Stock Course
Stocks 103: Investing for the long run
Over time, the rewards of investing in stocks outweigh the risks.
[Related content: stocks, stock market, investing strategy, shorting, investments]
By Morningstar.com
In the lesson Stocks 102, we noticed that the difference of only a few percentage points in investment returns or interest rates can have a huge impact on your future wealth. Therefore, in the long run, the rewards of investing in stocks can outweigh the risks. We'll examine this risk/reward dynamic in this lesson.
Volatility of single stocks
Individual stocks tend to have highly volatile prices, and the returns you might receive on any single stock may vary wildly. If you invest in the right stock, you could make bundles of money. For instance, Eaton Vance EV, an investment-management company, has had the best-performing stock for the last 25 years. If you had invested $10,000 in 1979 in Eaton Vance, assuming you had reinvested all dividends, your investment would have been worth $10.6 million by December 2004.
On the downside, since the returns on stock investments are not guaranteed, you risk losing everything on any given investment. There are hundreds of recent examples of dot-com investments that went bankrupt or are trading for a fraction of their former highs. Even established, well-known companies such as Enron, WorldCom, and Kmart filed for bankruptcy, and investors in these companies lost everything.
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Between these two extremes is the daily, weekly, monthly, and yearly fluctuation of any given company's stock price. Most stocks won't double in the coming year, nor will many go to zero. But do consider that the average difference between the yearly high and low stock prices of the typical stock on the New York Stock Exchange is nearly 40%.
More from MSN Money and Morningstar
Stocks 104: What matters and what doesn't
Stocks 105: The purpose of a company
Stocks 106: Gathering relevant information
Stocks 107: Introduction to financial statements
MSN Money's New Investor Center
In addition to volatility, there is the risk that a single company's stock price may not increase significantly over time. In 1965, you could have purchased General Motors (GM) stock for $50 per share (split adjusted). In the following decades, though, this investment has only spun its wheels. By June 2008, your shares of General Motors would be worth only about $18 each. Though dividends would have provided some ease to the pain, General Motors' return has been terrible. You would have been better off if you had invested your money in a bank savings account instead of General Motors stock.
Clearly, if you put all of your eggs in a single basket, sometimes that basket may fail, breaking all the eggs. Other times, that basket will hold the equivalent of a winning lottery ticket.
Volatility of the stock market
One way of reducing the risk of investing in individual stocks is by holding a larger number of stocks in a portfolio. However, even a portfolio of stocks containing a wide variety of companies can fluctuate wildly. You may experience large losses over short periods. Market dips, sometimes significant, are simply part of investing in stocks.
For example, consider the Dow Jones Industrials Index, a basket of 30 of the most popular, and some of the best, companies in America. If during the last 100 years you had held an investment tracking the Dow, there would have been 10 different occasions when that investment would have lost 40% or more of its value.
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The yearly returns in the stock market also fluctuate dramatically. The highest one-year rate of return of 67% occurred in 1933, while the lowest one-year rate of return of negative 53% occurred in 1931. It should be obvious by now that stocks are volatile, and there is a significant risk if you cannot ride out market losses in the short term. But don't worry; there is a bright side to this story.
Over the long term, stocks are best
Despite all the short-term risks and volatility, stocks as a group have had the highest long-term returns of any investment type. This is an incredibly important fact! When the stock market has crashed, the market has always rebounded and gone on to new highs. Stocks have outperformed bonds on a total real return (after inflation) basis, on average. This holds true even after market peaks.
Continued: Best performers
Related content: stocks, stock market, investing strategy, shorting, investments]
If you had deplorable timing and invested $100 into the stock market during any of the seven major market peaks in the 20th century, that investment, over the next 10 years, would have been worth $125 after inflation, but it would have been worth only $107 had you invested in bonds, and $99 if you had purchased government Treasury bills. In other words, stocks have been the best-performing asset class over the long term, while government bonds, in these cases, have merely kept up with inflation.
This is the whole reason to go through the effort of investing in stocks. Again, even if you had invested in stocks at the highest peak in the market, your total after-inflation returns after 10 years would have been higher for stocks than either bonds or cash. Had you invested a little at a time, not just when stocks were expensive but also when they were cheap, your returns would have been much greater.
Time is on your side
Just as compound interest can dramatically grow your wealth over time, the longer you invest in stocks, the better off you will be. With time, your chances of making money increase, and the volatility of your returns decreases.
The average annual return for the S&P 500 stock index for a single year has ranged from negative 39% to positive 61%, while averaging 13.2%. Stocks held for five years have seen annualized returns ranging from negative 4% to positive 30% while averaging 11.9%.
These returns easily surpass those you can get from any of the other major types of investments. Again, as your holding period increases, the expected return variation decreases, and the likelihood for a positive return increases. This is why it is important to have a long-term investment horizon when you are getting started in stocks.
More from MSN Money and Morningstar
Stocks 104: What matters and what doesn't
Stocks 105: The purpose of a company
Stocks 106: Gathering relevant information
Stocks 107: Introduction to financial statements
MSN Money's New Investor Center
Why stocks perform the best
While historical results certainly offer insight into the types of returns to expect in the future, it is still important to ask the following questions: Why, exactly, have stocks been the best-performing asset class? And why should we expect those types of returns to continue? In other words, why should we expect history to repeat?
Quite simply, stocks allow investors to own companies that have the ability to create enormous economic value. Stock investors have full exposure to this upside. For instance, in 1985, would you have rather lent Microsoft money at a 6% interest rate, or would you have rather been an owner, seeing the value of your investment grow several-hundred fold?
Because of the risk, stock investors also require the largest return compared with other types of investors before they will give their money to companies to grow their businesses. More often than not, companies are able to generate enough value to cover this return demanded by their owners.
Meanwhile, bond investors do not reap the benefit of economic expansion to nearly as large a degree. When you buy a bond, the interest rate on the original investment will never increase. Your theoretical loan to Microsoft yielding 6% would have never yielded more than 6%, no matter how well the company did. Being an owner certainly exposes you to greater risk and volatility, but the sky is also the limit on the potential return.
The bottom line
While stocks make an attractive investment in the long run, stock returns are not guaranteed and tend to be volatile in the short term. Therefore, we do not recommend that you invest in stocks to achieve your short-term goals. For best results, you should invest in stocks only to meet long-term objectives that are at least five years away. And the longer you invest, the greater your chances of achieving the types of returns that make investing in stocks worthwhile.
Published Oct. 1, 2008
http://articles.moneycentral.msn.com/learn-how-to-invest/stocks-103-investing-for-the-long-run.aspx
Sunday 10 May 2009
Introduction to financial statements
Learn about stocks
Stocks 107: Introduction to financial statements
You don't need to be a CPA to understand the basics of the three most fundamental and important financial statements: The income statement, the balance sheet, and the statement of cash flows.
[Related content: stocks, stock market, investments, investing strategy, bonds]
By Morningstar.com
Although the words "financial statements" and "accounting" send cold shivers down many people's backs, this is the language of business, a language investors need to know before buying stocks. The beauty is you don't need to be a CPA to understand the basics of the three most fundamental and important financial statements: the income statement, the balance sheet, and the statement of cash flows. All three of these statements are found in a firm's annual report, 10-K, and 10-Q filings.
The financial statements are windows into a company's performance and health. We'll provide a very basic overview of each financial statement in this lesson and go into much greater detail in Lessons 301-303.
Morningstar.com's Investing Classroom
The income statement
The income statement tells you how much money a company has brought in (its revenues), how much it has spent (its expenses), and the difference between the two (its profit or loss). It shows a company's revenues and expenses over a specific time frame such as three months or a year. This statement contains the information you'll most often see mentioned in the press or in financial reports -- figures such as total revenue, net income or earnings per share.
The income statement answers the question, "How well is the company's business performing?" Or in simpler terms, "Is it making money?" A company must be able to bring in more money than it spends or it won't be in business for very long. Companies with low expenses relative to revenues -- and thus, high profits relative to revenues -- are particularly desirable for investment because a bigger piece of each dollar the company brings in directly benefits you as a shareholder.
Each of the three main elements of the income statement is described below.
Revenues. The revenue section is typically the simplest part of the income statement. Often, there is just a single number that represents all the money a company brought in during a specific time period, although big companies sometimes break down revenues in ways that provide more information (for instance, segregated by geographic location or business segment). Revenues are also commonly known as sales.
More from MSN Money and Morningstar
Stocks 108: Learn the lingo – basic ratios
Stocks 101: Stocks versus other investments
Stocks 102: The magic of compounding
Stocks 103: Investing for the long run
MSN Money's New Investor Center
Expenses. Although there are many types of expenses, the two most common are the cost of sales and SG&A (selling, general and administrative) expenses. Cost of sales, which is also called cost of goods sold, is the expense most directly involved in creating revenue. For example, Gap (GPS, news, msgs) may pay $10 to make a shirt, which it sells for $15. When it is sold, the cost of sales for that shirt would be $10 -- what it cost Gap to produce the shirt for sale. Selling, general, and administrative expenses are also commonly known as operating expenses. This category includes most other costs in running a business, including marketing, management salaries, and technology expenses.
Profits. In its simplest form, profit is equal to total revenues minus total expenses. However, there are several commonly used profit subcategories investors should be aware of. Gross profit is calculated as revenues minus cost of sales. It basically shows how much money is left over to pay for operating expenses (and hopefully provide profit to stockholders) after a sale is made.
Using our example of the Gap shirt before, the gross profit from the sale of the shirt would have been $5 ($15 sales price - $10 cost of sales = $5 gross profit). Operating profit is equal to revenues minus the cost of sales and SG&A. This number represents the profit a company made from its actual operations, and excludes certain expenses and revenues that may not be related to its central operations. Net income generally represents the company's profit after all expenses, including financial expenses, have been paid. This number is often called the "bottom line" and is generally the figure people refer to when they use the word "profit" or "earnings."
The balance sheet
The balance sheet, also known as the statement of financial condition, basically tells you how much a company owns (its assets), and how much it owes (its liabilities). The difference between what it owns and what it owes is its equity, also commonly called "net assets," "stockholders' equity," or "net worth."
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The balance sheet provides investors with a snapshot of a company's health as of the date provided on the financial statement. Generally, if a company has lots of assets relative to liabilities, it's in good shape. Conversely, just as you would be cautious loaning money to a friend who is burdened with large debts, a company with a large amount of liabilities relative to assets should be scrutinized more carefully.
Each of the three primary elements of the balance sheet is described below.
Assets. There are two main types of assets: current assets and noncurrent assets. Within these two categories, there are numerous subcategories, many of which will be explained in Lesson 302. Current assets are likely to be used up or converted into cash within one business cycle -- usually defined as one year. For example, the groceries at your local supermarket would be classified as current assets because apples and bananas should be sold within the next year. Noncurrent assets are defined by our left-brained accountant friends as, you guessed it, anything not classified as a current asset. For example, the refrigerators at your supermarket would be classified as noncurrent assets because it's unlikely they will be "used up" or converted to cash within a year.
Liabilities. Similar to assets, there are two main categories of liabilities: current liabilities and noncurrent liabilities. Current liabilities are obligations the company must pay within a year. For example, your supermarket may have bought and received $1,000 worth of eggs from a local farm but won't pay for them until next month. Noncurrent liabilities are the flip side of noncurrent assets. These liabilities represent money the company owes one year or more in the future. For example, the grocer may borrow $1 million from a bank for a new store, which it must pay back in five years.
Equity. Equity represents the part of the company that is owned by shareholders; thus, it's commonly referred to as shareholders' equity. As described above, equity is equal to total assets minus total liabilities. Although there are several categories within equity, the two biggest are paid-in capital and retained earnings. Paid-in capital is the amount of money shareholders paid for their shares when the stock was first offered to the public. It basically represents how much money the firm received when it sold its shares. Retained earnings represent the total profits the company has earned since it began, minus whatever has been paid to shareholders as dividends. Because this is a cumulative number, if a company has lost money over time, retained earnings can be negative and would be renamed "accumulated deficit."
The statement of cash flows
The statement of cash flows tells you how much cash went into and out of a company during a specific time frame such as a quarter or a year. You may wonder why there's a need for such a statement because it sounds very similar to the income statement, which shows how much revenue came in and how many expenses went out.
The difference lies in a complex concept called accrual accounting. Accrual accounting requires companies to record revenues and expenses when transactions occur, not when cash is exchanged. While that explanation seems simple enough, it's a big mess in practice, and the statement of cash flows helps investors sort it out.
More from MSN Money and Morningstar
Stocks 108: Learn the lingo – basic ratios
Stocks 101: Stocks versus other investments
Stocks 102: The magic of compounding
Stocks 103: Investing for the long run
MSN Money's New Investor Center
The statement of cash flows is very important to investors because it shows how much actual cash a company has generated. The income statement, on the other hand, often includes noncash revenues or expenses, which the statement of cash flows excludes.
One of the most important traits you should seek in a potential investment is the company's ability to generate cash. Many companies have shown profits on the income statement but stumbled later because of insufficient cash flows. A good look at the statement of cash flows for those companies may have warned investors that rocky times were ahead.
Because companies can generate and use cash in several different ways, the statement of cash flows is separated into three sections: cash flows from operating activities, from investing activities and from financing activities.
The cash flows from operating activities section shows how much cash the company generated from its core business, as opposed to peripheral activities such as investing or borrowing. Investors should look closely at how much cash a company generates from its operating activities because it paints the best picture of how well the business is producing cash that will ultimately benefit shareholders.
The cash flows from investing activities section shows the amount of cash firms spent on investments. Investments are usually classified as either capital expenditures -- money spent on items such as new equipment or anything else needed to keep the business running -- or monetary investments such as the purchase or sale of money market funds.
The cash flows from financing activities section includes any activities involved in transactions with the company's owners or debtors. For example, cash proceeds from new debt, or dividends paid to investors would be found in this section.
Free cash flow is a term you will become very familiar with over the course of these lessons. In simple terms, it represents the amount of excess cash a company generated, which can be used to enrich shareholders or invest in new opportunities for the business without hurting the existing operations; thus, it's considered "free." Although there are many methods of determining free cash flow, the most common method is taking the net cash flows provided by operating activities and subtracting capital expenditures (as found in the "cash flows from investing activities" section).
Cash from Operations - Capital Expenditures = Free Cash Flow
The bottom line
Phew!!!
You made it through an entire lesson about financial statements. While we're the first to acknowledge that there are far more exciting aspects of investing in stocks than learning about accounting and financial statements, it's essential for investors to know the language of business. We also recommend you sharpen your newfound language skills by taking a good look at the more-detailed discussion on financial statements in Lessons 301-303.
Stocks 107: Introduction to financial statements
You don't need to be a CPA to understand the basics of the three most fundamental and important financial statements: The income statement, the balance sheet, and the statement of cash flows.
[Related content: stocks, stock market, investments, investing strategy, bonds]
By Morningstar.com
Although the words "financial statements" and "accounting" send cold shivers down many people's backs, this is the language of business, a language investors need to know before buying stocks. The beauty is you don't need to be a CPA to understand the basics of the three most fundamental and important financial statements: the income statement, the balance sheet, and the statement of cash flows. All three of these statements are found in a firm's annual report, 10-K, and 10-Q filings.
The financial statements are windows into a company's performance and health. We'll provide a very basic overview of each financial statement in this lesson and go into much greater detail in Lessons 301-303.
Morningstar.com's Investing Classroom
The income statement
The income statement tells you how much money a company has brought in (its revenues), how much it has spent (its expenses), and the difference between the two (its profit or loss). It shows a company's revenues and expenses over a specific time frame such as three months or a year. This statement contains the information you'll most often see mentioned in the press or in financial reports -- figures such as total revenue, net income or earnings per share.
The income statement answers the question, "How well is the company's business performing?" Or in simpler terms, "Is it making money?" A company must be able to bring in more money than it spends or it won't be in business for very long. Companies with low expenses relative to revenues -- and thus, high profits relative to revenues -- are particularly desirable for investment because a bigger piece of each dollar the company brings in directly benefits you as a shareholder.
Each of the three main elements of the income statement is described below.
Revenues. The revenue section is typically the simplest part of the income statement. Often, there is just a single number that represents all the money a company brought in during a specific time period, although big companies sometimes break down revenues in ways that provide more information (for instance, segregated by geographic location or business segment). Revenues are also commonly known as sales.
More from MSN Money and Morningstar
Stocks 108: Learn the lingo – basic ratios
Stocks 101: Stocks versus other investments
Stocks 102: The magic of compounding
Stocks 103: Investing for the long run
MSN Money's New Investor Center
Expenses. Although there are many types of expenses, the two most common are the cost of sales and SG&A (selling, general and administrative) expenses. Cost of sales, which is also called cost of goods sold, is the expense most directly involved in creating revenue. For example, Gap (GPS, news, msgs) may pay $10 to make a shirt, which it sells for $15. When it is sold, the cost of sales for that shirt would be $10 -- what it cost Gap to produce the shirt for sale. Selling, general, and administrative expenses are also commonly known as operating expenses. This category includes most other costs in running a business, including marketing, management salaries, and technology expenses.
Profits. In its simplest form, profit is equal to total revenues minus total expenses. However, there are several commonly used profit subcategories investors should be aware of. Gross profit is calculated as revenues minus cost of sales. It basically shows how much money is left over to pay for operating expenses (and hopefully provide profit to stockholders) after a sale is made.
Using our example of the Gap shirt before, the gross profit from the sale of the shirt would have been $5 ($15 sales price - $10 cost of sales = $5 gross profit). Operating profit is equal to revenues minus the cost of sales and SG&A. This number represents the profit a company made from its actual operations, and excludes certain expenses and revenues that may not be related to its central operations. Net income generally represents the company's profit after all expenses, including financial expenses, have been paid. This number is often called the "bottom line" and is generally the figure people refer to when they use the word "profit" or "earnings."
The balance sheet
The balance sheet, also known as the statement of financial condition, basically tells you how much a company owns (its assets), and how much it owes (its liabilities). The difference between what it owns and what it owes is its equity, also commonly called "net assets," "stockholders' equity," or "net worth."
More investing courses from Morningstar
The balance sheet provides investors with a snapshot of a company's health as of the date provided on the financial statement. Generally, if a company has lots of assets relative to liabilities, it's in good shape. Conversely, just as you would be cautious loaning money to a friend who is burdened with large debts, a company with a large amount of liabilities relative to assets should be scrutinized more carefully.
Each of the three primary elements of the balance sheet is described below.
Assets. There are two main types of assets: current assets and noncurrent assets. Within these two categories, there are numerous subcategories, many of which will be explained in Lesson 302. Current assets are likely to be used up or converted into cash within one business cycle -- usually defined as one year. For example, the groceries at your local supermarket would be classified as current assets because apples and bananas should be sold within the next year. Noncurrent assets are defined by our left-brained accountant friends as, you guessed it, anything not classified as a current asset. For example, the refrigerators at your supermarket would be classified as noncurrent assets because it's unlikely they will be "used up" or converted to cash within a year.
Liabilities. Similar to assets, there are two main categories of liabilities: current liabilities and noncurrent liabilities. Current liabilities are obligations the company must pay within a year. For example, your supermarket may have bought and received $1,000 worth of eggs from a local farm but won't pay for them until next month. Noncurrent liabilities are the flip side of noncurrent assets. These liabilities represent money the company owes one year or more in the future. For example, the grocer may borrow $1 million from a bank for a new store, which it must pay back in five years.
Equity. Equity represents the part of the company that is owned by shareholders; thus, it's commonly referred to as shareholders' equity. As described above, equity is equal to total assets minus total liabilities. Although there are several categories within equity, the two biggest are paid-in capital and retained earnings. Paid-in capital is the amount of money shareholders paid for their shares when the stock was first offered to the public. It basically represents how much money the firm received when it sold its shares. Retained earnings represent the total profits the company has earned since it began, minus whatever has been paid to shareholders as dividends. Because this is a cumulative number, if a company has lost money over time, retained earnings can be negative and would be renamed "accumulated deficit."
The statement of cash flows
The statement of cash flows tells you how much cash went into and out of a company during a specific time frame such as a quarter or a year. You may wonder why there's a need for such a statement because it sounds very similar to the income statement, which shows how much revenue came in and how many expenses went out.
The difference lies in a complex concept called accrual accounting. Accrual accounting requires companies to record revenues and expenses when transactions occur, not when cash is exchanged. While that explanation seems simple enough, it's a big mess in practice, and the statement of cash flows helps investors sort it out.
More from MSN Money and Morningstar
Stocks 108: Learn the lingo – basic ratios
Stocks 101: Stocks versus other investments
Stocks 102: The magic of compounding
Stocks 103: Investing for the long run
MSN Money's New Investor Center
The statement of cash flows is very important to investors because it shows how much actual cash a company has generated. The income statement, on the other hand, often includes noncash revenues or expenses, which the statement of cash flows excludes.
One of the most important traits you should seek in a potential investment is the company's ability to generate cash. Many companies have shown profits on the income statement but stumbled later because of insufficient cash flows. A good look at the statement of cash flows for those companies may have warned investors that rocky times were ahead.
Because companies can generate and use cash in several different ways, the statement of cash flows is separated into three sections: cash flows from operating activities, from investing activities and from financing activities.
The cash flows from operating activities section shows how much cash the company generated from its core business, as opposed to peripheral activities such as investing or borrowing. Investors should look closely at how much cash a company generates from its operating activities because it paints the best picture of how well the business is producing cash that will ultimately benefit shareholders.
The cash flows from investing activities section shows the amount of cash firms spent on investments. Investments are usually classified as either capital expenditures -- money spent on items such as new equipment or anything else needed to keep the business running -- or monetary investments such as the purchase or sale of money market funds.
The cash flows from financing activities section includes any activities involved in transactions with the company's owners or debtors. For example, cash proceeds from new debt, or dividends paid to investors would be found in this section.
Free cash flow is a term you will become very familiar with over the course of these lessons. In simple terms, it represents the amount of excess cash a company generated, which can be used to enrich shareholders or invest in new opportunities for the business without hurting the existing operations; thus, it's considered "free." Although there are many methods of determining free cash flow, the most common method is taking the net cash flows provided by operating activities and subtracting capital expenditures (as found in the "cash flows from investing activities" section).
Cash from Operations - Capital Expenditures = Free Cash Flow
The bottom line
Phew!!!
You made it through an entire lesson about financial statements. While we're the first to acknowledge that there are far more exciting aspects of investing in stocks than learning about accounting and financial statements, it's essential for investors to know the language of business. We also recommend you sharpen your newfound language skills by taking a good look at the more-detailed discussion on financial statements in Lessons 301-303.
Saturday 9 May 2009
One fund manager says it's time to buy when the chips are down - way down.
One fund manager says it's time to buy when the chips are down - way down.
NEW YORK (Fortune) -- Chris McHugh, manager of Turner Midcap Growth Fund, thinks it's time for investors to get back into buying mode and take on a longer-term view of the market.
"Historically you want to buy when things look absolutely at their worst," he says. "The traditional investor unfortunately always sells at the bottom and buys at the top."
While there are risks, he believes investors should accumulate during the dips if they don't want to miss out. For his fund, McHugh says that means buying high-quality growth names (like Kohl's (KSS, Fortune 500), its top holding), companies positioned to take market share, and early-cycle businesses that are the first to rally when the market bottoms.
"I think that's the right combination to be looking at to take advantage of very depressed valuation levels from a longer-term perspective in the marketplace," he says.
The Turner Midcap Growth Fund is up 14.94% year to date, beating out its category returns of 11.13% for the same period, according to Morningstar. The fund has dropped about 37% over a one-year period, but over five years it has fallen 0.53%, just beating out its category (-0.87%). Launched in 1996, the fund has about $840 million in assets.
McHugh places a special priority on earnings - both in their sustainability and quality. Crucial to him is that a company beats and exceeds expectations.
"At the end of the day, that's really the essence of the stock market," he says. "It all comes down to earnings, or lack thereof."
The fund's top holding in the "market-share gainer" category is McAfee (MFE), which provides computer security - one of the last tech items to get cut when a company is trimming costs, according to McHugh.
Another market-share gainer is Best Buy (BBY, Fortune 500), which he thinks is going to "take significant advantage of Circuit City's demise." McHugh believes the retailer can be stronger on its pricing strategy, which leads to better margins and earnings over time.
Early-cycle stocks, including housing, semiconductors, retailing, and certain industrials, will outperform when the economy improves, he says. In retail, McHugh likes Urban Outfitters (URBN) and Guess (GES), which he says have stayed on top of fashion trends and moved inventory, which means less discounting over the long run.
"There are some things that the consumer doesn't want to let go of," he says. "I think fashion and clothing are still high on the list as opposed to home furnishings or appliances."
McHugh's investment process involves three components - examining fundamentals, which included more than 1,000 meetings with management in 2008; technical analysis of stock charts to help with timing entry or exit points; and a quantitative component that examines 70 different factors considered predicative of future stock price performance.
Turner's 21 analysts divide the market into broad sectors and each specialize in one of five areas: healthcare, financial services, technology, consumer, and cyclical. While cyclical companies are not typically considered growth businesses, McHugh says one of the fund's strengths is being able to find growth stocks in what have not traditionally been considered growth sectors.
In the energy sector, which the fund categorizes as cyclical, McHugh likes natural gas companies, as he expects a price recovery in 2010 or 2011.
Southwestern Energy (SWN) and Range Resources (RRC), two of his long-time holdings, have grown production at more than four times the rate for the overall sector, he says. The two companies are big players in the U.S. oil shale industry, which he notes is the nation's fastest growing production area. Their production costs per barrel are also less than the industry average.
One of his fund's top holdings in tech - and one of its top 10 in the portfolio - is F5 Networks (FFIV), which produces software and hardware to make businesses' networks secure and more efficient. When its clients, which include Amazon, Microsoft, and Oracle, outgrow their networking needs, McHugh says, F5 allows them to expand without disrupting their operations.
http://money.cnn.com/2009/05/06/pf/growth_stocks_invest.fortune/index.htm
Turning $37.50 into $900,000.00+ ...
Turning $37.50 into $900,000.00+ ...
Sunday April 26, 2009
According to the most recent Fortune Magazine, which is dedicated to the annual Fortune 500, "If you'd bought a single share [of Johnson & Johnson] when the company went public in 1944 at its IPO price of $37.50 and had reinvested the dividends, you'd now have a bit over $900,000, a stunning annual return of 17.1%." On top of that, you'd be collecting somewhere around $34,200 per year in cash dividends!
The article goes on to say, "Even if you hadn't reinvested the dividends, that single share would now be 2,500 shares as a result of splits, and you'd be collecting dividends of $4,500 a year from that $37.50 investment. If only Grandpa had bought 100 shares."
Sunday April 26, 2009
According to the most recent Fortune Magazine, which is dedicated to the annual Fortune 500, "If you'd bought a single share [of Johnson & Johnson] when the company went public in 1944 at its IPO price of $37.50 and had reinvested the dividends, you'd now have a bit over $900,000, a stunning annual return of 17.1%." On top of that, you'd be collecting somewhere around $34,200 per year in cash dividends!
The article goes on to say, "Even if you hadn't reinvested the dividends, that single share would now be 2,500 shares as a result of splits, and you'd be collecting dividends of $4,500 a year from that $37.50 investment. If only Grandpa had bought 100 shares."
Investing in IPOs?
Investing in IPOs?
A question from Yahoo! Answers:
Investing in newly floated companies?
Just a thought…. I guess new companies floating on the stock market make an interesting investment. High risk and possibly great gain??. Does anyone have any opinions on this? How can you find out about new floatation? Does anyone know how many occur in a typical year?
Companies issuing stock during 1970-1990, whether in an initial public offering (IPO) or a seasoned equity offering (SEO), have been poor long run investments for investors.
During the five years after the issue, investors have received average returns of only 5% per year for companies going public and only 7% per year for companies conducting an SEO.
Book to market effects account for only a modest portion of the low returns. An investor would have had to invest 44% more money in the issuers than in non-issuers of the same size to have the same wealth five years after the offering date.
Source:
Loughran, Tim, and Jay R. Ritter, 1995, “The new issues puzzle,” Journal of Finance 50, 23-51.
http://www.myvirtualdisplay.com/2007/01/17/investing-in-ipos/
A question from Yahoo! Answers:
Investing in newly floated companies?
Just a thought…. I guess new companies floating on the stock market make an interesting investment. High risk and possibly great gain??. Does anyone have any opinions on this? How can you find out about new floatation? Does anyone know how many occur in a typical year?
Companies issuing stock during 1970-1990, whether in an initial public offering (IPO) or a seasoned equity offering (SEO), have been poor long run investments for investors.
During the five years after the issue, investors have received average returns of only 5% per year for companies going public and only 7% per year for companies conducting an SEO.
Book to market effects account for only a modest portion of the low returns. An investor would have had to invest 44% more money in the issuers than in non-issuers of the same size to have the same wealth five years after the offering date.
Source:
Loughran, Tim, and Jay R. Ritter, 1995, “The new issues puzzle,” Journal of Finance 50, 23-51.
http://www.myvirtualdisplay.com/2007/01/17/investing-in-ipos/
Warren Buffett: What does intrinsic value mean?
What does intrinsic value mean?
Why doesn't Mr. Buffett provide the shareholders with his estimate of Berkshire's intrinsic value?
"Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple.
As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover - and this would apply even to Charlie and me - will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of intrinsic value. What our annual reports do supply, though, are the facts that we ourselves use to calculate this value."
Source: Berkshire Hathaway's Owner's Manual
-----
BERKSHIRE HATHAWAY INC.
AN OWNER'S MANUAL*
A Message from Warren E. Buffett, Chairman and CEO
January 1999
INTRINSIC VALUE
Now let's focus on two terms that I mentioned earlier and that you will encounter in future annual reports.
Let's start with intrinsic value, an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.
The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover - and this would apply even to Charlie and me - will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of intrinsic value. What our annual reports do supply, though, are the facts that we ourselves use to calculate this value.
Meanwhile, we regularly report our per-share book value, an easily calculable number, though one of limited use. The limitations do not arise from our holdings of marketable securities, which are carried on our books at their current prices. Rather the inadequacies of book value have to do with the companies we control, whose values as stated on our books may be far different from their intrinsic values.
The disparity can go in either direction. For example, in 1964 we could state with certitude that Berkshire's per-share book value was $19.46. However, that figure considerably overstated the company's intrinsic value, since all of the company's resources were tied up in a sub-profitable textile business. Our textile assets had neither going- concern nor liquidation values equal to their carrying values. Today, however, Berkshire's situation is reversed: Now, our book value far understates Berkshire's intrinsic value, a point true because many of the businesses we control are worth much more than their carrying value.
Inadequate though they are in telling the story, we give you Berkshire's book-value figures because they today serve as a rough, albeit significantly understated, tracking measure for Berkshire's intrinsic value. In other words, the percentage change in book value in any given year is likely to be reasonably close to that year's change in intrinsic value.
You can gain some insight into the differences between book value and intrinsic value by looking at one form of investment, a college education. Think of the education's cost as its "book value." If this cost is to be accurate, it should include the earnings that were foregone by the student because he chose college rather than a job.
For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value. First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an appropriate interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education.
Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn't get his money's worth. In other cases, the intrinsic value of an education will far exceed its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as an indicator of intrinsic value.
http://www.berkshirehathaway.com/owners.html
http://www.focusinvestor.com/brkfaq.htm
Why doesn't Mr. Buffett provide the shareholders with his estimate of Berkshire's intrinsic value?
"Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple.
As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover - and this would apply even to Charlie and me - will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of intrinsic value. What our annual reports do supply, though, are the facts that we ourselves use to calculate this value."
Source: Berkshire Hathaway's Owner's Manual
-----
BERKSHIRE HATHAWAY INC.
AN OWNER'S MANUAL*
A Message from Warren E. Buffett, Chairman and CEO
January 1999
INTRINSIC VALUE
Now let's focus on two terms that I mentioned earlier and that you will encounter in future annual reports.
Let's start with intrinsic value, an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.
The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover - and this would apply even to Charlie and me - will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of intrinsic value. What our annual reports do supply, though, are the facts that we ourselves use to calculate this value.
Meanwhile, we regularly report our per-share book value, an easily calculable number, though one of limited use. The limitations do not arise from our holdings of marketable securities, which are carried on our books at their current prices. Rather the inadequacies of book value have to do with the companies we control, whose values as stated on our books may be far different from their intrinsic values.
The disparity can go in either direction. For example, in 1964 we could state with certitude that Berkshire's per-share book value was $19.46. However, that figure considerably overstated the company's intrinsic value, since all of the company's resources were tied up in a sub-profitable textile business. Our textile assets had neither going- concern nor liquidation values equal to their carrying values. Today, however, Berkshire's situation is reversed: Now, our book value far understates Berkshire's intrinsic value, a point true because many of the businesses we control are worth much more than their carrying value.
Inadequate though they are in telling the story, we give you Berkshire's book-value figures because they today serve as a rough, albeit significantly understated, tracking measure for Berkshire's intrinsic value. In other words, the percentage change in book value in any given year is likely to be reasonably close to that year's change in intrinsic value.
You can gain some insight into the differences between book value and intrinsic value by looking at one form of investment, a college education. Think of the education's cost as its "book value." If this cost is to be accurate, it should include the earnings that were foregone by the student because he chose college rather than a job.
For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its economic value. First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at an appropriate interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education.
Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn't get his money's worth. In other cases, the intrinsic value of an education will far exceed its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as an indicator of intrinsic value.
http://www.berkshirehathaway.com/owners.html
http://www.focusinvestor.com/brkfaq.htm
Friday 8 May 2009
It is the Business that Matters
IT IS THE BUSINESS THAT MATTERS
Analyst upgrades and chart patterns may be fine tools for traders who treat Wall Street like a casino, but they're of little use to investors who truly want to build wealth in the stock market. You have to get your hands dirty and understand the businesses of the stocks you own if you hope to be a successful long-term investor.
Over the long haul, stock prices tend to track the value of the business. When firms do well, so do their shares, and when business suffers, the stock will as well. Always focus on the company's fundamental financial performance.
Wal-Mart, for example, hit a speed bump in the mid-1990s when its growth rate slowed down a bit - and its share price was essentially flat during the same period. On the other hand, Colgate-Palmolive posted great results during the late 1990s as it cut fat from its supply chain and launched an innovative toothpaste that stole market share - and the company's stock saw dramatic gains at the same time. The message is clear: COMPANY FUNDAMENTALS HAVE A DIRECT EFFECT ON SHARE PRICES.
This principle applies only over a long time period - in the short term, stock prices can (and do) move around for a whole host of reasons that have nothing whatsoever to do with the underlying value of the company. We firmly advocate focussing on the LONG-TERM PERFORMANCE of businesses because the SHORT-TERM PRICE MOVEMENT of a stock is COMPLETELY UNPREDICTABLE. (Benjamin Graham: In the short term, the market is like a voting machine, however, in the long term it works like a weighing machine.)
Think back to the Internet mania of the late 1990s. Wonderful (but boring) businesses such as insurance companies, banks, and real estate stocks traded at incredibly low valuations, even though the intrinsic worth of these businesses hadn't really changed. At the same time, companies that had not a prayer of turning a profit wer being accorded billion-dollar valuations.
Analyst upgrades and chart patterns may be fine tools for traders who treat Wall Street like a casino, but they're of little use to investors who truly want to build wealth in the stock market. You have to get your hands dirty and understand the businesses of the stocks you own if you hope to be a successful long-term investor.
Over the long haul, stock prices tend to track the value of the business. When firms do well, so do their shares, and when business suffers, the stock will as well. Always focus on the company's fundamental financial performance.
Wal-Mart, for example, hit a speed bump in the mid-1990s when its growth rate slowed down a bit - and its share price was essentially flat during the same period. On the other hand, Colgate-Palmolive posted great results during the late 1990s as it cut fat from its supply chain and launched an innovative toothpaste that stole market share - and the company's stock saw dramatic gains at the same time. The message is clear: COMPANY FUNDAMENTALS HAVE A DIRECT EFFECT ON SHARE PRICES.
This principle applies only over a long time period - in the short term, stock prices can (and do) move around for a whole host of reasons that have nothing whatsoever to do with the underlying value of the company. We firmly advocate focussing on the LONG-TERM PERFORMANCE of businesses because the SHORT-TERM PRICE MOVEMENT of a stock is COMPLETELY UNPREDICTABLE. (Benjamin Graham: In the short term, the market is like a voting machine, however, in the long term it works like a weighing machine.)
Think back to the Internet mania of the late 1990s. Wonderful (but boring) businesses such as insurance companies, banks, and real estate stocks traded at incredibly low valuations, even though the intrinsic worth of these businesses hadn't really changed. At the same time, companies that had not a prayer of turning a profit wer being accorded billion-dollar valuations.
How Low Can Stocks Go?
How Low Can Stocks Go?
By Morgan Housel April 30, 2009 Comments (0)
Sure, the rally over the past few weeks has been a fun ride, but how quickly we forget: Between Feb. 9 and March 9, the Dow Jones Industrial Average dropped over 1,700 points. Repeat another of those plunges, and the "Dow's going to zero" camp might start gaining attention again.
Of course, we're not going to zero. No matter how ugly the markets get, the ferocity of what we've been through over the past few months can't continue for long.
But here's the bad news: That zero is out of the question doesn't mean stocks won't plummet from here. In fact, they could fall much, much further.
And history agrees.
What goes up ... The history of long-term market downturns is hideous. When times are bad, markets don't just get drunk with fear -- they start downing vodka shots of fear. When panic sets in, nobody wants to own stocks at any price. Investors' palms begin to sweat every time they watch CNBC. They bury their heads in the hope that the pain will go away. They throw in the towel and sell stocks indiscriminately. In short, things get really, really ugly.
Just how ugly? Have a look at the average price-to-earnings ratio of the entire S&P 500 index over these three periods of market mayhem:
Period
Average S&P 500 P/E Ratio
1977-1982
8.27
1947-1951
7.78
1940-1942
9.01
And while stocks have plummeted over the past year, so have corporate earnings: With Standard & Poor's predicting the S&P 500 will earn $28.51 per share in 2009, the index currently trades at almost 30 times earnings. Compare that with the above table, it's pretty apparent that stocks could fall much, much further than they already have, just by returning to the lows they historically hover around during downturns.
Assuming earnings stay flat, revisiting those historically low levels could easily mean a 50% decline from here. For the Dow Jones Industrial Average, that could easily mean Dow 5,000, or worse. Now, I'm not predicting, warning, or forecasting -- I'm just taking a long look at history.
But what if it did happen? What would happen to individual stocks? Here's what a few popular names would look like trading at P/E ratios of 8:
Company
One-Year Return
Decline From Current Levels With P/E of 8
Costco (Nasdaq: COST)
(36%)
(54%)
Cisco (Nasdaq: CSCO)
(26%)
(46%)
American Express (NYSE: AXP)
(50%)
(23%)
Google (Nasdaq: GOOG)
(31%)
(72%)
Procter & Gamble (NYSE: PG)
(26%)
(30%)
Baidu (Nasdaq: BIDU)
(39%)
(84%)
Johnson & Johnson (NYSE: JNJ)
(25%)
(28%)
Look scary? It is. And it could easily happen.
But here's the silver lining: Every one of those stocks -- heck, the overwhelming majority of stocks -- are worth much more than a pitiful 8 times earnings. The only thing that pushes the average stock to such embarrassing levels is an overdose of panic, rather than a good reading on what the company might actually be worth.
Be brave
As difficult as it is right now, following the "this too will pass" philosophy really does work. No matter how bad it gets, things will eventually recover. Those brave enough to dive in when no one else dares to touch stocks are the ones who end up scoring the multibagger returns.
Need proof? Think about the best times you could have bought stocks in the past: after the economy recovered from oil shocks in the '70s, after the magnificent market crash of 1987, after global financial markets seized up in 1998, and after the 9/11 attacks that shook markets to the core. As plainly obvious as it is in hindsight, the best buying opportunities come when investors are scared out of their wits and threaten to give up on markets altogether.
And that's exactly where we are today.
Pick what side you'd like to be on
The next few years are likely to be quite a ride. On the other hand, the history of the market shows that gloomy, volatile periods also provide once-in-a-lifetime opportunities that can earn ridiculous returns as rationality gets back on track.
This article was originally published on Oct. 18, 2008. It has been updated.
Fool contributor Morgan Housel owns shares of Procter & Gamble. Baidu and Google are Motley Fool Rule Breakers recommendations. Costco is a Motley Fool Stock Advisor pick. American Express and Costco are Motley Fool Inside Value picks. Johnson & Johnson and Procter & Gamble are Motley Fool Income Investor recommendations. The Fool owns shares of Procter & Gamble, American Express, and Costco. The Motley Fool is investors writing for investors.
http://www.fool.com/investing/value/2009/04/30/how-low-can-stocks-go.aspx
By Morgan Housel April 30, 2009 Comments (0)
Sure, the rally over the past few weeks has been a fun ride, but how quickly we forget: Between Feb. 9 and March 9, the Dow Jones Industrial Average dropped over 1,700 points. Repeat another of those plunges, and the "Dow's going to zero" camp might start gaining attention again.
Of course, we're not going to zero. No matter how ugly the markets get, the ferocity of what we've been through over the past few months can't continue for long.
But here's the bad news: That zero is out of the question doesn't mean stocks won't plummet from here. In fact, they could fall much, much further.
And history agrees.
What goes up ... The history of long-term market downturns is hideous. When times are bad, markets don't just get drunk with fear -- they start downing vodka shots of fear. When panic sets in, nobody wants to own stocks at any price. Investors' palms begin to sweat every time they watch CNBC. They bury their heads in the hope that the pain will go away. They throw in the towel and sell stocks indiscriminately. In short, things get really, really ugly.
Just how ugly? Have a look at the average price-to-earnings ratio of the entire S&P 500 index over these three periods of market mayhem:
Period
Average S&P 500 P/E Ratio
1977-1982
8.27
1947-1951
7.78
1940-1942
9.01
And while stocks have plummeted over the past year, so have corporate earnings: With Standard & Poor's predicting the S&P 500 will earn $28.51 per share in 2009, the index currently trades at almost 30 times earnings. Compare that with the above table, it's pretty apparent that stocks could fall much, much further than they already have, just by returning to the lows they historically hover around during downturns.
Assuming earnings stay flat, revisiting those historically low levels could easily mean a 50% decline from here. For the Dow Jones Industrial Average, that could easily mean Dow 5,000, or worse. Now, I'm not predicting, warning, or forecasting -- I'm just taking a long look at history.
But what if it did happen? What would happen to individual stocks? Here's what a few popular names would look like trading at P/E ratios of 8:
Company
One-Year Return
Decline From Current Levels With P/E of 8
Costco (Nasdaq: COST)
(36%)
(54%)
Cisco (Nasdaq: CSCO)
(26%)
(46%)
American Express (NYSE: AXP)
(50%)
(23%)
Google (Nasdaq: GOOG)
(31%)
(72%)
Procter & Gamble (NYSE: PG)
(26%)
(30%)
Baidu (Nasdaq: BIDU)
(39%)
(84%)
Johnson & Johnson (NYSE: JNJ)
(25%)
(28%)
Look scary? It is. And it could easily happen.
But here's the silver lining: Every one of those stocks -- heck, the overwhelming majority of stocks -- are worth much more than a pitiful 8 times earnings. The only thing that pushes the average stock to such embarrassing levels is an overdose of panic, rather than a good reading on what the company might actually be worth.
Be brave
As difficult as it is right now, following the "this too will pass" philosophy really does work. No matter how bad it gets, things will eventually recover. Those brave enough to dive in when no one else dares to touch stocks are the ones who end up scoring the multibagger returns.
Need proof? Think about the best times you could have bought stocks in the past: after the economy recovered from oil shocks in the '70s, after the magnificent market crash of 1987, after global financial markets seized up in 1998, and after the 9/11 attacks that shook markets to the core. As plainly obvious as it is in hindsight, the best buying opportunities come when investors are scared out of their wits and threaten to give up on markets altogether.
And that's exactly where we are today.
Pick what side you'd like to be on
The next few years are likely to be quite a ride. On the other hand, the history of the market shows that gloomy, volatile periods also provide once-in-a-lifetime opportunities that can earn ridiculous returns as rationality gets back on track.
This article was originally published on Oct. 18, 2008. It has been updated.
Fool contributor Morgan Housel owns shares of Procter & Gamble. Baidu and Google are Motley Fool Rule Breakers recommendations. Costco is a Motley Fool Stock Advisor pick. American Express and Costco are Motley Fool Inside Value picks. Johnson & Johnson and Procter & Gamble are Motley Fool Income Investor recommendations. The Fool owns shares of Procter & Gamble, American Express, and Costco. The Motley Fool is investors writing for investors.
http://www.fool.com/investing/value/2009/04/30/how-low-can-stocks-go.aspx
Welcome to the Oracle of Omaha’s “Long, Deep Recession”
Warren Buffett Investing: Welcome to the Oracle of Omaha’s “Long, Deep Recession”
by Alexander Green, Chairman, Investment U
Investment Director, The Oxford Club
Friday, May 30, 2008: Issue #801
Warren Buffett opined that the United States is already in recession, even if it’s not in the sense that economists would define it: two consecutive quarters of negative growth, in an interview with the German magazine Der Spiegel on Saturday. Furthermore, Buffett argues the recession “will be deep and last longer than many think.”
Sounds pretty ominous. After all, Buffett is now the world’s richest man - he recently surpassed Microsoft chairman Bill Gates - and is easily one of the planet’s most successful investors. If Buffett himself thinks the economic outlook is lousy, the average punter thinks, maybe I should get out of the market.
If you have money in the stock market that you will need in the next few months ahead, you should. (Not because the market is about to go down - although it may - but because money earmarked for short-term expenditures shouldn’t be in the market in the first place.) (Comment: The largest market losses, as you would expect, are in the beginning of any recession.)
However, if you own stocks to meet your long-term financial objectives, stay put. And look for fresh opportunities, too. After all, that’s what Buffett himself is doing… (Comment: The largest gains come from staying invested through the entire period. The numbers show market timing would have given you an 8% gain at best and a -3% loss at worst. )
Warren Buffett’s Global Investment Opportunities
One of the reasons Warren Buffett was in Germany is that he shares our view that you should search worldwide for the best investment opportunities. Right now Buffett would like to put Berkshire Hathaway’s cash war chest to work in a few well-managed German family-owned businesses.
But why would Buffett buy companies if the economic downturn is likely to be deeper and last longer than generally expected? (Ooops. Same comment: The largest market losses, as you would expect, are in the beginning of any recession. The largest gains come from staying invested through the entire period. The numbers show market timing would have given you an 8% gain at best and a -3% loss at worst. )
Because he knows that nobody can accurately or consistently predict something as big, diverse, and dynamic as the global economy. (Work like this is better left to the experts: you know, palm readers and Ouija boarders.)
Warren Buffett knows that even if you somehow knew what was going to happen in the economy, you still wouldn’t necessarily know what was going to happen in the stock market. Stocks fall during good times. They often rally during bad times. Money manager Ken Fisher doesn’t call the stock market “The Great Humiliator” for nothing. (Same comment again: The largest market losses, as you would expect, are in the beginning of any recession. The largest gains come from staying invested through the entire period. The numbers show market timing would have given you an 8% gain at best and a -3% loss at worst. )
Buffett knows that the stock market is a discounting mechanism. It takes the news and reflects it into stock prices immediately. Who in their right mind would sell their stocks today because he realizes the economy is slowing down. We’ve known that for months already. (And again: The largest market losses, as you would expect, are in the beginning of any recession. The largest gains come from staying invested through the entire period. The numbers show market timing would have given you an 8% gain at best and a -3% loss at worst. )
And, finally, Buffett knows that nothing beats the long-term returns available in equities. Where else can you put your money to work today? In real estate that is in a death spiral? In bonds that pay less than 5%? In money markets yielding 2%?
Warren Buffett’s Investment Strategy
In the same interview with Der Spiegel, talking about his investment strategy, Warren Buffett said “If the world were falling apart I’d still invest in companies.” In other words, he gets it. There is no superior alternative to common stocks. The long-term returns of every other asset class pale by comparison.
In an interview in the April 28, 2008 issue of Fortune, Buffett said “I think we’ve got fabulous capital markets in this country, and they get screwed up often enough to make them even more fabulous. I mean, you don’t want capital markets that function perfectly if you’re in my business. People continue to do foolish things… and they always will.”
Realize that when other investors sell too cheap or buy too dear, it creates opportunities for those of us on the other side of their trades.
Buffett ends his Fortune interview by saying, “Stocks are a better buy today then they were a year ago. Or three years ago… The American economy is going to do fine. But it won’t do fine every year and every week and every month… The only way an investor can get killed is by high fees or by trying to outsmart the market.” (And again the same comment: The largest market losses, as you would expect, are in the beginning of any recession. The largest gains come from staying invested through the entire period. The numbers show market timing would have given you an 8% gain at best and a -3% loss at worst. )
Amen. They don’t call him the Oracle of Omaha for nothing.
Good investing,
Alex
Alexander Green’s recommendations have beaten the Wilshire 5000 Total Market Index by more than 3 to 1 over the past five years. To get access to a steady stream of the companies he expects to outperform this year, consider joining The Oxford Club, our premium service. You’ll have access to all of Alex’s growth-stock recommendations in a matter of minutes. Learn more.
http://www.investmentu.com/IUEL/2008/May/warren-buffett-investing.html
Wednesday 6 May 2009
Rules for Investing in the Next Bull Market
Rules for Investing in the Next Bull Market
Sponsored by by Brett Arends
Wednesday, May 6, 2009
provided by
How to be smarter when the market comes back – and it will.
Is this a new bull market? Nobody really knows for certain. But one will -- presumably -- come along in due course. Will investors make the same mistakes they made last time, or will they be wiser? Here are 12 rules for the next bull market -- whenever it turns up.
1. Go global.
Most investors prefer to stick to their "home" market. It's a mistake. America accounts for only a fifth of the world economy but a third of its share values. No one knows where the best or worst returns will be, so spread your bets across the board. And you already have an oversized bet on the U.S. economy:, because you likely live, work and own a home here.
2. Avoid big moves.
If you buy or sell heavily in one shot you're taking a needless risk. And waiting for the right moment to make your move is futile. You probably won't catch the bottom or the peak anyway. If a market trend has much further to run, then what's the rush? And if it doesn't … what's the rush?
3. Remember the market is just "us."
No wonder shares rose when everyone was buying, and fell when they were selling. That was the reason. And when everyone is trying to predict "the market," they are effectively chasing themselves through a hall of mirrors.
4. Don't get fooled, don't get tense… and don't get fooled by the wrong tense.
Wall Street is riddled with people who mistake the past perfect ("these shares have risen") with the present ("these shares are rising") or the future ("these shares will rise."). Don't get suckered.
5. Pay no attention to TINA.
Sooner or later someone will urge you to buy shares, even at very high prices, because There Is No Alternative. It is a popular hustle at the peak of the market. There are always alternatives -- like holding more cash until valuations are more attractive.
6. Be truly diversified.
That means investing across a spread of different asset classes and strategies. As investors discovered last year, "large cap value" and "mid cap blend" funds don't offer diversification. They're just marketing gimmicks.
7. Treat forecasts with a grain of salt.
Most economists missed the recession, most strategists missed the crash, and most analysts are bullish just before a stock falls. Even the good experts are prone to group think, office politics, career risk - and hall of mirror syndrome (see point 3, above).
8. Never invest in what you don't understand.
Be happy to underperform a bull market. During the last boom, many investors were advised to go all-in on shares to get the biggest long-term gains. But the stock market has infinite risk tolerance and an infinite time horizon. Real people can't compete with market indices, and shouldn't try.
9. Ignore what everyone else is doing.
It's natural to want to "join the crowd" and avoid being "left behind." Leave those instincts in eighth grade. When it comes to investing, do what's right for you and your family.
10. Be patient.
Investment opportunities are like buses. If you missed one, you don't have to chase it. Relax. If history is any guide, others will be along shortly.
11. Don't sit on the sidelines completely until it's too late.
You'll probably end up splurging at the last moment. If you are afraid to invest, do it early, little, and often.
12. And above all: Price matters.
After all, an investment is just a claim check on future cash flows, whether it be a company's profits, a bond's coupons or an annuity's income stream. By definition, shares in a solvent company are twice as good at half the price… and vice versa. It's amazing how many people get suckered into thinking it's the other way around.
I'd like to hear from readers: If you have any suggested rules of your own, let me know.
Write to Brett Arends at brett.arends@wsj.com
Copyrighted, Dow Jones & Company, Inc. All rights reserved.
http://finance.yahoo.com/focus-retirement/article/107035/Rules-for-Investing-in-the-Next-Bull-Market?mod=fidelity-buildingwealth
Sponsored by by Brett Arends
Wednesday, May 6, 2009
provided by
How to be smarter when the market comes back – and it will.
Is this a new bull market? Nobody really knows for certain. But one will -- presumably -- come along in due course. Will investors make the same mistakes they made last time, or will they be wiser? Here are 12 rules for the next bull market -- whenever it turns up.
1. Go global.
Most investors prefer to stick to their "home" market. It's a mistake. America accounts for only a fifth of the world economy but a third of its share values. No one knows where the best or worst returns will be, so spread your bets across the board. And you already have an oversized bet on the U.S. economy:, because you likely live, work and own a home here.
2. Avoid big moves.
If you buy or sell heavily in one shot you're taking a needless risk. And waiting for the right moment to make your move is futile. You probably won't catch the bottom or the peak anyway. If a market trend has much further to run, then what's the rush? And if it doesn't … what's the rush?
3. Remember the market is just "us."
No wonder shares rose when everyone was buying, and fell when they were selling. That was the reason. And when everyone is trying to predict "the market," they are effectively chasing themselves through a hall of mirrors.
4. Don't get fooled, don't get tense… and don't get fooled by the wrong tense.
Wall Street is riddled with people who mistake the past perfect ("these shares have risen") with the present ("these shares are rising") or the future ("these shares will rise."). Don't get suckered.
5. Pay no attention to TINA.
Sooner or later someone will urge you to buy shares, even at very high prices, because There Is No Alternative. It is a popular hustle at the peak of the market. There are always alternatives -- like holding more cash until valuations are more attractive.
6. Be truly diversified.
That means investing across a spread of different asset classes and strategies. As investors discovered last year, "large cap value" and "mid cap blend" funds don't offer diversification. They're just marketing gimmicks.
7. Treat forecasts with a grain of salt.
Most economists missed the recession, most strategists missed the crash, and most analysts are bullish just before a stock falls. Even the good experts are prone to group think, office politics, career risk - and hall of mirror syndrome (see point 3, above).
8. Never invest in what you don't understand.
Be happy to underperform a bull market. During the last boom, many investors were advised to go all-in on shares to get the biggest long-term gains. But the stock market has infinite risk tolerance and an infinite time horizon. Real people can't compete with market indices, and shouldn't try.
9. Ignore what everyone else is doing.
It's natural to want to "join the crowd" and avoid being "left behind." Leave those instincts in eighth grade. When it comes to investing, do what's right for you and your family.
10. Be patient.
Investment opportunities are like buses. If you missed one, you don't have to chase it. Relax. If history is any guide, others will be along shortly.
11. Don't sit on the sidelines completely until it's too late.
You'll probably end up splurging at the last moment. If you are afraid to invest, do it early, little, and often.
12. And above all: Price matters.
After all, an investment is just a claim check on future cash flows, whether it be a company's profits, a bond's coupons or an annuity's income stream. By definition, shares in a solvent company are twice as good at half the price… and vice versa. It's amazing how many people get suckered into thinking it's the other way around.
I'd like to hear from readers: If you have any suggested rules of your own, let me know.
Write to Brett Arends at brett.arends@wsj.com
Copyrighted, Dow Jones & Company, Inc. All rights reserved.
http://finance.yahoo.com/focus-retirement/article/107035/Rules-for-Investing-in-the-Next-Bull-Market?mod=fidelity-buildingwealth
Financial markets are racing well ahead of the real world
Financial markets are racing well ahead of the real world
Positive thinking is a powerful force, even when it doesn’t make much sense. That is one explanation for the mounting exuberance in financial markets.
By Edward Hadas, breakingviews.com
Last Updated: 8:50AM BST 06 May 2009
It’s not exactly 1996, when Alan Greenspan, the then chairman of the US Federal Reserve, warned of “irrational exuberance”. But there is an uncanny similarity in investors' willingness to look on the bright side.
Not all of today’s exuberance is irrational. The narrowing of credit spreads, to levels before the collapse of Lehman Brothers, can be linked to effectively unlimited government support. The reversal of stock market losses in the first few months of 2009 may be a justifiable response to green shoots of economic recovery – even if economists, corporate bosses and politicians are doubtful of the turn.
Related Articles
Gold: 'Inflation will beat deflation and gold will hit $3,000'
Rising reserves of unused oil put strain on storage
Budget 2009: Alistair Darling's speech
Banks set to raise loans to businesses
Crisis has seen power shift and the East emerge from West's shadow
But overall, markets and indicators are diverging. The price of oil has risen from $40 to $53 a barrel since February, but inventories are up and demand is down. US bank shares have risen sharply in spite of leaks that 10 out of 19 of them would fail the government’s not terribly exigent stress tests. Meanwhile, government bond yields are barely moved by deficits that would have been considered tragic a few years ago.
Bulls argue that the markets are thinking ahead: oil demand will turn soon and banks will shortly generate decent earnings to offset their losses. As for the deficits, the government can always shut down the money presses before inflation takes hold.
These may be true, but they do not justify the market euphoria. They are reminiscent of the dubious explanations provided by suspects in murder mysteries. Readers are well advised to ignore them, and look for the love interest. In market mysteries, the answer can be found in the money.
In the 1990s, too much money flowed into markets, thanks in large part to Greenspan’s low official interest rates. Now generous central banks and profligate governments are trying to keep the economy afloat with vast amounts of funding. Investors get first dibs on much of the cash. That kick starts markets. And that can help the economy. But right now, the markets are well ahead of the real world.
For more agenda-setting financial insight, visit www.breakingviews.com
http://www.telegraph.co.uk/finance/breakingviewscom/5278103/Financial-markets-are-racing-well-ahead-of-the-real-world.html
Positive thinking is a powerful force, even when it doesn’t make much sense. That is one explanation for the mounting exuberance in financial markets.
By Edward Hadas, breakingviews.com
Last Updated: 8:50AM BST 06 May 2009
It’s not exactly 1996, when Alan Greenspan, the then chairman of the US Federal Reserve, warned of “irrational exuberance”. But there is an uncanny similarity in investors' willingness to look on the bright side.
Not all of today’s exuberance is irrational. The narrowing of credit spreads, to levels before the collapse of Lehman Brothers, can be linked to effectively unlimited government support. The reversal of stock market losses in the first few months of 2009 may be a justifiable response to green shoots of economic recovery – even if economists, corporate bosses and politicians are doubtful of the turn.
Related Articles
Gold: 'Inflation will beat deflation and gold will hit $3,000'
Rising reserves of unused oil put strain on storage
Budget 2009: Alistair Darling's speech
Banks set to raise loans to businesses
Crisis has seen power shift and the East emerge from West's shadow
But overall, markets and indicators are diverging. The price of oil has risen from $40 to $53 a barrel since February, but inventories are up and demand is down. US bank shares have risen sharply in spite of leaks that 10 out of 19 of them would fail the government’s not terribly exigent stress tests. Meanwhile, government bond yields are barely moved by deficits that would have been considered tragic a few years ago.
Bulls argue that the markets are thinking ahead: oil demand will turn soon and banks will shortly generate decent earnings to offset their losses. As for the deficits, the government can always shut down the money presses before inflation takes hold.
These may be true, but they do not justify the market euphoria. They are reminiscent of the dubious explanations provided by suspects in murder mysteries. Readers are well advised to ignore them, and look for the love interest. In market mysteries, the answer can be found in the money.
In the 1990s, too much money flowed into markets, thanks in large part to Greenspan’s low official interest rates. Now generous central banks and profligate governments are trying to keep the economy afloat with vast amounts of funding. Investors get first dibs on much of the cash. That kick starts markets. And that can help the economy. But right now, the markets are well ahead of the real world.
For more agenda-setting financial insight, visit www.breakingviews.com
http://www.telegraph.co.uk/finance/breakingviewscom/5278103/Financial-markets-are-racing-well-ahead-of-the-real-world.html
The dangers of failing to write your will
The dangers of failing to write your will
Not writing a will, or not updating it, can be disastrous for those left behind.
By Emma Wall
Last Updated: 10:13AM BST 05 May 2009
Actress Natascha McElhone with her late husband Martin Kelly Photo: GETTY
The actress Natascha McElhone feared she might lose her home after her husband died without leaving a will, she has revealed.
Although in the end McElhone managed to keep her property with the help of a lawyer, her fears illustrate the dangers to a family's finances if one of its members dies intestate.
Although in the end McElhone managed to keep her property with the help of a lawyer, her fears illustrate the dangers to a family's finances if one of its members dies intestate.
A survey by Standard Life, the insurer, revealed that only a third of people aged 35 to 44 had a will and, perhaps more surprisingly, one in five people aged 65 or more did not. But only with a valid will can you be certain that your estate will go to the right people.
If you do not draw up a proper will, you risk depriving your spouse or partner of their home, increasing the inheritance tax (IHT) burden and leaving parts of your estate in the wrong hands.
On a brighter note for people who fail to make a will, the rules governing an intestate death have been changed to their benefit. People who die without making a will shall now have more of their estate given to their spouse or civil partner.
Previously, if you did not have children, £200,000 of your estate was awarded to your spouse should you die without a will. This figure has now been increased to £450,000. The remainder of an estate is then halved between your parents and your spouse.
Should the parents be dead, it is divided between siblings and the spouse. If you do have children, £250,000 (previously £125,000) of your estate will be awarded to your spouse, before being divided between your children.
The changes mean that inheritance tax liabilities are reduced because the spouse (who is tax exempt) will inherit more, and so the amount going to non-exempt beneficiaries is reduced.
Experts worry, however, that these changes will create a false sense of security and people will feel they do not need to make a will. People may consider their estate to be covered under the law change, when it is still just as important to draw up a will. Failure to do so can cause acrimony and complications.
Look no further than famous stars such as Barry White, Bob Marley and Jimi Hendrix whose families squabbled for years because they all died intestate.
Paul Bricknell, private client associate for Mace & Jones, warned that the increased limits did not mean that a will was now unnecessary. "There are so many reasons to try and avoid the intestacy rules. Failing to make provision for a partner will almost certainly lead to unnecessary legal costs in trying to rearrange an estate after death," he said.
There are many eventualities that are not covered under intestate law. For example, if you die without making a will the rules of intestacy award none of the estate to stepchildren and live-in partners, regardless of the longevity of the relationship.
Unless you have a joint mortgage, the house that you share with your live-in partner, even if they have lived there for 20 years or more, could potentially be passed onto your children, parents, siblings or the state, leaving your partner homeless.
Leaving no will can also mean extensive legal costs for your beneficiaries; failing to provide for a partner or dependent will mean they will have to hire legal help to contest the state's decisions, with no guaranteed result. Complex cases can require the hire of a genealogy expert, at great cost, to clarify relatives' rights to your estate.
Julie Hutchison of Standard Life said making a will and keeping it up to date could save family and friends a great deal of distress and, potentially, money, so it should be regarded as a priority.
Aside from the legal implications, there may be personal wishes that cannot be fulfilled without a will. You may not want your children to inherit at 18 – the set inheritance age in intestate law – considering it too young, or you may not want parents or siblings to benefit at the detriment to your spouse.
If you draw up a will, you can specify how long funds must be held in trust for children, to any age you deem appropriate. You may also exclude family members who you don't want to benefit from your estate in a will.
Stepchildren or live-in partners can only inherit part of the deceased's estate if specified in a will, as is the case for friends or charities. You may also want to outline personal wishes, such as funeral arrangements or who should inherit particular property or items of worth.
Drawing up a will also prevents assets being claimed by the state at the cost of loved ones. Ms Hutchison urged people to make sure they had an up to date will. "A will should be part of bread-and-butter financial housekeeping," she said.
"Once you've bought your first property you should draw one up, regardless of your age."
Even if you have made a will, you need to ensure it is updated. Family make-up can change after the birth of a child or the breakdown of a marriage, but if a will is not updated to include or remove beneficiaries, they will have little or no claim to the estate should you die. The late Heath Ledger's daughter Matilda was left out of a will completed before her birth.
Neither, in the event that both you and your spouse dies, will you have any say in who becomes your children's guardian. If your child or children are under the age of 18 it is essential you have a will for this reason. This also applies to a family member or dependant with special needs.
Nearly half of all marriages end in divorce, meaning that not updating your will can have devastating effects for your spouse and any new children or stepchildren. It is also vitally important that family members know where your will is kept and that a duplicate is stored with a solicitor or financial adviser.
Mr Bricknell cautioned: "Many people's estates are administered as if they are intestate, even if they have a will, simply because no one knows where the will is kept."
If you do not draw up a proper will, you risk depriving your spouse or partner of their home, increasing the inheritance tax (IHT) burden and leaving parts of your estate in the wrong hands.
On a brighter note for people who fail to make a will, the rules governing an intestate death have been changed to their benefit. People who die without making a will shall now have more of their estate given to their spouse or civil partner.
Previously, if you did not have children, £200,000 of your estate was awarded to your spouse should you die without a will. This figure has now been increased to £450,000. The remainder of an estate is then halved between your parents and your spouse.
Should the parents be dead, it is divided between siblings and the spouse. If you do have children, £250,000 (previously £125,000) of your estate will be awarded to your spouse, before being divided between your children.
The changes mean that inheritance tax liabilities are reduced because the spouse (who is tax exempt) will inherit more, and so the amount going to non-exempt beneficiaries is reduced.
Experts worry, however, that these changes will create a false sense of security and people will feel they do not need to make a will. People may consider their estate to be covered under the law change, when it is still just as important to draw up a will. Failure to do so can cause acrimony and complications.
Look no further than famous stars such as Barry White, Bob Marley and Jimi Hendrix whose families squabbled for years because they all died intestate.
Paul Bricknell, private client associate for Mace & Jones, warned that the increased limits did not mean that a will was now unnecessary. "There are so many reasons to try and avoid the intestacy rules. Failing to make provision for a partner will almost certainly lead to unnecessary legal costs in trying to rearrange an estate after death," he said.
There are many eventualities that are not covered under intestate law. For example, if you die without making a will the rules of intestacy award none of the estate to stepchildren and live-in partners, regardless of the longevity of the relationship.
Unless you have a joint mortgage, the house that you share with your live-in partner, even if they have lived there for 20 years or more, could potentially be passed onto your children, parents, siblings or the state, leaving your partner homeless.
Leaving no will can also mean extensive legal costs for your beneficiaries; failing to provide for a partner or dependent will mean they will have to hire legal help to contest the state's decisions, with no guaranteed result. Complex cases can require the hire of a genealogy expert, at great cost, to clarify relatives' rights to your estate.
Julie Hutchison of Standard Life said making a will and keeping it up to date could save family and friends a great deal of distress and, potentially, money, so it should be regarded as a priority.
Aside from the legal implications, there may be personal wishes that cannot be fulfilled without a will. You may not want your children to inherit at 18 – the set inheritance age in intestate law – considering it too young, or you may not want parents or siblings to benefit at the detriment to your spouse.
If you draw up a will, you can specify how long funds must be held in trust for children, to any age you deem appropriate. You may also exclude family members who you don't want to benefit from your estate in a will.
Stepchildren or live-in partners can only inherit part of the deceased's estate if specified in a will, as is the case for friends or charities. You may also want to outline personal wishes, such as funeral arrangements or who should inherit particular property or items of worth.
Drawing up a will also prevents assets being claimed by the state at the cost of loved ones. Ms Hutchison urged people to make sure they had an up to date will. "A will should be part of bread-and-butter financial housekeeping," she said.
"Once you've bought your first property you should draw one up, regardless of your age."
Even if you have made a will, you need to ensure it is updated. Family make-up can change after the birth of a child or the breakdown of a marriage, but if a will is not updated to include or remove beneficiaries, they will have little or no claim to the estate should you die. The late Heath Ledger's daughter Matilda was left out of a will completed before her birth.
Neither, in the event that both you and your spouse dies, will you have any say in who becomes your children's guardian. If your child or children are under the age of 18 it is essential you have a will for this reason. This also applies to a family member or dependant with special needs.
Nearly half of all marriages end in divorce, meaning that not updating your will can have devastating effects for your spouse and any new children or stepchildren. It is also vitally important that family members know where your will is kept and that a duplicate is stored with a solicitor or financial adviser.
Mr Bricknell cautioned: "Many people's estates are administered as if they are intestate, even if they have a will, simply because no one knows where the will is kept."
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When investing in stocks control your greed and fear
Wednesday May 6, 2009
When investing in stocks control your greed and fear
Personal Investing - A column by Ooi Kok Hwa
We need to know who we are in order to do well in stock market investing
THE recent strong market rally caught many investors by surprise again.
Most investors, including some analysts, predicted earlier that it was just a bear market rally. They have been hoping the market will turn down again. Unfortunately, it has been moving up strong without looking back.
For investors who have not invested during the recent low in March 2009, they are getting very worried as they are not benefitting from the recent rally. They may even wonder whether they should jump in now in order not to miss the boat.
Another group of investors, who have managed to catch some stocks at cheap prices during the previous market low, are also facing the dilemma of whether to lock in their gains now or continue to hold on to their gains. Some even regretted selling their stocks too early last month.
We all know that it is very difficult, in fact impossible, to predict stock market movement. Most investment gurus will refuse to time the market.
Howard Kahn and Cary Cooper published a book titled “Stress in the Dealing Room” in 1993. According to their surveys done on 225 dealers, 73.8% of them suffered from fear of “misreading the market.” Most dealers have the same problem of acquiring and handling information.
We believe that in order to do well in stock investing, we need to know ourselves, especially in controlling our emotion on greed and fear.
Due to information overloading, our emotion is highly influenced by the news that we read. Each time we feel that the market is getting bullish and time to buy stock, the overall market will collapse the moment we enter.
On the other hand, the moment we fear that it will drop further and we have decided to cut losses, we will notice the market will recover after that. Most of the time, the prices of stocks that we sold were at the lowest of the recent fall.
In order to control our greed and fear, we need to ask ourselves whether the market has discounted the news that we have received.
For example, many analysts have been bullish lately, having the opinion that the worst may be over for the market based on the recent economic indicators which showed that the overall economy may have stopped contracting or is on its way to recovery.
Nevertheless, the recent strong market rally would have discounted this bullish news. In fact, we need to ask ourselves whether the current stock prices can be supported by the fundamentals for certain listed companies.
In our experience, in most cases, the moment we feel like buying stocks is the best time to sell them while the moment that we feel like selling them is in fact the best time to buy. We can apply this contrarian theory quite successfully in most periods.
Sometimes, if we are taking in too much contradicting information and, as a result, get confused over the market direction, we feel that the best strategy is to stay away from the market until we have a better and clearer picture of the overall market or the economic situation.
We should not be influenced by other opinions.
There are times that we need to follow our heart. Sometimes, our hearts try to warn us from taking hasty investment decisions. However, we refuse to follow our intuition but instead, choosing to get influenced by others or the information that we read and ending up making mistakes.
In conclusion, we need to maintain our concentration.
We should not be led by the market sentiments regardless whether it is on the way up or crashing down fast. We need to go back to the fundamental of economic situation and the companies’ performance and future prospects.
One way to minimise the feeling of regret is to stagger our purchase and selling. We will only know the peak when the market starts turning downwards and vice versa. Therefore, by staggering, we will have an averaging effect rather than taking a one-time hit, especially if it is at the wrong timing.
Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting
http://biz.thestar.com.my/news/story.asp?file=/2009/5/6/business/3838362&sec=business
When investing in stocks control your greed and fear
Personal Investing - A column by Ooi Kok Hwa
We need to know who we are in order to do well in stock market investing
THE recent strong market rally caught many investors by surprise again.
Most investors, including some analysts, predicted earlier that it was just a bear market rally. They have been hoping the market will turn down again. Unfortunately, it has been moving up strong without looking back.
For investors who have not invested during the recent low in March 2009, they are getting very worried as they are not benefitting from the recent rally. They may even wonder whether they should jump in now in order not to miss the boat.
Another group of investors, who have managed to catch some stocks at cheap prices during the previous market low, are also facing the dilemma of whether to lock in their gains now or continue to hold on to their gains. Some even regretted selling their stocks too early last month.
We all know that it is very difficult, in fact impossible, to predict stock market movement. Most investment gurus will refuse to time the market.
Howard Kahn and Cary Cooper published a book titled “Stress in the Dealing Room” in 1993. According to their surveys done on 225 dealers, 73.8% of them suffered from fear of “misreading the market.” Most dealers have the same problem of acquiring and handling information.
We believe that in order to do well in stock investing, we need to know ourselves, especially in controlling our emotion on greed and fear.
Due to information overloading, our emotion is highly influenced by the news that we read. Each time we feel that the market is getting bullish and time to buy stock, the overall market will collapse the moment we enter.
On the other hand, the moment we fear that it will drop further and we have decided to cut losses, we will notice the market will recover after that. Most of the time, the prices of stocks that we sold were at the lowest of the recent fall.
In order to control our greed and fear, we need to ask ourselves whether the market has discounted the news that we have received.
For example, many analysts have been bullish lately, having the opinion that the worst may be over for the market based on the recent economic indicators which showed that the overall economy may have stopped contracting or is on its way to recovery.
Nevertheless, the recent strong market rally would have discounted this bullish news. In fact, we need to ask ourselves whether the current stock prices can be supported by the fundamentals for certain listed companies.
In our experience, in most cases, the moment we feel like buying stocks is the best time to sell them while the moment that we feel like selling them is in fact the best time to buy. We can apply this contrarian theory quite successfully in most periods.
Sometimes, if we are taking in too much contradicting information and, as a result, get confused over the market direction, we feel that the best strategy is to stay away from the market until we have a better and clearer picture of the overall market or the economic situation.
We should not be influenced by other opinions.
There are times that we need to follow our heart. Sometimes, our hearts try to warn us from taking hasty investment decisions. However, we refuse to follow our intuition but instead, choosing to get influenced by others or the information that we read and ending up making mistakes.
In conclusion, we need to maintain our concentration.
We should not be led by the market sentiments regardless whether it is on the way up or crashing down fast. We need to go back to the fundamental of economic situation and the companies’ performance and future prospects.
One way to minimise the feeling of regret is to stagger our purchase and selling. We will only know the peak when the market starts turning downwards and vice versa. Therefore, by staggering, we will have an averaging effect rather than taking a one-time hit, especially if it is at the wrong timing.
Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting
http://biz.thestar.com.my/news/story.asp?file=/2009/5/6/business/3838362&sec=business
Economist cautions on equities market
Economist cautions on equities market
Wed May 6, 2009 6:47am
SINGAPORE (Reuters) - Rallying global stock markets will likely reverse trend later this year when weak earnings and economic news surprise investors, Nouriel Roubini, a well-known economist who predicted the credit crisis, said on Wednesday.
"This is still a bear market rally," Roubini told a financial seminar. Roubini is chairman of independent economic research firm RGE Monitor and professor of economics at the Stern School of Business at New York University.
He gave three reasons why investors ought to be cautious about the rally that has seen the Dow Jones Industrial Average .DJI rise 27 percent in two months and taken Asian stocks 42 percent higher over the same period.
Roubini expects macroeconomic news to be worse than expected, lower than expected earnings, and more bad news from the banking sector or an emerging market crisis.
"We will discover soon enough there are a lot of financial shocks.
"While financial markets are mending, we are going to see negative surprises in the next few quarters," he said.
"Markets are getting ahead of themselves."
(Reporting by Vidya Ranganathan and Kevin Lim; Editing by Tomasz Janowski)
http://uk.reuters.com/article/businessNews/idUKTRE54514W20090506?feedType=nl&feedName=ukdailyinvestor
Wed May 6, 2009 6:47am
SINGAPORE (Reuters) - Rallying global stock markets will likely reverse trend later this year when weak earnings and economic news surprise investors, Nouriel Roubini, a well-known economist who predicted the credit crisis, said on Wednesday.
"This is still a bear market rally," Roubini told a financial seminar. Roubini is chairman of independent economic research firm RGE Monitor and professor of economics at the Stern School of Business at New York University.
He gave three reasons why investors ought to be cautious about the rally that has seen the Dow Jones Industrial Average .DJI rise 27 percent in two months and taken Asian stocks 42 percent higher over the same period.
Roubini expects macroeconomic news to be worse than expected, lower than expected earnings, and more bad news from the banking sector or an emerging market crisis.
"We will discover soon enough there are a lot of financial shocks.
"While financial markets are mending, we are going to see negative surprises in the next few quarters," he said.
"Markets are getting ahead of themselves."
(Reporting by Vidya Ranganathan and Kevin Lim; Editing by Tomasz Janowski)
http://uk.reuters.com/article/businessNews/idUKTRE54514W20090506?feedType=nl&feedName=ukdailyinvestor
Now It's Time for Short-Sellers to Panic
Now It's Time for Short-Sellers to Panic
By Dan Caplinger
May 5, 2009 Comments (0)
For more than a year, investors who own stocks have heard over and over again that they shouldn't panic. Now, their patience has finally earned a reward, and it's time for another group of market participants to have their turn at dealing with a challenging market.
Short-sellers have turned bets against the market into huge profits ever since the market peaked in late 2007. With so many stocks losing huge portions of their value, finding a profitable short-selling candidate has been like shooting fish in a barrel.
But over the past two months, the market's extraordinary rebound has put short-sellers in the squeeze of a lifetime. As you can see, some of short-sellers' most popular targets have performed extremely well since the market's lows in early March:
Stock
% of Shares Sold Short
Return Since March 9
1-Year Return
Barnes & Noble (NYSE: BKS)
34%
67.7%
(11.4%)
MGM Mirage (NYSE: MGM)
30.9%
305.2%
(80.6%)
Goodrich Petroleum (NYSE: GDP)
24.5%
75.8%
(22%)
Citigroup (NYSE: C)
23.8%
204.8%
(87.2%)
Hovnanian (NYSE: HOV)
23.5%
400%
(74.7%)
Green Mountain Coffee Roasters (Nasdaq: GMCR)
44.4%
97.1%
96.7%
Bankrate (Nasdaq: RATE)
36.1%
47.2%
(46.5%)
Sources: Yahoo! Finance and WSJ.com. Short interest as of April 15.
Those rebounds have been extremely painful for anyone who sold those stocks short. No matter how bad things get, investors who buy stocks can never lose more than what they paid for their shares. But as these examples show, short-sellers can do much worse. If you sold Hovnanian short in early March, for instance, you've now lost four times as much money as you initially received when you sold your borrowed shares.
Why do they do it? In some ways, short-sellers have much in common with any other investor. They do their research and try to find promising candidates for their investing strategy. It's just that the "promising" stocks that shorts look for are those that are least likely to do well -- companies whose businesses are failing or whose prospects have gotten so pumped up that there's no way the reality can ever meet shareholders' expectations.
Under ordinary market conditions, you'll usually find a few companies that fit the bill. In the past, stocks like Krispy Kreme and Crocs acted almost perfectly for short-sellers; hopeful investors bid up shares to the stratosphere, and then all it took was having the patience and financial resources to wait for the company's fundamentals to fall apart.
An embarrassment of riches
Now, though, short-sellers are in the same position that most investors enjoy at the top of a bull market. Shorts have had many chances to make huge amounts of money in the past year, but now, many of their best candidates have already fallen substantially. With many stocks having fallen 80% or more, the risk for short-sellers who continue to bet against the market has risen exponentially.
Perhaps the most dangerous part of short-selling is that if you keep upping your bet on a particular stock, you can end up being right about the stock dropping but still lose money. For instance, say you shorted 100 shares of General Motors last year at $22 per share. If you closed out the short now, you would realize a little over $2,000 in profit.
But now say you upped your short position to 1,000 shares. If GM stock rose to just $4 -- still an 80% loss from last year's levels -- you would have lost all your profits and then some.
Yet that's the dilemma short-sellers face now. Do you increase your exposure on existing positions, hoping shares will fall back but taking on a lot more risk -- or do you give up and cover your shorts in the face of the current rally?
Be panic-proof
There's no one-size-fits-all answer to that question. But by the time the situation comes up, you should already know what you're going to do. If you're going to sell stocks short successfully, you need several things:
An exit strategy.
Even more than with owning shares, you can't afford to panic when the market moves against you. Know your risk tolerance, and know in advance when you'll get out to limit your losses.
Discipline.
It's tough to watch a company's stock rise when you know its business stinks. Irrational markets can last a long time, though, so being patient is essential.
Hedges.
Sometimes, a safer way to short is to buy shares of another stock in the same industry. That way, you can make money overall even if your short does badly, as long as the stock you own does (relatively) better.
Short-selling is not for the meek, so don't do it if you're not comfortable with the consequences. And right now, with the market already having declined so much, short-sellers could find themselves even worse off than investors who've owned shares throughout the bear market.
Fool contributor Dan Caplinger hasn't sold anything short for a long while, though he does have a bunch of thumbs-down positions in CAPS. He doesn't own shares of the companies mentioned.
http://www.fool.com/investing/high-growth/2009/05/05/now-its-time-for-short-sellers-to-panic.aspx
****Investing Lessons From Benjamin Graham
Investing Lessons From Benjamin Graham
By Motley Fool Staff May 5, 2009 Comments (1)
A dictionary will tell you that investing involves putting money into assets with the intent of making a profit. But that's not the whole story. Speculating, for example, involves the very same process.
The legendary Dean of Wall Street, Benjamin Graham, differentiates the two approaches in his seminal work, Security Analysis, and in the process offers one of the best definitions of investing. Ever.
Graham says an investment is something that "upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative." [Emphasis added.]
Given that definition, a lot of us who think we are investing may come to discover that we're engaging in what I would call intelligent speculation.
So let's briefly review Graham's three criteria for an investment.
1. Thorough analysis : Do your homework
Warren Buffett used to write down why he was making an investment. If what he wrote wasn't crystal clear, he either did more research, or he'd decide that he simply could not understand the business well enough to make an investment.
Imagine you're buying a house. You'll make sure it's in a nice, safe neighborhood with a good school system before you put down your money. Buffett puts that kind of prudent diligence into his stock research, and so should you.
Really good investments are really hard to find. So when you find one that looks interesting, do your homework. Study the industry. Examine the competition. Find out everything that could possibly go wrong through boom and bust cycles.
2. Safety of principal : Never lose money
Buffett says he has two goals when making an investment.
Rule No. 1: Never lose money.
Rule No. 2: Never forget Rule No. 1.
There are three types of stocks:
One way to keep attuned to that goal is to focus on value over price.
Apple (Nasdaq: AAPL), for example, is a great business that has done all the right things to ensure its long-term success. Yet when it traded early last year at more than $200 a share, Apple had an extremely rich earnings multiple. As the ensuing year proved, even as Apple continued to exceed analyst expectations on earnings, you didn't have much safety of principal at $200.
But after the stock suddenly shot down to below $100, if you believed the economic characteristics of the business remained intact, then your investment thesis was entirely different.
The one variable is the price. As Buffett once said, "Price is what you pay. Value is what you get."
3. Satisfactory return : Risk versus reward
Any time you commit capital to one business, you are forgoing the opportunity to commit that capital to any other business. But that's OK, because if you are rational, the investment you choose will be better than all other alternatives.
So what should you be looking for? Well, you can always invest in the market through index funds and earn, on average, about 10% a year without exerting any effort.
Whatever you do, you should at least expect a higher rate of return than 30-year U.S. Treasuries, commonly referred to as the risk-free rate, which currently stands at around 4%.
A reasonable goal is to make investments that you think can exceed the market rate of return by 3 percentage points over the long run.
John Bogle once stated that more than 85% of active money managers fail to beat the stock market by 3 percentage points, so making investments that can yield you 13%-15% a year is a great return, given your alternatives.
Meeting the Graham threshold
So how do you find good prospects for stocks Graham might approve of? Using Motley Fool CAPS, the Fool's free online investing community, you can run a simple screen to find some reasonably valued stocks that have earned the attention of Foolish investors.
Stock
Current P/E
Estimated Future Earnings Growth
Accenture (NYSE: ACN)
10.9
13.3%
Cameron (NYSE: CAM)
10.3
12.0%
Enbridge (NYSE: ENB)
10.6
11.2%
GameStop (NYSE: GME)
12.2
17.0%
Nokia (NYSE: NOK)
12.7
13.8%
Raytheon (NYSE: RTN)
11.5
11.7%
Source: Yahoo! Finance, Motley Fool CAPS. P/E = price-to-earnings ratio.
Of course, screen results alone aren't enough to conclude that these are truly Graham-quality stocks. Rather, these give you a place to start your own research.
For more on value investing:
This Rally Is Ridiculous
The Best Opportunity This Decade
How Low Can Stocks Go?
This article, written by Sham Gad, was originally published on June 12, 2007. It has been updated by Dan Caplinger, who doesn't own shares of the companies mentioned. Apple and GameStop are Motley Fool Stock Advisor selections.
By Motley Fool Staff May 5, 2009 Comments (1)
A dictionary will tell you that investing involves putting money into assets with the intent of making a profit. But that's not the whole story. Speculating, for example, involves the very same process.
The legendary Dean of Wall Street, Benjamin Graham, differentiates the two approaches in his seminal work, Security Analysis, and in the process offers one of the best definitions of investing. Ever.
Graham says an investment is something that "upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative." [Emphasis added.]
Given that definition, a lot of us who think we are investing may come to discover that we're engaging in what I would call intelligent speculation.
So let's briefly review Graham's three criteria for an investment.
1. Thorough analysis : Do your homework
Warren Buffett used to write down why he was making an investment. If what he wrote wasn't crystal clear, he either did more research, or he'd decide that he simply could not understand the business well enough to make an investment.
Imagine you're buying a house. You'll make sure it's in a nice, safe neighborhood with a good school system before you put down your money. Buffett puts that kind of prudent diligence into his stock research, and so should you.
Really good investments are really hard to find. So when you find one that looks interesting, do your homework. Study the industry. Examine the competition. Find out everything that could possibly go wrong through boom and bust cycles.
2. Safety of principal : Never lose money
Buffett says he has two goals when making an investment.
Rule No. 1: Never lose money.
Rule No. 2: Never forget Rule No. 1.
There are three types of stocks:
- the overvalued type,
- the fairly valued type, and
- the undervalued type.
One way to keep attuned to that goal is to focus on value over price.
Apple (Nasdaq: AAPL), for example, is a great business that has done all the right things to ensure its long-term success. Yet when it traded early last year at more than $200 a share, Apple had an extremely rich earnings multiple. As the ensuing year proved, even as Apple continued to exceed analyst expectations on earnings, you didn't have much safety of principal at $200.
But after the stock suddenly shot down to below $100, if you believed the economic characteristics of the business remained intact, then your investment thesis was entirely different.
The one variable is the price. As Buffett once said, "Price is what you pay. Value is what you get."
3. Satisfactory return : Risk versus reward
Any time you commit capital to one business, you are forgoing the opportunity to commit that capital to any other business. But that's OK, because if you are rational, the investment you choose will be better than all other alternatives.
So what should you be looking for? Well, you can always invest in the market through index funds and earn, on average, about 10% a year without exerting any effort.
Whatever you do, you should at least expect a higher rate of return than 30-year U.S. Treasuries, commonly referred to as the risk-free rate, which currently stands at around 4%.
A reasonable goal is to make investments that you think can exceed the market rate of return by 3 percentage points over the long run.
John Bogle once stated that more than 85% of active money managers fail to beat the stock market by 3 percentage points, so making investments that can yield you 13%-15% a year is a great return, given your alternatives.
Meeting the Graham threshold
So how do you find good prospects for stocks Graham might approve of? Using Motley Fool CAPS, the Fool's free online investing community, you can run a simple screen to find some reasonably valued stocks that have earned the attention of Foolish investors.
Stock
Current P/E
Estimated Future Earnings Growth
Accenture (NYSE: ACN)
10.9
13.3%
Cameron (NYSE: CAM)
10.3
12.0%
Enbridge (NYSE: ENB)
10.6
11.2%
GameStop (NYSE: GME)
12.2
17.0%
Nokia (NYSE: NOK)
12.7
13.8%
Raytheon (NYSE: RTN)
11.5
11.7%
Source: Yahoo! Finance, Motley Fool CAPS. P/E = price-to-earnings ratio.
Of course, screen results alone aren't enough to conclude that these are truly Graham-quality stocks. Rather, these give you a place to start your own research.
For more on value investing:
This Rally Is Ridiculous
The Best Opportunity This Decade
How Low Can Stocks Go?
This article, written by Sham Gad, was originally published on June 12, 2007. It has been updated by Dan Caplinger, who doesn't own shares of the companies mentioned. Apple and GameStop are Motley Fool Stock Advisor selections.
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