Thursday, 16 August 2012
Getting Rich with Dividends: 3 Tips to Improve Returns With Dividend Stocks
Knowing a Business Leads to Investing Success. Act Like an Owner
Investing is very similar. You must be able to:
1) value a business and
2) wait for the right price.
You should spend at least as much time reading annual reports as you do studying books on value investing. I’m not saying you don’t need to master the great books and writings on investing. On the contrary, this is essential too.
Nevertheless, as you master the framework and develop your own investing process, more and more of your time and energy shouldshift to studying businesses.
1) value a business and
2) wait for the right price.
You should spend at least as much time reading annual reports as you do studying books on value investing. I’m not saying you don’t need to master the great books and writings on investing. On the contrary, this is essential too.
Nevertheless, as you master the framework and develop your own investing process, more and more of your time and energy shouldshift to studying businesses.
Do yourself a favour, invest in your financial education before you invest in the markets
"Risk comes from not knowing what you are doing."
Risk can be alleviated with proper education and experience. This is the same process that you must commit to undertake when you decide to invest in any market. First and foremost, you must get yourself educated.
It is strange that most parents would not think twice to pay high school fees to send their kids to university, when there is no real guarantee that they will succeed in life after getting their degree. However, when it comes to paying for financial education, where there is a chance they can lose all of the kids' education funds, many people shy away because of the price. Instead, they would rather risk their hard earned money in a market or instrument that they have little knowledge of, or worse, investing based on rumours or tips from various unverified sources.
Most people are attracted by the myth of quick, easy money from investing (or trading) but fail to understand that it takes a lot of hard work to be successful. Everyone equates being a doctor or lawyer to earning lots of money. But it is also common understanding that to be a doctor or a lawyer requires one to put in many years of education and practice before one can be successful. Ask anyone about his or her current job and you would most likely get the same response that hard work is the norm. How then can it be different for investing (and trading)?
"Risk comes from not knowing what you are doing" - a famous quote from Warren Buffett.
It sounds simplistic, but it epitomises the real meaning of the work "Risk".
Any instrument, be it stocks or forex will be dangerous if you don't know what you are doing. it is not the instrument but the level of the investor's understanding of the instrument and the market that determines his risk level. So, do yourself a favour, invest in your financial education before you invest in the markets.
Here is another quote from Mr. Buffett: "The most important investment you can make is in yourself.."
Risk can be alleviated with proper education and experience. This is the same process that you must commit to undertake when you decide to invest in any market. First and foremost, you must get yourself educated.
It is strange that most parents would not think twice to pay high school fees to send their kids to university, when there is no real guarantee that they will succeed in life after getting their degree. However, when it comes to paying for financial education, where there is a chance they can lose all of the kids' education funds, many people shy away because of the price. Instead, they would rather risk their hard earned money in a market or instrument that they have little knowledge of, or worse, investing based on rumours or tips from various unverified sources.
Most people are attracted by the myth of quick, easy money from investing (or trading) but fail to understand that it takes a lot of hard work to be successful. Everyone equates being a doctor or lawyer to earning lots of money. But it is also common understanding that to be a doctor or a lawyer requires one to put in many years of education and practice before one can be successful. Ask anyone about his or her current job and you would most likely get the same response that hard work is the norm. How then can it be different for investing (and trading)?
"Risk comes from not knowing what you are doing" - a famous quote from Warren Buffett.
It sounds simplistic, but it epitomises the real meaning of the work "Risk".
Any instrument, be it stocks or forex will be dangerous if you don't know what you are doing. it is not the instrument but the level of the investor's understanding of the instrument and the market that determines his risk level. So, do yourself a favour, invest in your financial education before you invest in the markets.
Here is another quote from Mr. Buffett: "The most important investment you can make is in yourself.."
Risk versus Reward
Most investors believe that the more risk you take on, the greater the profit you can expect.
The Master Investor, on the contrary, does not believe that risk and reward are related. By investing only when his expectancy of profit is positive, he assumes little or no risk at all.
The Master Investor, on the contrary, does not believe that risk and reward are related. By investing only when his expectancy of profit is positive, he assumes little or no risk at all.
Actuarial Investing. Benjamin Graham's investing was actuarially based.
When Warren Buffett started investing, his approach was very different from the one he follows today. He adopted the method of his mentor, Benjamin Graham, whose system was actuarially based.
Graham's aim was to purchase undervalued common stocks of secondary companies "when they can be bought at two-thirds or less of their indicated value."
He determined value solely by analysing publicly available information, his primary source of information being company financial statements.
A company's book value was his basic measure of intrinsic value. His ideal investment was a company that could be bought at a price significantly below its liquidation or break-up value.
But a stock may be cheap for a good reason.
By just analysing the numbers Graham could not know why the stock was cheap.
So how could he make money? He made sure he bought dozens of such stocks, so the profits on the stocks that went up far outweighed the losses on the others.
This is the actuarial approach to risk management. In the same way that an insurance company is willing to write fire insurance for all member of a particular class of risks, so Graham was willing to buy all members of a particular class of stock.
An insurance company doesn't know, specifically, whose house is going to burn down, but it can be pretty certain how often it's going to have to pay for fire damage. In the same way, Graham didn't know WHICH of his stocks would go up. But he knew that, on average, a predictable percentage of the stocks he bought would go up.
An insurance company can only make money by selling insurance at the right price. Similarly, Graham had to buy at the right price; if he paid too much he would lose, not make money.
The actuarial approach certainly lacks the romantic flavour of the stereotypical Master Investor who somehow magically, only buys stocks that are going to go up. Yet it is probably used by more successful investors than any other method. For success, it depends on identifying a narrow class of investments that, taken together, have a positive average profit expectancy.
Buffet started out this way, and still follows this approach when he engages in arbitrage transactions. it also contributes to Soro's success: and is the basis of most commodity trading systems.
AVERAGE PROFIT EXPECTANCY is the investor's equivalent of the insurer's actuarial tables. Hundreds of successful investment and trading systems are built on the identification of a class of events which, when repeatedly purchased over time, have a POSITIVE AVERAGE EXPECTANCY OF PROFIT.
Ref: The Winning Investment Habits of Warren Buffett and George Soros by Mark Tier
Graham's aim was to purchase undervalued common stocks of secondary companies "when they can be bought at two-thirds or less of their indicated value."
He determined value solely by analysing publicly available information, his primary source of information being company financial statements.
A company's book value was his basic measure of intrinsic value. His ideal investment was a company that could be bought at a price significantly below its liquidation or break-up value.
But a stock may be cheap for a good reason.
- The industry may be in decline,
- the management may be incompetent, or
- a competitor may be selling a superior product that's taking away all the company's customers - to cite just a few possibilities.
By just analysing the numbers Graham could not know why the stock was cheap.
- So some of his purchases went bankrupt:
- some hardly moved from his purchase price; and
- some recovered to their intrinsic value and beyond.
So how could he make money? He made sure he bought dozens of such stocks, so the profits on the stocks that went up far outweighed the losses on the others.
This is the actuarial approach to risk management. In the same way that an insurance company is willing to write fire insurance for all member of a particular class of risks, so Graham was willing to buy all members of a particular class of stock.
An insurance company doesn't know, specifically, whose house is going to burn down, but it can be pretty certain how often it's going to have to pay for fire damage. In the same way, Graham didn't know WHICH of his stocks would go up. But he knew that, on average, a predictable percentage of the stocks he bought would go up.
An insurance company can only make money by selling insurance at the right price. Similarly, Graham had to buy at the right price; if he paid too much he would lose, not make money.
The actuarial approach certainly lacks the romantic flavour of the stereotypical Master Investor who somehow magically, only buys stocks that are going to go up. Yet it is probably used by more successful investors than any other method. For success, it depends on identifying a narrow class of investments that, taken together, have a positive average profit expectancy.
Buffet started out this way, and still follows this approach when he engages in arbitrage transactions. it also contributes to Soro's success: and is the basis of most commodity trading systems.
AVERAGE PROFIT EXPECTANCY is the investor's equivalent of the insurer's actuarial tables. Hundreds of successful investment and trading systems are built on the identification of a class of events which, when repeatedly purchased over time, have a POSITIVE AVERAGE EXPECTANCY OF PROFIT.
Ref: The Winning Investment Habits of Warren Buffett and George Soros by Mark Tier
Risk is Manageable: Manage Risk Actuarially
Risk avoidance strategy: Manage Risk Actuarially
This way is to act, in effect, like an insurance company.
An insurance company will write a life insurance policy without having any idea WHEN it will have to pay out. It might be tomorrow; it might be 100 years from now. It doesn't matter (to the insurance company).
The insurance company controls risk by writing a large number of policies so that it can predict, with a high degree of certainty, the AVERAGE amount of money it will have to pay out each year.
Dealing with averages, not individual events, it will set its premium from the AVERAGE EXPECTANCY of the event. So the premium on your life insurance policy is based on the average life expectancy of a person of your sex and medical condition at the age you were when you took out the policy. The insurance company is making no judgement about YOUR life expectancy.
The person who calculates insurance premiums and risks is called an actuary; thus calling this method of risk control "managing risk actuarially."
This approach is based on averages of what's called "risk expectancy."
The Master Investor using this way of managing risk is actually looking at the AVERAGE PROFIT EXPECTANCY.
This way is to act, in effect, like an insurance company.
An insurance company will write a life insurance policy without having any idea WHEN it will have to pay out. It might be tomorrow; it might be 100 years from now. It doesn't matter (to the insurance company).
The insurance company controls risk by writing a large number of policies so that it can predict, with a high degree of certainty, the AVERAGE amount of money it will have to pay out each year.
Dealing with averages, not individual events, it will set its premium from the AVERAGE EXPECTANCY of the event. So the premium on your life insurance policy is based on the average life expectancy of a person of your sex and medical condition at the age you were when you took out the policy. The insurance company is making no judgement about YOUR life expectancy.
The person who calculates insurance premiums and risks is called an actuary; thus calling this method of risk control "managing risk actuarially."
This approach is based on averages of what's called "risk expectancy."
The Master Investor using this way of managing risk is actually looking at the AVERAGE PROFIT EXPECTANCY.
Risk is Manageable: Actively Managing Risk
Risk avoidance strategy: Actively Managing Risk
This is primarily a trader's approach - and a key to Soros's success.
Managing risk is very different from reducing risk. If you have reduced risk sufficiently, you can go home and go to sleep. Or take a long vacation.
Actively managing risk requires full-focused attention to constantly monitor the market (sometimes minute-by-minute); and the ability to act instantly with total dispassion when it's time to change course (when a mistake is recognised, or when a current strategy is running its course).
Soro's ability to handle risk was "imprinted" on him during the Nazi occupation of Budapest, when the daily risk he faced was death.
His father, being a Master Survivor, taught him the three rules of risk which still guide him today:
1. It's okay to take risks.
2. When taking a risk, never bet the ranch.
3. Always be prepared to beat a hasty retreat.
This is primarily a trader's approach - and a key to Soros's success.
Managing risk is very different from reducing risk. If you have reduced risk sufficiently, you can go home and go to sleep. Or take a long vacation.
Actively managing risk requires full-focused attention to constantly monitor the market (sometimes minute-by-minute); and the ability to act instantly with total dispassion when it's time to change course (when a mistake is recognised, or when a current strategy is running its course).
Soro's ability to handle risk was "imprinted" on him during the Nazi occupation of Budapest, when the daily risk he faced was death.
His father, being a Master Survivor, taught him the three rules of risk which still guide him today:
1. It's okay to take risks.
2. When taking a risk, never bet the ranch.
3. Always be prepared to beat a hasty retreat.
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