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

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

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


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

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

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

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

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

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

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

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


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

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

Core-satellite Portfolio Management

Alternative Strategy - A Trader's Approach
Short Term Trading

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


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

Forgotten History of a Sideways Market
Futile Asset Allocation Strategies

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

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

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


Ref:  How to Be a Successful Investor by William Cai

What makes you rich is your financial intelligence

Robert Kiyosaki Why the Rich Get Richer

Paying a High Price for Bad Advice
by Robert Kiyosaki

Posted on Sunday, January 11, 2009, 12:00AM
At this time of financial crisis, people are seeking good, relevant advice. But this can be hard to find.

The following is typical of a question you would see in a financial publication -- and its less-than helpful answer:

Q: What can someone whose 401(k) is down do to rebuild their retirement savings?
A: For anyone who is at least five years from retirement, there is probably time for their investments to right themselves.
Resist the urge to take money out of a 401(k) or to stop making contributions to it. Research has shown that dollar-cost averaging -- investing at given intervals -- pays off well in times of crisis.
Check whether the wild market swings have thrown off your asset allocation -- the specific mix of stocks and bonds that makes sense for an individual's financial goals and risk tolerance. If so, then rebalance it by selling shares that are overvalued and buying those that are below optimal levels. Focus on low cost....
Blah, blah, blah.

How naive do the so-called financial experts think people are? Well, obviously, many people are that naive because millions keep listening to the same old advice again and again.

The Same Old Story
So what is wrong with those giving the advice and those following it? Now that the markets have crashed and trillions have been lost, these so-called experts continue on like mindless parrots, saying over and over again, "Polly wants you to invest in a well-diversified portfolio of mutual funds."
Don't they know the market has changed? Don't they know the global economy is contracting, not expanding? Don't they know their advice is bad regardless of whether the market is expanding or contracting? Doesn't the general public realize that most financial "experts" are not professional investors? They're either sales people or journalists -- people who earn money via commissions or a paycheck. And even the people running our biggest investment banks -- or what use to be investment banks -- are compensated via commissions or a paycheck. They are not investors. They are employees working for banks.
So my advice is, be very careful whom you take financial advice from -- and that includes me. My guidance, after all, does not work for 80 percent of the people. My suggestions are not right for those who work for a paycheck or for commissions, nor do they work for those who save money in the bank or a retirement account.

The Right Advice for the Right Audience
My advice is for people who are entrepreneurs or professional investors. I have had a "real" job for only four years of my life, which means I only collected a traditional paycheck for that very short period of time. I do not have a retirement account. If my businesses or my investments are not profitable, then I don't eat. And I like to eat.
I chose to live my life this way because this financial lifestyle keeps me honest. It also keeps me wary and very suspicious of financial experts who offer inane advice. I personally cannot live on such advice. My businesses and investments need to be profitable monthly and pay me monthly, regardless of whether the economy is expanding or contracting.
I don't live in some fairytale world with the hope that the markets will right themselves in five years. I don't keep putting money into a losing venture such as a retirement plan filled with stocks, bonds, and mutual funds. I do not live on false promises. I cannot afford to live on bad advice.

Some Serious Questions
My questions to financial journalists and others who are doling out poor counsel: "What if your advice is wrong in five years? What happens if the markets don't come back? What happens if the markets just stay flat or crash even further? What happens if the markets recover and then crash when the person following your advice is in their late eighties?"
My advice for those seeking financial advice: Look for investments that pay you monthly or quarterly, regardless of whether the markets are up or down or whether the economy is expanding or contracting. Stop listening to those pseudo financial experts with crystal balls and journalism degrees.
The following are tidbits of information to keep in mind as you consider your financial options:
1. I learned my investment philosophy at the age of nine by playing Monopoly. In the game, if I had one green house, I was paid $8. If I had two green houses, then I was paid $16.
I began playing Monopoly for real when I was 26 years old. Today my wife and I have approximately 1,400 little green houses -- each paying us monthly. You do not have to be a rocket scientist or have a Harvard degree to play Monopoly for real. Today's depressed real estate market is the best time to start buying little green houses, even if credit is tight.
In 1987 the stock market crashed. That crash was followed by the crash of the Savings and Loan industry. Those two crashes led to the crash of the real estate market. The economy stayed down from 1987 to 1995. Even though my wife and I were strapped for cash and bankers did not want to lend to small investors, we found ways of putting deals together by using seller financing and creative financing, or simply taking over properties that the bank did not want on its books.
Most financial experts discourage people from doing what I do. They often say that it is risky -- and it certainly can be. But, in my opinion, following their advice of putting money into a savings account and investing in a 401(K) is even riskier in this volatile economy.
2. Today, as the economy is contracting, cash is king. Yet because the Federal Reserve is printing trillions of Monopoly dollars in order to stop deflation, in a few years we could see a hyperinflationary period. Hyperinflation will wipe out the value of a saver's holdings and eventually destroy most mutual funds as the government begins to raise interest rates in an attempt to stem inflation. In a hyperinflationary period, gold and silver will be king.
3. I am not actually recommending gold, silver, or real estate. Assets do not make you rich. Assets can make you poor if you are not careful. In 1980 gold and silver hit all-time highs, gold hitting $800 an ounce and silver $50 an ounce. So the suckers jumped in and were slaughtered. The same thing happened with real estate in 2004.
If you do not know what you are doing, no asset can make you rich. Ultimately, what makes you rich is your financial intelligence. Your greatest asset is your brain -- so take care of it and protect it from bad advice.

http://finance.yahoo.com/expert/article/richricher/133569;_ylt=Akwical0lHGQqFTKToSXlTq7YWsA

Educational experience with an outcome other than expected

During bull markets owning stocks and calls on underpriced stocks should increase the value of the portfolio.

Bear markets should benefit positions in your portfolio that are either short overpriced companies or own puts on the overpriced stock.

Income may be generated by selling covered calls or credit spreads during a neutral market.

Please note that I have made extensive use of the words "should" and "may". Please do not invest any money that you can not afford to lose. Everyone has a different tolerance for risk. It is important that you do your own homework and take responsibility for any decisions that you make.

When investing, it doesn't take very long to have an educational experience with an outcome other than expected.

http://hyperdiversification.com/default.aspx

In Warren Buffet's 1992 letter to the share holders he discussed the following:

• During 1992, their Book Value had increased by 20.3%
  
• Between 1964 and 1992 book value per share (BVPS) had increased from $19 to $7745 resulting in a CAGR of 23.6%.
  
• Used book value for intrinsic value.
  
• CAGR goal 15%
  
• The number of outstanding shares has changed very little between 1964 and 1992 (1,137,778 vs. 1,152,547 respectively)
  
• Requiring a significant Margin of Safety (MOS) when purchasing stock in another company as a cornerstone of Berkshire Hathaway's success

My mom bought her first new car back in 1965. It was a Ford Falcon. She really liked the car. I wonder how much higher her networth would be if she would have bought a used car and invested the difference in Berkshire Hathaway. ;) Of course BH is the exception and not the norm. :))

http://hyperdiversification.com/cagr_main.aspx

Learn from:

Our focus is to protect and accumulate wealth for our clients. To do that, we are guided by one core principal. DON'T LOSE MONEY. It seems simple, but is by far one of the most challenging endeavors an investor can undertake.
In order to achieve the goal of capital preservation, the Strategy must protect previously earned gains while allowing an investor to profit from a market rebound after a substantial market decline. In other words, the Strategy wants to profit from bull markets and protect the portfolio in bear markets. http://www.swaninvesting.com/home

High-net-worth Investors & Listed Options
Portfolio Management Strategies for Affluent Investors, Family Offices, and Trust Companies http://www.swaninvesting.com/HighNetWorthInvestors.pdf

What is the best strategy for buying shares?

In general, most people have the tendency to buy shares upwards - perhaps due to greed. They feel that the price is rising and even ready to "take off" higher. Thus, they must buy more regardless of the fact that they are now buying these shares at a much higher price than they have previously bought.

Such a situation normally ends in losses because of the higher risks involved as the share price can fall suddenly. In the case of a market correction, the investor will then end up "carrying the baby". As such, the best way to buy shares is to buy downwards. (My comments: Do you agree?). But here again, it will take a lot of courage to buy downwards because it always appears that the more you buy, the more you seem to be losing.

Nevertheless, the name of the game is PATIENCE as share prices will eventually rise again - it is just a matter of time.

In short, the trick is, you need lots of money and guts to see you through. And, if you do - you will ultimately reap your profits when the stock market turn bullish again.

Best Strategy:

• Money
• Guts
• Patience
• Confidence

Ref: Making Mistakes in the Stock Market by Wong Yee

My strategies for buying and selling (KISS version)

Strategies for buying and selling.

For buying (ABC):

A.  Assess Quality, Management and Valuation (QMV)

B.  Buy good quality stocks.

C.  Buy these stocks at a discount (Margin of Safety)

(If you select your stocks carefully, often one can hold them for long periods. The idea is to allow compounding over the long period to work in your favour.)


For selling (1,2,3,4):

1. If you need cash for emergency. (But then, hopefully, you will have separate money for such emergencies. The cash invested into the market should be separate.)

2. You will need to sell URGENTLY (QUICKLY) if there is something wrong with the fundamental of your stock (example: fraudulent accounting, etc). At other instances, you do have the time to SELL at leisure.

3. Your stock has gone up too high. By your assessment, at that price the upside return is less, but the downside risk is more, then you may wish to sell to REINVEST INTO ANOTHER STOCK WITH MORE FAVOURABLE UPSIDE REWARD/DOWNSIDE RISK RATIO.

4. On occasions, you have identified a very good BARGAIN, you may wish to sell some of your stocks to REINVEST into these stocks to capture a higher upside/downside reward risk ratio that these stocks offer.

Defensive Portfolio Management = 2.
This is to prevent harm to the portfolio.
Urgent attention needed.

Offensive Portfolio Management = 3 & 4.
This is to optimise returns of the portfolio.
Have the time to sell at leisure.


BB
"Investing should be fun and not a game."


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QMV
Quality = Points 1 to 6
Management = Point 7
Valuation = Point 8






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Additional Related Notes:

Why do you Sell and When?

Reducing serious loss

When the fundamentals of a stock have deteriorated, sell to protect your portfolio. This decision should be make quickly based on the facts and situations, in order to keep your losses small.


Taking profit

Profit should be realised from sales of stocks in the following situations:
(I) when the stock is obviously overpriced, or
(II) when the sale of the stock frees the capital to be reinvested into another stock with potentially better return.

Not taking profit in the above situations can harm your portfolio and compromise its returns. In other circumstances, let the winners run.

Underperforming stocks should also be sold early. Hanging onto underperforming stocks is costly too. There is the opportunity cost that the capital can be better employed for higher return. Also, hanging onto these lack-lustre stocks reduces the overall return of your portfolio.
http://myinvestingnotes.blogspot.com/2011/02/why-do-you-sell-and-when.html

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Related:

The Time to Sell: How Warren Determines It is Time To Sell

• The first is when you need money to make an investment in an even better company at a better price, which occasionally happens. 
• The second is when the company looks like it is going to lose it durable competitive advantage.  A questionable competitive advantage is not where you want to keep your money long-term. (An example:  Nokia's Cautionary Tale)
• The third is during bull markets when the stock market, in an insane buying frenzy, sends the prices of these fantastic businesses through the ceiling. 

When to Sell?  The QVM Approach to Selling Stocks