Why Invest in Stocks?

Investing is a complex business.


But, then, so is medicine, engineering, chemistry, geology, law, philosophy, photography, history, accounting - you name it.

In fact, investing is so intimidating that many intelligent individuals avoid it.

Instead, they stash their money in CDs, annuitites, bonds, or mutual funds.

Apparently, they can't face buying common stocks.

This is too bad, because that's precisely where the money is made.

You don't make money every day, every week, or even every year.

But over the long term, you will make the most out of your investment dollars.

Read also:
Why Invest in Stocks?
Why Invest in Stocks? Look at the Facts
Why Invest in Stocks? Investing for the Long Term
Why Invest in Stocks? Some Profitable Comparisons
Why Invest in Stocks? Why Doesn't Everyone Buy Common Stocks?
Why Invest in Stocks? An Example in Practice

The Danger Lurking in Your Portfolio

I like the title of this article. It reminds us to always be aware of the danger(s) that may be overlooked in our portfolio. Therefore, in our regular rebalancing and reweighting of our stocks in our portfolio, always keep this in mind.

This article touches on investing through mutual funds. What I usually will do is to look at the stocks that are in these funds. This is very important, as the performance of the fund will be dependent on what stocks are within these funds. For the less knowledgeable investors, this may be a another hurdle for them to cross. There is no better way than to start getting financially educated early in your investing career.

Another point in this article, is that having all your money in one fund or in many funds holding almost similar stocks may not ensure that you are well diversified.

----

The Danger Lurking in Your Portfolio
By Dan Caplinger
June 26, 2009

For years, financial experts have repeated the mantra of diversification as a way to smooth out the ups and downs of your portfolio. Yet, many people who believe that they have a diversified set of investments couldn't be more wrong -- and they're carrying much greater risk than they may think.

The benefits of mutual funds
Mutual funds have helped millions of investors diversify their holdings even with relatively small amounts of money. By pooling your money together with other investors, a typical mutual fund gives you a small piece of dozens or even hundreds of different stocks. With minimum investments as low as a few hundred dollars, you can create a portfolio that would require huge amounts of money to duplicate using 100-share lots of individual stocks.

But as useful as a single mutual fund is in helping you diversify, combining a bunch of funds into your overall portfolio won't automatically make you more diversified. If you own too many of the same general type of mutual fund, then you're going to have a more concentrated portfolio than you think -- and you could have some big gaps in your asset allocation.

Different funds, same stocks
To illustrate the point, take a look at these three different funds:

• The Vanguard US Growth Fund (VWUSX) invests in U.S. companies with promising growth prospects.
• The Fidelity Select Technology Fund (FSPTX) focuses on companies within the technology sector.
• The California Investment Nasdaq 100 Index (NASDX) is an index fund that seeks to track the performance of the Nasdaq 100.

Especially to those just starting out investing, each of these three funds looks like it has a different purpose in a fund portfolio. But when you look closely at the top five holdings of each of these funds, you'll notice something peculiar:

Fund (Top 5 Holdings)

Vanguard US Growth
Google (Nasdaq: GOOG), Hewlett-Packard (NYSE: HPQ), Apple (Nasdaq: AAPL), Gilead Sciences (Nasdaq: GILD), Qualcomm (Nasdaq: QCOM)

Fidelity Select Technology
Microsoft (Nasdaq: MSFT), Hewlett-Packard, Apple, Google, Qualcomm

California Nasdaq 100
Apple, Qualcomm, Microsoft, Google, Gilead Sciences


Source: Morningstar.


Of course, more experienced investors might realize that the Nasdaq is made up largely of technology stocks, and that most tech stocks fall into the growth category. And of course, the Vanguard fund has plenty of non-tech companies further down the list, including Wal-Mart (NYSE: WMT). But without checking your holdings, you may end up with a false sense of security -- when in reality, you're dangerously overinvested in technology or some other sectors.

What to do
Luckily, once you start looking, it's not difficult to get plenty of information about mutual funds. Here are some tools you can use to make sure you're properly diversified:

Look for different asset classes. If you own several different funds, but they all concentrate on large-cap U.S. stocks, then the odds are good that you'll have a lot of overlap. Make sure you have at least one fund that covers other asset classes, including small caps and international stocks.
Use different fund companies. Sometimes, a given manager will share his stock picks and research across different funds within the same fund family. To increase the chance that you'll get a diverse set of investing ideas, seek out funds from different managers across a range of fund families.
Fill in the gaps. By looking at your fund's periodic reports, you can determine what areas a fund focuses on and which sectors it tends to avoid. If a fund is light in one particular sector, then you can get exposure either through a sector-specific fund or with a more general fund that has a focus in that sector.
Diversification is important, but just because you own a long list of funds doesn't necessarily mean you're diversified. In order to avoid the risk of owning a more concentrated portfolio than you think, be sure to look at your fund's holdings on a regular basis and make sure there's not too much overlap.


For more on smart fund investing, read about:
Could a recovery be right around the corner?
Why should you bother buying mutual funds at all?
Can "set it and forget it" investing really work?

http://www.fool.com/investing/mutual-funds/2009/06/26/the-danger-lurking-in-your-portfolio.aspx

Singapore’s rich list takes a beating

Singapore’s rich list takes a beating
SINGAPORE, June 26 — Singapore’s rich were not spared the effects of the global financial meltdown last year, with the number of millionaires here shrinking 22 per cent to 61,000 people.

A year earlier, Singapore boasted one of the world’s top 10 fastest-growing millionaires’ clubs, with a 15.3 per cent expansion to 78,000.

A millionaire is defined as a person having net assets of at least US$1 million (RM3.52 million), excluding his main residence and everyday possessions.

Observers say the sharp drop is probably because the well-heeled here were invested heavily in equities and real estate, both of which have suffered in the crisis.

The figures emerged in the 13th annual World Wealth Report released yesterday by banking group Merrill Lynch and research firm Capgemini.

On average, Singapore’s ‘high net worth individuals’ were worth about US$3 million each, said Kong Eng Huat, managing director and head of South Asia advisory at Merrill Lynch Global Wealth Management.

“A lot of these (individuals) are in the US$1 million to US$5 million range. So that’s why you find a greater drop in terms of the high net worth population because...when the market comes down and they have invested heavily in equities then they would not be a high net worth individual any more,’ he added.

Globally, the number of people in the millionaires’ club fell by about 15 per cent to 8.6 million, which is below the figure in 2005. North America, Europe and the Asia-Pacific registered the largest declines.

The total wealth of these individuals fell to US$32.8 trillion, also below the levels in 2005. However, this is forecast to recover in all regions by 2013, with Asia-Pacific leading the growth.

More than half of the world’s millionaires last year came from three countries — the United States, Japan and Germany. The proportion is a slight increase from the year before.

China climbed one rung to become the country with the fourth largest millionaires’ population of 364,000.

The World Wealth Report also indicated that the millionaires have reacted to the crisis by moving more of their assets into cash and fixed-income securities — and away from equities.

A larger proportion of wealth was allocated to art collections and jewellery, gems and watches. This category hit 47 per cent last year, up from 38 per cent in 2006.

Bhalaji Raghavan, Capgemini’s banking solutions leader for Asia-Pacific, said: “One of the reasons is that people believe that (these items) over a long period of time increase in value, so it’s a lot safer than putting their money in financial markets.”

Giving to charity was forecast to be on the decrease on average across the globe this year, especially in North America, but increasing in the Asia-Pacific region.

Private banks contacted by The Straits Times said their clients are now staying away from high-risk investment products.

“Currently, it is back to basics of investment, and we have seen that cash positions in portfolios are high,” said Rajesh Malkani, Standard Chartered Private Bank’s head of Southeast Asia.

Raj Sriram, RBS Coutts’ head of private banking in Singapore, agreed: “From a private bank perspective, the main challenge is that clients have become more risk averse due to volatility in the markets...Clients today largely prefer simpler, liquid investments.” — The Straits Times

http://www.themalaysianinsider.com/index.php/business/30586-singapores-rich-list-takes-a-beating

The Four Essentials of Successful Investing

In brief, here are the four rules:

• Start early in life to invest.


• Invest in common stocks.


• Be thrifty.


• Pick the right investment.

1. Start early in life to invest

Start young. Many people wait until age 50 before they realize what has happened.

Let's assume you want to have $1 million by age 65. That may not be enough , but it is a lot more than most people ahve when they decide to retire from the world of commerce and frustration.

• If you start at age 35 and can realize an annual return of 10% compounded, you will have to put aside $6,079 each year.


• If you delay until you are 45, it will mean you have to set aside $17,460 each year.


• If you start at age 55, the amount gets a little steep - $62,746!

2. Invest Mostly in Stocks, not Bonds

It takes commitment, even if you start early, to save for the future.

But if you buy bonds, CDs, or a money market fund, the task is even tougher.

Let's try the different ages again, but this time assuming a compound annual return of 6, instead of 10%.

Also, let's assume you want to have $1 million by age 65.

• If you start at age 35 and can realize an annual return of 6% compounded, you will have to put aside $12,649 into CD each year. - that is a lot more than the first illustration.


• If you delay until you are 45, it will mean you have to set aside $27,185 each year.


• If you start at age 55, the amount you will forced to set aside for fixed-income vehicles will be $75,869 each year.

3. Be thrifty (Don't be a Spendthrift)

An important ingredient of successful investing is discipline.

Of course, it pays to earn an above-average salary.

If you make $30,000 a year and have 4 children, you are not likely to end up rich. Sorry about that.

On the other hand, there are plenty of people who make great incomes and still don't own any stocks. The reason: They can always find things to buy.

Successful investors not only make a good income, but they are thrifty shoppers.

For instance, do you need a new car every 2 years? I happen to be rich and I buy used cars. Not rusted-out jalopies - normally, I buy Buicks that are 3 years old.

If you want to find out how people get rich, you should get The Millionaire Next Door by Thomas J. Stanley and William D. Danko. Typically, millionaires are extremely careful how they spend their money and they invest in good-quality common stocks with very infrequent trading.
Invest enough to make it worthwhile, such as 10% of your income. You can do this if you are thrifty.





4. Picking the Right Investments


The final factor is picking the right stocks or mutual funds.


Surprisingly, this is the least important factor. That is because no one knows how to do it consistenly.

There are mutual funds with good records, but those managers are rarely able to duplicate their performance year after year. However, that shouldn't deter you from trying. You will pick your share of winners if you do your homework and exercise patience.

Finally, make sure you don't make any big bets. Diversify over a few stocks in different sectors or industries.

You will need to be financially educated and do enough reading to ensure you pick stocks that have the potential to make you rich.

Some thoughts on Analysing Stocks

Ideally, a stock you plan to purchase should have all of the following charateristics:

• A rising trend of earnings, dividends, and book value per share.
• A balance sheet with less debt than other companies in its particular industry.
• A P/E ratio no higher than average.
• A dividend yield that suits your particular needs.
• A below-average dividend pay-out ratio.
• A history of earnings and dividends not pockmarked by erratic ups and downs.
• Companies whose ROE is 15 or better.
• A ratio of price to cash flow (P/CF) that is not too high when compared to other stocks in the same industry.

Keep It Simple and Safe.

Nine Mistakes that Investors Make

Nine mistakes that investors make

1. Failure to diversify

2. Paying too much for a stock

3. Buying a stock with a high payout ratio*

4. Too much trading

5. Failure to read the company's quarterly and annual reports

6. Failure to invest in stocks after a long decline

7. Failure to keep adequate records (recordkeeping)**


*Stock with high payout ratio

Most companies need to invest their retained earnings to grow their business.

A low payout ratio is preferred, since it means that the company is plowing back its profits into future growth.

Examine what percentage of earnings per share are paid out in dividend. For instance:

• if the company earns $4 a share and pays out $3, that's too much.
  
• most would much prefer a company that paid out less than 50% - 30 or 40% would be even better.

Companies that don't pay a dividend at all are often very speculative. They can be extremely volatile.



Recordkeeping**

This is a common blunder. You should have a filing cabinet that holds a folder for each stock.

The first thing you should put in that file is the confirmation slip for the purchase of the stock, which should have been sent to you by your broker.

Then when you sell the stock, you will know what you paid for it so that you can tell your accountant. He will in turn tell the IRS.

The Buy-and-Hold Strategy Is Going, Going, Gone ...

The Buy-and-Hold Strategy Is Going, Going, Gone ...
By Peter Khanahmadi

June 25, 2009


It's been interesting to observe the zeal with which people have taken part in the Fool's debate about buy-and-hold investing. There have been many arguments in favor of buy and hold, some against, and some in between.

My view is that the buy-and-hold strategy is fading fast, right before our eyes. The days of holding onto a stock for 20 or 30 years and forgetting about it until retirement are over.

Thanks to technological advancements that enable far greater competition, as well as global economic uncertainty, the buy-and-hold approach just isn't effective in today's market.


For example, consider a company like Sun Microsystems (Nasdaq: JAVA), which was riding high during the tech boom of the late 1990s. Investors at the time felt Sun would be a long-term buy given its significant tailwinds -- it was providing software and Internet equipment for the ever-growing World Wide Web.

But the tech bust, along with furious competition from IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ), dismantled Sun and its stock price. Although this is just one admittedly extreme example (Sun is down 85% over the past decade), it serves to remind us how critical it is to actively monitor stock investments to gauge when to make appropriate decisions to sell.

Several comments from our Foolish members support the view that buy and hold is rapidly fading. Here are a few interesting ones:

"Holding anything for a long period of time has never been a good idea, and even less so today. In our economic system, money moves rapidly and constantly, so while you're sitting on your money for a long period of time, a lot of people are using/moving your money and making big profits, and in the end you'll get a few scraps back after sitting on it for ten years. If a 8-12% return on your investment after several years seems good to you, then fine, but in reality it's a very paltry sum compared to what other made with your money in the same time period. And as many of you know, after ten years you may be even be down, not up." -- IMHarvey

"I vote YES. When I became a cognizant being in the 60's and 70's, BAH had a rather concrete meaning. You bought a stalwart American company, an engine of capitalism, like AT&T or GM or a utility. You held it forever; the rest of your life; until you die. When you retire, you harvest your crop.TMF seems to quote 10 years as a horizon, but I wonder if many journalists and everyday investors are thinking of 5 years; I know I do." -- jerryguru69

"In my opinion, the buy and hold days are over. That does not mean you should become a day trader, but modern technology is changing so fast that the probability that any one company is going to be the top dog forever is very low. I now set stop losses on every stock I buy and if it drops significantly it automatically sells. If it turns out I should have kept the stock, I can buy it back again for $7 on many on line sites. I will never again let my portfolio drop significantly based on predictions from so called stock experts, that on reality don't know any more than I do." -- harry1n

As with all great debates, both sides must be heard. Although I strongly hold the view that buy and hold is fading fast, some members provided evidence to the contrary:

"Coca-Cola (NYSE: KO), a blue-chip stock anyone with a 5th grade education can understand, is up over 9,000% over the last 35 years, yet more than 97% of the population missed the run. As recently as March 2009, this simple, yet very powerful stock was trading at a very reasonable 14 times earnings, yielding 4% in dividend income. This is the same PRICE Warren Buffett paid for it in 1989! (adjusted to 4 bucks a share, post splits). Yet, there were with NO takers!!!


Truth be told, most people do NOT have the stomach, nor the patience for the stock market. You need both.


If you are reading this post, are less than 45 years old, and do not smoke, then you are likely going to live for another 30-40 years. If history has taught us anything, over that kind of time horizon, a 50-60,000 handle on the DJIA is simply inevitable.


Thus, the one thing all LONG TERM equity investors have in common is FAITH.


For without faith, I would have tossed my Dow Chemical, General Electric, Harley Davidson (NYSE: HOG), McDonald's (NYSE: MCD), and Pfizer (NYSE: PFE) stock overboard a long time ago." -- daveandrae

Wherever you fall in the debate, you cannot ignore the fact that today's market is filled with volatility and uncertainty. Knowing this, investors must stay on top of their portfolios and actively track, follow, and yes, even manage, their holdings.


What's your take? Is buy and hold quickly fading or not? Leave us a comment below and let us know!


For all our buy-and-hold coverage:
Long-Term Investing Doesn't Work
Blog: The Life and Subsequent Death of Buy-and-Hold Investing
Buy and Hold Isn't Dead. It's Just Wounded.
The Most Certain Way to Wealth in Our Uncertain World?





http://www.fool.com/investing/general/2009/06/25/the-buy-and-hold-strategy-is-going-going-gone.aspx

Know Yourself and Make More Money

Know Yourself and Make More Money
By Selena Maranjian
June 25, 2009





If you want to be a better investor, you have to know how your mind works. Not everyone thinks the same way about investing, and if you don't know your own particular quirks -- and weaknesses -- then it'll show in your results.

In particular, think about some of your not-so-wonderful investing habits. Even if they don't come to mind right away, odds are that you'll find a whole host of examples if you dig out some of your old brokerage statements and review some of your bone-headed investments. Try to figure out what led you to make those mistakes. Here are some possibilities:

Do you get swayed by an exciting detail or two? For instance, both Google (Nasdaq: GOOG) and Intuitive Surgical (Nasdaq: ISRG) have had amazing revenue growth in recent years, with average annual rates of 72% and 57%, respectively. But don't invest without filling out the picture much more. There's simply no way those growth rates are sustainable in the long run. In the current recession, demand for Intuitive's expensive robotic surgery equipment has slowed. Even companies that enter a slower-growth phase can make profitable investments, though, as Wal-Mart (NYSE: WMT) shareholders can attest.

Do you get too impatient? Did you maybe invest in Diamond Offshore (NYSE: DO) or Adobe Systems (Nasdaq: ADBE) a year ago, based partly on their robust margins, revenue growth, and return on equity? Are you thinking of selling them just because they're down over 30% in the past year? Well, next time you look at them and your trigger finger starts itching, be patient -- that's a key trait of great investors. As long as you remain confident of their strength and promise, holding can be the best thing to do.

Conversely, are you sometimes pigheaded? If you're holding on to companies just because they're down, even though you've lost faith in them, that's not such a good idea. Maybe, for example, you lost money on Capital One Financial (NYSE: COF) or Bank of America (NYSE: BAC), and are worried about new regulations in the credit card industry and the chance of increased loan defaults in the recession. If so, at least think about moving your money into a company you feel more confident about.

Do you focus much more on a stock's positives than its negatives? Are you eager to buy a stock after hearing someone on TV rave about it, without looking into his track record or the stock itself? If those traits haven't gotten you in trouble already, they certainly will in the future.


Discover your unproductive tendencies, so that you can notice and avoid them when they rear their ugly heads. Your portfolio might thank you for it.



http://www.fool.com/investing/general/2009/06/25/know-yourself-and-make-more-money.aspx





Learn more:
Mr. Market's 3 Biggest Weaknesses
4 Ways to Destroy Your Retirement
8 Common Investing Mistakes
Not-so-wonderful investing habits

The Best Place to Find Promising Stocks

The Best Place to Find Promising Stocks
By Motley Fool Staff
June 25, 2009



Everybody loves getting in on a secret. It doesn't matter what it's about, whether it's who some politician went hiking the Appalachian Trail with or the identity of the leaker in the Watergate scandal. While some secrets cost you only the price of a grocery-store tabloid, some people will try to collect quite a bit more information.

Consider how much you would pay to learn the secrets of successful investing. Many well-known financial gurus have written books that try to explain their winning recommendations; several, such as Peter Lynch's One Up on Wall Street, have become best-sellers. Even now, many fund managers define their aspirations for success by seeking to become the next Peter Lynch or Bruce Berkowitz.

It turns out, however, that the secret of how successful fund managers pick investments isn't much of a secret at all. You don't have to buy a book or a magazine to find it. In fact, it doesn't take a lot of effort to find out all sorts of things about how the best fund managers are investing.

The worst-kept secrets of successful fund managers
Sounds like a good book title, doesn't it? In truth, fund managers aren't allowed to keep their investment choices secret for long because mutual funds are required to fully disclose their holdings. The Investment Company Act of 1940, which governs mutual funds, requires funds to disclose several types of information to fund shareholders at least twice a year, including financial statements of income and capital flows, fees charged by management, and lists of securities held. The SEC has considered requiring more frequent disclosure, and many funds voluntarily release information on a more frequent basis.

This means that if you identify a fund manager whose style you like, and whose results have been good, you can look at what investments have contributed the most to the manager's success. There are a few different ways of doing so.

Analyzing fund holdings
Some mutual fund managers choose to take large positions in a relatively small number of individual stocks. If the fund performs well, it's usually because those large positions do well. So, by looking at the largest holdings in a particular fund, you often identify individual stocks that have performed well.

For instance, in looking at the market-beating performance of the Fairholme Fund, you'll find that the top 10 holdings constitute over 60% of the entire fund. You can see that many of these holdings, including Sears Holdings (Nasdaq: SHLD), Pfizer (NYSE: PFE), and Forest Labs (NYSE: FRX), have held up relatively well over the past year, which helped contribute to the fund's overall performance.

Not all of a fund's top holdings have to be winners for the fund to perform well. For instance, a look at Longleaf Partners (LLPFX) shows that while investments in Sun Microsystems (Nasdaq: JAVA) and Level 3 Communications (Nasdaq: LVLT) have done well so far in 2009, the fund's shares of FedEx (NYSE: FDX) and Berkshire Hathaway (NYSE: BRK-A) have held the fund back from an even stronger performance. Sometimes, the best-performing choices won't even be among the top holdings.

If you're willing to do a little more research, you can look from quarter to quarter to see what changes a fund manager is making in the fund's holdings. If a company drops off the holdings list, then you know that the manager has lost confidence in that company. Similarly, if a new company appears, or holdings in an existing company increase dramatically, then the manager believes that company will do well.

Building your own fund
By looking at the best investments of successful fund managers, you can create your own portfolio, including the best of the best. One excellent way to build a well-diversified portfolio is to pick a few companies from each of your favorite funds in a variety of asset classes, thus quickly putting together a portfolio that includes companies across a wide spectrum of company sizes, regions, and industries.

Limitations of using fund data
But, like other investment strategies, using fund holdings data doesn't guarantee success. For one thing, many funds buy and sell stocks frequently, so a stock that appears on a list of holdings one day may be sold from the fund the next. As a result, you may buy a stock at exactly the time the fund has sold it. For funds with high turnover ratios, it's important to identify core holdings that the fund has owned for a long time.

Also, many funds own stock in a huge number of companies, so even the top holdings don't represent a large percentage of the portfolio. When such funds outperform their peers, it's more likely a result of more subtle differences in allocating money among similar companies. For instance, a fund might have 4% of its assets in a stock, while the index gives it only a 3% weighting. So, if that company does well, the fund will benefit from the larger position. You may not notice the impact of these subtle differences simply by looking at a fund's list of holdings.

However, if you're looking to understand how your favorite fund manager thinks, or if you're looking for good companies to consider, looking at a fund's list of holdings isn't a bad place to start. Keep in mind that you can always just buy the fund and let the manager do the work for you.



This article was originally published Sept. 1, 2006. It has been updated by Dan Caplinger, who owns shares of Berkshire Hathaway. Fairholme Fund is a Champion Funds recommendation. Berkshire Hathaway and FedEx are Motley Fool Stock Advisor recommendations. Berkshire Hathaway, Pfizer, and Sears Holdings are Motley Fool Inside Value picks. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy tells all.

http://www.fool.com/investing/mutual-funds/2009/06/25/the-best-place-to-find-promising-stocks.aspx

Bargain Stocks Are Everywhere

Bargain Stocks Are Everywhere
By Morgan House
June 25, 2009




Bet against the masses. Don't be the lemming. Be fearful when others are greedy.

Follow these simple rules, and you'll probably be a successful investor.

With those rules of thumb in mind, you'd be forgiven for thinking now is a terrible time to buy stocks. The S&P 500 is up more than 30% over the past three months or so, which is typically consistent with a market flooded with unrestrained optimism. Sure enough, some investors are preaching of an overvalued market that's gotten way ahead of itself.

Oh really?
And maybe they're right. But perspective is in order: When stocks bottomed out in early March, a better part of the investment community thought the world was about to explode. Companies like Bank of America (NYSE: BAC) and Citigroup (NYSE: C) traded for trivial valuations because, quite literally, their deaths looked imminent.

Today, it looks like we've skirted most of those calamitous end-of-the-world threats. It's still terrible, mind you, just not as terrible as many thought. Naturally, stocks have sprung back to levels that reflect a deep recession, rather than a total Mad Max scenario.

This is an incredibly important distinction to make: Markets haven't risen to levels reflective of future optimism, but to levels consistent with a world that isn't about to fall into mass insolvency.

This is evident by looking at the biggest winners over the past few months. By and large, the stocks that have risen the most are ones you wouldn't recommend to your worst enemy. Have a look:

Company
3-Month Return
2009 EPS Estimates

Dollar Thrifty Automotive
756%
($0.85)

Avis Budget Group
430%
($0.66)

ArvinMeritor
188%
($1.24)


Data from Yahoo! Finance and Google Finance.


Are these companies destined for greatness? Did they announce a new blockbuster product? Are they the next Google (Nasdaq: GOOG), revolutionizing the way we access information in our everyday lives? Goodness, no. Not even close. Their huge gains are simply a reflection that they'll live to see another day.

This is a rally built on canceling out past pessimism, not pricing in future optimism. The biggest gains have been concentrated in very low-quality companies that are simply being given a second shot at life.

Not all gains are created equal
The idea that a stock is overvalued after a massive run-up is contingent on the idea that it was properly priced to being with. But this was hardly the case when the market bottomed in March. More importantly, some of the highest-quality companies in the world have largely been left out of the rally and still trade at attractive prices.

Here are three in particular:

Company
3-Month Return
Forward P/E Ratio (FY 2009)

Berkshire Hathaway (NYSE: BRK-A)
(1.9%)
16.0

Procter & Gamble (NYSE: PG)
8.3%
13.2

Altria (NYSE: MO)
(0.4%)
9.5


Data from Yahoo! Finance.


What's to like about these three? Glad you asked:

We gab about the awesomeness of Warren Buffett enough here at the Fool, so I won't bore you with warm and fuzzy stories. I'll just give you the numbers: Over the past 15 years, Berkshire Hathaway has traded for an average of 1.91 times book value; today it trades for 1.30 times book value. I find that very intriguing, and think you should, too.

Whether you know it or not, you probably use several Procter & Gamble products. Its strong brands -- which range from Gillette to Cascade to Tide -- are in your bathroom, kitchen, and laundry room. Since 1994, P&G shares have traded at an average of more than 26 times earnings. Today, you can pick them up for 13 times earnings. That's the kind of opportunity that makes investing in recessions such a blast.

Altria -- maker of Marlboro cigarettes -- is a staggeringly simple business that generates huge amounts of cash. Investors are nervous about new regulations that put tobacco under the watch of the Food and Drug Administration and restrict tobacco advertising. But oddly enough, the new regulations may actually benefit Altria substantially. Limits on tobacco advertising make it harder for other cigarette makers to challenge Altria’s dominant market share. This would be a huge moat that few other businesses have -- the government is, in effect, limiting competition. If you're looking for international diversification, global sibling Philip Morris International (NYSE: PM) offers a lower yield but more growth opportunity.

Onward
Perspective can be a powerful thing: One year ago, Dow 8,500 would have been associated with the end of the world. Today, some want to treat it like it symbolizes irrational exuberance simply because we've bounced so far off the March lows. This is inherently flawed thinking. Focusing on a stock's percentage change over a short period of time is utterly meaningless. Drilling down on a company's intrinsic value and buying bargains like we haven't seen in decades is what's important.

And that's why our Motley Fool Inside Value team of analysts is having a field day digging through the rubble and finding cheap stocks like never before.


Fool contributor Morgan Housel owns shares of Berkshire, Altria, Procter & Gamble, and Philip Morris International. Google is a Motley Fool Rule Breakers recommendation. Berkshire Hathaway is both a Motley Fool Stock Advisor and Motley Fool Inside Value pick. Procter & Gamble is a Motley Fool Income Investor recommendation. Philip Morris International is a Motley Fool Global Gains pick. The Fool owns shares of Procter & Gamble and Berkshire Hathaway and has a disclosurepolicy.

http://www.fool.com/investing/value/2009/06/25/bargain-stocks-are-everywhere.aspx

How Low Can Stocks Go?

How Low Can Stocks Go?
By Morgan Housel
January 23, 2009




Between Jan. 6 and Jan. 20, the Dow Jones Industrial Average dropped more than 1,000 points. If it kept plunging at that rate, the index would hit zero in a matter of months.

Of course, we won't see zero. No matter how ugly the markets get, the pain we saw over these past few months can't continue for long.

But here's the bad news: Even though zero is out of the question, that 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 pretty abysmal. When times are bad, markets don't just get drunk with fear -- they start downing entire vodka shots of it.

At times like this, nobody wants to own stocks. Investors' palms begin to sweat every time they watch CNBC. They hide their heads in the hope that the pain will go away. They throw in the towel and sell stocks indiscriminately. In short, everything gets 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

Compare that to the average P/E ratio today of 19.59 (as calculated by Standard & Poor's) and a seven-year average of more than 24, and it's apparent that stocks could fall much, much further than they already have, just by returning to the lows around which they historically hover during downturns.

Assuming that earnings stay flat, revisiting those historically low levels could easily mean a nearly 50% decline from here. For the Dow Jones Industrial Average, that'd correlate to roughly Dow 5,000 -- give or take. Of course, 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

PepsiCo (NYSE: PEP)
(26%)
(44%)

Oracle (Nasdaq: ORCL)
(22%)
(48%)

Microsoft (Nasdaq: MSFT)
(41%)
(22%)

Yahoo! (Nasdaq: YHOO)
(44%)
(54%)

Amazon.com (Nasdaq: AMZN)
(37%)
(77%)

Monsanto (NYSE: MON)
(26%)
(58%)

Walgreen (NYSE: WAG)
(22%)
(36%)


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 -- is worth much more than a measly eight 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 will 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 doesn't own shares in any of the companies mentioned in this article PepsiCo is a Motley Fool Income Investor selection. Microsoft is an Inside Value pick. Amazon.com is a Stock Advisor recommendation. The Motley Fool is investors writing for investors.

http://www.fool.com/investing/value/2009/01/23/how-low-can-stocks-go.aspx

Asset Allocation is not the same as Diversification

Asset allocation is not the same as diversification.

Rather, it refers to the strategy of allocating your investment funds among different types of investments, such as stocks, bonds, or money-market funds.

• In the long run, you will be better off with all of your assets concentrated in common stocks.
• In the short run, this may not be true, since the market occasionally has a sinking spell.
• A severe one, such as that of 2000-2002, can cause your holdings to decline in value 20% or more.
• To protect against this, most investors spread their money around.

They may for instance,

• allocate 50% to stocks, 40% to bonds, and 10% to a money-market fund, or,
• a more realistic breakdown might be 70% in stocks, 25% in bonds, and 5% in a money-market fund.
  
  
  

Related posts: Some Simple Formulas for Asset Allocation
How Much Should You Invest in Stocks?
Asset Allocation is not the same as Diversification
A Simple Approach to Asset Allocation
Forget about Everything Else and Buy Only Stocks
Some asset allocation options to consider
A favourite Formula for Asset Allocation

Virtues of Major Stocks (Blue Chips)

- Blue chip companies are not likely to go bankrupt.

- They have their troubles, but they are big enough to hire a CEO who can bring them back to life. Among the 30 companies in the DJIA, for instance, such companies as IBM, Eastman Kodak, AT&T, Sears, United Technologies, and Allied Signal were restructured in recent years by a few dynamic executives.

- Major corporations are also found in most institutional portfolios such as mutual funds, pension plans, bank trust departments, and insurance companies. One reason they like these big-capitalization stocks is liquidity.

• Since institutions have huge amounts of cash to invest, they feel comfortable with these stocks. The reason: The number of shares outstanding is huge, which means they won't disturb the market when they buy or sell.
• By contrast, if a major institution tries to invest a million dollars in a tiny Nasdaq company, the stock will shoot up several points before they complete their investing. It could be just as disruptive when they try to get out.
• As a consequence, major companies are in demand and are not left to drift.
• On the other hand, there are thousands of small companies that no one ever heard of. The only investors who can push them up are individuals - not institutions.

- Big companies can afford to hire top-notch executives and they have the resources to allocate to research and marketing.

- Also, their new products, acquisitions, management changes, and strategies are discussed frequently in such publications as the Wall Street Journal, the New York Times, Barron's, Fortune, Forbes, and Business Week, all of which are easily available.

Shortcomings of Bonds

A bond is a contractual agreement that means you have loaned money to some entity, and that entity has agreed to pay you a certain sum of money (interest) every six months until that bond matures. At that time, you will also get back the money you originally invested - no more, no less.

The two advantages of bonds are safety and income.

If you wait until the maturity date, you will be assured of getting the face value of the bond.

In the meantime, however, the bond will fluctuate, because of

• changes in interest rates, or
• the creditworthiness of the corporation.

Long-term bonds, moreover, fluctuate far more than short-term bonds.



Bonds don't have a particularly impressive record.

• Except for a year here or there, common stocks have always been a better place to be.
• Furthermore, the return on bonds today is not much better than the rate you can get on a money-market fund.

Also, bonds, even U.S. Treasuries, have an element of risk.

• They decline in value when interest rates go up.
• Long-term bonds, moreover, slide precipitously when rates shoot up.

A Simple Approach to Asset Allocation

Serious investors spend a lot of time deciding which stocks or mutual funds to buy. This is appropriate. If you are going to invest your money, you shouldn't do it without some research and thought.

On the other hand, some financial gurus maintain that it is far more important to make an effort to achieve an effective approach to asset allocation. They believe that you should place your emphasis on how much of your portfolio is invested in such sectors as:

Government bonds
Corporate bonds
Municipal bonds
Convertible bonds
Preferred bonds
Large-cap domestic stocks
Small-cap domestic stocks
Foreign stocks
Foreign bonds
Certificates of deposit
Annuities
Money-market funds

There are probably a few other categories you could include in your portfolio, and examining this list gives you an idea of what is meant by asset allocation.

The importance of asset allocation is in understanding how it can help or hurt you during certain investment periods.


A Simple Approach to Asset Allocation

From the above, you can see that asset allocation, like everything else in the world of finance, can get rather complex and confusing. It is no wonder that many people don't delve into this too much.

Here is one such approach by an investor.

"My idea of investing is to make it simple. There are just so many hours in the day. If you are still gainfully employed, you probably work eight hours in the day making a living. In the evenings, you may spend a few hours a week reading journals and other material so that you don't get fired. Obviously, that doesn't leave much time for studying the stock market.

For my part, I don't invest in many small-cap stocks, foreign stocks, bonds, convertibles, preferred stocks, or most of the other stuff on this list. I prefer to invest mostly in big-cap stocks (such as ExxonMobil, GE, Merck, IBM, Procter & Gamble, and Johnson & Johnson) and money-market funds (a safe alternative to cash).

This reduces my categories to two (2), not a dozen. All you have to do is decide what percentage of your portfolio is in stocks. The rest is in the money-market fund. Of course, the percentage is vitally important."



Related posts:Some Simple Formulas for Asset Allocation
How Much Should You Invest in Stocks?
Asset Allocation is not the same as Diversification
A Simple Approach to Asset Allocation
Forget about Everything Else and Buy Only Stocks
Some asset allocation options to consider
A favourite Formula for Asset Allocation

Forget about Everything Else and Buy Only Stocks

Believe it or not, there are some investors who are convinced that common stocks - and common stocks alone - are the royal road to riches.

"A good friend of mine has never bought anything but stocks, and he's been doing it for many years. He even went through the severe bear market of 1973 - 1974, when stocks plunged over 40 percent. He wasn't exactly happy to see his stocks being ground to a pulp, but he hung on. Today, he is a millionaire many times over. He's now 60 years old, still a comparatively young investor. His name is David A. Seidenfeld, a businessman in Cleveland."

David Seidenfeld got his start by listening to the late S. Allen Nathanson, a savvy investor who wrote a series of magazine articles on why common stocks are the best way to achieve great wealth. David Seidenfeld recently collected these essays and published them as a hardcover book, Bullishly Speaking.

If you start investing early, such as in your forties, this method can work. If you systematically invest, setting aside 10 or 15 percent of your earnings each year and doing it through thick and thin, you won't need any bonds, money-market funds, or any of the other alternatives that financial magazines seem to think you must have. You will arrive at retirement with a large portfolio that will enable you to live off the dividends.

However, if you arrived late to the investment party - let's say in your late 50s or early 60s - you may not be able to sleep too well if you rely entirely on common stocks. After all, stocks have their shortcomings, too. They tend to bounce around a lot, and they can cut their dividends when things turn bleak.


Read also:

The story of Uncle Chua
Uncle Chua's Portfolio & Dividend Income

and

Related posts: Some Simple Formulas for Asset Allocation
How Much Should You Invest in Stocks?
Asset Allocation is not the same as Diversification
A Simple Approach to Asset Allocation
Forget about Everything Else and Buy Only Stocks
Some asset allocation options to consider
A favourite Formula for Asset Allocation

Some asset allocation options to consider

For the ultraconservative investor, a suggestion is for you to invest only 55% of your portfolio in common stocks. To be sure, when the stock market is marching ahead, as it has in the 90s, you won't be able to keep pace. But if it falters and heads south for a year or two, like recently, your cautious approach will keep you out of the clutches of insomnia.

Generally, such an approach is considered timid, and is not the best way to approach asset allocation. However, many are using this formula and are not complaining.

A better way to handle the uncertainty is to invest 70% in stocks, with the rest in a money-market fund. Once you decide on a particular percentage, stick with it. Don't change it every time someone makes a market forecast.

These market forecasts don't work often enough to pay any attention to them. No professional investor has a consistent record in forecasting. Every once in a while, one of these pundits makes a correct call at a crucial turning point, and from that day on, every one listens intently to the pronouncements of this person - until the day the pronouncement is totally wrong. That day always come.



Related posts:Some Simple Formulas for Asset Allocation
How Much Should You Invest in Stocks?
Asset Allocation is not the same as Diversification
A Simple Approach to Asset Allocation
Forget about Everything Else and Buy Only Stocks
Some asset allocation options to consider
A favourite Formula for Asset Allocation

How Much Should You Invest in Stocks?

When it comes to deciding on the percentage you should devote to common stocks, there are several alternatives that should be considered. All have some merit, and none are perfect.

In fact, there is no such thing as a perfect formula for asset allocation.

It depends on such factors as

• your age, and
• your temperament.

It might also depend on what you think the market is going to do.

• If it's about to soar, you would want to be fully invested.
• But if you think stocks are poised to fall off the cliff, you might prefer to seek the safety of a money-market fund.

Related posts: Some Simple Formulas for Asset Allocation

• How Much Should You Invest in Stocks?
• Asset Allocation is not the same as Diversification
• A Simple Approach to Asset Allocation
• Forget about Everything Else and Buy Only Stocks
• Some asset allocation options to consider
• A favourite Formula for Asset Allocation

A favourite Formula for Asset Allocation

Age is the key to asset allocation. The older you are, the less you should have in common stocks.

If you are age 65, you should have 65% in common stocks, with the rest in a money-market fund.

If you are younger than 65, add 1% per year to your common stock sector. As an example, if you are 60 years old, you will have 70% in stocks.

If you are older than 65, deduct 1% a year. Thus, if you are age 70, you will have only 60% in stock.

Here is a table breaking down the 2 percentages by age:

Age--Stocks--Money-Market Funds

40---90%---10%
45---85%---15%
50---80%---20%
55---75%---25%
60---70%---30%
65---65%---35%
70---60%---40%
75---55%---45%
80---50%---50%
85---45%---55%


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How Much Should You Invest in Stocks?
Asset Allocation is not the same as Diversification
A Simple Approach to Asset Allocation
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A favourite Formula for Asset Allocation

Benjamin Graham felt that individual investors fell into two camps

Types of Investors

Graham felt that individual investors fell into two camps :

• "defensive" investors and
• "aggressive" or "enterprising" investors.

These two groups are distinguished not by the amount of risk they are willing to take, but rather by the amount of "intelligent effort" they are "willing and able to bring to bear on the task."

Thus, for instance, he included in the defensive investor category professionals (his example--a doctor) unable to devote much time to the process and young investors (his example--a sharp young executive interested in finance) who are as-yet unfamiliar and inexperienced with investing.

Graham felt that the defensive investor should confine his holdings to the shares of important companies with a long record of profitable operations and that are in strong financial condition. By "important," he meant one of substantial size and with a leading position in the industry, ranking among the first quarter or first third in size within its industry group.

Aggressive investors, Graham felt, could expand their universe substantially, but purchases should be attractively priced as established by intelligent analysis. He also suggested that aggressive investors avoid new issues.

http://www.investinvalue.com/0/styles.php

(Check out the table in this site for rules for defensive versus enterprising investors.)


Also read:
Investment Policies (Based on Benjamin Graham)

Developing an approach to a 'tip'

What I did when someone suggested a stock to buy.

This is not uncommon. Your friend or a stranger will suggest a stock to buy.

My approach has always to take note of it. I do not dismiss these 'tips' straight off, unless I am very familiar with the stock already and have a preexisting valuation or opinion on this.

The better approach would be to just have a look at their 'tips'. During your free time, have a look at the stock's fundamentals. It only takes you a short time to decide whether you wish to study the stock more thoroughly or not.

Do not just accept tips from the professionals or the 'knowledgeable'. Embrace also the tips from the most unlikely person, the taxi driver, a cleaner, or a factory worker. You may sometimes be surprised the tip led to a 'gem' stock for you to invest in.

Three years ago, a stranger casually remarked that Company X's new business has started to prosper after a few years of slow growth. This company was a poor performer for many years. Many investors would have lost money in this stock for a prolonged period. It was a definitely shunned counter on KLSE. In fact, many investors would not even touch this stock due to their unpleasant previous experiences. Few had kind words for this company even in the discussions in the blogs. Various negatives were thrown up - it was either the quality of the management, the nature of the business, blah, blah, blah...

Anyway, looking at the fundamentals of this Company X, it was obvious that its revenues and earnings were growing strongly then. It was generating a lot of cash. It was also improving on its efficiency. Investing into this company over the last couple of years had been rewarding indeed, even though 2007 -2009 was a severe bear market.

What led me to invest in this stock? A casual remark from a stranger. Herein lies the lesson of this post.

Any tips? :-)

Core Tenets in Value Investing

Read this promotional pamplet. It contains all the core tenets of value investing in a single page. Very useful indeed.


5 Secrets of Buying Dream Stocks at Bargain Prices
How to Build Your Financial Dreams On a Foundation of Value

To make real money in today's market you need to be a stock picker. And no one does it better than Warren Buffett.

Buffett is the ultimate value investor. His results are legendary. He's beaten the S&P 500's total return by nearly 60 to 1. If you had invested in his Berkshire Hathaway stock in 1965, you would have… Turned Every $10,000 into nearly $50 Million!


To Buffett, value investing is the only way to invest. It's the art of finding great stocks selling below their real value.

But finding authentic value stocks is anything but easy these days. There are many once-great companies that look cheap, but are actually traps that aren't even worth their new lower price.

And judging a stock's real value is no simple feat either. In the age of Enron, company insiders have made an art form of disguising their true financial health.

How to Find Great Value Stocks
My name is Philip Durell. I'm Founder and Senior Advisor of Motley Fool Inside Value. It's my passion to help individual investors find great value stocks. I believe value investing is the key to building life-changing wealth.

That's why value stocks belong in every portfolio. And it's why every investor needs to learn to think like a value investor. As Warren Buffett's long-time business partner Charlie Munger says, “All intelligent investing is value investing.”

5 Secrets of Value Investing
So how do you do it? Here are some of the secrets the legendary value investors use to find great bargains:

Buy When Wall Street Won't — The big players on Wall Street are very short-term focused. They'll often dump stocks just for missing one earnings estimate. But value investors favor a longer-term view. We can find hidden value in stocks that may be down as much as 30%, based on small news items and diligent research.


Own Companies, Not Stocks — Don't buy “stocks.” Instead, become a business owner of companies with strong competitive advantages. Buffett looks for companies with solid financial performance managed by seasoned and savvy executives.


Beware of the ‘Value Trap’ —Don't be fooled by judging stocks on price alone. Just because a former high-flying stock is selling for half-price doesn't mean it's a good value. The stock may have much farther to fall and may never recover. Without knowing its intrinsic value, or possible catalysts for turnaround, you can't know if a low price is a good value or not.


Know the True Value —Price is what you pay, value is what you get. Cash flow is the real health of the business. As Buffett says, “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.” Discounted Cash Flow (DCF) is a powerful tool to help you know whether to buy, hold, or sell. (We offer our subscribers a unique DCF calculator on our website that makes this simple to do.)


Don't Overpay for Growth — It's not true that value stocks can't be growth stocks. Growth is a component of value. It's just that value investors don't rely on growth. Value investors minimize risk by looking at the worst case first. They choose investments with a built-in margin of safety. That's why value stocks are the best way to follow Warren Buffett's famous rules: Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.


As Buffett's mentor Benjamin Graham wrote in The Intelligent Investor, “In the short-term, the market is a voting machine, in the long-term it is a weighing machine.” So as a value investor, you're not waiting on a rising market to lift your stock — only for the market to realize your stock's true worth. This is a much more certain way to make money.


Value Stocks Earn Market-Crushing Returns
Value beats every other type of stock investing across all types of markets hands down. Value stocks returned an average 12.6% annual return from 1926-2002, according to a study by Ibbotson Associates. $1,000 invested in 1926 have turned into more than $8,000,000!
Another study by Ibbotson looked at the period between December 1968 and December 2002. During that time value stocks returned 11.0% per year, growth stocks returned 8.8%, and the S&P 500 returned 10.2%.

At those rates

$10,000 invested in the S&P 500 grew to $270,081.
$10,000 invested in growth stocks grew to $175,200.
$10,000 invested in value stocks grew to $346,300.
Value stocks beat growth stocks nearly 2 to 1 and beat the S&P 500 more than 4 to 1!

Invest Like the Masters
I follow the trails blazed by legendary investors such as Benjamin Graham and Warren Buffett. In their value-investing approaches, they've searched for companies with beaten-down stocks that still had solid management, free cash flow, and attractive assets.
To spot the great turnarounds, I constantly search the market for out-of-favor companies. I run numerous stock screens. And then, for the few select companies that make it on my watch list, I run a series of metrics — including discounted cash flow (DCF) analysis — to give me my estimate of a company's intrinsic value.

Once I have the fair value, based on my required margin of safety, I sit back … and wait patiently. I then wait for the share price to drop below my “Buy Below” price. This gives me a margin of safety for my investment. When I spot such a bargain, I buy. Then I again patiently wait, this time for the market to recognize the stock's real value. It usually doesn't take long until the market drives up the price of the stock to levels at or above my intrinsic value estimate.

In short, I seek good deals at great prices. Having a margin of safety allows me to minimize the risk while aiming for solid returns.

Get Great Stocks at Bargain Prices
Buying great stocks at bargain prices is the surest way to get rich. You've estimated your profit before you put down your money. Value investing is the polar opposite of speculation. You squeeze out risk at every step. Then, you can buy a dollar's worth of value for as little as 50 cents because you know what you're buying. You're not basing your decision just on price, but the intrinsic value of the company you're buying. That's why…

Value Investors Sleep Well
If you're like many investors, you're still suffering from the current market meltdown. You're painfully aware that it takes a 100% gain just to break even after a 50% loss. That's why you want to avoid losing money at all costs. Value investing is the best way to find safe stocks. And they're the best way to make great profits across all types of markets.

Market-Beating Returns
So, how are we doing? Since we launched Inside Value in September 2004, we've been soundly beating the market. Even though many of my picks are very recent in a value investor's time frame, we've had great results with stocks such as:

MasterCard — locked in a 279% gain
Omnicare — locked in a 102% gain
Intuit — locked in a 84% gain

We're also collectively beating the S&P 500 since our service was founded. That's all my stocks, the winners and the losers. And, on a risk-adjusted basis, the returns are even better.

Value is the key to investing success. And that's why I invite you to join me and profit from the best values in the stock market. My commitment is to help you find great value stocks. INSIDE VALUE is the best way I know to find solid, well-managed companies that are worth more than you are paying.

Inside Value will help you:
Build your retirement dreams on a rock-solid foundation — Value is what intelligent investing is all about. You'll get all the tools and advice you need to invest in great value stocks. And along the way you'll gain the discipline, objectivity, and patience of a great value investor.

Watch your investments like a hawk — Our focus on value and free cash flow will help you keep a close eye on the stocks you own. Our live interactive scorecard shows your results throughout the trading day. It makes it easy to track each of your stocks against the S&P 500's return. Our weekly updates will keep you informed and up-to-date on any important developments with your stocks.

Experience new freedom from worry — No matter what the market does, you'll own stocks that are already priced below their value. They'll better hold their prices in bear markets and will soar higher in bull markets. Most of my recommendations are long-term “buy-and-holds,” so you don't need to worry about trading or timing the market. But when it's time to take profits, or if there's another reason to sell, I'll let you know.

Discover your true potential as an investor — Value investing is what intelligent investing is all about. You'll expand your “circle of competence” as a knowledgeable value investor. You'll find that the tools and outlook of a value investor will help you in every investing situation, from choosing new stocks to managing your portfolio to knowing when to sell.
Simplify your life — There's never been an easier way to use all the tools of value investing. We make it easy for you to grab great bargains in companies you'll want to own for the long term.

All told, Inside Value is a total investor information system to help you build real wealth in the fastest, most reliable way possible.


-----


Your Subscription Includes:

12 Monthly Issues of Inside Value — Each month my team and I will bring you two stock picks that I believe are huge bargains based on their intrinsic value. With each stock we recommend you'll get the results of all our research covering: Business Analysis, Competitive Landscape, Valuation, and Risks. You'll get everything you need to take action — including a buy-below price, intrinsic value per share, and a risk level.

You'll receive your issues delivered in print form via U.S. mail. You can also download the issues online on the day of release, and you'll also receive an e-mail telling you the instant my latest issue is available online.

Each Issue of Inside Value includes these features:

Best Buys Now — These are the best opportunities on our scorecard right now in terms of potential returns and risk, and the Inside Value team determines this list every month based on rigorous Qualitative and Quantitative Analysis.

Scorecard — Where we track all our stock returns against the S&P 500.

Valuable Knowledge — This feature focuses on sharing the skills and insights that will help you become a better value investor.

Annual Review of Stock Performance — You'll get a complete recap of the performance of all our past picks every year.

And Your Subscription also includes:

Live Interactive Stock Scorecard — Our scorecard helps you keep track of how each of our recommendations is performing relative to the S&P 500. It's online and constantly updated throughout the trading day, providing current buy-below prices and intrinsic values for every stock.

Bonus Updates — You'll receive an e-mail update on our stocks each week. We'll also send you updates whenever there is important information you need to know about right away — from buying and selling a stock to our analysis of a development in the news.

Online Discussions with Value Investing Experts — You'll also have the chance to participate in our online Q&A forums where you can ask questions and get specific answers from my team of analysts.

All Back Issues — Every back issue of the newsletter is archived on the site so you can read every recommendation and every company update we've published.

Access to Our Subscriber-Only Website — Where you'll get a wealth of information to make you a more successful investor.

Interviews with the Experts — Where I bring you exclusive interviews with key executives at many of our companies and some expert value investors. You'll meet people such as George Buckley, the new CEO of 3M who also led the turn-around at Brunswick Corp.; Joel Greenblatt, founder of Gotham Capital and author of The Little Book that Beats the Market; Wayne Huyard, president of MCI; and scores of other leaders.

Discounted Cash Flow Calculator — This unique calculator gives a fast and easy way to value a company. You'll be able to decide in a matter of minutes whether it's a great value worth looking into. The calculator makes it simple to find the intrinsic value of the company per share; your margin of safety; and price to value ratio. This tool by itself could help you find great investments or save you from a huge mistake. Make sure you run any major investment through this unique and easy-to-use investment tool. It's only available to Inside Value subscribers at our password-protected website.

FREE Membership in Inside Value Discussion Boards — This online community includes conversations on every stock we've recommended in the history of the service. Where else can you learn about a stock directly from the candid experiences of the company's employees, customers and investors?

Plus:
Don't just make your money back — come out ahead! Here are 9 top stocks ready to rebound in 2009...

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7 Stocks That Could Cause Permanent Losses

7 Stocks That Could Cause Permanent Losses
By Alex Dumortier, CFA
February 12, 2009





In a recent research note to clients, Societe Generale investment strategist James Montier identified 42 stocks worldwide that he believes threaten investors with a permanent loss of capital.

So what?
Montier is not your run-of-the mill investment strategist, which is one of the reasons I follow him. For instance, he once published a research note on the psychology of happiness with 10 suggestions, including the following: "Have sex (preferably with someone you love)."

Don't be fooled by this unorthodox style, though. Montier is no charlatan -- he's an expert on behavioral finance, and his work is steeped in the no-nonsense principles of value investing, as laid out by legendary teacher-investor Ben Graham.

In other words, it's worth your time and money to listen to what he has to say -- particularly on a matter as serious as preserving your assets.

Permanent loss of capital vs. stock price drop
First, let me emphasize what value investors refer to by a permanent loss of capital. Whether stock losses are permanent can be determined only if you have a notion of the stock's intrinsic value. Two sets of circumstances can result in permanent loss. Either :

• your cost basis was materially higher than the intrinsic value, or


• the intrinsic value itself has declined.

It's vital to understand that a drop in stock price does not cause a permanent loss of capital.

• Rather, if there is a mismatch between price and intrinsic value, there will be a downward adjustment in the stock price -- don't confuse cause and effect.


• Furthermore, not all stock-price drops are the product of latent permanent losses -- they may have other causes, such as forced selling and investor irrationality.

The trinity of risks
Now that we know what it is we are trying to avoid, let's focus on the three factors Montier refers to as the "trinity of risks" that can produce such losses:

1. Valuation risk: If earnings are at a cyclical high, the current P/E may be masking an overvalued stock. Montier uses an adjusted P/E ratio that replaces current earnings per share (EPS) in the denominator with a 10-year average EPS. This approach smooths out the effect of earnings volatility and comes straight from the Ben Graham playbook. When screening for danger, Montier looks for stocks that have an adjusted P/E ratio of greater than 16.

2. Balance sheet / financial risk: Excessive leverage can put a company into bankruptcy, no matter how sound the underlying business. Investors need to be particularly sensitive to financial risk in an environment that combines a contracting economy and tight credit.

The Z-Score is a statistical indicator of bankruptcy risk developed by Edward Altman of NYU. Montier's screen identifies companies with a Z-score below 1.8, the "distressed" range in which companies run a significant risk of bankruptcy.

3. Business / earnings risk: If current earnings are significantly higher than their recent historical average, investors may extrapolate future earnings from an inflated base and award the stock a valuation it doesn't deserve. This risk is exacerbated at the tail of a bubble. Montier looks for companies with current earnings per share that are double or more the 10-year average.

Using Montier's three criteria, I ran a screen and came up with 19 mid- and large-cap U.S. stocks. The following table contains seven of them:

Stock
Adjusted Price/ Earnings Ratio*
Z-Score
Current EPS/ 10-year Average EPS*

Wynn Resorts (Nasdaq: WYNN)
73.3
1.32
5.8

CME Group (Nasdaq: CME)
29.9
0.69
2.6

XTO Energy (NYSE: XTO)
26.4
1.44
2.6

Transocean (NYSE: RIG)
26.2
1.74
6.9

Williams (NYSE: WMB)
24.0
1.20
2.5

NYSE Euronext (NYSE: NYX)
18.5
1.39
2.6

Norfolk Southern
17.5
1.79
2.11


*Note that, in certain cases, the average earnings were calculated over fewer than 10 years for lack of data. Source: Capital IQ, a division of Standard & Poor's, as of Feb. 3, 2009.


A couple of surprise guests
I was surprised to find exchange operators CME Group and NYSE Euronext on the list, as theirs is a sector I find attractive right now. Perhaps this illustrates one of the limitations of mechanically screening by adjusted P/E and comparing current earnings to the 10-year average: It doesn't allow you to distinguish between secular increases (or declines) in earnings and cyclicality. Both companies became publicly traded within the past 10 years, so their focus on profit growth is boosted.

Here's an extreme example: Google's (Nasdaq: GOOG) earnings per share have, on average, doubled every year over the past five years; in this instance, it's pretty clear that using the 10-year average EPS to calculate the P/E would actually muddy the waters. An average earnings figure calculated over a period of strong growth is inadequate to describe the company's true earnings power at the end of the period.

Safety first
All the same, the results should give investors pause -- the other companies in the table are clearly cyclical, particularly those in the energy sector (Transocean, XTO Energy, and Williams). Cyclical or not, if you own any of the stocks in the table, it may be worth revisiting your analysis in light of these results.

James Montier's methodology is an excellent illustration of the way value investors think about avoiding permanent losses. The team at Motley Fool Inside Value follows the same principles to help their members sidestep sinkholes and invest in well-run, well-capitalized businesses trading at cheap prices.

Fool contributor Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. Google and NYSE Euronext are Motley Fool Rule Breakers picks. The Motley Fool has a disclosure policy.

http://www.fool.com/investing/value/2009/02/12/7-stocks-that-could-cause-permanent-losses.aspx