Be prepared for Declining Markets

Certain experiences shape the investor and his/her investing philosophies, and nothing better can happen to an investor than to buy a stock that declines.

Your measure as an investor is how your philosophies hold up during turbulent times.

Investing as opposed to Gambling

Some aspects of investing can be very similar to gambling.

• Not knowing what you are doing.
• Not understanding what you own.
• Trading in and out of the market.
• Following the advice of interested parties.
• Being in a hurry to get rich.
• Relying on luck rather than skill.

Investing and wealth building is different.

• It is both an art and a science and can be emulated.

True measure of a Successful Investor

The true measure of a successful investor is not a comparison of performance against the NASDAQ or the Dow Jones Industrial Average (DJIA) or even the S&P Index, but rather how well a portfolio performs during down markets.

• During the period when the market was losing money, a successful value investor was adding the greatest value to his/her portfolio.  
• Conversely, when the overall market was achieving high growth, a successful value investor was not able to add value.

When you invest in companies with earnings that are growing over time and which are not as vulnerable to competition, you soon dramatically build up a snowball of earnings.

• Through buying companies with earnings, the successful investor can buy more companies with those earnings.
• The type of industry doesn't matter; the quality of those earnings do.
• This capital structure has created an unlimited source of cash and a brilliant earnings business model.

Buying earnings of companies at attractive prices with outstanding management and with remarkable competitive advantages will ensure you will be a successful investor for the long run.

The Case for Dividends

Dividends and dividend growth provide a solid basis for a stock's intrinsic value. 

In the end, a stock will only be worth the value of the dividends it pays.

Numerous academic studies have established the importance of dividends and dividend reinvestment in investor returns.

In some studies, dividends accounted for more than half of long-term total returns.



Dividends are making a comeback.

The yield on the S&P 500 is still below historic norms at just under 2%, but real dividend growth (adjusted for inflation) is running at its best pace in decades.

Dividend is a simple and versatile analytic tool.

Less than half of U.S. stocks pay a dividend.



Stay with consistent growth, mature, moat-protected stocks.

It is not particularly well suited to deeply cyclical firms, whose earnings power and even dividend rates will vary widely from year to year.

It is also not suited for emerging-growth stories.

But for the ranks of relatively consistent, mature, moat-protected stocks - of which there are hundreds, if not thousands, to pick from - we can use the dividend as a critical selection too.



The advantages conferred by dividends

Compared with retained earnings or buybacks, a solid dividend:

• establishes a firm intrinsic value for the stock, 
• helps reduce the stock's volatility, and 
• acts as a check on management's capital-allocation practices.

You can use the dividend to identify high-quality stocks with good total return prospects.

It is always preferable to invest in compounders and growth companies than just any bargains or cheap non-quality stocks..

Given a choice:

Choose compounders and growth.

They are always better than lousy companies that are available at low prices.

Those who choose these lousy companies at low price may find many of them not so rewarding.

A few though rewarding, but they will soon realise that this strategy gives limited upsides.

Don't just focus on cheapness.

Always look for great quality growing companies to buy at cheap prices.

Seek out the ones that will give you the 10 baggers in 10 years.



What does a 10 bagger investment looks like?

$1000 invested today growing to $10,000 in 10 years.

Initial capital  $1000
1st doubling  $2000  ($1,000 x 2^1)
2nd doubling $4000  ($1,000 x 2^2)
3rd doubling  $8000  ($1,000 x 2^3)
4th doubling  $16,000 ($1,000 x 2^4)

Basically, you aim to double your capital every 3rd year.

Essentially, you need to grow your capital at a rate of 24% annually.  (Rule of 72:   72/3 = 24%)

Terry Smith:  Choose Quality Stocks Over Value Investing (Morningstar)

Mohnish Pabrai Lecture at Boston College on the Power of Compounding ...

At an early age, Warren Buffett understood the power of compounding.

He soon realised as early as 11 years old, that becoming first in class is not going to make him very rich but compounding through asset acquisition will make him very rich.




Starting EARLY in your savings and investing is MOST IMPORTANT.

Assumptions:
Compounding at 7% per year.
Rule of 72
Money will double in 10 years.


Mr. EARLY saves and invests early.

At age of 20, he saves and invests 10,000.

Age 80, he will have compounded over 60 years.

Every 10 years his money doubles.

This is 6 doubling = 2^6 = 2^3 x 2^3 = 8 x 8 = 64

At age of 80, his money of 10,000 will have grown to 64 x 10,000 = 640,000.



Mr. LATE BY TEN YEARS saves and invests 10 years later than Mr. EARLY.

At age of 30, he saves and invests also 10,000.

Age 80, he will have compounded over 50 years.

Every 10 years his money doubles.

This is 5 doubling = 2^5 = 2^3 x 2^2 = 8 x 4 = 32

At age of 80, his money of 10,000 will have grown to 32 x 10,000 = 320,000.


By investing early by 10 years the same 10,000 will have grown an extra 320,000 for Mr. EARLY compared to Mr. LATE BY 10 years!


START SAVING, INVESTING AND COMPOUNDING EARLY.

The 5 steps of the Fat-Pitch Strategy

The fat-pitch strategy is based on a baseball analogy.

Instead of watching borderline pitches go by, batters often swing away because they fear being called out on strikes.

Similarly, many investors - instead of waiting for fantastic investment opportunities (fat pitches) - choose to buy stocks that they may not be too enthusiastic about, out of fear of being left behind by the market (FOMO = Fear of Missing Out).

THERE ARE NO CALLED STRIKES IN INVESTING.

Individual investors often have an edge over professionals because individuals are not required to be fully invested at all times.  

Thus, they can patiently wait for fat pitches to come along without being worried about being called out.



The FIVE steps of the fat-pitch approach to stock investing are:

1.  Look for wide-moat companies.
2.  Always have a margin of safety.
3.  Don't be afraid to hold cash.
4.  Don't be afraid to hold relatively few stocks.
5.  Don't trade very often.

Why Buffett's Berkshire Hathaway May Be a Bargain

Why Buffett's Berkshire Hathaway May Be a Bargain

By Mark Kolakowski
October 1, 2018


Shares of Berkshire Hathaway Inc. (BRK.A) have put on a growth spurt recently, propelling them far ahead of the market, in defiance of critics who had raised concerns about the giant ($526 billion market capitalization) conglomerate's prospects for future growth, and who argued that CEO Warren Buffett had lost his edge as an investor. Now some leading investment professionals are seeing value in Berkshire, and calling it a buy, Barron's reports. The recent performance of Berkshire's class A stock is compared to major stock market indexes in the table below.

Buffett's Berkshire Is Flying High

Stock or Index	Gain Since 7/17	1-Year Gain
Berkshire Hathaway Class A	10.9%	16.5%
S&P 500 Index (SPX)	3.7%	16.1%
Dow Jones Industrial Average (DJIA)	5.3%	18.2%
Nasdaq Composite Index (IXIC)	2.4%	24.7%

Source: Yahoo Finance, based on adjusted close data.

Read more: Why Buffett's Berkshire Hathaway May Be a Bargain | Investopedia https://www.investopedia.com/news/why-buffetts-berkshire-hathaway-may-be-bargain/#ixzz5VOba1eIl


What Matters for Investors

Widely recognized as an investing genius, Buffett's moves are closely watched for clues about the future direction of the market and the best places to invest. Also, since Berkshire's constituent operating subsidiaries are often seen as models of best management practices.

Nonetheless, Berkshire stock has lagged the market for a number of years, as detailed in the table below, leading an increasing number of analysts and commentators to criticize Buffett as someone who is still resting on the laurels of big gains posted decades ago. In June, a Barron's column argued that Berkshire is long overdue for a series of changes necessary to keep it relevant going forward. (For more, see also: How Berkshire Should Prepare for Life After Buffett.)

Berkshire's Stock Has Lost Its Edge

Average Annual Total Returns	Last 10 Years	Last 5 Years
Berkshire Hathaway Class A	8.7%	11.1%
S&P 500	9.7%	13.5%

Source: Barron's, based on Bloomberg data and Berkshire reports; data through June 13.

One of those proposed changes was to return capital to investors through dividends and share repurchases. Berkshire is sitting on a mountain of cash that exceeded $106 billion as of June 30, spurring concerns that Buffett is finding it increasingly difficult to employ this capital profitably. On July 17, Buffett announced that Berkshire would become more flexible in its approach to share repurchases, a move that sent its shares upward. Since its recent high close on Sept. 20, however, the price of Berkshire's class A shares has retreated by 4.0%.

"Berkshire is not a screaming bargain, but it's still undervalued," according to David Rolfe, chief investment officer at St. Louis-based money management firm, in remarks to Barron's. He believes that the class A shares should be worth about $400,000 each, or 25% above the Sept. 28 close, while he values the class B shares at $275 each, implying a potential 28% gain.

Rolfe bases these figures on a bottom-up analysis of Berkshire's operating units, such as the Burlington Northern railroad and the Geico insurance company. He inferred market values for them, based on comparisons with competitors that share their strengths. Additionally, he applied current market prices to Berkshire's investment portfolio of share holdings in other publicly-traded companies, which was worth $192 billion as of June 30.

Second quarter operating profits for Berkshire were up by 67% year-over-year (YOY). Barron's notes that its operating companies are domestically-focused, and are propelled by the strong U.S. economy, while also being big winners from corporate tax reductions.

Looking Ahead

Buffett turned 88 in August, and his longtime right-hand man, Berkshire Vice Chairman Charlie Munger, is 94. A major question mark hanging over the company is Buffett's failure to announce a succession plan.

Meanwhile, Berkshire's stake in Apple Inc. (AAPL) is by far the largest position in its equity investment portfolio. As of June 30, Berkshire held 252 million shares of Apple, then worth nearly $47 billion, according to Fortune. Since then, Apple's share price has risen by 22.4%, making this holding now worth about $57 billion. Buffett has been adding to this position, though others question whether Apple's growth has peaked.

As far as investing Berkshire's cash hoard is concerned, rumors abound regarding what new companies Buffett might choose to buy into, or buy outright. Among those alleged targets is Southwest Airlines Co. (LUV), whose market cap of around $36 billion would make it easily digestible for Buffett. Berkshire already owns Southwest stock worth about $3 billion, and has positions in several other major airlines. Berkshire also increased its holdings of The Goldman Sachs Group Inc. (GS) and Teva Pharmaceutical Industries Ltd. (TEVA) in the second quarter, per Fortune. (For more, see also: Morgan Stanley Thinks Berkshire Should Buy This Airline.)



Read more: Why Buffett's Berkshire Hathaway May Be a Bargain | Investopedia https://www.investopedia.com/news/why-buffetts-berkshire-hathaway-may-be-bargain/#ixzz5VObFsEqs
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Stock Data:

Current Price (10/26/2018): 296,805
(Figures in U.S. Dollars)


Recent Stock Performance:
1 Week -5.6%
4 Weeks -1.7%
13 Weeks -7.2%
52 Weeks 5.4%

Warren Buffett: Volatility in the Market

Market Volatility

What should you do?

If you own a farm or an apartment, you do not get a quote on them every day or every week.

The value of a business depends on how much in terms of cash it delivers to its owners between now and judgment day and I don't think it changes in 10% in a 2 months period if you are looking at it as a business.

Anything, I mean, anything can happen in the market; that is why don't borrow money against any securities.  Markets don't have to open tomorrow.  You can have extraordinary events.


You can get some of the instruments that people don't understand very well that has a lot of fire-power.

Billionaire Ray Dalio: Don't take on debt until you've asked yourself this question

Thu, 25 Oct 2018

Many young people are deep in debt: Millennials between the ages of 25 and 34 have an average of $42,000 of debt per person and members of Gen Z (ages 16 to 20) already have an average debt of $4,343. And as interest rates rise, that debt is often becoming more expensive to pay off.

Billionaire investor Ray Dalio, the founder of the world's largest hedge fund, Bridgewater Associates, advises young people to do a bit of analysis before they agree to take out a loan.

"Be very careful about debt," Dalio tells CNBC Make It. "Some is good and some is bad."

When it comes to borrowing money you'll have to pay back at a higher cost — anything from credit card debt to student loans to home mortgages and auto loans — Dalio suggests asking yourself one question: Will the debt help you save or earn more money in the future?

"Debt that produces more cash flow than it costs is good," Dalio says. For example, taking a loan to complete an advanced degree that will raise your salary above the cost of the loan's monthly payments and interest is a good form of debt, according to Dalio.

Another type of good debt is the kind that forces you to save money over time. For example, monthly payments on a home mortgage are a type of forced savings, he says, because you are socking away money into an asset you can later sell.

Since Americans often struggle to save (the personal savings rate has hovered around 6.6 percent in the U.S. since June) forced savings can be an important mechanism for Americans to store wealth without being tempted to spend it.

"Debt that creates forced savings, which is greater than you would save if you didn't have it, like buying a house, will produce good debt," Dalio explains.

Unlike taking on debt to earn more or to save more, getting a loan to buy something that won't help you in the future is a bad idea.

"Debt for consumption, or for anything that doesn't produce more income than it costs, is bad debt," Dalio says.

Racking up credit card debt by shopping for clothes or dining out and not paying off the balance at the end of the month is an example of bad debt. The average interest rate on credit cards is close to 17 percent, and consumers spent over $100 billion on credit card interest payments and fees in the last year, according to data from Magnify Money.

As a rule, Dalio prefers to avoid taking on debt whenever he can.

"I'm personally very debt and risk averse — probably too much so," he says. "That's probably because my dad lived through the Great Depression and war and he impressed upon me the freedom from worry one gets from having savings and no debt."

Dalio is worth an estimated $18 billion, according to Forbes, and founded Bridgewater Associates in his two-bedroom apartment in New York in 1975. From its founding through 2017, Bridgewater returned the biggest cumulative net profit for a hedge fund ever, according to data from LCH Investments.

"I never had significant personal debt, and I built Bridgewater without borrowing a dime or raising a dime from outside equity, and I made sure it has significant savings," Dalio says. "Besides having peace of mind, it gave me the power of knowing that I could never be knocked out of the game."



https://www.cnbc.com/2018/10/23/ray-dalio-ask-yourself-this-question-before-taking-on-debt.html

Gabelli's Approach (GAPIC Approach)

What makes a great value investor?

1.  Patience

Buying a piece of business.
What is a business worth?


Mario Gabelli's approach (GAPIC approach)

1. Gather the data and look at all the public information.
2. Put the data by rearranging it.
3. Project
4. Interprete and
5. Communicate

Graham-Dodd Net-Net Approach

• 1 million shares outstanding
• Price per share $10
• Cash and Receivables  $12 per share
• Thus, you will be buying below net current asset value in the public market.

2.  Cumulative knowledge of industry over extended period of time.

For example, by following the auto industry, farm equipment business and entertainment business for 40 years, you can adopt to changes quicker.  If the stock market (Mr. Market) comes down because of Brexit, you can see which company makes an interesting opportunity.  Are they weakened up and how much time you have to hold it?



Private Market Value with a Catalyst versus Market Price

In value investing, how do you close the gap between the market price and the book value, assuming you bought with a gap of 20% below the book value?

We aim to narrow the spread between the Private Market Value with a catalyst and the Public Price of the security.

• What element is visible to a strategic buyer or an interested corporate buyer?
• We do not necessarily look at book value.
• What multiple of cash flow minus capital expenditure (EBITDA) would you pay to own the business?
• How quickly EBITDA grows?  Will it be affected by inflation or deflation?
• Are the cash flows, subscription revenues (cable TV cash flows) or transaction revenues (price of sugar spikes up giving lots of gains)?  How much or what multiples would you pay?
• We look at book value versus value of business and that value can change over time.

In leveraged buy-out or private equity transactions:

• What multiple will you sell the business 5 years from now?
• What kind of return on your equity investment are you looking at?
• How much debt can you raise to finance the purchase today?
• Also, how much debt can another raise 5 years from now who wish to the same thing?

Time Horizon

$40 billion fund.
Turnover 10% per year.
Holding period for stocks about 10 years.

https://www.gabelli.com/gamco/value_strat.cfm

Definition of a Stock Bubble

Definition of a stock bubble


A bubble occurs in a stock when:

1.  Implausible assumptions are applied to justify its present price using normal valuation (e.g.  DCF) models.

2.  There are people buying at these prices ignoring these implausible assumptions.


Based on this defintition, Tesla is a bubble while Apple and Microsoft are not at current prices.  

Gerald Loeb: Timeless Trend Following Wisdom

Gerald Loeb: Timeless Trend Following Advice

Gerald Loeb (July 1899 – April 13, 1974) was a founding partner of E.F. Hutton & Co., a renowned Wall Street trader and brokerage firm. He is the author of The Battle For Investment Survival.

One of the early trend following pioneers? Indeed.

Wisdom from Gerald Loeb

1. The most important single factor in shaping security markets is public psychology.

2. To make money in the stock market you either have to be ahead of the crowd or very sure they are going in the same direction for some time to come.

3. Accepting losses is the most important single investment device to insure safety of capital.

4. The difference between the investor who year in and year out procures for himself a final net profit, and the one who is usually in the red, is not entirely a question of superior selection of stocks or superior timing. Rather, it is also a case of knowing how to capitalize successes and curtail failures.

5. One useful fact to remember is that the most important indications are made in the early stages of a broad market move. Nine times out of ten the leaders of an advance are the stocks that make new highs ahead of the averages.

6. There is a saying, “A picture is worth a thousand words.” One might paraphrase this by saying a profit is worth more than endless alibis or explanations…prices and trends are really the best and simplest “indicators” you can find.

7. Profits can be made safely only when the opportunity is available and not just because they happen to be desired or needed.

8. Willingness and ability to hold funds uninvested while awaiting real opportunities is a key to success in the battle for investment survival.-

9. In addition to many other contributing factors of inflation or deflation, a very great factor is the psychological. The fact that people think prices are going to advance or decline very much contributes to their movement, and the very momentum of the trend itself tends to perpetuate itself.

10. Most people, especially investors, try to get a certain percentage return, and actually secure a minus yield when properly calculated over the years. Speculators risk less and have a better chance of getting something, in my opinion.

11. I feel all relevant factors, important and otherwise, are registered in the market’s behavior, and, in addition, the action of the market itself can be expected under most circumstances to stimulate buying or selling in a manner consistent enough to allow reasonably accurate forecasting of news in advance of its actual occurrence. The market is better at predicting the news than the news is at predicting the market

12. You don’t need analysts in a bull market, and you don’t want them in a bear market.

https://www.trendfollowing.com/gerald_loeb/

Which is Better: Dollars in the Hand or "in the Bush"?

Professional investment managers strongly favour corporations which can plow back a high percentage of earnings into growing their business.

Does this always pay?

Or should the investor prefer his dividends?

For every example of a company that has compounded its growth by wise investment of its cash there are several that would have done better to pass their surplus on to their stockholders.

Very rarely, one finds a management that can do both.

• For example:  Company XYZ paid out almost 70% of its earnings in dividends.  It has invested its cash flow internally to maximum advantage.  Its shareholders have had their cake and eaten it too.

Expected Profits

The normal way for management to look upon proposed investments is to estimate the expected amount of profit.

This varies from industry to industry.

In any case,it would be unreasonable to invest company funds unless the expected return was substantial.

One finds far too much reinvestment that fails to pay off.

It is difficult for management to understand that in some cases stockholders are paid off better with their company dead than alive.




Examine the past record.

Correct judgement of management policy can only come from a full understanding of the problems involved.

It will pay the investor well to look beyond the superficialities of figures showing totals put back into business by management.  

Consideration should be given to the past record.

How have plow-back expenditures actually turned out?




There is no hard-and-fast rule.

Some stockholders profited enormously by management spending.

Other stockholders suffered through management hoarding.

Many unwise investments were made by corporate management at the wrong time.

Some very wise one were made at the right time.

This is an often overlooked factor which you should include in your analysis of stocks to buy.

If pricing is right, one leading stock is all that is necessary to buy.

If pricing# is right, one stock - the leader if it can be recognized - is all that is necessary to buy.

Or perhaps, two or three stocks of different degrees of risk.

The practice of diversification among dozens of issues is sheer folly for medium or even fairly large securities accounts.

No mixed list can do as well as the prime leaders.




Selection of too many issues is often a form of hedging against ignorance.

• Some people imagine falsely that it is safer.
• One can know a great deal about a very few issues, but it is impossible to have a thorough knowledge of all the ones which go into a diversified list.  
• The chance of errors in judgment is thus increased by diversification, and certainly keeping posted on a broad list after it is purchased is much more difficult than keeping posted on a few very select shares.

# Right price coincides with right timing

If one is trading for rapid profits .....

If one is trading for rapid profits, one must concentrate in those stocks that will give one the action one seeks.

Safety in the trading should come not from the selection of "safe" stocks # :

• a slow mover or 
• a cheap issue or 
• worse yet, a group of such shares.   

Real Safety

Safety should be by concentration in the one outstanding, fast-trading leader that is jumping in the right direction.

There is more safety and more profit in so timing one's buying in the one outstanding, fast-trading leader type of issue that when one gets a report on the purchase,  the bid is then already in excess of what one has paid.

One cannot afford to be wrong in such a fast-moving issue and one is sure to be

• much more certain about one's opinion before one acts to get in than in the case of a slow issue, and 
• likewise much more watchful to get out quickly if the stock doesn't act as anticipated or reverses its action.  

Here is the real safety.

Here also is a chance to build a backlog of profit which is partly a safety fund against future errors.



Use of Margin

In the same way, a sizable position in an issue, even on margin if that is what the individual's situation calls for, is relatively safer than the imagined security of having something paid for and locked up.

One is more careful establishing the margin position and one watches it more carefully.



Final Message

In short, know you are right and go ahead.  If in doubt, stay out.




Additional Notes:

# The issue which is "safe" because it is low and cheap is ordinarily a poor mover, usually creeping or backing and filling without getting much of anywhere while the sensational trading moves are practically all in shares which have broken out of the accumulation stage.

# With regards to these "safe" stocks, it is likely to be most exasperating during a rising market when other shares are scoring rapid advances; and during a period of decline when one is long, then the slow action of the safe stock will lull one into a sense of false security.

"High Priced" versus "Low Priced" stocks

High Priced stocks may be undervalued

Frequently the highest per share prices represent the lowest total valuation for a company when price is multiplied by shares outstanding and compared with total earning power and other figures.


Why high priced stocks can be favourable?

I generally favour issues selling at high prices per share.

They are more often to be in the rapid-growth stage.

They are likely to have a better-grade following.

Think possible profits on percentage basis

One should regard one's possible profits more on a percentage basis than on an absolute dollar basis.

A move to $10 from $5, is $5, but certainly no one would think a move to $130 from $125, meant the same thing.

Traders will not see anything dangerous in the doubling of a low-priced share to 10, from 5, though they will avoid, fear, and occasionally, even sell short a stock that moves to 175 from 125, or $50, when an issue in that class actually would have to rise to $250 to double.

It is quite useful to have a logarithmic chart just as a reminder. 

A "log" chart shows such movements in proper scale and tends to temper the judgement.



High-Priced stocks very occasionally can be available at low prices

Very occasionally, once in a good many years, normally high-priced stocks can be bought for low prices. 

This is so obviously advantageous, if one has the cash at the time and the foresight.



Low Priced stocks with small capitalizations

Sometimes one can buy low-priced stocks of companies that also have small capitalizations, and realise some very amazing profits.  

However, it should be realised that the possibilities of selecting one of the few a make good, and selecting it at the right time, are quite slight.



Low-Priced stocks with large capitalizations

Low -priced shares with huge capitalizations are usually quite undesirable.

Always write down the reasons, pro and con, before making a purchase or a sale

Tip to the Investors:  Always Write it Down

Writing down your reasons for making an investment should save you in your investing.

What you expect to make?
What you expect to risk?
The reasons why?

Always write down the reasons, pro and con, before making a purchase or a sale.

• Major successes in some investors were invariably preceded by a type of written analysis.  
• Sudden emotional decisions have generally being disappointments.
• Writing things down before you do them can keep you out of trouble.  
• It can bring you peace of mind after you have made your decision.
• It also gives you tangible material for reference to evaluate the whys and wherefores of your profits or losses.

Quality Not Quantity

I have seen many analyses, some involving many pages of information.

In practice, quantity doesn't make quality.  

There is invariably one ruling reason why a particular security transaction can be expected to show profit.

• Writing it down will help you find it.
• It will help you judge whether it is really as important as your first inclination suggests.

Are you buying just because something "acts well"?

Is it a technical reason - 

• a coming increase in earnings or dividend not yet discounted in the market price, 
• a change of management,
• a promising new product, 
• an expected improvement in the market's valuation of earnings?

In any given case you will find that one factor will almost certainly be more important than all the rest put together.



Reward/Risk Ratio

Writing it down will help you estimate what you expect to make and it is important that this be worthwhile.

Of course, you will want to decide how much you can afford to lose.

There will be a level at which you will decide that things have not worked out and where you will sell.

Your risk is the difference between your cost and this sell point; it ought to be substantially less than your hopes for profit.

You certainly want to feel that the odds as you see them are in your favour.



Much More Difficult:  When to Sell

All this self-interrogation will help you immeasurably in the much more difficult decision:  when to close a commitment.

When you open a commitment, whether it is a purchase or a short sale, you are, so to speak, on your home ground.  Unless everything suits you, you don't play.

But when you are called upon to close a commitment, then you have to make decisions, whether you see the answer clearly or not (analogy:  being stuck on a railway crossing with the train approaching).

• You don't know what to do -but you have to do something.  
• Go backward, go forward - or jump out.

If you know clearly why you bought a stock it will help you to know when to sell it.  

• The major factor which you recognized when you bought a security will either work out or not work out.  
• Once you can say definitely that it has worked or not worked, the security should be sold.

One of the greatest causes of loss in security transactions is to open a commitment for a particular reason, and then fail to close it when the reason proves to be invalid.

• Write it down and you will be less likely to find yourself making irrelevant excuses for holding a security long after it should have been sold.
• Better still, a stock well bought is far more than half the battle.

Careful Investors look for Signs of Quality Management

One of the main factors determining the success of a corporation is the competence of management.

Buy into companies with "good management."


But in practice, how do you know?

• Ideally you begin by meeting management.  However, the door is open to very few and the ability to assess it is just as limited.
• The practical approach is to begin by looking at the record.

Practical Approach:  Looking at the Record

If a company's earnings are increasing, this is one piece of evidence pointing to good management.

• However, the results must be measured against others in the same industry.  
• Otherwise, a management which swims with a favourable tide may get more credit than it deserves.  

Often a superior management fighting bad conditions is unjustly criticized.


Type of Management Counts

Is the company in question headed by an old-fashioned entrepreneur who has made management a one-man show?

Or does it have good management in echelon depth which can survive the retirement or death of its chief executive?


Officers' shareholdings

One aspect of management worth noting is the extent to which the officers own their own shares.

Broadly speaking, it is advantageous for the officers to have a stake in ownership.

It makes a difference whether they own the stock

• because they want it or 
• because they are stuck with it.

You should consider whether they

• acquired it through inheritance, 
• bought it on option, or 
• bought it in the open market.  

Likewise, where possible, consider the purchase date and price paid.



Close Watch Pays Off

One of the many ways of making money in securities, is through a close watch on management.

Watch and understand the changes where companies have been in difficulty, their stocks depressed and general dissatisfaction expressed and where a new management comes in and invariably begins by sweeping out the accounting cobwebs.

• Everything is marked down or written off so that the new management is not held accountable for the mistakes of the old.  
• Very often dividends which were imprudently paid are cut or passed.  
• Thus an investor at this juncture often gets in at the bottom or the beginning of a new cycle.
• A recent example:  TESCO London.

Conclusion:

Attempting to evaluate management, even though you cannot get all the answers, is worth all the effort it entails.



Related post:

Management Compensation
https://myinvestingnotes.blogspot.com/2010/04/buffett-1994-in-setting-compensation-we.html

"Come Back" Fallacy

One quote often mentioned on many occasions is that "Stocks recover if held long enough."

The stock market is full of examples of stocks of investment grade that have never "come back."  Some have vanished entirely.




"Come Back" Fallacy

There are examples of many stocks that were prime investments in the past or were darlings of investors in the past.   They are now selling at a fraction of the prices they once commanded.  They have never "come back."

It should be realized that even when stocks do come back, the original investor benefits very little if it takes the stocks a long time (20 to 30 years) to do so.  During that period,

• his life, needs and desires have changed,
• the value of money has changed, and 
• in the meantime, other opportunities have slipped by.

The Better Approach

So, it is much better to accept a loss, if you can, while it is still moderate - say 10% or so. 

If the stock really runs away from you, usually it is better to take a substantial loss and start anew than to be tied hopelessly to something which you wouldn't buy if you had the cash.