Investing in "Fallen Angels"

When it comes to investing, many people are interested in trying to find the "right" stock. Gabriel Wisdom has found a great deal of success in looking for "fallen angels" -- stocks that were once "hot" but have fallen out of favor. In his recent book, Wisdom on Value Investing: How to Profit on Fallen Angels, Wisdom provides helpful hints that you can use to help improve your investing performance. I recently spoke with Wisdom over the phone, and he talked about how you can profit from looking for these fallen angels.

"The old Wall Street used to refer to fallen angels to describe something that was very popular and overpriced for a time before it fell. We've updated the term to refer to stocks and bonds that have fallen -- but that should be rising. Based on revenue and earnings growth, or on balance statements, these are investments that are on sale, and have a great upside potential over time." 

Wisdom describes value investing at its finest: Look for fundamentally sound companies that are undervalued, and invest in them for the long term. "It's important, though, to distinguish between 'fallen' and 'falling'," Wisdom points out. "You want a security that has already come close to reaching its bottom." 

He also insists that investors need to look at markets in terms of cycles, and what happens during these cycles. "Just like cars, groceries and other items, there are good times to buy stocks and bonds, giving you a better deal. You need to study the market and ideally buy when things are on sale. Then you sell when everyone else is excited about what is happening." 

Knowing when to sell is an important part of investing. "It's the hardest part of successful investing," Wisdom says. "J. Paul Getty, possibly the first billionaire of his time, bought when people were complaining and sold when they were celebrating." Wisdom offers three keys to knowing when to sell: 

1. Something has changed fundamentally so that the reason you bought is no longer valid.
2. Your profits come sooner than anticipated. Wisdom recommends that you should at least sell half if you can't part with the whole investment at once.
3. A better investment opportunity comes along, and you need the capital to take advantage of it.

In addition to offering the above insights, Wisdom's book also includes other helpful investing hints. The first chapter offers 10 traits of good bargain hunters, and provides you with great information on how to develop these traits. The book then takes you through bottom fishing, cheap and timely securities, Wall Street cycles, time arbitrage, and profit vs. panic. The book also includes a helpful checklist for effective investing. I like this checklist because it forces you to stop, take stock of the situation and make investment decisions (to buy or sell) based on something approaching rational thought, rather than a visceral reaction to what might be happening in the market. 

You really can become a better investor if you pay attention to fundamentals, and look for investments that are underpriced but have good upside potential.You may not score big in a year or two, but you are more likely to see steady gains over the years if you employ some of the techniques in Wisdom's book.


http://www.allbusiness.com/banking-finance/financial-markets-investing-securities/13837019-1.html

Learn from the Worst: The Fallen

"From the errors of others, a wise man corrects his own."

We are going to examine how and why investors have failed so that you'll be ready when confronted with the same pitfalls.

The Fallen

It's a pretty crowded place. There are the professionals - the mutual fund managers, the newsletter publishers, and the individual stock pickers.


Mutual Fund Managers

Most mutual fund managers fail to beat the returns you'd get if you had just bought an index fund that tracks the S&P 500. (The S&P 500 index is generally what people refer to when they talk about beating 'the market').

John Bogle (Vanguard Group): From 1983 through 2003, the average equity fund returned an average of 10.3% annually, while the S&P grew at a 13 % pace. A 2.7% spread between the S&P and mutual fund managers' performances may not seem like all that much. But, the compounded returns you get in the stock market can turn that kind of difference into a lot of money very quickly. A $10,000 investment that grows at 13% per year compounded annually, for example, will give you a shade over $115,000 after 20 years; at 10.3% per year, you'd end up with about $44,000 less than that (approximately $71,000).

O'Shaughnessy: "The best 10 years, ending December 31,1994, saw only 26% of the traditionally managed active mutual funds beating the S&P index." That means that just over a quarter of fund managers earned their clients market-beating returns in the best of those periods!

"Less than half of the funds that beat the S&P 500 for the 10 years ending May 31, 2004 did so by more than 2% per year on a compound basis." What's more - this is a key point - these statistics didn't include all the funds that failed to survive a particular 10-year period, meaning that his findings actually overstate the collective performance of equity funds.


Newsletter Publishers

These are investors - some professionals and some amateur - who write monthly or quarterly publications (many are published online) that give their assessment of the economy as well as their own stock picks. They sound official and authoritative and sometimes even have large reseach staffs working for them.

But while they can attract thousands of readers, more often than not their advice is lacking. Hubert Financial Digest monitors investment newsletters and tracks the performance of their picks said in a 2004 Dallas Morning News article that about 80% of newsletters don't keep pace with the S&P 500 over long periods of time.

And just as their individual stock picks are often subpar, newsletter publishers also have a difficult time just picking the general direction of the market.

A National Bureau for Economic Research study of 237 newsletter strategies done in the 1990s found that, between June 1980 and December 1992, there was "no evidence to suggest that investment newsletteres as a group have any knowledge over and above the common level of predictability."

While their advertisements and promises may sound tempting, the data indicates that newsletter publishers and money managers have a weak record when it comes to beating the market. Their collective track record, however, is far better than that of individual investors.


Individual Investors

John Bogle: He has addressed the issue of individual investors' returns and his findings paint an equally glum picture. He told that congressional committee in 2004 that he estimated individuals investors in equity fund has averaged an annual gain of just 3% over the previous 20 years, during which time the S&P 500 grew 13% per year.