PORTFOLIO MANAGEMENT

Portfolio of securities may offer equivalent expected returns with lower volatility of returns (lower risk) compared to individual securities.

The composition of the portfolio is an important determinant of the overall level of risk inherent in the portfolio.

By varying the weights of the individual securities, investors can arrive at a portfolio that offers the same return as an equally weighted portfolio, but with a lower standard deviation (risk).


Steps in the Portfolio Management Process

1.  Planning:

• The investment objectives - Understanding the investor's needs and constraints
•  Developing an investment policy statement (IPS) - The IPS is a written document that    describes the objectives and constraints of the investor.

2.  Execution:  

• Asset allocation - distribution of investable funds between various asset classes e.g., equities, fixed-income securities, alternative investments, etc.)
• Security Analysis - Analysis of companies and the industry to identify investments that offer the most attractive risk return characteristics from within each asset class.
• Portfolio construction - Constructing the portfolio, after determining the target asset allocation and conducting security analysis, in line with the objectives outlined in the IPS.

3.  Feedback

• Portfolio monitoring and rebalancing - The portfolio must be regularly monitored.  Changes in fundamental factors and investor's circumstances may require changes in the portfolio's composition.  Rebalancing may be required when changes in security prices cause a significant change in weight of assets in the portfolio.
• Performance measurement and reporting - This step involves measuring the performance (absolute or relative performance) of the portfolio stated in the IPS.

Trading and portfolio management from a value investing point of view.

Portfolio Management

Portfolio management is described as an on-going process that is never complete. 

While certain businesses may be fairly stable, its prices will fluctuate over time, and so the investor must constantly monitor the situation. 

Value investors are not into buying certain industries or business ideas without regard to price, and so price changes are a fundamental factor that drive portfolio decisions.

The portfolios need to be somewhat liquid. 

Investors are advised not to purchase their entire positions at one go, but rather to leave room to buy in at cheaper prices should the stock go down. 

A good test for an investor is to consider whether he would indeed buy more of the stock were it to drop; if he is not, he is probably speculating and should not be buying in the first place!

The Decision of When to Sell 

Determining when to buy a stock is usually a much easier decision for a value investor, since the stock at that time is trading below what the investor considers an adequate margin of safety. 

But when the stock is trading within the range of values the investor believes it to be worth, what is the investor to do? 

We can argue against selling after percentage gain thresholds or price targets have been reached.   

Instead, the investor should compare the investment to available alternative investments:

• It would be foolish to sell if there were no better investments and the stock was still undervalued, but 
• it would be foolish not to sell if there are better bargains around!

Read also:

• 
  
• Your investments using Mutual Funds or Money Managers
• Trading and portfolio management from a value investing point of view
• Value Investor's Opportunities in Distressed Securities
• Value Investing Opportunities in the Banking Sector
• Look at FUNDAMENTALS and POTENTIAL CATALYSTS when making investment decisions
• Where to look for Investment Opportunities
• Business value cannot be precisely determined. Make use of ranges of values
• Central elements to a Value Investing Philosophy
• The Philosophy of Value Investing and Why It Works
• Philosophy of value investing. Need to have clear strategies too
• How Wall Streets can create investment fads? The Junk Bond Market of mid-1980s
• Understanding these changes in the investment world allows investors to earn superior returns
• What's good for Wall Street is not necessarily good for investors
• Speculators, Investors and Market Fluctuations

Principles of Portfolio Planning

Investors benefit from holding portfolios of investments rather than single investments.

Without necessarily sacrificing returns, investors who hold portfolios can reduce risk.

Surprisingly, the volatility of a portfolio may be less than the volatilities of the individual assets that make up the portfolio.

When it comes to portfolios and risk, the whole is less than the sum of its parts!



Investment Goals

A portfolio is a collection of investments assembled to meet one or more investment goals.

Different investors have different objectives for their portfolios.

The primary goal of a growth-oriented portfolio is long-term price appreciation.

An income-oriented portfolio is designed to produce regular dividends and interest payments.




Portfolio Objectives

Setting portfolio objectives involves definite tradeoffs, such as the tradeoff

• between risk and return or 
• between potential price appreciation and income.

How you evaluate these tradeoffs will depend on your tax bracket, current income needs, and the ability to bear risk.

The key point is that your portfolio objectives must be established BEFORE you begin to invest.

The ultimate goal of an investor is an efficient portfolio, one that provides the highest return for a given level of risk.

Efficient portfolios are not necessarily easy to identify.

You usually must search out investment alternatives to get the best combinations of risk and return.

Constructing a Winning Portfolio using a general methodology that will serve you well

No one can predict the course of the market over the next month or the next year but you will be able to better the odds of constructing a winning portfolio.

The price levels of stocks and bonds will undoubtedly fluctuate beyond your control.

You need to acquire a general methodology that will serve you well in realistically projecting long-run returns and adopting your investment program to your financial needs.


What determines the returns from stocks and bonds?

Very long run returns from common stocks are driven by two critical factors:

• The dividend yield at the time of purchase, and,
• The future growth rate of earnings and dividends.

In principle, for the buyer who holds his or her stocks forever, a share of common stock is worth the present or discounted value of its stream of future dividends.

A stock buyer purchases an ownership interest in a business and hopes to receive a growing stream of dividends.

Even if a company pays very small dividends today and retains most (or even all) of its earnings to reinvest in the business, the investor implicitly assumes that such reinvestment will lead to a more rapidly growing stream of dividends in the future or alternatively to greater earnings that can be used by the company to buy backs its stocks.

LONG RUN EQUITY RETURN = INITIAL DIVIDEND YIELD + GROWTH RATE.

From 1926 to 2010:
Common stocks provided an average annual rate of return of about 9.8%.
The dividend yield for the market as a whole on Jan 1, 1926 was about 5%.
The long-run rate of growth of earnings and dividends was also about 5%.
Adding the initial dividend yield to the growth rate gives a close approximation of the actual rate of return.


OVER SHORTER PERIODS, SUCH AS A YEAR OR EVEN SEVERAL YEARS, A THIRD FACTOR IS CRITICAL IN DETERMINING RETURNS.

This factor is the change in valuation relationships - specifically, the change in the price-dividend or price-earnings multiple.  (Increases or decreases in the price-dividend multiple tend to move in the same direction as the more popularly used price-earnings multiple.)



Price-dividend and price-earnings multiples vary widely from year to year.

In times of great optimism, such as early March 2000, stocks sold at price-earnings multiples well above 30.
The price-dividend multiple was over 80.

At times of great pessimism, such as 1982, stocks sold at only 8 times earnings and 17 times dividends.



These multiples are also influenced by interest rates.

When interest rates are low, stocks, which compete with bonds for an investor's savings, tend to sell at low dividend yields and high price-earnings multiples.

When interest rates are high, stock yields rise to be more competitive and stocks tend to sell at low price-earnings multiples.

Portfolio Management for the Lay Investor by Warren Buffett

As a small investor, you got a chance to be in thousands and thousands of great businesses and their prices change all the time; so their relative valuations change and you can make the exchange at very low cost, close to nothing. You can always shift from one business to another.

You have a huge advantage over the big boys, as they cannot shift their business to retail or something else so easily.  You can rearrange your business empire in your portfolio that you have at a moment's notice at practically no cost.  You have a huge advantage which, sadly, many turn into a disadvantage.

There is nothing in the price action of the stock that tells you whether you should keep owning the stock.  What tells you to keep owning it is - what do you expect the company to do in the future versus the price you are selling now.and compare to the other opportunity which you think you know equally well and make the same comparison.

You can check your portfolio regularly to see how to optimise the stocks in your portfolio.  There is nothing to stop you from checking this daily.  However, don't do it too frequently.




@ 33 minutes
Warren Buffett's advice on portfolio management for the lay investors.




Read also:  http://executiveeducation.wharton.upenn.edu/~/media/wee/course%20packs/wharton-investment-strategies-and-portfolio-management.pdf

Investment strategies and Portfolio Management

PROGRAM OVERVIEW
For finance or investment professional, change and challenge are constant, particularly in this volatile, complex marketplace. You are presented with diverse opportunities in emerging markets, real estate, hedge funds, derivatives, and other alternative investments. As the choices increase, shaping and monitoring investment portfolios becomes more complicated. Which investments will generate the highest returns without exposing you to excessive risk? In Investment Strategies and Portfolio Management, you will learn how to evaluate this fundamental issue and manage related risk to increase your effectiveness as an investment professional for your clients and your organization. This program examines specific investment areas such as stocks, bonds, derivatives, real estate, and global investments, giving you a solid foundation from which to build optimal investment portfolios and make better investments.

EXPERIENCE
Through the Investment Strategies and Portfolio Management program, you will increase your effectiveness as an investment professional and gain financial tools you can immediately put to use for your clients and your organization. Wharton’s Finance faculty facilitates highly interactive dialogues that demonstrate hands-on applications of portfolio and investment strategies. They, along with noted industry experts, examine current issues such as the market outlook, investing in emerging markets, alternative investments, and hedge funds. All content is designed for you to use practically and effectively once you leave the classroom.

Quick Guide to Reviewing Your Portfolio Holdings

Benchmarking performance and watching key metrics are essential to evaluating whether your retirement holdings are doing their job.

Adam Zoll23/02/15

Whether your retirement portfolio consists of dozens of holdings or just a few, from time to time, it is a good idea to assess how each is performing and to take a look under the bonnet.

That's why it is important to know which performance benchmarks and key metrics to use when sizing up each holding individually. In doing so, you should look at both past performance and forward-looking measures designed to provide guidance as to how the investment will perform moving forward. That way, you can determine whether things in your portfolio are ticking along just fine, a few upgrades are in order, or whether changes need to be made.

Take the Long View on Past Performance

The metric that investors tend to focus on most, of course, is total return, a backward-looking measure. But reviewing a holding's total return versus its benchmark and peer group requires a dose of perspective. For one thing, it's important not to place too much emphasis on near-term results. If a fund you own has performed poorly of late, try to understand why.

Perhaps the fund's manager has placed an outsized bet on a particular sector that has underperformed in the near term but is poised to rebound soon. Likewise, don't be lulled into overconfidence by near-term outperformance – today’s outperforming investment often becomes tomorrow's underperformer.

Remember that you're investing for a retirement that may be years – if not decades – away, depending on your age. If you're more than 10 years from retirement, you have time to ride out the market's ups and downs. If you're closer to retirement, you may want to ratchet down the risk; but you'll still need to have a good sense of how your holdings may perform once you stop working. Whatever your retirement time frame, focus on your holdings' performance over the trailing five- and 10-year periods, but also pay attention to how they've reacted in different market environments.

You could begin your analysis by focusing on 2008, when the financial meltdown sent stock prices plummeting and bond prices higher. But also look at 2013, when stocks posted strong gains while bonds languished.

Using Appropriate Metrics

Of course, your portfolio probably contains at least a few different asset types, meaning you'll need to pay attention to benchmarks and metrics that are most relevant to each type. For example, volatility and risk measures may be more important to you when it comes to your stock holdings, whereas interest-rate sensitivity probably matters more to you with regard to your bond holdings.

The following guide is designed to point you in the right direction when it comes to benchmarking the performance of various asset types and identifying other important metrics to watch. It's by no means a comprehensive list, but it's a good place to start.

Key forward-looking metrics

Morningstar Rating for stocks: Represents a stock's current trading price relative to our analyst team's assessment of its fair value price.

Stocks rated at 4 or 5 stars are trading meaningfully below their fair value estimates, meaning they appear to be undervalued, while those rated at 3 stars are fairly priced and those rated at 1 or 2 stars are trading above their fair value, meaning they appear to be overvalued.

Morningstar Economic Moat Rating: Analyst assessment of whether the company has one or more sustainable competitive advantages, with ratings ranging from wide to narrow to none.

Companies with economic moats tend to be better at sustaining profitability over time than those without them.

Key backward-looking metrics

Revenue growth: The amount of money the company brings in year over year, and a good indication of whether it is growing and to what degree.

Operating Margin:  A measure of company profitability. The wider the operating margin, the more the company makes on sales of its products or services.

Free Cash Flow: Another measure of company profitability, based on the firm's cash flow from operations minus its capital spending. 

https://my.morningstar.com/ap/news/134697/Quick-Guide-to-Reviewing-Your-Portfolio-Holdings.aspx

Practical suggestions on switching stocks

Let us summarize our practical suggestions in the matter of security switches as follows:

The investor who begins with a list of standard, first-grade common stocks can expect some of them to lose quality through the years.

His aim should be to replace these, with a minimum sacrifice of dividend return and with a fair chance of recouping any loss of principal value resulting from their sale.

The best means of accomplishing this is by seeking out attractive issues in the secondary group.  A competent security analyst is usually in a position to recommend a number of such issues which by objective tests appear to be worth substantially above their selling price.  

The fundamental principle of every security replacement should be the following:
Each dollar paid for the issue bought should appear to obtain more intrinsic value than was represented by a dollar's worth of the issue sold.

We believe, in sum, that quality may be approached soundly by way of value.  If the value is abundant, the quality may be deemed sufficient.


Benjamin Graham

Fundamentals of Wealth Management - The Complete Lesson

Published on 7 May 2012
The complete lesson.

Dow Wealth Management offers the services of a world-class investment firm dedicated to improving clients' financial lives and making their futures more secure. As an independent firm, Dow Wealth Management provides objective advice and is committed to excellence for its clients. The Dow family has been investing traditionally in the securities markets since 1937.

Before attempting to structure a portfolio that might be capable of delivering long-term investment success, we must first understand the nature of the financial markets in which we will operate and the inherent limitations we are sure to confront as investors.

This video, Fundamentals in Wealth Management, will help to acquaint the investor with these dynamics and then illustrate how Dow Wealth Management seeks to position its clients' portfolios for long-term investment success. We could call it "How to survive bad markets...and thrive in good ones."



@6.08 The 3 issues addressed in this video.

1. The Life Cycle of Family Wealth: Accumulation, Preservation and Growth of Mature Wealth. Wealth preservation and growth became more important than wealth accumulation.
2. Defining the Investment Problem: The Dow Wealth Management Analysis
3. The Dow Wealth Management Approach

To maintain your portfolio at peak performance.

To pick the right stock for the long term, you should keep to:

1.  Buying quality companies
2.  Buying at the right price - potential return > 15% at acceptable risk (where the potential return to potential loss of >3x.)

Your ability to do the above is all you need to build a great portfolio that will meet your expectations.

To maintain your portfolio at peak performance, you will need to manage it well, optimizing its performance and preventing the companies that occasionally go south from damaging it.

Portfolio management chores take a minimal amount of time.

Related:

My strategies for buying and selling (KISS version)

Quality Persists

Once you have determined that a company does meet your quality standards, its status is not likely to change - at least for a while.

In fact, the only factor that could change your assessment is the data that is reported every three months, so you can be reasonably confident that your assessment will survive at east that long.

And there's an 80% chance it will last a good deal longer.

So it pays you to collect and maintain a "watch-list" of good companies and wait for them to hit an attractive price - just have them available should your portfolio management strategy call for selling or replacing one you already own.

What Is Warren Buffett's Investing Style?

May 23 2011

If you want to emulate a classic value style, Warren Buffett is a great role model. Early in his career, Buffett said, "I'm 85% Benjamin Graham." Graham is the godfather of value investing and introduced the idea of intrinsic value - the underlying fair value of a stock based on its future earnings power.

But there are a few things worth noting about Buffett's interpretation of value investing that may surprise you.

1.  First, like many successful formulas, Buffett's looks simple.
2.  But simple does not mean easy.
3.  To guide him in his decisions, Buffett uses 12 investing tenets, or key considerations, which are categorized in the areas of business, management, financial measures and value (see detailed explanations below).
4.  Buffett's tenets may sound cliché and easy to understand, but they can be very difficult to execute.
5.  Second, the Buffett "way" can be viewed as a core, traditional style of investing that is open to adaptation.
6.  Even Hagstrom, who is a practicing Buffett disciple, or "Buffettologist," modified his own approach along the way to include technology stocks, a category Buffett conspicuously continues to avoid.
7.  One of the compelling aspects of Buffettology is its flexibility alongside its phenomenal success.

Business
1.  Buffett adamantly restricts himself to his "circle of competence" - businesses he can understand and analyze.
2.  As Hagstrom writes, investment success is not a matter of how much you know but rather how realistically you define what you don't know. 
3.  Buffett considers this deep understanding of the operating business to be a prerequisite for a viable forecast of future business performance.
4. After all, if you don't understand the business, how can you project performance?
5.  Buffett's business tenets each support the goal of producing a robust projection. 
6.  First, analyze the business, not the market or the economy or investor sentiment. 
7.  Next, look for a consistent operating history. 
8.  Finally, use that data to ascertain whether the business has favorable long-term prospects.

Management
1.  Buffett's three management tenets help evaluate management quality.
2.  This is perhaps the most difficult analytical task for an investor.
3.  Buffett asks, "Is management rational?" 
4.  Specifically, is management wise when it comes to reinvesting (retaining) earnings or returning profits to shareholders as dividends?
5.  This is a profound question, because most research suggests that historically, as a group and on average, management tends to be greedy and retain a bit too much (profits), as it is naturally inclined to build empires and seek scale rather than utilize cash flow in a manner that would maximize shareholder value.
6.  Another tenet examines management's honesty with shareholders.
7.  That is, does it admit mistakes? 
8.  Lastly, does management resist the institutional imperative? 
9.  This tenet seeks out management teams that resist a "lust for activity" and the lemming-like duplication of competitor strategies and tactics.
10.  It is particularly worth savoring because it requires you to draw a fine line between many parameters (for example, between blind duplication of competitor strategy and outmaneuvering a company that is first to market).

Financial Measures
1.  Buffett focuses on return on equity (ROE) rather than on earnings per share.
2.  Most finance students understand that ROE can be distorted by leverage (a debt-to-equity ratio) and therefore is theoretically inferior to some degree to the return-on-capital metric.
3.  Here, return-on-capital is more like return on assets (ROA) or return on capital employed (ROCE), where the numerator equals earnings produced for all capital providers and the denominator includes debt and equity contributed to the business.
4.  Buffett understands this, of course, but instead examines leverage separately, preferring low-leverage companies. 
5.  He also looks for high profit margins.

6.  His final two financial tenets share a theoretical foundation with EVA.
7.  First, Buffett looks at what he calls "owner's earnings," which is essentially cash flow available to shareholders, or technically, free cash flow to equity (FCFE).
8.  Buffett defines it as net income plus depreciation and amortization (for example, adding back non-cash charges) minus capital expenditures (CAPX) minus additional working capital (W/C) needs. 
9.  In summary, net income + D&A - CAPX - (change in W/C). 
10.  Purists will argue the specific adjustments, but this equation is close enough to EVA before you deduct an equity charge for shareholders.
11.  Ultimately, with owners' earnings, Buffett looks at a company's ability to generate cash for shareholders, who are the residual owners.

12.  Buffett also has a "one-dollar premise," which is based on the question:
13.  What is the market value of a dollar assigned to each dollar of retained earnings? 
14.  This measure bears a strong resemblance to market value added (MVA), the ratio of market value to invested capital.

Value
1.  Here, Buffett seeks to estimate a company's intrinsic value. 
2.  A colleague summarized this well-regarded process as "bond math." 
3.  Buffett projects the future owner's earnings, then discounts them back to the present.
4.  Keep in mind that if you've applied Buffett's other tenets, the projection of future earnings is, by definition, easier to do, because consistent historical earnings are easier to forecast.

5.  Buffett also coined the term "moat," which has subsequently resurfaced in Morningstar's successful habit of favoring companies with a "wide economic moat."
6.  The moat is the "something that gives a company a clear advantage over others and protects it against incursions from the competition."
7.  In a bit of theoretical heresy perhaps available only to Buffett himself, he discounts projected earnings at the risk-free rate, claiming that the "margin of safety" in carefully applying his other tenets presupposes the minimization, if not the virtual elimination, of risk.

The Bottom Line
1.  In essence, Buffett's tenets constitute a foundation in value investing, which may be open to adaptation and reinterpretation going forward.
2.  It is an open question as to the extent to which these tenets require modification in light of a future where consistent operating histories are harder to find, intangibles play a greater role in franchise value and the blurring of industries' boundaries makes deep business analysis more difficult.

http://www.investopedia.com/articles/05/012705.asp

What Is Warren Buffett's Investing Style?

May 23 2011

If you want to emulate a classic value style, Warren Buffett is a great role model. Early in his career, Buffett said, "I'm 85% Benjamin Graham." Graham is the godfather of value investing and introduced the idea of intrinsic value - the underlying fair value of a stock based on its future earnings power. But there are a few things worth noting about Buffett's interpretation of value investing that may surprise you. (For more on Warren Buffett and his current holdings, check out Coattail Investor.)

TUTORIAL: Stock Picking Strategies

First, like many successful formulas, Buffett's looks simple. But simple does not mean easy. To guide him in his decisions, Buffett uses 12 investing tenets, or key considerations, which are categorized in the areas of business, management, financial measures and value (see detailed explanations below). Buffett's tenets may sound cliché and easy to understand, but they can be very difficult to execute. For example, one tenet asks if management is candid with shareholders. This is simple to ask and simple to understand, but it is not easy to answer. Conversely, there are interesting examples of the reverse: concepts that appear complex yet are easy to execute, such as economic value added (EVA). The full calculation of EVA is not easy to comprehend, and the explanation of EVA tends to be complex. But once you understand that EVA is a laundry list of adjustments - and once armed with the formula - it is fairly easy to calculate EVA for any company.

Second, the Buffett "way" can be viewed as a core, traditional style of investing that is open to adaptation. Even Hagstrom, who is a practicing Buffett disciple, or "Buffettologist," modified his own approach along the way to include technology stocks, a category Buffett conspicuously continues to avoid. One of the compelling aspects of Buffettology is its flexibility alongside its phenomenal success. If it were a religion, it would not be dogmatic but instead self-reflective and adaptive to the times. This is a good thing. Day traders may require rigid discipline and adherence to a formula (for example, as a means of controlling emotions), but it can be argued that successful investors ought to be willing to adapt their mental models to current environments. (It's not always bad to copy someone, especially when it's one of the greatest investors ever. Check out Emulate Buffett For Fun And Profit - Mostly Profit.)

Business
Buffett adamantly restricts himself to his "circle of competence" - businesses he can understand and analyze. As Hagstrom writes, investment success is not a matter of how much you know but rather how realistically you define what you don't know. Buffett considers this deep understanding of the operating business to be a prerequisite for a viable forecast of future business performance. After all, if you don't understand the business, how can you project performance? Buffett's business tenets each support the goal of producing a robust projection. First, analyze the business, not the market or the economy or investor sentiment. Next, look for a consistent operating history. Finally, use that data to ascertain whether the business has favorable long-term prospects.

Management
Buffett's three management tenets help evaluate management quality. This is perhaps the most difficult analytical task for an investor. Buffett asks, "Is management rational?" Specifically, is management wise when it comes to reinvesting (retaining) earnings or returning profits to shareholders as dividends? This is a profound question, because most research suggests that historically, as a group and on average, management tends to be greedy and retain a bit too much (profits), as it is naturally inclined to build empires and seek scale rather than utilize cash flow in a manner that would maximize shareholder value. Another tenet examines management's honesty with shareholders. That is, does it admit mistakes? Lastly, does management resist the institutional imperative? This tenet seeks out management teams that resist a "lust for activity" and the lemming-like duplication of competitor strategies and tactics. It is particularly worth savoring because it requires you to draw a fine line between many parameters (for example, between blind duplication of competitor strategy and outmaneuvering a company that is first to market).

Financial Measures 

Buffett focuses on return on equity (ROE) rather than on earnings per share. Most finance students understand that ROE can be distorted by leverage (a debt-to-equity ratio) and therefore is theoretically inferior to some degree to the return-on-capital metric. Here, return-on-capital is more like return on assets (ROA) or return on capital employed (ROCE), where the numerator equals earnings produced for all capital providers and the denominator includes debt and equity contributed to the business. Buffett understands this, of course, but instead examines leverage separately, preferring low-leverage companies. He also looks for high profit margins.

His final two financial tenets share a theoretical foundation with EVA. First, Buffett looks at what he calls "owner's earnings," which is essentially cash flow available to shareholders, or technically, free cash flow to equity (FCFE). Buffett defines it as net income plus depreciation and amortization (for example, adding back non-cash charges) minus capital expenditures (CAPX) minus additional working capital (W/C) needs. In summary, net income + D&A - CAPX - (change in W/C). Purists will argue the specific adjustments, but this equation is close enough to EVA before you deduct an equity charge for shareholders. Ultimately, with owners' earnings, Buffett looks at a company's ability to generate cash for shareholders, who are the residual owners.

Buffett also has a "one-dollar premise," which is based on the question: What is the market value of a dollar assigned to each dollar of retained earnings? This measure bears a strong resemblance tomarket value added (MVA), the ratio of market value to invested capital.

Value
Here, Buffett seeks to estimate a company's intrinsic value. A colleague summarized this well-regarded process as "bond math." Buffett projects the future owner's earnings, then discounts them back to the present. Keep in mind that if you've applied Buffett's other tenets, the projection of future earnings is, by definition, easier to do, because consistent historical earnings are easier to forecast.

Buffett also coined the term "moat," which has subsequently resurfaced in Morningstar's successful habit of favoring companies with a "wide economic moat." The moat is the "something that gives a company a clear advantage over others and protects it against incursions from the competition." In a bit of theoretical heresy perhaps available only to Buffett himself, he discounts projected earnings at the risk-free rate, claiming that the "margin of safety" in carefully applying his other tenets presupposes the minimization, if not the virtual elimination, of risk.

The Bottom Line
In essence, Buffett's tenets constitute a foundation in value investing, which may be open to adaptation and reinterpretation going forward. It is an open question as to the extent to which these tenets require modification in light of a future where consistent operating histories are harder to find, intangibles play a greater role in franchise value and the blurring of industries' boundaries makes deep business analysis more difficult. (If you appreciate the fundamentals of value investing, you'll want to study this: The Value Investor's Handbook.)

http://www.investopedia.com/articles/05/012705.asp

Warren Buffett's Bear Market Maneuvers

July 12 2009

In times of economic decline, many investors ask themselves, "What strategies does the Oracle of Omaha employ to keep Berkshire Hathaway on target?" The answer is that the esteemed Warren Buffett, the most successful known investor of all time, rarely changes his long-term value investment strategy and regards down markets as an opportunity to buy good companies at reasonable prices. In this article, we will cover the Buffett investment philosophy and stock-selection criteria with specific emphasis on their application in a down market and a slowing economy. (For more on Warren Buffett and his current holdings, sign up for our Coattail Investor newsletter.)

The Buffett Investment Philosophy

Buffett has a set of definitive assumptions about what constitutes a "good investment". These focus on the quality of the business rather than the short-term or near-future share price or market moves. He takes a long-term, large scale, business value-based investment approach that concentrates on good fundamentals and intrinsic business value, rather than the share price. (For further reading, seeWarren Buffett: The Road To Riches and What Is Warren Buffett's Investing Style?)

Buffett looks for businesses with "a durable competitive advantage." What he means by this is that the company has a market position, market share, branding or other long-lasting edge over its competitors that either prevents easy access by competitors or controls a scarce raw-material source. (For more insight, see Competitive Advantage Counts, 3 Secrets Of Successful Companiesand Economic Moats Keep Competitors At Bay.)

Buffett employs a selective contrarian investment strategy: using his investment criteria to identify and select good companies, he can then make large investments (millions of shares) when the market and the share price are depressed and when other investors may be selling.

In addition, he assumes the following points to be true:

• The global economy is complex and unpredictable.
• The economy and the stock market do not move in sync.
• The market discount mechanism moves instantly to incorporate news into the share price.
• The returns of long-term equities cannot be matched anywhere else.

Buffett Investment Activity

Berkshire Hathaway investment industries over the years have included:

• Insurance 
• Soft drinks 
• Private jet aircraft
• Chocolates 
• Shoes
• Jewelry 
• Publishing
• Furniture 
• Steel
• Energy 
• Home building

The industries listed above vary widely, so what are the common criteria used to separate the good investments from the bad?

Buffett Investment Criteria

Berkshire Hathaway relies on an extensive research-and-analysis team that goes through reams of data to guide their investment decisions. While all the details of the specific techniques used are not made public, the following 10 requirements are all common among Berkshire Hathaway investments:

1. The candidate company has to be in a good and growing economy or industry.
2. It must enjoy a consumer monopoly or have a loyalty-commanding brand.
3. It cannot be vulnerable to competition from anyone with abundant resources.
4. Its earnings have to be on an upward trend with good and consistent profit margins.
5. The company must enjoy a low debt/equity ratio or a high earnings/debt ratio.
6. It must have high and consistent returns on invested capital.
7. The company must have a history of retaining earnings for growth.
8. It cannot have high maintenance costs of operations, high capital expenditure or investment cash flow.
9. The company must demonstrate a history of reinvesting earnings in good business opportunities, and its management needs a good track record of profiting from these investments.
10. The company must be free to adjust prices for inflation.

The Buffett Investment Strategy

Buffett makes concentrated purchases. In a downturn, he buys millions of shares of solid businesses at reasonable prices. Buffett does not buy tech shares because he doesn't understand their business or industry; during the dotcom boom, he avoided investing in tech companies because he felt they hadn't been around long enough to provide sufficient performance history for his purposes.

And even in a bear market, although Buffett had billions of dollars in cash to make investments, in his 2009 letter to Berkshire Hathaway shareholders, he declared that cash held beyond the bottom would be eroded by inflation in the recovery.

Buffett deals only with large companies because he needs to make massive investments to garner the returns required to post excellent results for the huge size to which his company, Berkshire Hathaway, has grown. (To learn about the disadvantage of being confined to blue chip stocks, readWhy Warren Buffett Envies You.)

Buffett's selective contrarian style in a bear market includes making some large investments in blue chip stocks when their stock price is very low. And Buffett might get an even better deal than the average investor: His ability to supply billions of dollars in cash infusion investments earns him special conditions and opportunities not available to others. His investments often are in a class of secured stock with its dividends assured and future stock warrants available at below-market prices.

Conclusion

Buffett's strategy for coping with a down market is to approach it as an opportunity to buy good companies at reasonable prices. Buffett has developed an investment model that has worked for him and the Berkshire Hathaway shareholders over a long period of time. His investment strategy is long term and selective, incorporating a stringent set of requirements prior to an investment decision being made. Buffett also benefits from a huge cash "war chest" that can be used to buy millions of shares at a time, providing an ever-ready opportunity to earn huge returns.

http://www.investopedia.com/articles/stocks/09/buffett-bear-market-strategies.asp?utm_source=coattail-buffett&utm_medium=Email&utm_campaign=WBW-6/12/2013-b

5 Popular Portfolio Types

Stock investors constantly hear the wisdom of diversification. The concept is to simply not put all of your eggs in one basket, which in turn helps mitigate risk, and generally leads to better performance or return on investment. Diversifying your hard-earned dollars does make sense, but there are different ways of diversifying, and there are different portfolio types. We look at the following portfolio types and suggest how to get started building them: aggressive, defensive, income, speculative and hybrid. It is important to understand that building a portfolio will require research and some effort. Having said that, let's have a peek across our five portfolios to gain a better understanding of each and get you started.

The Aggressive PortfolioAn aggressive portfolio or basket of stocks includes those stocks with high risk/high reward proposition. Stocks in the category typically have a high beta, or sensitivity to the overall market. Higher beta stocks experience larger fluctuations relative to the overall market on a consistent basis. If your individual stock has a beta of 2.0, it will typically move twice as much in either direction to the overall market - hence, the high-risk, high-reward description.

Most aggressive stocks (and therefore companies) are in the early stages of growth, and have a unique value proposition. Building an aggressive portfolio requires an investor who is willing to seek out such companies, because most of these names, with a few exceptions, are not going to be common household companies. Look online for companies with earnings growth that is rapidly accelerating, and have not been discovered by Wall Street. The most common sectors to scrutinize would be technology, but many other firms in various sectors that are pursuing an aggressive growth strategy can be considered. As you might have gathered, risk management becomes very important when building and maintaining an aggressive portfolio. Keeping losses to a minimum and taking profit are keys to success in this type of portfolio.

The Defensive PortfolioDefensive stocks do not usually carry a high beta, and usually are fairly isolated from broad market movements. Cyclical stocks, on the other hand, are those that are most sensitive to the underlying economic "business cycle." For example, during recessionary times, companies that make the "basics" tend to do better than those that are focused on fads or luxuries. Despite how bad the economy is, companies that make products essential to everyday life will survive. Think of the essentials in your everyday life, and then find the companies that make these consumer staple products.

The opportunity of buying cyclical stocks is that they offer an extra level of protection against detrimental events. Just listen to the business stations and you will hear portfolios managers talking about "drugs," "defense" and "tobacco." These really are just baskets of stocks that these managers are recommending based upon where the business cycle is and where they think it is going. However, the products and services of these companies are in constant demand. A defensive portfolio is prudent for most investors. A lot of these companies offer a dividend as well which helps minimize downside capital losses.

The Income Portfolio An income portfolio focuses on making money through dividends or other types of distributions to stakeholders. These companies are somewhat like the safe defensive stocks but should offer higher yields. An income portfolio should generate positive cash flow. Real estate investment trusts (REITs) and master limited partnerships (MLP) are excellent sources of income producing investments. These companies return a great majority of their profits back to shareholders in exchange for favorable tax status. REITs are an easy way to invest in real estate without the hassles of owning real property. Keep in mind, however, that these stocks are also subject to the economic climate. REITs are groups of stocks that take a beating during an economic downturn, as building and buying activity dries up.

An income portfolio is a nice complement to most people's paycheck or other retirement income. Investors should be on the lookout for stocks that have fallen out of favor and have still maintained a high dividend policy. These are the companies that can not only supplement income but also provide capital gains. Utilities and other slow growth industries are an ideal place to start your search.

SEE: Dividends Still Look Good After All These Years

The Speculative Portfolio A speculative portfolio is the closest to a pure gamble. A speculative portfolio presents more risk than any others discussed here. Finance gurus suggest that a maximum of 10% of one's investable assets be used to fund a speculative portfolio. Speculative "plays" could be initial public offerings (IPOs) or stocks that are rumored to be takeover targets. Technology or health care firms that are in the process of researching a breakthrough product, or a junior oil company which is about to release its initial production results, would also fall into this category.

Another classic speculative play is to make an investment decision based upon a rumor that the company is subject to a takeover. One could argue that the widespread popularity of leveraged ETFs in today's markets represent speculation. Again, these types of investments are alluring: picking the right one could lead to huge profits in a short amount of time. Speculation may be the one portfolio that, if done correctly, requires the most homework. Speculative stocks are typically trades, and not your classic "buy and hold" investment. 

The Hybrid PortfolioBuilding a hybrid type of portfolio means venturing into other investments, such as bonds, commodities, real estate and even art. Basically, there is a lot of flexibility in the hybrid portfolio approach. Traditionally, this type of portfolio would contain blue chip stocks and some high grade government or corporate bonds. REITs and MLPs may also be an investable theme for the balanced portfolio. A common fixed income investment strategy approach advocates buying bonds with various maturity dates, and is essentially a diversification approach within the bond asset class itself. Basically, a hybrid portfolio would include a mix of stocks and bonds in a relatively fixed allocation proportions. This type of approach offers diversification benefits across multiple asset classes as equities and fixed income securities tend to have a negative correlation with one another. 

The Bottom LineAt the end of the day, investors should consider all of these portfolios and decide on the right allocation across all five. Here, we have laid the foundation by defining five of the more common types of portfolios. Building an investment portfolio does require more effort than a passive, index investing approach. By going it alone, you will be required to monitor your portfolio(s) and rebalance more frequently, thus racking up commission fees. Too much or too little exposure to any portfolio type introduces additional risks. Despite the extra required effort, defining and building a portfolio will increase your investing confidence, and give you control over your finances.

SEE: How To Pick A Stock

January 26 2013

http://www.investopedia.com/articles/basics/11/5-popular-portfolio-types.asp

Portfolio Management

When you start investing in stocks, you will soon have a portfolio of them. And managing your portfolio is just as important as picking the right stocks in the first place. Because if you mismanage your portfolio you could be minimizing your potential returns or end up losing money! 

So always take note of your stock portfolio and here are some guidelines to help you along:

1. This one is straightforward but some beginners neglect to do this - Keep records of all your investment decisions. If you don't keep track, you won't know how much you're making or losing!
2. A portfolio of 5-8 stocks is optimum for the typical investor . Keep within a certain number so your portfolio remains manageable. Too many stocks could result in a lack of proper management and cause losses in your portfolio
3. Monitor a company's' quarterly reports and keep track of their fundamental performance
4. On top of monitoring your stock through financial reports, you should attend the Annual General Meetings (AGMs) to meet a company's management team face-to-face
5. Stay current with world and economic affairs and monitor any news on your stocks and the industry they're in

In a nutshell, managing your portfolio can be summed up in one simple sentence: sell your losers, keep your winners. Sell bad, under-performing investments and cut your losses. Stay invested in good companies and hold on to them, especially if they have good growth potential.

Because let me ask you...

Would you be happy with a 22% dividend yield year after year? That means for every $100 you invested, you're getting $22 back in passive income every year. You don't even have to do anything to make that money; you just sit and wait!

Well, that's what value investing can do for you when you hold on to a winner long enough. Read this article below and it'll show you how:

http://www.millionaireinvestor.com/3-reasons-why-value-investing-is-so-powerful

MillionaireInvestor.com

What is Portfolio Management anyway?

When to Sell: A Workshop with Ellis Traub

Session 1

What is Portfolio Management anyway?

Around the end of last year, a few of us were asked to contribute a list of five stocks we thought would be good investments and to comment on the reasons we thought they would be. I did so but, unfortunately, I got so wrapped up in other things that I forgot all about them. So I’m in the embarrassing position of having to lead this discussion off with the admonition, “Do as I say and not as I do!”

In any event, the best I can hope for is a) you’ll accept this as an example of why you should pay attention to what’s ahead, and b) I’ll be able to demonstrate in the months ahead how you can greet such a challenge and turn things around. That disclaimer out of the way, let’s get at it.

Although most of the fun of investing surrounds the acquisition of your stocks, the fact is that buying them is only a half of what investing’s all about. The other half—for a variety of reasons we’ll discuss in a moment—is considered by most of us as being pretty much of a drag! Yet, there’s as much or more potential benefit is to be derived from managing your portfolio as from buying the right stocks in the first place.

What I intend to do in the next few days is to address all the reasons why we don’t do it very well—if we do it at all—and to expose those reasons for what they are: insufficient excuses. In the next five lessons, I hope to make it clear that we no longer have a leg to stand on for not doing what we need to do; and, with any luck at all, I might even persuade you it can be fully as much fun as the stuff we do to select our companies for investment.

You know, just the term, “Portfolio Management,” is pretentious …almost intimidating. It suggests that we have to put in hours of dedicated and tedious work, and it suggests that it’s much more complicated than it really is. So let’s set the record straight here by first understanding what Portfolio Management really is; and start that process by explaining what it’s not.

Portfolio Management is definitely not Portfolio Tracking. If you think that regularly looking at our portfolios to see how the prices are doing, and whether or not they’re making money, is managing our portfolios, fuggedaboudit! Portfolio tracking, at best, is merely checking to see how good or poor a job of managing our portfolios we’re doing. It has nothing to do with the actual task of managing our holdings. In fact, as you’ll see down the road in this workshop, portfolio tracking can be one of the more insidious things that can work against sound portfolio management.

No, Portfolio Management is a pro-active activity that requires a certain amount of discipline and dedication. Its purpose is simply to catch our losers before they damage our portfolios’ performances, and to maintain our average estimated return at as close to 15 percent as possible so we can meet our objective or doubling our money every five years.

When an issue seems complicated, what’s the easiest way to cut it down to size? It’s to break it down into its smallest parts. In this case, that’s easy! Once we own a stock or stocks, there are only two things we can possibly do with them: either hold onto them or sell them.

Since we already hold them, we are left with only one decision to make; and that is simply when to sell them. So Portfolio Management is nothing more than making that determination: when to sell them. That’s all there is to it!

More than “when,” why we would sell them is the important issue. As long-term investors, the most important thing that distinguishes us from “the herd”—those who trade or try to make money in the market in the short term—is the definition of “long-term.” We buy stocks not to hold until they reach a target price, not for a month, not even for five years. We buy them to hold forever! …unless—and here is where I can go another step further in making it simpler for you—unless one of three, and only three, conditions come to pass:

1. We want or need the money,
2. The Quality deteriorates (Defensive strategy: SSG Sections 1 & 
3. The potential Return deteriorates (Offensive strategy: SSG Sections 3 – 5)

Indeed, these are the only three conditions that would warrant your selling a stock.

So, “When to sell” (Portfolio Management) means watching our holdings to see whether any of them meet conditions 2 or 3 in hopes that we can hold onto them until such time as we reach condition 1.

During the next five days, we’re going to discuss 1) all the excuses we have heard for not doing the job; 2) why you can no longer use them for excuses; 3) the basics of defensive portfolio management, 4) the basics of offensive portfolio management, and 5) the tools we have at our disposal to make the task even simpler.

http://www.stockcentral.com/tabid/143/forumid/289/postid/3523/view/topic/Default.aspx