 06:00 PM ESTWarren Buffett is the world's richest human. But he may owe it all to his teacher Benjamin Graham.
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| Benjamin Graham |
Warren Buffett is widely considered to be one of the greatest investors of all time, but if you were to ask him who he thinks is the greatest investor, he would probably mention one man: his teacher Benjamin Graham. Graham was an investor and investing mentor who is generally considered to be the father of security analysis and value investing.
His ideas and methods on investing are well documented in his books Security Analysis(1934) and The Intelligent Investor (1949), which are two of the most famous investing books. These texts are often considered to be requisite reading material for any investor, but they aren't easy reads. Here, we'll condense Graham's main investing principles and give you a head start on understanding his winning philosophy.
Principle No. 1: Always Invest With a Margin of Safety
Margin of safety is the principle of buying a security at a significant discount to its intrinsic value, which is thought to not only provide high-return opportunities but also to minimize the downside risk of an investment. In simple terms, Graham's goal was to buy assets worth $1 for 50 cents. He did this very, very well.
To Graham, these business assets may have been valuable because of their stable earning power or simply because of their liquid cash value. It wasn't uncommon, for example, for Graham to invest in stocks in which the liquid assets on the balance sheet (net of all debt) were worth more than the total market cap of the company (also known as "net nets" to Graham followers). This means that Graham was effectively buying businesses for nothing. While he had a number of other strategies, this was the typical investment strategy for Graham. (For more on this strategy, read "What Is Warren Buffett's Investing Style?")
This concept is very important for investors to note, as value investing can provide substantial profits once the market inevitably re-evaluates the stock and raises its price to fair value. It also provides protection on the downside if things don't work out as planned and the business falters. The safety net of buying an underlying business for much less than it is worth was the central theme of Graham's success. When stocks are chosen carefully, Graham found that a further decline in these undervalued equities occurred infrequently.
While many of Graham's students succeeded using their own strategies, they all shared the main idea of the "margin of safety."
Principle No. 2: Expect Volatility and Profit From It
Investing in stocks means dealing with volatility. Instead of running for the exits during times of market stress, the smart investor greets downturns as chances to find great investments. Graham illustrated this with the analogy of "Mr. Market," the imaginary business partner of each and every investor. Mr. Market offers investors a daily price quote at which he would either buy an investor out or sell his share of the business. Sometimes, he will be excited about the prospects for the business and quote a high price. Other times, he will be depressed about the business's prospects and will quote a low price.
Because the stock market has these same emotions, the lesson here is that you shouldn't let Mr. Market's views dictate your own emotions or, worse, lead you in your investment decisions. Instead, you should form your own estimates of the business's value based on a sound and rational examination of the facts. Furthermore, you should only buy when the price offered makes sense and sell when the price becomes too high. Put another way, the market will fluctuate--sometimes wildly--but rather than fearing volatility, use it to your advantage to get bargains in the market or to sell out when your holdings become way overvalued.
--Dollar-cost averaging: Achieved by buying equal dollar amounts of investments at regular intervals. It takes advantage of dips in the price and means that an investor doesn't have to be concerned about buying his or her entire position at the top of the market. Dollar-cost averaging is ideal for passive investors and alleviates them of the responsibility of choosing when and at what price to buy their positions. (For more, read "DCA: It Gets You In At The Bottom" and "Dollar-Cost Averaging Pays.")Here are two strategies that Graham suggested to help mitigate the negative effects of market volatility:
--Investing in stocks and bonds: Graham recommended distributing one's portfolio evenly between stocks and bonds as a way to preserve capital in market downturns while still achieving growth of capital through bond income. Remember, Graham's philosophy was, first and foremost, to preserve capital, and then to try to make it grow. He suggested having 25% to 75% of your investments in bonds, and varying this based on market conditions. This strategy had the added advantage of keeping investors from boredom, which leads to the temptation to participate in unprofitable trading (i.e., speculating). (To learn more, read"The Importance Of Diversification.")
Principle No. 3: Know What Kind of Investor You Are
Graham said investors should know their investment selves. To illustrate this, he made clear distinctions among various groups operating in the stock market.
Active vs. passive:Graham referred to active and passive investors as "enterprising investors" and "defensive investors."
You only have two real choices: The first is to make a serious commitment in time and energy to become a good investor who equates the quality and amount of hands-on research with the expected return. If this isn't your cup of tea, then be content to get a passive, and possibly lower, return but with much less time and work. Graham turned the academic notion of "risk = return" on its head. For him, "work = return." The more work you put into your investments, the higher your return should be.
If you have neither the time nor the inclination to do quality research on your investments, then investing in an index is a good alternative. Graham said that the defensive investor could get an average return by simply buying the 30 stocks of the Dow Jones industrial average in equal amounts. Both Graham and Buffett said getting even an average return--for example, equaling the return of the S&P 500--is more of an accomplishment than it might seem.
The fallacy that many people buy into, according to Graham, is that if it's so easy to get an average return with little or no work (through indexing), then just a little more work should yield a slightly higher return. The reality is that most people who try this end up doing much worse than average.
In modern terms, the defensive investor would be an investor in index funds of both stocks and bonds. In essence, they own the entire market, benefiting from the areas that perform the best without trying to predict those areas ahead of time. In doing so, an investor is virtually guaranteed the market's return and avoids doing worse than average by just letting the stock market's overall results dictate long-term returns. According to Graham, beating the market is much easier said than done, and many investors still find they don't beat the market. (To learn more, read "Index Investing.")
Speculator vs. investor:Not all people in the stock market are investors. Graham believed that it was critical for people to determine whether they were investors or speculators. The difference is simple: An investor looks at a stock as part of a business and the stockholder as the owner of the business, while the speculator views himself as playing with expensive pieces of paper with no intrinsic value. For the speculator, value is only determined by what someone will pay for the asset. To paraphrase Graham, there is intelligent speculating as well as intelligent investing--just be sure you understand which you are good at.
Commentary
Graham's basic ideas are timeless and essential for long-term success. He bought into the notion of buying stocks based on the underlying value of a business and turned it into a science at a time when almost all investors viewed stocks as speculative. Graham served as the first great teacher of the investment discipline, as evidenced by those in his intellectual bloodline who developed their own. If you want to improve your investing skills, it doesn't hurt to learn from the best; Graham continues to prove his worth in his disciples, such as Buffett, who have made a habit of beating the market.
Below you will find a table of stocks Forbes recently identified based on the Benjamin Graham screen of the American Association of Individual Investors.
Company
|
Description
|
Market Cap ($mil)
|
Price/Earnings
|
Yield
|
Auto & truck manufacturers
|
152
|
3.1
|
2.1%
| |
Water transportation
|
168
|
2.7
|
14.5
| |
Retail
|
608
|
3.5
|
538.6
| |
Iron & steel
|
2,007
|
2.1
|
5
| |
Iron & steel
|
4,006
|
1.9
|
3.5
|
Source: AAII Stock Investor Pro
--The price-to-earnings ratio is among the lowest 10% of the database (percent rank less than or equal to 10).
--The current ratio for the last fiscal quarter (Q1) is greater than or equal to 1.5.
--The long-term debt to working capital ratio for the last fiscal quarter (Q1) is greater than 0% and less than 110%.
--Earnings per share for each of the last five fiscal years and for the last 12 months have been positive.
--The company intends to pay a dividend over the next year (indicated dividend is greater than zero).
--The company has paid a dividend over the last 12 months.
--Earnings per share for the last 12 months is greater than the earnings per share from five years ago (Y5).
--Earnings per share for the last fiscal year (Y1) is greater than the earnings per share from five years ago (Y5).
--The price-to-book ratio is less than or equal to 1.2.
--The current ratio for the last fiscal quarter (Q1) is greater than or equal to 1.5.
--The long-term debt to working capital ratio for the last fiscal quarter (Q1) is greater than 0% and less than 110%.
--Earnings per share for each of the last five fiscal years and for the last 12 months have been positive.
--The company intends to pay a dividend over the next year (indicated dividend is greater than zero).
--The company has paid a dividend over the last 12 months.
--Earnings per share for the last 12 months is greater than the earnings per share from five years ago (Y5).
--Earnings per share for the last fiscal year (Y1) is greater than the earnings per share from five years ago (Y5).
--The price-to-book ratio is less than or equal to 1.2.
http://www.forbes.com/2009/02/23/graham-buffett-value-personal-finance_benjamin_graham.html
Thursday 25 October 2012
Using Market Fluctuations as a guide to making Investment Decisions*
Graham, Chapter 8:
In chapter eight of Graham's book, he brings up the subject of market fluctuation. I think he makes an important point to those people who are monitoring their retirement portfolios almost on a daily basis.
He states that "the investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances" (p. 206).
With this in mind, he suggests using these fluctuations in the market as a guide to making investment decisions.
More precisely, he suggests using the dips in the market as points to acquire more of a quality stock along with finding new opportunities for suitable investments.
The Intelligent Investor by Benjamin Graham
Wednesday 15 August 2012
Why I am interested in stocks?
Stock prices fluctuated wildly while the underlying value of the business was far more stable.
To be a successful investor you need to have the time to stop and contemplate what's going on.
To be a successful investor you need to have the time to stop and contemplate what's going on.
MARKET FLUCTUATIONS OF INVESTOR'S PORTFOLIO
Thursday 12 July 2012
Any price - and therefore P/E - movements that is not related to the company's earnings is transient.
The stock market is governed by a diverse set of influences. And just as the sea is, it is predictable over the long term but not over the short term.
Probably the most widely watched reason for the long-term fluctuations of the price and P/E is the rise and fall of the stock market itself. This can be a function of the economy's volatility. The economy is battered by the rise and fall of interest rates, by inflation, and by a variety of factors that drive consumer confidence or buying power up or down. Actual changes in the economy itself will cause longer-term changes in the market and the prices of its individual stocks. Speculation about such changes has a shorter-term effect.
In the shorter term, there are the ripples and wavelets. Every little utterance of a government official or company offer, insider buying or selling (which may or may not mean anything), rumour, gossip, and just about anything else can influence the whims of those on the street. Many people will use these stories to try to make or break a market in the stock.
Over the life of a company, its fair P/E - the "normal" relationship between a company's earnings and its stock's price - is relatively constant. It does tend to decline slowly as the company's earnings growth declines, which happens with all successful companies. For all practical purposes, however, that relationship is remarkably stable. And for that reason, it's also remarkably predictable.
When a company's earnings continue to grow, so will its stock price. Conversely, when earnings flatten or go down, the price will follow.
The little fluctuations in the P/E ration above and below that constant (fair) value are not so predictable because they are all caused by investor perception and opinion. Think of them as the winds that blow across the surface of the sea.
The broader moves above and below the norm are the undulations that are typically caused by the continuous rising and falling of analysts' expectations. When a company first emerges into its explosive growth period, the analysts expect earnings to continue to skyrocket. Earnings growth estimates in the 50% range or more are not uncommon.
As the company continues to meet these expectations, investor confidence booms along with it, and more investors pay a higher and higher price for the stock. The P/E rises as a meteor right along with the price. The faster the growth, the higher the P/E. This does nothing to alter the value of the "reasonable or fair" P/E multiple. It just means that investor confidence has risen well above that norm and that there will eventually be an adjustment.
Sure enough, one fine day when the analysts' consensus called for growth of 45%, the company turns in a "disappointing" earnings growth of only 38%. The analysts start wringing their hands because the company has not met their expectations, and some fund manger sells. Next, all of the lemmings on Wall Street follow suit. And not long thereafter you get a call from your broker telling you that you've had a nice ride, you've made a lot of money on the stock, and it's time to take your profit and get out. In the meantime, the broker has made a commission on your purchase and is hoping to make it on your sale as well.
After a while, after the price and the P/E have plummeted and then sat there for a while, some analyst wakes up to the fact that a 34% earning growth rate is still pretty darn good and jumps back in. Soon the cycle is reversed. The market starts showing the company some respect again. And you get a call from your broker.
Of course, as a smart intelligent investor you didn't sell it in the first place! Because you were watching the fine earnings growth all along, you knew better than to sell. And you chose the opportunity to buy some more. In the meantime, your brokers'; clients who were not so savvy has taken their profits (and, had paid the taxes on them, by the way) and are now wishing that they had stayed in with you. By the time their broker called them again, the price had already climbed past the point where it made good sense for them to jump in again.
It is best to assume that any price - and therefore P/E - movements that is not related to the company's earnings is transient. If the stories - not the numbers - cause the price to move, the change won't last. What goes up will come down, and what goes down will come up., You have to be concerned only when the sales, pretax profits, or earnings cause the change, and then only if you find that the performance decay is related to a major long-term problem that is beyond the management's ability to resolve.
Remember also that a sizable segment of Wall Street doesn't make its money investing as you do; it makes its money on the "ocean motion." Buy or sell, it makes little difference to them what you do. They make their money either way. But it sure makes a big difference to you!
Probably the most widely watched reason for the long-term fluctuations of the price and P/E is the rise and fall of the stock market itself. This can be a function of the economy's volatility. The economy is battered by the rise and fall of interest rates, by inflation, and by a variety of factors that drive consumer confidence or buying power up or down. Actual changes in the economy itself will cause longer-term changes in the market and the prices of its individual stocks. Speculation about such changes has a shorter-term effect.
In the shorter term, there are the ripples and wavelets. Every little utterance of a government official or company offer, insider buying or selling (which may or may not mean anything), rumour, gossip, and just about anything else can influence the whims of those on the street. Many people will use these stories to try to make or break a market in the stock.
Over the life of a company, its fair P/E - the "normal" relationship between a company's earnings and its stock's price - is relatively constant. It does tend to decline slowly as the company's earnings growth declines, which happens with all successful companies. For all practical purposes, however, that relationship is remarkably stable. And for that reason, it's also remarkably predictable.
When a company's earnings continue to grow, so will its stock price. Conversely, when earnings flatten or go down, the price will follow.
The little fluctuations in the P/E ration above and below that constant (fair) value are not so predictable because they are all caused by investor perception and opinion. Think of them as the winds that blow across the surface of the sea.
The broader moves above and below the norm are the undulations that are typically caused by the continuous rising and falling of analysts' expectations. When a company first emerges into its explosive growth period, the analysts expect earnings to continue to skyrocket. Earnings growth estimates in the 50% range or more are not uncommon.
As the company continues to meet these expectations, investor confidence booms along with it, and more investors pay a higher and higher price for the stock. The P/E rises as a meteor right along with the price. The faster the growth, the higher the P/E. This does nothing to alter the value of the "reasonable or fair" P/E multiple. It just means that investor confidence has risen well above that norm and that there will eventually be an adjustment.
Sure enough, one fine day when the analysts' consensus called for growth of 45%, the company turns in a "disappointing" earnings growth of only 38%. The analysts start wringing their hands because the company has not met their expectations, and some fund manger sells. Next, all of the lemmings on Wall Street follow suit. And not long thereafter you get a call from your broker telling you that you've had a nice ride, you've made a lot of money on the stock, and it's time to take your profit and get out. In the meantime, the broker has made a commission on your purchase and is hoping to make it on your sale as well.
After a while, after the price and the P/E have plummeted and then sat there for a while, some analyst wakes up to the fact that a 34% earning growth rate is still pretty darn good and jumps back in. Soon the cycle is reversed. The market starts showing the company some respect again. And you get a call from your broker.
Of course, as a smart intelligent investor you didn't sell it in the first place! Because you were watching the fine earnings growth all along, you knew better than to sell. And you chose the opportunity to buy some more. In the meantime, your brokers'; clients who were not so savvy has taken their profits (and, had paid the taxes on them, by the way) and are now wishing that they had stayed in with you. By the time their broker called them again, the price had already climbed past the point where it made good sense for them to jump in again.
It is best to assume that any price - and therefore P/E - movements that is not related to the company's earnings is transient. If the stories - not the numbers - cause the price to move, the change won't last. What goes up will come down, and what goes down will come up., You have to be concerned only when the sales, pretax profits, or earnings cause the change, and then only if you find that the performance decay is related to a major long-term problem that is beyond the management's ability to resolve.
Remember also that a sizable segment of Wall Street doesn't make its money investing as you do; it makes its money on the "ocean motion." Buy or sell, it makes little difference to them what you do. They make their money either way. But it sure makes a big difference to you!
Sunday 17 June 2012
If some degree of mis-pricing exists in the stock market, it does not persist for long.
Market valuations rest on both logical and psychological factors.
The theory of valuation depends on the projection of a long-term stream of dividends whose growth rate is extraordinarily difficult to estimate. Thus, fundamental value is never a definite number. It is a fuzzy band of possible values, and prices can move sharply within this band whenever there is increased uncertainty or confusion. Moreover, the appropriate risk premiums for common equities are changeable and far from obvious either to investors or to financial economists. Thus, there is room for the hopes, fears, and favorite fashions of market participants to play a role in the valuation process.
History provides extraordinary examples of markets in which psychology seemed to dominate the pricing process, as in the tulip-bulb mania in seventeenth century Holland and the Internet bubble at the turn of the twenty-first century. It is doubtful that the current array of market prices ALWAYS represents the best estimate available of appropriate discounted value.
Nevertheless, the evidence suggest that stock prices display a remarkable degree of efficiency. Prices adjust so well to important information. Information contained in past prices or any publicly available fundamental information is rapidly assimilated into market prices. If some degree of mis-pricing exists, it does not persist for long.
"True value will always out" in the stock market. To paraphrase Benjamin Graham, ultimately the market is a weighing mechanism, not a voting mechanism.
The theory of valuation depends on the projection of a long-term stream of dividends whose growth rate is extraordinarily difficult to estimate. Thus, fundamental value is never a definite number. It is a fuzzy band of possible values, and prices can move sharply within this band whenever there is increased uncertainty or confusion. Moreover, the appropriate risk premiums for common equities are changeable and far from obvious either to investors or to financial economists. Thus, there is room for the hopes, fears, and favorite fashions of market participants to play a role in the valuation process.
History provides extraordinary examples of markets in which psychology seemed to dominate the pricing process, as in the tulip-bulb mania in seventeenth century Holland and the Internet bubble at the turn of the twenty-first century. It is doubtful that the current array of market prices ALWAYS represents the best estimate available of appropriate discounted value.
Nevertheless, the evidence suggest that stock prices display a remarkable degree of efficiency. Prices adjust so well to important information. Information contained in past prices or any publicly available fundamental information is rapidly assimilated into market prices. If some degree of mis-pricing exists, it does not persist for long.
"True value will always out" in the stock market. To paraphrase Benjamin Graham, ultimately the market is a weighing mechanism, not a voting mechanism.
Saturday 12 May 2012
Benjamin Graham on Market Behavior
In Security Analysis, Benjamin Graham emphasizes the importance of not only focusing on a firm’s potential and accounting statements, but to also pay great attention to the business cycle. Individual investors should research and create their own one year outlook for the market.
Almost any security may be a sound purchase at some real or prospective price and an indicated sale at another price.
- Benjamin Graham, Security Analysis
Think Long-Term
However, Graham also stresses that day-to-day and month-to-month fluctuations of the market should be ignored. Instead, investors should focus on the major shifts in market sentiment and estimating what stage of the business cylce we are in. Clearly today we are in a brutal bear market that has brought down the S&P 500 over 40% year to date. But we have to ask ourselves, what inning of this bear market are we in? Where do we see the strongest values in the market?
Benjamin Graham on Investing in Bear Markets
In a typical case of bear-market hysteria or pessimism the investor would be better off if he were not able to sell out so readily; in fact, he is often better off if he does not even know what changes are taking place in the market price of his securities.
- Benjamin Graham, Security Analysis
Graham’s sentiment on holding onto securities in a bear market could have taken a huge chunk out of someone’s portfolio this year, I know holding onto crashing stocks has severly hurt my portfolio. However at this state of the bear market I believe the above quote is appropriate.
It is ill-advised at this moment in time to liquidate investments into weakness. Your portfolio may depreciate in the coming months, but sometimes you have to take a 3 month deep breath and try your best to not follow your stock prices on a daily basis and just enjoy your dividend yields! To do this you have to be sure that your portfolio is filled with strong, value stocks with years of consistent earnings growth. Ignoring equity prices does not mean you should ignore the latest news from stocks you own. Shares should be sold if there is a fundamental shift in the companies’ long-term outlook.
Even though Warren Buffet’s 2 month-old investment in Goldman Sachs (GS) at $115 a share has fallen almost in half to $65 a share, I’m willing to bet he is sleeping well at night knowing he is invested in a first-in class company (although the investment banking class may be gone forever) and enjoying a 10% dividend yield from his preferred stock.
Don’t Purchase a Stock at Any Price
Finding the strongest values is no easy task, and Benjamin Graham gives some bull market advice that is worth remembering once this cycle changes gears. “Don’t purchase stocks atany price.” He writes that great companies don’t necessarily indicate a great investment if their stock price is comparatively high. Be a patient investor and wait until the company drops to an attractive level. For instance during a bull market in 2006 you could have bought Microsoft (MSFT) at a high of $30.19 or a low of $21.92 (or today at $19.15!) - a 27% variation. If a stock price of a company you have been watching continues to soar far above the intristic value (you can use my post on the Dividend Growth Model to estimate intrinsic value) you give the company, don’t feel like you missed the boat, in the long-term the price very well will come down to levels you like or their earnings will improve to increase your valutation.
When to Invest In Small Cap Stocks
Graham also notes that small cap stocks are more sensitive to swings in the overall market. Your position in small caps should be minimized in your portfolio if you have a weak outlook for the coming year and your small cap positions should be increased in bull markets. This sentiment is supported decades after Graham’s writing, consider comparing SPDR DJ Wilshire Small Cap Growth (DSG) which retreated 49% YTD vs. SPDR DJ Wilshire Large Cap Growth (ELG) which declined only (only!?) 43% YTD.
Beware of Bull Markets
Beware of “bargains” when most stock prices are high. An undervalued, neglected stock may continue to be neglected through the end of the bull market and may potential be one of the hardest hit stocks in the following bear market.
Market Environment, Potential Value, and Intristic Value Produce Market Price
http://www.theintelligentinvestor.net/benjamin-graham-on-market-behavior
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