The Hidden Desire of Investors
John Price, PhD
What is the most important question for a stockmarket investor?
Whether the market is undervalued or overvalued? No!
Whether interest rates will go up or down? No!
Whether a particular company is undervalued or overvalued? No!
Whether you should buy ABC or XYZ? No!
Whether Joe Bloggs, the famous analyst, says it is a great buy? No!
Tempting as it is to look for answers to these, we will soon see that they are misleading.
Yet, there are whole office buildings full of people pumping out answers to these questions. from their side they are not trying to mislead you. They are just trying to supply answers to these questions because people keep asking them and are willing to pay large amounts of money for the answers.
Even if they could be answered, the answers will not help you reach your financial goals. Why? Because they are the wrong questions.
Focusing on these questions will give you the illusion that you are a serious investor. Long hours reading all the articles and books, perhaps even poring over charts and financial reports, will only keep you locked in the system of struggle and mediocre success.
For others, the questions will give you an illusion of confidence and comfort because you are acting on the advice the latest Wall Street hotshot.
But illusions hold you in bondage. As Morpheus in the film The Matrix explains, "Like everyone else, you were born into bondage. Born into a prison that you cannot taste or smell or touch. A prison ... for your mind."
Chasing answers to these questions will keep you in this prison. At best you may from time to time do better than the S&P500 or some other index. At worst you will see your money slipping away with poor returns and excessive fees.
Consider the case of trying to determine whether a company is undervalued or overvalued. It may turn out to be undervalued using some academic model. And there are hundreds of books describing such models. But if it stays undervalued for the next 10 years it is not going to be much of an investment.
Even the whole notion of what is value is flawed. Suppose you go into a jewelry store and decide to buy an emerald ring for $2,000. The jeweler assures you that it is really worth a lot more and even arranges to get an insurance certificate for $4,000. Great! You are now congratulating yourself for buying something that is valued at 100% more than you paid for it.
What if you split up with the person you were going to give the ring to. No worries, you are thinking. "I'll just sell it back to the store." But when you go back in you are told that they will only pay $1,000 to buy it back. What you thought you were getting for 50% of its true value turns out to be overvalued by 100%.
All the other questions asked above can be dealt with in a similar manner. For example, Warren Buffett said that he has no idea what the market is going to do and whether it is undervalued or overvalued, whatever that may mean. What is more, he is not interested in knowing.
The same applies to interest rates. Buffett once said, "If the Federal Reserve Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn't change one thing I do."
There is only one question. Underneath it all, there is only one question. What is my profit rate or percentage return going to be?
The core activity of an investor is to estimate with confidence the percentage return over a specified holding period when buying stock in a company. And you want to be able to do this based on reliable numbers and information.
When you can do this with a range of companies you have a rational basis to decide when to buy stock in a particular company, when to hold, and when to sell. You can decide between companies. You can even decide between investing in a particular company or in bonds.
You are in control. The market is now working for you instead of against you. Because you know the expected return on a range of quality companies, you can wait until Mr. Market offers to sell you stock in one of these companies that will give you the return that you want.
You can do this and more in a few minutes with the Conscious Investor Investment System.
http://www.conscious-investor.com/articles/articles/article0005.asp
Sunday 23 August 2009
Identify the Right Company
How Conscious Investor Helps You Identify the Right Company
-- and What Price to Pay for It.
Conscious Investor® is a sophisticated, yet user-friendly, analysis tool that has been designed to allow all investors to follow a systematic, business-like approach to buying and selling stocks.
Until now, selecting outstanding companies and calculating what price to pay for them has been excessively challenging and time consuming, if not downright impossible.
Conscious Investor® completely changes the face of the selection process, and gives you an edge that has never before been available to ordinary investors. You will quickly gain immunity from all the conflicting opinions expressed daily by the talking heads, the gurus, the newsletters, and even your neighbors.
1. The first step is to scan individual sectors, or even the whole market, to find the small minority of stocks that meet our stringent “Buffett-style” criteria. This scanning combines crucial company information with proprietary tools to estimate future profitability of an investment in any of the companies.
These scanners alone will save you literally hours of time researching potentially wealth-eroding companies.
2. The second step is to perform more analyses on any of the companies that have been passed through the initial filters.
3. The third step is calculating the right price to pay. This is where the power of Conscious Investor really comes to the fore. It is not a question of whether a stock is undervalued or overvalued according to some theoretical model. Rather, what Conscious Investor does is calculate precisely what return you can expect under your own margin of safety.
http://www.conscious-investor.com/whatis/identify.asp
The next step is to use Conscious Investor to do further analysis on the companies that have lasted to this point. This is followed by the third step to determine if now is the time to buy stock in the remaining companies or to sell them if they are already in your portfolio.
If the current price is still too high to make a purchase (remember Warren Buffett says that you can pay too much for even the best of companies), then Conscious Investor will help you calculate a target price . This is the maximum price that you can pay to get your desired return under your margin of safety.
Similarly, if you are thinking of selling the stock, but the price is still too low, Conscious Investor will help you calculate a target price for selling.
-- and What Price to Pay for It.
Conscious Investor® is a sophisticated, yet user-friendly, analysis tool that has been designed to allow all investors to follow a systematic, business-like approach to buying and selling stocks.
Until now, selecting outstanding companies and calculating what price to pay for them has been excessively challenging and time consuming, if not downright impossible.
Conscious Investor® completely changes the face of the selection process, and gives you an edge that has never before been available to ordinary investors. You will quickly gain immunity from all the conflicting opinions expressed daily by the talking heads, the gurus, the newsletters, and even your neighbors.
1. The first step is to scan individual sectors, or even the whole market, to find the small minority of stocks that meet our stringent “Buffett-style” criteria. This scanning combines crucial company information with proprietary tools to estimate future profitability of an investment in any of the companies.
These scanners alone will save you literally hours of time researching potentially wealth-eroding companies.
2. The second step is to perform more analyses on any of the companies that have been passed through the initial filters.
3. The third step is calculating the right price to pay. This is where the power of Conscious Investor really comes to the fore. It is not a question of whether a stock is undervalued or overvalued according to some theoretical model. Rather, what Conscious Investor does is calculate precisely what return you can expect under your own margin of safety.
http://www.conscious-investor.com/whatis/identify.asp
The next step is to use Conscious Investor to do further analysis on the companies that have lasted to this point. This is followed by the third step to determine if now is the time to buy stock in the remaining companies or to sell them if they are already in your portfolio.
If the current price is still too high to make a purchase (remember Warren Buffett says that you can pay too much for even the best of companies), then Conscious Investor will help you calculate a target price . This is the maximum price that you can pay to get your desired return under your margin of safety.
Similarly, if you are thinking of selling the stock, but the price is still too low, Conscious Investor will help you calculate a target price for selling.
Earnings Forecasts Made Easy
Earnings Forecasts Made Easy
John Price, PhD
This article describes research on a new test that is included in the Conscious Investor Investment System. The result is that we can provide earnings forecasts on selected stocks that are five times more accurate than the average of analysts' forecasts.
In the long run, the value of a stock is the discounted value of the cash that can be taken out of the company during its remaining life. The usual analysis requires two inputs.
John Price, PhD
This article describes research on a new test that is included in the Conscious Investor Investment System. The result is that we can provide earnings forecasts on selected stocks that are five times more accurate than the average of analysts' forecasts.
In the long run, the value of a stock is the discounted value of the cash that can be taken out of the company during its remaining life. The usual analysis requires two inputs.
- Firstly, a forecast of how much cash the company is going to generate year by year. This is generally written as a percentage growth rate starting with the current cash.
- Secondly, a rate at which this cash should be discounted.
There are two extra ingredients that are often pushed to the background.
- The first is what do we mean by the cash that can be taken out of the company. The simple answer is the earnings. A better answer is one of the variations of free cash flow. I’ll talk about this in a later article. To keep things straightforward, here I will just use earnings.
- The second extra ingredient is confidence. How confident are we with the earnings forecasts? I have seen investors' eyes glaze over as they started imagining the yacht they were going to buy. They had found a stock and forecast its earnings to grow at 30% per annum. The market had missed it and now our starry-eyed investors were ready to make a killing. Alas, even though this was the forecast, what are the odds of it being accurate?
First, lets consider how well the professional do. In 1997 Lawrence Brown published a study in the Financial Analysts Journal looking at 130,000 forecasts by analysts from 1985 to 1996. He found that the average absolute error was a whopping 91.6 percent.
The difficulty is that analysts are starting behind the eight ball. They are assigned a group of companies and told to forecast their earnings. Unfortunately the earnings of companies such as Chiquita Brands and the Venator Group have more ups and downs and twists and turns than The Beast roller coaster in Cincinnati.
But we do not have this problem. No one tells us which companies to analyze. We have 10,000 companies to choose from so why not turn the problem around and focus on those companies about which we can have confidence?
One way to do this is to eyeball the historical earnings of companies and pick out those companies with earnings that grew smoothly. Next, extrapolate the data for these companies to forecast future earnings. This works to some extent, but I wanted to automate the selection/forecasting process.
This is where STAEGR™ enters, a new test I developed for my investment software Conscious Investor. It measures the stability of earnings growth from year to year and expresses it as a percentage. The maximum figure of 100% represents earnings that go up, or down, by the same percentage each year. The calculations are based on fitting an exponential curve to the historical data with more emphasis on the stability of the growth of recent earnings. Special adjustments are made for negative earnings, for extreme outliers, and for earnings near zero.
Using Value Line data, I considered all the companies with eleven years of earnings data from 1988 to 1998 inclusive. Next I divided the companies into ten groups ranging from those with the highest STAEGR over the ten years from 1988 to 1997 to those with the lowest STAEGR over this period. Each group contained 115 companies.
The next step was to calculate the earnings growth over the ten-year period using another Conscious Investor function. Earnings in 1998 were forecast using 1997 data and this historical growth figure. Finally the forecasted earnings were compared with the actual earnings in 1998.
The result of most interest to us was that the forecasted earnings of the high STAEGR group were extremely accurate. For the technically minded, the forecasted earnings explained 98 percent of the variation of the actual earnings. This can be seen in the accompanying chart.
The points represent the earnings figures, forecast and actual, of the companies in the group. Most of the points lie on or near a straight line which means that actual earnings were very close to the forecasts using historical earnings. The STAEGR of this group of 115 companies was 93% and up.
Another way of describing the results is that the average absolute error for this group of was 16 percent compared to the analyst error of 91.6 percent for all stocks. The difference is even more significant than it appears since the forecasts for the STAEGR method were for a full year whereas those of the analysts were only for the next quarter.
The results for the second group of stocks was similar. Their STAEGR ranged from 90% to 93%. This means that when we focus on stocks with the highest levels of STAEGR, say 90% and up, then the past growth or earnings is a statistically reliable predictor of earnings for the following year.
The accompanying chart shows the data for group of stocks with the lowest STAEGR.
In contrast, to the previous chart, clearly the dispersion of the data points is much higher. Notice that for some of the points the forecast is negative while the actual earnings are positive and for other points the opposite holds, positive forecasts resulting in negative outcomes.
The way these points are scattered is typical of the groups of stocks with lower STAEGR. In each case, the accuracy of the predictions using historical data was lower in two ways. Firstly the data points were more dispersed. Secondly the line of best fit had slopes further away from 1 and in many cases it was negative.
The study shows that you can have more confidence that earnings will continue to grow as in the past for stocks with a high level of STAEGR.
Here are some of the companies with the highest levels of STAEGR.
Company Ticker STAEGR
William Wrigley Jr. WWY 99.80%
Trustco Bank Corp TRST 97.20%
Bed Bath & Beyond Inc. BBBY 98.90%
Westamerica Bancorporation WABC 98.90%
Harley-Davidson, Inc. HDI 98.60%
Matthew's International MATW 98.50%
Johnson & Johnson JNJ 98.50%
C.H. Robinson Worldwide, Inc. CHRW 98.20%
Quality Systems, Incorporated QSII 97.50%
Old Second Bancorp, Inc. OSBC 97.30%
FactSet Research Systems, Inc. FDS 97.20%
Companies with the lowest levels of STAEGR were Chiquita Brands CQB (1.0%) and the Venator Group Z (0.8%).
Of course, just because we have confidence in our forecasts of future earnings of a company does not mean that we should rush out and buy it. But it does provide a solid basis for any buy/sell/hold analysis. Sorting stocks with the high levels of STAEGR for earnings as well as sales is another of the unique features of Conscious investor.
http://www.conscious-investor.com/articles/articles/article0008.asp
Is finding undervalued stocks still a mystery for you?
Is finding undervalued stocks still a mystery for you?
Do you know the story of the person looking under a street lamp for a coin that he lost? A passerby offered to help and asked where he lost it. The answer he received was that it was further up the street but there was no light there to search properly!
It is much the same in the stock market. People look for value amongst the arcane models and methods put out by academics and copied by the investment professionals. But they are looking in the wrong place.
They are searching for value in terms of trying to answer questions such as whether or not a particular stock is 30 percent undervalued or 20 percent overvalued. Then they wonder why their performance is mediocre at best. Remember that around 70-80 percent of fund managers, the main people who use these methods, actually under perform the market.
The problem is that they are confusing various static definitions of value with value in terms of performance. No wonder finding undervalued stocks is a mystery for most people.
The aim of successful investing boils down to one thing—being confident that you will get a healthy return. In other words value for an investor needs to be tied to future performance and not whether it appears to be a bargain at the moment.
A key quote from Warren Buffett explains how he approaches this.“Unless we see a very high probability of at least 10% pre-tax returns," he wrote, "we will sit on the sidelines.” You might be thinking, “Wait a minute, Buffett gets a much higher return than this.” You would be right in thinking this.
The point is that this is really his worst case scenario. It is like locking in a minimum of 10 percent and leaving open the possibility of much higher returns which in Buffett’s case is an average of over 20 percent per year.
In other words, a true undervalued stock is first of all a quality company and secondly it is selling at a price so that under a margin of safety you can be confident of receiving a strong return.
This is precisely what Conscious Investor® does.
Do you know the story of the person looking under a street lamp for a coin that he lost? A passerby offered to help and asked where he lost it. The answer he received was that it was further up the street but there was no light there to search properly!
It is much the same in the stock market. People look for value amongst the arcane models and methods put out by academics and copied by the investment professionals. But they are looking in the wrong place.
They are searching for value in terms of trying to answer questions such as whether or not a particular stock is 30 percent undervalued or 20 percent overvalued. Then they wonder why their performance is mediocre at best. Remember that around 70-80 percent of fund managers, the main people who use these methods, actually under perform the market.
The problem is that they are confusing various static definitions of value with value in terms of performance. No wonder finding undervalued stocks is a mystery for most people.
The aim of successful investing boils down to one thing—being confident that you will get a healthy return. In other words value for an investor needs to be tied to future performance and not whether it appears to be a bargain at the moment.
A key quote from Warren Buffett explains how he approaches this.“Unless we see a very high probability of at least 10% pre-tax returns," he wrote, "we will sit on the sidelines.” You might be thinking, “Wait a minute, Buffett gets a much higher return than this.” You would be right in thinking this.
The point is that this is really his worst case scenario. It is like locking in a minimum of 10 percent and leaving open the possibility of much higher returns which in Buffett’s case is an average of over 20 percent per year.
In other words, a true undervalued stock is first of all a quality company and secondly it is selling at a price so that under a margin of safety you can be confident of receiving a strong return.
This is precisely what Conscious Investor® does.
- It starts by identifying great companies in terms such as management performance, strong and consistent growth and minimum debt.
- Once you have decided on a particular company, the second step is to calculate the expected return over your investment period under your margin of safety. For example, you can calculate your performance over the next five years if the growth in earnings dropped by 50 percent from its past rate.
In this way Conscious Investor helps you hone in on companies that give you true value as an investor.
http://www.conscious-investor.com/whatis/findingvalue.asp
Maladies of get-evenitis and consolidatus profitus.
Get-Evenitis and Other Investor Maladies
By John Price, Ph.D.
What happens when you buy a stock and it drops by 30 percent? Do you sell or do you hang on hoping that it will come back to its original price? If you usually hang on, then you may be suffering from get-evenitis, a highly contagious disease particularly among males.
If you buy XYZ for $20 and it drops to $12, you now own a $12 stock. It does not matter how it arrived at this price. The question now becomes, "If I had $12, would I buy a unit of XYZ or would I buy something else?" If the answer is to buy XYZ, then hang on to it. Otherwise sell it. Unfortunately our ego will goad us into all sorts of rationalizations why we should not sell at a loss.
We want to be able to say, "It's only a paper loss. Don't worry. It will come back." Worse than having our teeth pulled is being forced to utter "I made a mistake." Even "There was a downturn in the market which caused XYZ to go south" is hard for most of us to say. Just as in real life, sometimes we have to face our mistakes and accept a loss before we can move on.
In 1995 Nicholas Leeson became famous for causing the collapse of Barings Bank, his employer. Over the previous years he had some serious losses. Instead of admitting them, in his own words, he "gambled on the stock market to reverse his mistakes and save the bank." But things just got worse and he ended up losing $1.4 billion.
It is unlikely that any of us are going to catch such an acute case of get-evenitis. More likely it will be a low-grade infection that eats away at our investing profits.
Get-evenitis has an associated disease called consolidatus profitus. Where you see one, you usually see the other. Sufferers of consolidatus profitus are often heard intoning "You can't lose money by taking a profit."
You may not lose money for that particular stock, but in the end what makes the difference is what we do with our profits. What if we put the money from the sale into a stock that is a major underperformer? We may be able to say that we made a profit on a particular stock. What we are not saying is that our portfolio went down because of the way we spent the profits.
If ABC goes from $20 to $30, then you now own a $30 stock. In the same way that you examined the loser above, think what you would do with $30. If you would buy ABC for $30, then keep the stock. If not, then sell it.
Of course, in real life things are a bit more complicated since we have to take into account transaction costs and taxes. But I think the general idea is clear-evaluate your stocks on what return you expect to get from them in the future, not on what they have done in the past.
Just how wide-spread are these diseases follows from a large-scale study carried out by Terrance Odean of the University of California in Davis. Reporting in the Journal of Finance, 1998, he found that people tended to trade out of winners into stocks that performed less well. Overall he found that people would have been better to sell their losers and keep their winners. Instead, they did the opposite, namely keep their losers and sell their winners.
To get a rough idea of the size of the losses, imagine an investor that has two stocks to sell, one a past winner and the other a past loser. Using data from Odean's study, the average return on the past winner over the next year was 2.4 percent above the market average compared to a 1 percent loss on the past loser.
This means that holding on to your winner would put you 2.4 percent ahead of the market during the next year. In contrast, holding on to the loser would put you 1 percent behind the market. But this is just what the average investor did. On average, investors choose to sell their winners more often than their losers.
The difference between the two strategies is even more marked when taxes are taken into account. When you claim a loss you are getting a tax rebate and so you want this as early as possible. In contrast, with a profit you are paying tax so you want to delay this as long as possible. But, as we just learned, the average investor tends to take profits early and losses late ending up on the wrong side of the taxman.
Actually, some investors are aware of these tax consequences. The above findings are actually for the months of January to November. In December, there was a slight tendency in the opposite direction with losers being sold more often than winners.
There are two primary explanations as to why investors sell winners more often than losers. The first explanation is what was described above, the aversion to having to admit that you made a loss is greater than the joy of being able to announce a success.
The second explanation is that investors generally believe in mean reversion for stock prices. This is the concept that over the longer term, stocks that go down will move back up to their original price whereas stocks that go up will come back down to their original price. Alas, if only the stock market was so simple. The results of Odean's study indicate that the opposite is more likely to happen, stocks that have gone up will go up even more, and stocks that have gone down will go down even more.
Of course, none of the above would come as a surprise to people familiar with the world of trading where the maxim "cut your losses short and let your profits run" is a basic tenet. In his famous book How to Make Money in Stocks, William O'Neil wrote, "If you want to make money in the stock market, you need a specific defensive plan for cutting your losses quickly and you need to develop the decisiveness and discipline to make these tough, hard-headed decisions without wavering."
The moral is to take a hard look at the stocks in your portfolio using objective criteria such as contained in Conscious Investor. Make your buy/hold/sell decisions on a careful appraisal of the profit you expect from them in the future and not on emotional attachment or pride. If you do this you will have inoculated yourself against the maladies of get-evenitis and consolidatus profitus.
http://www.conscious-investor.com/articles/articles/article0020.asp
By John Price, Ph.D.
What happens when you buy a stock and it drops by 30 percent? Do you sell or do you hang on hoping that it will come back to its original price? If you usually hang on, then you may be suffering from get-evenitis, a highly contagious disease particularly among males.
If you buy XYZ for $20 and it drops to $12, you now own a $12 stock. It does not matter how it arrived at this price. The question now becomes, "If I had $12, would I buy a unit of XYZ or would I buy something else?" If the answer is to buy XYZ, then hang on to it. Otherwise sell it. Unfortunately our ego will goad us into all sorts of rationalizations why we should not sell at a loss.
We want to be able to say, "It's only a paper loss. Don't worry. It will come back." Worse than having our teeth pulled is being forced to utter "I made a mistake." Even "There was a downturn in the market which caused XYZ to go south" is hard for most of us to say. Just as in real life, sometimes we have to face our mistakes and accept a loss before we can move on.
In 1995 Nicholas Leeson became famous for causing the collapse of Barings Bank, his employer. Over the previous years he had some serious losses. Instead of admitting them, in his own words, he "gambled on the stock market to reverse his mistakes and save the bank." But things just got worse and he ended up losing $1.4 billion.
It is unlikely that any of us are going to catch such an acute case of get-evenitis. More likely it will be a low-grade infection that eats away at our investing profits.
Get-evenitis has an associated disease called consolidatus profitus. Where you see one, you usually see the other. Sufferers of consolidatus profitus are often heard intoning "You can't lose money by taking a profit."
You may not lose money for that particular stock, but in the end what makes the difference is what we do with our profits. What if we put the money from the sale into a stock that is a major underperformer? We may be able to say that we made a profit on a particular stock. What we are not saying is that our portfolio went down because of the way we spent the profits.
If ABC goes from $20 to $30, then you now own a $30 stock. In the same way that you examined the loser above, think what you would do with $30. If you would buy ABC for $30, then keep the stock. If not, then sell it.
Of course, in real life things are a bit more complicated since we have to take into account transaction costs and taxes. But I think the general idea is clear-evaluate your stocks on what return you expect to get from them in the future, not on what they have done in the past.
Just how wide-spread are these diseases follows from a large-scale study carried out by Terrance Odean of the University of California in Davis. Reporting in the Journal of Finance, 1998, he found that people tended to trade out of winners into stocks that performed less well. Overall he found that people would have been better to sell their losers and keep their winners. Instead, they did the opposite, namely keep their losers and sell their winners.
To get a rough idea of the size of the losses, imagine an investor that has two stocks to sell, one a past winner and the other a past loser. Using data from Odean's study, the average return on the past winner over the next year was 2.4 percent above the market average compared to a 1 percent loss on the past loser.
This means that holding on to your winner would put you 2.4 percent ahead of the market during the next year. In contrast, holding on to the loser would put you 1 percent behind the market. But this is just what the average investor did. On average, investors choose to sell their winners more often than their losers.
The difference between the two strategies is even more marked when taxes are taken into account. When you claim a loss you are getting a tax rebate and so you want this as early as possible. In contrast, with a profit you are paying tax so you want to delay this as long as possible. But, as we just learned, the average investor tends to take profits early and losses late ending up on the wrong side of the taxman.
Actually, some investors are aware of these tax consequences. The above findings are actually for the months of January to November. In December, there was a slight tendency in the opposite direction with losers being sold more often than winners.
There are two primary explanations as to why investors sell winners more often than losers. The first explanation is what was described above, the aversion to having to admit that you made a loss is greater than the joy of being able to announce a success.
The second explanation is that investors generally believe in mean reversion for stock prices. This is the concept that over the longer term, stocks that go down will move back up to their original price whereas stocks that go up will come back down to their original price. Alas, if only the stock market was so simple. The results of Odean's study indicate that the opposite is more likely to happen, stocks that have gone up will go up even more, and stocks that have gone down will go down even more.
Of course, none of the above would come as a surprise to people familiar with the world of trading where the maxim "cut your losses short and let your profits run" is a basic tenet. In his famous book How to Make Money in Stocks, William O'Neil wrote, "If you want to make money in the stock market, you need a specific defensive plan for cutting your losses quickly and you need to develop the decisiveness and discipline to make these tough, hard-headed decisions without wavering."
The moral is to take a hard look at the stocks in your portfolio using objective criteria such as contained in Conscious Investor. Make your buy/hold/sell decisions on a careful appraisal of the profit you expect from them in the future and not on emotional attachment or pride. If you do this you will have inoculated yourself against the maladies of get-evenitis and consolidatus profitus.
http://www.conscious-investor.com/articles/articles/article0020.asp
Friday 21 August 2009
What’s your sell discipline?
What’s your sell discipline?
Jim Yih B.Comm, PRP, CSA, EPC, RDB
Saturday, September 15, 2007
With any investment, there are two key decisions that have to be made. The first is when to buy and the second is when to sell.
In the investment world, a lot of time is spent on which investments to buy. You can find hot tips everywhere you look. For most investors, very little time is spent understanding when to sell and yet it is equally important as the decision to buy. This week, I met Jack who bought a penny stock a year ago and the stock has more than tripled. When I asked him when he was planning to sell the stock, he had no plans to sell since the outlook for the company still looked great.
Buy your winners and sell your losers
The problem with not having a sell strategy is that selling becomes a reaction to emotion. Investing is an emotional game to begin with. We love investments that make money and we tend to buy more or hold on as investments go up. On the other hand when investments drop, we tend to panic and sell.
Take a look at your portfolio today. Rank your investments from best to worst. Chances are, your natural instinct is to keep your winners and get rid of your losers. It's human nature to react in this fashion but the real strategy that works is buy low, sell high.
When I think of the best money managers, stock brokers or the best financial advisors, typically they have a good understanding of both the buy and the sell side of investing. Here are some thoughts on when it might be appropriate to sell an investment.
1.You got it wrong. We all make mistakes from time to time. Sometimes investors are lead to hang onto an investment because the industry promotes the merits of buy and hold. The problem is the industry has both good investments and bad investments. If you buy a bad investment and hold a bad investment, you will always have a bad investment. Sometimes it's best to cut your losses when you make that bad investment.
2.Something Fundamental has changed. Whether you invested in a stock or mutual fund, remember that everything changes. Sometimes changes are for the better but naturally it can change for the worse too. It is important to monitor your investments in case there is a fundamental change for the worse.
3.Your personal circumstances have changed. One thing the investment industry is very concerned about is whether investments are 'suitable for the investor'. Inevitably, your personal financial circumstances will change form time to time, which may lead you to be more conservative or more aggressive. Make sure your portfolio is adjusted accordingly.
4.Re balancing. Rebalancing is a strategy that forces you to sell your winners and buy more of your losers. In other words buy lower and sell higher. I highly recommend that you rebalance a portfolio from time to time for this very reason.
5.Profit taking. If you go back to the example of Jack who has tripled his investment. Probably the most prudent strategy for Jack is to take profits and maybe sell a third of his investment. This way he will take out his original investment and only be speculating with money he never had.
6.Set sell targets from the start. Many professional money managers set sell targets at the time they make the buy. This ensures there is some logic and discipline put into place to help keep emotions from running the show.
When it comes to investing, make sure you devote some time to understanding the sell side of investing. If you are using a professional maybe one good question to ask is "What is your sell strategy?"
Jim Yih is the author of the Best Selling Mutual Fundamentals and also Seven Strategies to Guarantee Your Investments. He is a Financial Expert who writes a regular weekly syndicated column and lectures as a professional speaker on wealth, retirement and personal finance. For more information you can visit his any of his other websites http://www.jimyih.com/, http://www.retirehappy.ca/ or http://www.thinklots.com/. Inquiries can be emailed to feedback@WealthWebGurus.com
Jim Yih B.Comm, PRP, CSA, EPC, RDB
Saturday, September 15, 2007
With any investment, there are two key decisions that have to be made. The first is when to buy and the second is when to sell.
In the investment world, a lot of time is spent on which investments to buy. You can find hot tips everywhere you look. For most investors, very little time is spent understanding when to sell and yet it is equally important as the decision to buy. This week, I met Jack who bought a penny stock a year ago and the stock has more than tripled. When I asked him when he was planning to sell the stock, he had no plans to sell since the outlook for the company still looked great.
Buy your winners and sell your losers
The problem with not having a sell strategy is that selling becomes a reaction to emotion. Investing is an emotional game to begin with. We love investments that make money and we tend to buy more or hold on as investments go up. On the other hand when investments drop, we tend to panic and sell.
Take a look at your portfolio today. Rank your investments from best to worst. Chances are, your natural instinct is to keep your winners and get rid of your losers. It's human nature to react in this fashion but the real strategy that works is buy low, sell high.
When I think of the best money managers, stock brokers or the best financial advisors, typically they have a good understanding of both the buy and the sell side of investing. Here are some thoughts on when it might be appropriate to sell an investment.
1.You got it wrong. We all make mistakes from time to time. Sometimes investors are lead to hang onto an investment because the industry promotes the merits of buy and hold. The problem is the industry has both good investments and bad investments. If you buy a bad investment and hold a bad investment, you will always have a bad investment. Sometimes it's best to cut your losses when you make that bad investment.
2.Something Fundamental has changed. Whether you invested in a stock or mutual fund, remember that everything changes. Sometimes changes are for the better but naturally it can change for the worse too. It is important to monitor your investments in case there is a fundamental change for the worse.
3.Your personal circumstances have changed. One thing the investment industry is very concerned about is whether investments are 'suitable for the investor'. Inevitably, your personal financial circumstances will change form time to time, which may lead you to be more conservative or more aggressive. Make sure your portfolio is adjusted accordingly.
4.Re balancing. Rebalancing is a strategy that forces you to sell your winners and buy more of your losers. In other words buy lower and sell higher. I highly recommend that you rebalance a portfolio from time to time for this very reason.
5.Profit taking. If you go back to the example of Jack who has tripled his investment. Probably the most prudent strategy for Jack is to take profits and maybe sell a third of his investment. This way he will take out his original investment and only be speculating with money he never had.
6.Set sell targets from the start. Many professional money managers set sell targets at the time they make the buy. This ensures there is some logic and discipline put into place to help keep emotions from running the show.
When it comes to investing, make sure you devote some time to understanding the sell side of investing. If you are using a professional maybe one good question to ask is "What is your sell strategy?"
Jim Yih is the author of the Best Selling Mutual Fundamentals and also Seven Strategies to Guarantee Your Investments. He is a Financial Expert who writes a regular weekly syndicated column and lectures as a professional speaker on wealth, retirement and personal finance. For more information you can visit his any of his other websites http://www.jimyih.com/, http://www.retirehappy.ca/ or http://www.thinklots.com/. Inquiries can be emailed to feedback@WealthWebGurus.com
5 Investing Adages That Are Still Relevant Today
5 Investing Adages That Are Still Relevant Today
Written By Soo L.
Being able to rely on long standing investing adages can help you keep a level head when investing. Human nature hasn't changed much since the birth of investing, which makes many adages relevant for years and years. If you're new or old to investing, here are a handful of adages that can help you stay on top of your game.
1. Bulls And Bears Get Rich, But (Greedy)Pigs Get Slaughtered
This is a classic investing adage with an important message. If someone is overly greedy, he/she will end up getting slaughtered. Greed can be a big problem if you let it control you. When greed makes your decisions, you can be hasty and uncareful in what you do, which can cost you big when making investments. If you don't do your homework and due diligence on your next investment and make an impulsive buy, you could easily get slaughtered.
The adage states that bulls and bears get rich, meaning those who don't succumb to greed get rich. This isn't true in all cases, but the message is still valid. If you stay disciplined and careful, it doesn't matter which side of the fence you're playing (either a bull or a bear), you can still make a handsome profit. To help put this adage to work in your investing life, remember to keep your your emotions and greed in check.
2. Be Fearful When Others Are Greedy, And Greedy When Others Are Fearful
When others are fearful, there is less demand, and when there is less demand, and prices are lower. This adage teaches that it is important to take advantage of these types of situations because, like greed and other emotions, fear can make people act irrationally. If you follow the crowd and are greedy when others are greedy and fearful when others are fearful, you'll just be following the trends and playing catch up with the crowd. This type of investing strategy is hardly effective because usually all of the profits are taken before everyone else learns about it.
The adage teaches to take advantage of opportunities in markets where fear has an unrealistic effect on the price of things. An example of this was on September 11th, 2001 where stocks plummeted so quickly that the US markets had to close. Fear had a tremendous effect on the entire stock market and there were certainly bargains for any investor.
As with any investment, there is no certainty in anything you do, Even if you are greedy when others are fearful won't automatically make you rich, but having a non-herd mentality can give you an edge. The first adage on this list gives a warning about the danger of greed, which is still relevant to this adage. Even though it recommends being greedy, it is still important to keep your greed under control.
3. Never Try Catching A Falling Knife
This adage is an important counter to the previous one. While it is important to not be another sheep in the herd, it is also important to not be too much of a contrarian. If you see other people are fearful over a certain investment and are selling, there is a chance that they're letting their fears get the best of them, or there is a very legitimate reason why people are selling. If you get involved in an investment that's plummeting and you try to catch it like a falling knife, you could get cut.
Again as the first adage states, it is always important to not be too greedy. You have to do your homework and research before getting into any investment. If you don't, you might as well gamble your money at the casino. By avoiding falling knife investments, you'll be able to protect yourself from seriously damaging your portfolio. Stay away from industries and sectors that really have no future. Investments are only successful if they increase in value, which is impossible in a dying industry or sector.
4. A Rising Tide Lifts All Boats
When the economy is doing well, most companies do well as a result. This is the reasoning behind this old adage. If you ignore rising tides in economies, industries, and sectors, you could miss out on big profits. Missing out on these types of profits can hurt you because trend following is one of the easiest and most reliable investing strategies (as long as you're not the last one that follows).
If you see trends forming early on in any market, and invest in that market, you can make a very nice profit. The important part again, is to do your homework to identify the most credible trends and take advantage of them before anyone else. The earlier you get in on an upward trend, the better off you'll be.
5. Let Your Winners Run, Cut Your Losers
When you invest, it is easy to sell your successful investments and keep your failing ones. This is what comes intuitively to most investors but can end up costing you a lot of potential profits. By selling your winners too early, you could miss out on huge gains. By keeping your losers too long, you could realize many losses. This isn't always true, but it makes mathematical sense; if you keep your money in losing investments instead of winning ones, you'll more likely end up losing money.
If you have an investment that has been performing consistently well, there is no good reason to sell it. As the adage states, it is important to let your winners run. By selling too early, you could miss out on a lot more than holding onto a losing investment for too long. When holding onto a losing investment too long, you can only lose the money you initially spent. If you sell too early, you could lose many times the amount of money you initially spent. By letting your winners run, and cutting your losers, you can do much better than doing the opposite. As with all investments, it is still important to do your homework.
http://www.manhelper.com/money_career/5_investing_adages_that_are_still_relevant_today
Written By Soo L.
Being able to rely on long standing investing adages can help you keep a level head when investing. Human nature hasn't changed much since the birth of investing, which makes many adages relevant for years and years. If you're new or old to investing, here are a handful of adages that can help you stay on top of your game.
1. Bulls And Bears Get Rich, But (Greedy)Pigs Get Slaughtered
This is a classic investing adage with an important message. If someone is overly greedy, he/she will end up getting slaughtered. Greed can be a big problem if you let it control you. When greed makes your decisions, you can be hasty and uncareful in what you do, which can cost you big when making investments. If you don't do your homework and due diligence on your next investment and make an impulsive buy, you could easily get slaughtered.
The adage states that bulls and bears get rich, meaning those who don't succumb to greed get rich. This isn't true in all cases, but the message is still valid. If you stay disciplined and careful, it doesn't matter which side of the fence you're playing (either a bull or a bear), you can still make a handsome profit. To help put this adage to work in your investing life, remember to keep your your emotions and greed in check.
2. Be Fearful When Others Are Greedy, And Greedy When Others Are Fearful
When others are fearful, there is less demand, and when there is less demand, and prices are lower. This adage teaches that it is important to take advantage of these types of situations because, like greed and other emotions, fear can make people act irrationally. If you follow the crowd and are greedy when others are greedy and fearful when others are fearful, you'll just be following the trends and playing catch up with the crowd. This type of investing strategy is hardly effective because usually all of the profits are taken before everyone else learns about it.
The adage teaches to take advantage of opportunities in markets where fear has an unrealistic effect on the price of things. An example of this was on September 11th, 2001 where stocks plummeted so quickly that the US markets had to close. Fear had a tremendous effect on the entire stock market and there were certainly bargains for any investor.
As with any investment, there is no certainty in anything you do, Even if you are greedy when others are fearful won't automatically make you rich, but having a non-herd mentality can give you an edge. The first adage on this list gives a warning about the danger of greed, which is still relevant to this adage. Even though it recommends being greedy, it is still important to keep your greed under control.
3. Never Try Catching A Falling Knife
This adage is an important counter to the previous one. While it is important to not be another sheep in the herd, it is also important to not be too much of a contrarian. If you see other people are fearful over a certain investment and are selling, there is a chance that they're letting their fears get the best of them, or there is a very legitimate reason why people are selling. If you get involved in an investment that's plummeting and you try to catch it like a falling knife, you could get cut.
Again as the first adage states, it is always important to not be too greedy. You have to do your homework and research before getting into any investment. If you don't, you might as well gamble your money at the casino. By avoiding falling knife investments, you'll be able to protect yourself from seriously damaging your portfolio. Stay away from industries and sectors that really have no future. Investments are only successful if they increase in value, which is impossible in a dying industry or sector.
4. A Rising Tide Lifts All Boats
When the economy is doing well, most companies do well as a result. This is the reasoning behind this old adage. If you ignore rising tides in economies, industries, and sectors, you could miss out on big profits. Missing out on these types of profits can hurt you because trend following is one of the easiest and most reliable investing strategies (as long as you're not the last one that follows).
If you see trends forming early on in any market, and invest in that market, you can make a very nice profit. The important part again, is to do your homework to identify the most credible trends and take advantage of them before anyone else. The earlier you get in on an upward trend, the better off you'll be.
5. Let Your Winners Run, Cut Your Losers
When you invest, it is easy to sell your successful investments and keep your failing ones. This is what comes intuitively to most investors but can end up costing you a lot of potential profits. By selling your winners too early, you could miss out on huge gains. By keeping your losers too long, you could realize many losses. This isn't always true, but it makes mathematical sense; if you keep your money in losing investments instead of winning ones, you'll more likely end up losing money.
If you have an investment that has been performing consistently well, there is no good reason to sell it. As the adage states, it is important to let your winners run. By selling too early, you could miss out on a lot more than holding onto a losing investment for too long. When holding onto a losing investment too long, you can only lose the money you initially spent. If you sell too early, you could lose many times the amount of money you initially spent. By letting your winners run, and cutting your losers, you can do much better than doing the opposite. As with all investments, it is still important to do your homework.
http://www.manhelper.com/money_career/5_investing_adages_that_are_still_relevant_today
Investing is a Loser’s Game
We wish to examine the field of investments from simple game theoretical considerations.
What determines success and what determines failure? Are there principles that can be understood to help the individual invest more successfully? I believe that the best principle that can be adopted by the individual investor is to ignore the market, minimize trading expenses, think a bit like a business owner, invest long-term, and, most crucially, know your limitations as an investor.
There are two types of games: "Winner’s Games" and "Loser’s Games." Now this doesn’t mean that losers play only certain games, while winners play other games. It has nothing to do with personality characteristics. By "Loser’s Game," I don’t mean that investors are losers. It is just a way to classify games to help us understand them better.
The outcome of any competitive game depends upon the actions of both the winner and the loser of the game. This does not always imply the winner’s actions will dominate the outcome. Many games are not won, but rather, are lost. It is important to understand the distinction.
Winner’s Games are those games whose outcome is largely determined by the actions of the winner. Loser’s Games are those games whose outcome is largely determined by the actions of the loser.
Amateur tennis is a loser’s game. Non-highly-trained players do not possess the skills to deliver excellent serves and returns with consistency. An attempt to try harder to deliver superior shots, compared to the opponent, will not meet with success, but double faults and shots that go out of bounds. Trying harder to make great shots will mean that you are giving the opponent points. The player is not only competing against the other player, but also against the inherent difficulties of the game. The more competitive the amateur tries to be, the more the inherent difficulties of the game will beat him down.
The amateur who has not mastered the fundamentals of the game is far better off just trying to deliver a shot within the tennis court bounds than trying to outplay the opponent. Keep the ball in play and give the opponent the opportunity to mess up the shot. And, the harder the opponent tries, the more likely he will mess up!
If you were playing a professional tennis player, the situation would change drastically. Professional tennis is a winner’s game. Professional tennis players have mastered the fundamentals of the game. You must not only master the fundamentals of the game to win, but you must also deliver superior shots. You must outplay your opponent to win. Returning the ball within court bounds is not enough. The opponent probably won’t mess up and might well force a shot you can’t return.
In amateur tennis, having the opportunity to hit the ball is an opportunity for the opponent. In professional tennis, hitting the ball is an opportunity for the hitter. Professionals look upon having the serve as an advantage. Amateurs are better off the less contact they need to have with the ball!
Loser’s games are the competitive person’s bane until the fundamentals of the game are mastered. When I was younger, I once lost about twenty-six tennis matches in a row to a friend. The further behind I felt, the more I tried to cream the ball and deliver a killer shot.
I remember one shot actually being in bounds and drilling right through the fence behind the court. Wow! What Power! That was fun. What potential I had! Unfortunately, for that one shot, there were many more shots that hit the net, went out-of-bounds, or, in some other way, cost me a point. The more I tried to deliver superior play, the further behind I got. I had not mastered the fundamentals of the game. Nor, would I ever.
Competitive people want to win. Often, they derive much of their sense of self-worth from winning. So, as the competitive person loses more and more, he will either try harder and harder to win, or else give up. That is a natural human tendency. With tennis, an individual who really wants to win will, in time, learn that by just easing up a bit, more games are won.
Some people make excellent amateur tennis players. They learn just to keep the ball in play. Sometimes, they even feel they will be able to become a professional. Then, they find they are never able to beat the better, more professional players. They have been able to win consistently, despite never really mastering the fundamentals of the game and constantly pushing themselves to improve as players. They win, by letting the other amateur lose.
The very best players have mastered the game and work to improve, to learn to force more shots. With tennis, there is the potential to master the game and learn to force good shots, if only you work enough at it.
So, the best players will start to develop a unique approach to play as they grow in ability. They will play conservatively when it is needed. But, if they are far enough ahead, they will push themselves to force a few shots. In that way they can grow from being a good amateur into having a more professional level of play. In time, the best will learn to play tennis as a winner’s game. If they continue to count on the opponent's messing up to win games, they will never move to a professional level.
You now have a complete understanding of the difference between winner's games and loser's games.
Investing is a loser’s game. It is a loser’s game, not only at the amateur level, but also at the professional level. Over time, trying harder to achieve superior returns will usually lead to inferior returns. Trying to time the stock market, day trading, buying options, and most active investment advice approaches investing as though it were a winner’s game—believing you can actually conquer and beat the market.
If, for example, you had felt that the stock market was overvalued and due for a correction, and you had remained out of the stock market for the year 1995, you would have missed one of the market’s best years ever. But, maybe, you also missed the big market drop of 1987. What could you conclude from this? Probably, as with my streak of tennis losses, you would tend to remember the victories (or, near victory shots that led to losing the game!) and forget the defeats.
You reason that if only all your tennis shots or investment decisions had been as great as the best ones you remember, you would have won decisively! But, seeking that one great shot is what cost you the match.
You would tend to explain your victory as confirming proof of market timing and your skill to do it, while the defeat would be interpreted as only indicating a need to improve your methods slightly! You are interpreting investing, and more specifically, market timing, as though it were a winner’s game. It is not! It has never been shown that anyone, I repeat anyone, can master stock market timing.
Looking for stocks you feel might go up ten or twenty times from their present price in a few short years is also a form of trying to invest in the stock market as though it were a winner’s game. Or, given the late 1990’s you might be seeking growth stocks that go up 100 times or more in a few short years!
After all, you recall Dell, Cisco, Yahoo, and other companies which shot up by amazing amounts. To buy such speculative stocks implies you feel confident in finding opportunities that are grossly misevaluated by the market. Usually, you will not invest in the next Dell or Cisco, but, rather, the next He-Ro apparel company of the day. That is to say, a lousy investment. This can lead to huge losses.
Individual investors usually have not mastered business evaluation and fundamental analysis sufficiently to actively select the very best aggressively-chosen stocks from among the larger market. But don't feel bad. The professionals who are paid millions of dollars haven't done much better.
Yet, the human need to try to force a shot now and then reoccurs. If you must try to invest on winner’s game terms, I will show you what I feel are two of the best strategies.
One is investing in turnaround companies. Those are stocks that have hit bad times and are largely disliked by most investors. I can’t show you how to select the real winners from the pack of dogs. No one really can. But, I can help you learn to protect yourself from investing in obviously crummy companies. That is a skill well worth having.
The other strategy is seeking out growth companies. Again, I can’t tell you how to find the next Microsoft. No one can. But, I can help give you some general principles to keep in mind. Things to watch out for. Things that help you decide not to invest in a potential growth company. This is my sunscreen advice. If you must sit out in the blazing sun, protect yourself as best as you can!
Understanding that investing is a loser’s game at heart should keep you from trying to force too many shots. Rather than looking for one big winner, aim for consistency in your results. The bulk of an intelligent investor’s portfolio should be invested in high-quality, larger companies purchased at reasonable prices. Such a portfolio will likely beat, not only a market timer’s portfolio, but also a speculative portfolio of "carefully" selected, aggressive stocks on a risk-adjusted basis.
High portfolio turnover is indicative of trying to play the investment game as though it were a winner’s game. Shifting money rapidly from one investment to another indicates a belief that you can place the two possible investments on a scale of their relative merit with a high degree of accuracy. Further, you are expecting that the market will, in short order, realize just how knowledgeable you are and correct the valuations!
Any individual investor who buys individual stocks must be able to make an estimate of the relative merit of two stocks. However, we must be realistic about our ability to distinguish opportunities. Often the difference between two stocks, as far as investment desirability is concerned, is so slight that there is no way to distinguish which one will prove superior. This is assuming, of course, that the market rewards the superior stock with a higher valuation!
But, don't assume this will happen in the very near future. Undervalued stocks will not instantly increase in stock price, just because you now own them. But, we can say this: Companies that prosper as businesses, companies that grow their sales revenue and profits over the years will almost certainly appreciate in stock price. And, even if appreciation is not tremendous, a steady stream of growing dividends will probably be paid to the investor, providing an excellent return on his investment.
We must avoid shifting money between indistinguishable opportunities. Commissions and taxes will kill performance. This is the motto of "Sell reluctantly." Today, with Internet stock trading, commissions are sufficiently low that excessive portfolio turnover is no longer the concern it once was. Yet, high portfolio turnover seldom enhances overall return.
Playing investment like a loser’s game means taking advantage of long-term compounding, diversification, managing risk, and controlling the urge to imbibe in speculative excess. If you understand only this single concept, that investing is a loser’s game, you will do well as an investor throughout your life.
*The Speech, "Everybody's Free To Wear Sunscreen" was incorrectly attributed to Kurt Vonnegut who, in fact, never delivered this particular speech to any college. The speech was actually based upon a Chicago Tribune article by Mary Schmich. The speech was so popular, Baz Luhrmann had it made into a popular song. Radio stations everywhere played the song and incorrectly attributed it to Kurt's commencement address at MIT. Where did all the confusion and misinformation come from? Rumors and e-mail on the Internet. Fortunately, investors aren't subject to such foolishness. Unlike the mass media, they'll be sure to check their information over carefully.
http://www.hcmpublishing.com/Investment/sample-chapter-losers-game.html
What determines success and what determines failure? Are there principles that can be understood to help the individual invest more successfully? I believe that the best principle that can be adopted by the individual investor is to ignore the market, minimize trading expenses, think a bit like a business owner, invest long-term, and, most crucially, know your limitations as an investor.
There are two types of games: "Winner’s Games" and "Loser’s Games." Now this doesn’t mean that losers play only certain games, while winners play other games. It has nothing to do with personality characteristics. By "Loser’s Game," I don’t mean that investors are losers. It is just a way to classify games to help us understand them better.
The outcome of any competitive game depends upon the actions of both the winner and the loser of the game. This does not always imply the winner’s actions will dominate the outcome. Many games are not won, but rather, are lost. It is important to understand the distinction.
Winner’s Games are those games whose outcome is largely determined by the actions of the winner. Loser’s Games are those games whose outcome is largely determined by the actions of the loser.
Amateur tennis is a loser’s game. Non-highly-trained players do not possess the skills to deliver excellent serves and returns with consistency. An attempt to try harder to deliver superior shots, compared to the opponent, will not meet with success, but double faults and shots that go out of bounds. Trying harder to make great shots will mean that you are giving the opponent points. The player is not only competing against the other player, but also against the inherent difficulties of the game. The more competitive the amateur tries to be, the more the inherent difficulties of the game will beat him down.
The amateur who has not mastered the fundamentals of the game is far better off just trying to deliver a shot within the tennis court bounds than trying to outplay the opponent. Keep the ball in play and give the opponent the opportunity to mess up the shot. And, the harder the opponent tries, the more likely he will mess up!
If you were playing a professional tennis player, the situation would change drastically. Professional tennis is a winner’s game. Professional tennis players have mastered the fundamentals of the game. You must not only master the fundamentals of the game to win, but you must also deliver superior shots. You must outplay your opponent to win. Returning the ball within court bounds is not enough. The opponent probably won’t mess up and might well force a shot you can’t return.
In amateur tennis, having the opportunity to hit the ball is an opportunity for the opponent. In professional tennis, hitting the ball is an opportunity for the hitter. Professionals look upon having the serve as an advantage. Amateurs are better off the less contact they need to have with the ball!
Loser’s games are the competitive person’s bane until the fundamentals of the game are mastered. When I was younger, I once lost about twenty-six tennis matches in a row to a friend. The further behind I felt, the more I tried to cream the ball and deliver a killer shot.
I remember one shot actually being in bounds and drilling right through the fence behind the court. Wow! What Power! That was fun. What potential I had! Unfortunately, for that one shot, there were many more shots that hit the net, went out-of-bounds, or, in some other way, cost me a point. The more I tried to deliver superior play, the further behind I got. I had not mastered the fundamentals of the game. Nor, would I ever.
Competitive people want to win. Often, they derive much of their sense of self-worth from winning. So, as the competitive person loses more and more, he will either try harder and harder to win, or else give up. That is a natural human tendency. With tennis, an individual who really wants to win will, in time, learn that by just easing up a bit, more games are won.
Some people make excellent amateur tennis players. They learn just to keep the ball in play. Sometimes, they even feel they will be able to become a professional. Then, they find they are never able to beat the better, more professional players. They have been able to win consistently, despite never really mastering the fundamentals of the game and constantly pushing themselves to improve as players. They win, by letting the other amateur lose.
The very best players have mastered the game and work to improve, to learn to force more shots. With tennis, there is the potential to master the game and learn to force good shots, if only you work enough at it.
So, the best players will start to develop a unique approach to play as they grow in ability. They will play conservatively when it is needed. But, if they are far enough ahead, they will push themselves to force a few shots. In that way they can grow from being a good amateur into having a more professional level of play. In time, the best will learn to play tennis as a winner’s game. If they continue to count on the opponent's messing up to win games, they will never move to a professional level.
You now have a complete understanding of the difference between winner's games and loser's games.
Investing is a loser’s game. It is a loser’s game, not only at the amateur level, but also at the professional level. Over time, trying harder to achieve superior returns will usually lead to inferior returns. Trying to time the stock market, day trading, buying options, and most active investment advice approaches investing as though it were a winner’s game—believing you can actually conquer and beat the market.
If, for example, you had felt that the stock market was overvalued and due for a correction, and you had remained out of the stock market for the year 1995, you would have missed one of the market’s best years ever. But, maybe, you also missed the big market drop of 1987. What could you conclude from this? Probably, as with my streak of tennis losses, you would tend to remember the victories (or, near victory shots that led to losing the game!) and forget the defeats.
You reason that if only all your tennis shots or investment decisions had been as great as the best ones you remember, you would have won decisively! But, seeking that one great shot is what cost you the match.
You would tend to explain your victory as confirming proof of market timing and your skill to do it, while the defeat would be interpreted as only indicating a need to improve your methods slightly! You are interpreting investing, and more specifically, market timing, as though it were a winner’s game. It is not! It has never been shown that anyone, I repeat anyone, can master stock market timing.
Looking for stocks you feel might go up ten or twenty times from their present price in a few short years is also a form of trying to invest in the stock market as though it were a winner’s game. Or, given the late 1990’s you might be seeking growth stocks that go up 100 times or more in a few short years!
After all, you recall Dell, Cisco, Yahoo, and other companies which shot up by amazing amounts. To buy such speculative stocks implies you feel confident in finding opportunities that are grossly misevaluated by the market. Usually, you will not invest in the next Dell or Cisco, but, rather, the next He-Ro apparel company of the day. That is to say, a lousy investment. This can lead to huge losses.
Individual investors usually have not mastered business evaluation and fundamental analysis sufficiently to actively select the very best aggressively-chosen stocks from among the larger market. But don't feel bad. The professionals who are paid millions of dollars haven't done much better.
Yet, the human need to try to force a shot now and then reoccurs. If you must try to invest on winner’s game terms, I will show you what I feel are two of the best strategies.
One is investing in turnaround companies. Those are stocks that have hit bad times and are largely disliked by most investors. I can’t show you how to select the real winners from the pack of dogs. No one really can. But, I can help you learn to protect yourself from investing in obviously crummy companies. That is a skill well worth having.
The other strategy is seeking out growth companies. Again, I can’t tell you how to find the next Microsoft. No one can. But, I can help give you some general principles to keep in mind. Things to watch out for. Things that help you decide not to invest in a potential growth company. This is my sunscreen advice. If you must sit out in the blazing sun, protect yourself as best as you can!
Understanding that investing is a loser’s game at heart should keep you from trying to force too many shots. Rather than looking for one big winner, aim for consistency in your results. The bulk of an intelligent investor’s portfolio should be invested in high-quality, larger companies purchased at reasonable prices. Such a portfolio will likely beat, not only a market timer’s portfolio, but also a speculative portfolio of "carefully" selected, aggressive stocks on a risk-adjusted basis.
High portfolio turnover is indicative of trying to play the investment game as though it were a winner’s game. Shifting money rapidly from one investment to another indicates a belief that you can place the two possible investments on a scale of their relative merit with a high degree of accuracy. Further, you are expecting that the market will, in short order, realize just how knowledgeable you are and correct the valuations!
Any individual investor who buys individual stocks must be able to make an estimate of the relative merit of two stocks. However, we must be realistic about our ability to distinguish opportunities. Often the difference between two stocks, as far as investment desirability is concerned, is so slight that there is no way to distinguish which one will prove superior. This is assuming, of course, that the market rewards the superior stock with a higher valuation!
But, don't assume this will happen in the very near future. Undervalued stocks will not instantly increase in stock price, just because you now own them. But, we can say this: Companies that prosper as businesses, companies that grow their sales revenue and profits over the years will almost certainly appreciate in stock price. And, even if appreciation is not tremendous, a steady stream of growing dividends will probably be paid to the investor, providing an excellent return on his investment.
We must avoid shifting money between indistinguishable opportunities. Commissions and taxes will kill performance. This is the motto of "Sell reluctantly." Today, with Internet stock trading, commissions are sufficiently low that excessive portfolio turnover is no longer the concern it once was. Yet, high portfolio turnover seldom enhances overall return.
Playing investment like a loser’s game means taking advantage of long-term compounding, diversification, managing risk, and controlling the urge to imbibe in speculative excess. If you understand only this single concept, that investing is a loser’s game, you will do well as an investor throughout your life.
*The Speech, "Everybody's Free To Wear Sunscreen" was incorrectly attributed to Kurt Vonnegut who, in fact, never delivered this particular speech to any college. The speech was actually based upon a Chicago Tribune article by Mary Schmich. The speech was so popular, Baz Luhrmann had it made into a popular song. Radio stations everywhere played the song and incorrectly attributed it to Kurt's commencement address at MIT. Where did all the confusion and misinformation come from? Rumors and e-mail on the Internet. Fortunately, investors aren't subject to such foolishness. Unlike the mass media, they'll be sure to check their information over carefully.
http://www.hcmpublishing.com/Investment/sample-chapter-losers-game.html
Ride Your Winners, Dump Your Losers
Ride Your Winners, Dump Your Losers
www.mastersuniverse.net
Assume that you have invested into two stocks - Stock A and Stock B. You made 50% on Stock A and lost 50% on Stock B. If you need to liquidate one stock to get some cash, which stock would you sell? It is human nature for people to take profits on Stock A and keep the losing trade until Stock B rebounds. Chances are Stock A is so wonderful that it will keep going up after you sold, and Stock B will keep going down and your loss becomes bigger. The bigger your loss, the more reluctant you are to sell and eventually you will end up with a bunch of losers.
Ride Your Winners
Momentum Trading
According to the “Ride Your Winners, Dump Your Losers” theory, if you manage to fight off your human nature and keep the winners instead of the losers, you will make money. This seems to fit in well with the theory of momentum trading – buy the strongest stocks with the highest momentum, i.e. the stocks that are increasing quickly on higher volume than the market. Disciplined momentum traders would buy with the flow of the market, if a trade goes against them, they would sell without hesitation. They follow the market trend with no question ask.
As the theory goes, you should not be emotionally attached to your trade. If you have invested in a dud, you should just admit your mistake and cut the loss. This theory sounds credible and sensible.
Value Investing
This theory may make sense for a short-term momentum trader, but it certainly does not make sense for a long-term value investor. Assuming that you have done your homework and the two stocks were the same valuation at the time of investment, the fact that Stock A has gone up and Stock B has gone down means that Stock A is now far more expensive than Stock B. A prudent value investor would switch out of the expensive Stock A and switch into the much better valued Stock B, provided the fundamentals of the two stocks have not changed.
Instead of blindly selling the losers until all you have are winners, you should really look at whether the fundamentals have changed for the stocks. There may indeed be a good reason for the relative underperformance of Stock B – e.g. poor management or grim industry outlook. However if nothing has changed and you thought Stock B was good value when you first bought it, it must be an absolute bargain after dropping an extra 50%! Shouldn’t you be buying more instead of selling?
Winners Always Outperform Losers?
The key question in deciding whether this is a valid theory is whether winners are more likely to outperform the losers? If that is the case, the same group of winners should always dominate the world economy. Taking the component stocks of the Dow Jones Industrial as examples, which are the winners of the winners. Do these blue chip winners always outperform the market? Looking at the original dozen component stocks of the Dow in 1896:
American Sugar Now Domino Foods, Inc., part of Sweden’s Assa Abloy
American Cotton Oil Now Bestfoods, part of Unilever
North American Company Electric company broken up in the 1940s
Chicago Gas
Now a subsidiary of Integrys Energy Group, Inc
Laclede Gas Still in operation as The Laclede Group
National Lead Now NL Industries
Tennessee Coal & Iron Swallowed by U.S. Steel
American Tobacco Broken up into Fortune Brands and R.J. Reynolds
Distilling & Cattle Feeding Predecessor of Millennium Chemical, part of LyondellBasell
U.S. Leather Liquidated in 1952
U.S. Rubber Company Merged with B.F. Goodrich, now part of Michelin
General Electric Only one that is still around
The only company that you may still recognize is General Electric (even General Electric has been dropped from the Dow for 9 years). The rests have either been taken over or wound up. Had your great great grandpa set up a family trust to invest in these winners 100 years ago, there would probably not be a lot inheritance left for you.
In fact, some academics have noticed the opposite effect - “the small stock anomaly”. For example, Rolf W. Banz has shown that smaller companies (which tend to include a lot of “losers”) from 1926 to 1980 outperformed the larger companies.
The Winner Takes It All
It Really Comes Down to Your Trading Style
Ultimately it really depends on your trading style. If you are a momentum trader that trade purely on the basis of a surge in price and high trading volume, it is wise to scramble for the exit when the stock loses its momentum. However if you have picked the stock on the basis of its valuation, the fact that it drops more means it is even better value – time to buy more instead of sell. Obviously if the fundamentals (future prospects and changing sector conditions) of the company have deteriorated, you may need to admit your mistake and sell.
This theory sounds more credible than it really is in countering the human tendency to keep the losers. The fact that it identifies a stock as a winner or loser on the basis of the entry price already introduces an element of subjectivity. An emotion free investor would only look objectively at the fundamentals and the valuation of the stock, instead of getting hung up on the entry price.
www.mastersuniverse.net
Assume that you have invested into two stocks - Stock A and Stock B. You made 50% on Stock A and lost 50% on Stock B. If you need to liquidate one stock to get some cash, which stock would you sell? It is human nature for people to take profits on Stock A and keep the losing trade until Stock B rebounds. Chances are Stock A is so wonderful that it will keep going up after you sold, and Stock B will keep going down and your loss becomes bigger. The bigger your loss, the more reluctant you are to sell and eventually you will end up with a bunch of losers.
Ride Your Winners
Momentum Trading
According to the “Ride Your Winners, Dump Your Losers” theory, if you manage to fight off your human nature and keep the winners instead of the losers, you will make money. This seems to fit in well with the theory of momentum trading – buy the strongest stocks with the highest momentum, i.e. the stocks that are increasing quickly on higher volume than the market. Disciplined momentum traders would buy with the flow of the market, if a trade goes against them, they would sell without hesitation. They follow the market trend with no question ask.
As the theory goes, you should not be emotionally attached to your trade. If you have invested in a dud, you should just admit your mistake and cut the loss. This theory sounds credible and sensible.
Value Investing
This theory may make sense for a short-term momentum trader, but it certainly does not make sense for a long-term value investor. Assuming that you have done your homework and the two stocks were the same valuation at the time of investment, the fact that Stock A has gone up and Stock B has gone down means that Stock A is now far more expensive than Stock B. A prudent value investor would switch out of the expensive Stock A and switch into the much better valued Stock B, provided the fundamentals of the two stocks have not changed.
Instead of blindly selling the losers until all you have are winners, you should really look at whether the fundamentals have changed for the stocks. There may indeed be a good reason for the relative underperformance of Stock B – e.g. poor management or grim industry outlook. However if nothing has changed and you thought Stock B was good value when you first bought it, it must be an absolute bargain after dropping an extra 50%! Shouldn’t you be buying more instead of selling?
Winners Always Outperform Losers?
The key question in deciding whether this is a valid theory is whether winners are more likely to outperform the losers? If that is the case, the same group of winners should always dominate the world economy. Taking the component stocks of the Dow Jones Industrial as examples, which are the winners of the winners. Do these blue chip winners always outperform the market? Looking at the original dozen component stocks of the Dow in 1896:
American Sugar Now Domino Foods, Inc., part of Sweden’s Assa Abloy
American Cotton Oil Now Bestfoods, part of Unilever
North American Company Electric company broken up in the 1940s
Chicago Gas
Now a subsidiary of Integrys Energy Group, Inc
Laclede Gas Still in operation as The Laclede Group
National Lead Now NL Industries
Tennessee Coal & Iron Swallowed by U.S. Steel
American Tobacco Broken up into Fortune Brands and R.J. Reynolds
Distilling & Cattle Feeding Predecessor of Millennium Chemical, part of LyondellBasell
U.S. Leather Liquidated in 1952
U.S. Rubber Company Merged with B.F. Goodrich, now part of Michelin
General Electric Only one that is still around
The only company that you may still recognize is General Electric (even General Electric has been dropped from the Dow for 9 years). The rests have either been taken over or wound up. Had your great great grandpa set up a family trust to invest in these winners 100 years ago, there would probably not be a lot inheritance left for you.
In fact, some academics have noticed the opposite effect - “the small stock anomaly”. For example, Rolf W. Banz has shown that smaller companies (which tend to include a lot of “losers”) from 1926 to 1980 outperformed the larger companies.
The Winner Takes It All
It Really Comes Down to Your Trading Style
Ultimately it really depends on your trading style. If you are a momentum trader that trade purely on the basis of a surge in price and high trading volume, it is wise to scramble for the exit when the stock loses its momentum. However if you have picked the stock on the basis of its valuation, the fact that it drops more means it is even better value – time to buy more instead of sell. Obviously if the fundamentals (future prospects and changing sector conditions) of the company have deteriorated, you may need to admit your mistake and sell.
This theory sounds more credible than it really is in countering the human tendency to keep the losers. The fact that it identifies a stock as a winner or loser on the basis of the entry price already introduces an element of subjectivity. An emotion free investor would only look objectively at the fundamentals and the valuation of the stock, instead of getting hung up on the entry price.
Flip the losers, let the winners run
Thursday, April 2, 2009
Sell the losers, let the winners run
Why selling is a common problem
Published: 2009/02/04
Most investors tend to agree that the decision to sell a stock is one of the most difficult to make. Sometimes it is more difficult to decide when and what to sell than to buy. Ever wondered why?
* People tend to sell winners too soon and hold on to losers too long
You will find that regardless of whether the market is running hot or is coming down, there are still a lot of people out there who either sell their stocks too early only to realize that the prices continue to soar, or hold on to losers for too long only to see them continue to bleed further.
From a behavioural finance standpoint, this phenomenon is held by Hersh Shefrin and Meir Statman (1985) as the "disposition effect". This was discovered from their research entitled, "The disposition to sell winners too early and ride losers too long: theory and evidence".
Based on research, individual investors are more likely to sell stocks that have gone up in value, rather than those that have gone down. By not selling, they are hoping that the price of the losers will eventually go back to their purchase price or even higher, saving them from experiencing a painful loss.
In the end, most investors will end up selling good quality stocks the minute the prices move up and hold on to those poor fundamental stocks for the long term, while the performances of these stocks continue to deteriorate.
* People tend to forget their original objectives
In stock market investment, there are two types of investment activities, trading versus investing. Trading means "buy and sell" while investing means "buy and hold". The stock selection criteria for these two types of activities are entirely different.
Most of the time those involved in trading will choose stocks based on factors which will affect the price movement in short term, paying less attention to the companies' fundamentals whereas those involved in investment will go for good quality stocks which are more suitable for long-term holding.
However, you will find that many people get their objectives mixed up in the process. They get distracted by external factors so much so that some panic when the market goes in the direction that is not in line with their expectation, and as a result, end up selling the stocks that they find too expensive to buy back later.
On the other hand, some force themselves to change the status of the stocks that were originally meant for short-term trading into long-term investment as they are unable to face the harsh fact that they have to sell the stocks at a loss, even though they know that the stocks are not good fundamental stocks that can appreciate in value.
So, when to sell then?
There are few different schools of thoughts on this. Based on the advice from the investments gurus, like Benjamin Graham, Warren Buffet and Philip Fisher, when you buy a stock, you need to make sure that you understand the companies that you are buying, and these are good fundamental stocks, which will provide good income and appreciate in value in long term.
Therefore, you will be treating your stock purchase as a business you bought, which is meant for long term. You should not be affected by any temporary price movement due to overall market volatility.
You will only consider selling the company if the growth of the company's intrinsic value falls below "satisfactory" level or you find out that a mistake was made in the original analysis as you grow more familiar to the business or industry.
However, if you find that your investment portfolio is highly concentrated on one single company, then you might want to consider diversifying your portfolio and lowering your risk.
Any single investment that is more than 10 per cent to 15 per cent of your portfolio value should be reconsidered no matter how solid the company performance or prospect is, suggested Pat Dorsey of Morningstar.
Last but not least, if you find that by selling the stock, you can invest the money in a better option, then that is a good reason to sell.
In summary, successful investing is highly dependent on your self-discipline, taking away the emotional factors and not going with the crowd. It should always be backed by sound investment principles.
Always remember there is no short cut in investment, only hard work and patience.
Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC2/Article/index_html
Sell the losers, let the winners run
Why selling is a common problem
Published: 2009/02/04
Most investors tend to agree that the decision to sell a stock is one of the most difficult to make. Sometimes it is more difficult to decide when and what to sell than to buy. Ever wondered why?
* People tend to sell winners too soon and hold on to losers too long
You will find that regardless of whether the market is running hot or is coming down, there are still a lot of people out there who either sell their stocks too early only to realize that the prices continue to soar, or hold on to losers for too long only to see them continue to bleed further.
From a behavioural finance standpoint, this phenomenon is held by Hersh Shefrin and Meir Statman (1985) as the "disposition effect". This was discovered from their research entitled, "The disposition to sell winners too early and ride losers too long: theory and evidence".
Based on research, individual investors are more likely to sell stocks that have gone up in value, rather than those that have gone down. By not selling, they are hoping that the price of the losers will eventually go back to their purchase price or even higher, saving them from experiencing a painful loss.
In the end, most investors will end up selling good quality stocks the minute the prices move up and hold on to those poor fundamental stocks for the long term, while the performances of these stocks continue to deteriorate.
* People tend to forget their original objectives
In stock market investment, there are two types of investment activities, trading versus investing. Trading means "buy and sell" while investing means "buy and hold". The stock selection criteria for these two types of activities are entirely different.
Most of the time those involved in trading will choose stocks based on factors which will affect the price movement in short term, paying less attention to the companies' fundamentals whereas those involved in investment will go for good quality stocks which are more suitable for long-term holding.
However, you will find that many people get their objectives mixed up in the process. They get distracted by external factors so much so that some panic when the market goes in the direction that is not in line with their expectation, and as a result, end up selling the stocks that they find too expensive to buy back later.
On the other hand, some force themselves to change the status of the stocks that were originally meant for short-term trading into long-term investment as they are unable to face the harsh fact that they have to sell the stocks at a loss, even though they know that the stocks are not good fundamental stocks that can appreciate in value.
So, when to sell then?
There are few different schools of thoughts on this. Based on the advice from the investments gurus, like Benjamin Graham, Warren Buffet and Philip Fisher, when you buy a stock, you need to make sure that you understand the companies that you are buying, and these are good fundamental stocks, which will provide good income and appreciate in value in long term.
Therefore, you will be treating your stock purchase as a business you bought, which is meant for long term. You should not be affected by any temporary price movement due to overall market volatility.
You will only consider selling the company if the growth of the company's intrinsic value falls below "satisfactory" level or you find out that a mistake was made in the original analysis as you grow more familiar to the business or industry.
However, if you find that your investment portfolio is highly concentrated on one single company, then you might want to consider diversifying your portfolio and lowering your risk.
Any single investment that is more than 10 per cent to 15 per cent of your portfolio value should be reconsidered no matter how solid the company performance or prospect is, suggested Pat Dorsey of Morningstar.
Last but not least, if you find that by selling the stock, you can invest the money in a better option, then that is a good reason to sell.
In summary, successful investing is highly dependent on your self-discipline, taking away the emotional factors and not going with the crowd. It should always be backed by sound investment principles.
Always remember there is no short cut in investment, only hard work and patience.
Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC2/Article/index_html
Thursday 20 August 2009
Trading Versus Investing
Trading Versus Investing
Not only is technical analysis more short term in nature than fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach.
In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment.
Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price.
The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools.
http://www.investopedia.com/university/technical/techanalysis2.asp
Not only is technical analysis more short term in nature than fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach.
In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment.
Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price.
The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools.
http://www.investopedia.com/university/technical/techanalysis2.asp
Chinese shares tip into a bear market
Chinese shares tip into a bear market
The Shanghai stock exchange suffered another major fall on Wednesday, closing down 4.3pc to bring the declines over the past two weeks to around 20pc, a technical bear market.
By Malcolm Moore in Shanghai
Published: 11:10AM BST 19 Aug 2009
A Chinese investor monitors screens showing stock indexes at a trading house in Shanghai on August 19, 2009. Photo: AFP
Until this month, Shanghai had been the world's best-performing stock exchange, recording a rise of 89pc as money poured into the market from China's fiscal stimulus policies.
Banks loaned more than £700bn in the first half of the year, and analysts believe a sizeable proportion of that cash flowed directly into speculation. Even after the latest reversal, Shanghai is up some 53pc this year.
State-owned behemoths led the declines, with Baoshan Steel dropping 7.18pc to 7.11 yuan and Angang Steel falling 6.23pc to 13.25 yuan.
PetroChina, China's largest oil producer, fell 2.33pc to close at 12.99 yuan.
China's enormous banks are also reporting interim results this year, and analysts believe their revenues will be down because of lower interest payments.
Property shares were also hit by fears that the housing bubble may also pop. Vanke, the country's largest developer, fell 5.58pc to 11 yuan.
Investors, who maintain a firm belief that the Chinese government will intervene to prop up the market, took flight when no such relief appeared. The only sign of government aid came in the form of editorials in three influential newspapers, talking up the benefits of buying shares.
"Investors are disappointed that regulators failed to take any concrete steps to support the market," said Chen Huiqin, at Huatai Securities.
Chinese institutional investors are also cashing out, in the hope of finding better returns elsewhere after Shanghai's phenomenal rise, according to Zhang Suyu, a strategist at Dongxing Securities.
Other analysts said the falls in the market did not reflect the health of the broader Chinese economy. "Rocketing and slumping has always been a characteristic of the market. It took only one year for the index to rise from 1,664 to 6,124 points and vice versa," said Dong Dengxin, a professor at Wuhan Science University.
The Shanghai exchange is all but closed to foreign investors, while Chinese investors have few other options to place their money, since they cannot buy overseas shares. Consequently, the exchange remains extremely volatile, according to local brokers.
The Shanghai stock exchange suffered another major fall on Wednesday, closing down 4.3pc to bring the declines over the past two weeks to around 20pc, a technical bear market.
By Malcolm Moore in Shanghai
Published: 11:10AM BST 19 Aug 2009
A Chinese investor monitors screens showing stock indexes at a trading house in Shanghai on August 19, 2009. Photo: AFP
Until this month, Shanghai had been the world's best-performing stock exchange, recording a rise of 89pc as money poured into the market from China's fiscal stimulus policies.
Banks loaned more than £700bn in the first half of the year, and analysts believe a sizeable proportion of that cash flowed directly into speculation. Even after the latest reversal, Shanghai is up some 53pc this year.
State-owned behemoths led the declines, with Baoshan Steel dropping 7.18pc to 7.11 yuan and Angang Steel falling 6.23pc to 13.25 yuan.
PetroChina, China's largest oil producer, fell 2.33pc to close at 12.99 yuan.
China's enormous banks are also reporting interim results this year, and analysts believe their revenues will be down because of lower interest payments.
Property shares were also hit by fears that the housing bubble may also pop. Vanke, the country's largest developer, fell 5.58pc to 11 yuan.
Investors, who maintain a firm belief that the Chinese government will intervene to prop up the market, took flight when no such relief appeared. The only sign of government aid came in the form of editorials in three influential newspapers, talking up the benefits of buying shares.
"Investors are disappointed that regulators failed to take any concrete steps to support the market," said Chen Huiqin, at Huatai Securities.
Chinese institutional investors are also cashing out, in the hope of finding better returns elsewhere after Shanghai's phenomenal rise, according to Zhang Suyu, a strategist at Dongxing Securities.
Other analysts said the falls in the market did not reflect the health of the broader Chinese economy. "Rocketing and slumping has always been a characteristic of the market. It took only one year for the index to rise from 1,664 to 6,124 points and vice versa," said Dong Dengxin, a professor at Wuhan Science University.
The Shanghai exchange is all but closed to foreign investors, while Chinese investors have few other options to place their money, since they cannot buy overseas shares. Consequently, the exchange remains extremely volatile, according to local brokers.
Follow Graham: profit from folly rather than participate in it.
If you follow the behavioural and business principles that Graham advocates - and if you pay special attention to the invaluable advice in Chapters 8 and 20 - you will not get a poor result from your investments. (That represents more of a accomplishment than you might think.)
Whether you achieve outstanding results will depend on the effort and intellect you apply to your investments, as well as on the amplitudes of stock-market folly that prevail during your investing career.
The sillier the market's behaviour, the greater the opportunity for the business-like investor.
Follow Graham and you will profit from folly rather than participate in it.
Ref: Intelligent Investor by Benjamin Graham
Whether you achieve outstanding results will depend on the effort and intellect you apply to your investments, as well as on the amplitudes of stock-market folly that prevail during your investing career.
The sillier the market's behaviour, the greater the opportunity for the business-like investor.
Follow Graham and you will profit from folly rather than participate in it.
Ref: Intelligent Investor by Benjamin Graham
Uncertainty = Investing
"Investors don't like uncertainty."
But investors have never liked uncertainty - and yet it is the most fundamental and enduring condition of the investing world. It always has been, and it always will be.
At heart, "uncertainty" and "investing" are synonyms.
In the real world, no one has ever been given the ability to see that any particular time is the best time to buy stocks.
Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow.
But investors have never liked uncertainty - and yet it is the most fundamental and enduring condition of the investing world. It always has been, and it always will be.
At heart, "uncertainty" and "investing" are synonyms.
In the real world, no one has ever been given the ability to see that any particular time is the best time to buy stocks.
Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow.
Wednesday 19 August 2009
How To Make Your First $1 Million
The Three Ps
Persistence, patience and purpose are common traits that you'll find in every millionaire from John Jacob Astor to Bill Gates. Even though inflation has brought the value of $1 million down from its lofty perch, you still need these traits to reach it. Why isn't everyone a millionaire? Maybe because it is easier to spend now, buy big and put off saving and investing than it is to sacrifice to reach the goal of becoming a millionaire. Using the tips given here can help you on your way, but you have to be brave enough to take the steps - first, final and all the hard ones that lay in between.
http://investopedia.com/slide-show/millionaire-mindset/
http://investopedia.com/Slides/LastSlide.aspx
How To Make Your First $1 Million
Increase Your Income
There is nothing terribly romantic about becoming a millionaire while working a regular job, but it is probably the avenue available to most people. You don't need to start your own business to pull in a high income, and you don't even need to pull in a high income if your saving, spending and investing habits are sound. Asking for a raise, upgrading your skills or taking a second job will add that much more to your savings and investments and subtract that same amount from the countdown to your first million. If you are entrepreneurial at heart, starting a business on the side can actually decrease your overall tax bill, rather than putting you in a higher income tax bracket. (See Increase Your Disposable Income for more.)
How To Make Your First $1 Million
Reconsider Real Estate
Owning real estate provides equity and diversity to your investments. If you own your own home, then paying your rent builds up equity. If you invest in real estate, then someone else's rent builds up your equity. Real estate investing isn't for everyone, but it has built fortunes for many savvy people. Owning your own home, however, is usually a good idea regardless of your opinion on real estate bubbles. Peter Lynch, one of the greatest stock investors of all time, believed that you should own your first home before you buy your first stock. (If you feel ready, see Investing In Real Estate for more.)
How To Make Your First $1 Million
Dare To Diversify
If your portfolio is made up entirely of American companies or is even all held in stocks, then you may need to diversify. In the first case, more and more financial activity is out there in the wider world. This doesn't just mean investing in emerging economies like China and India that are producing huge gains, but recognizing that there are companies in Europe and Asia that are just as good (maybe better) as investments in the U.S.. Diversifying also means not putting all your money into one type of asset. Being a financial omnivore opens up that much more opportunity in times of growth and makes certain you won't go hungry when one source dries up. (See The Importance Of Diversification for more.)
How To Make Your First $1 Million
Incremental Investing
If you've got your retirement portfolios where you want them and are ready to start a pure income portfolio, then incremental investing is an excellent way to begin. You don't have to jump into the market with your life savings to make money. Even relatively small amounts can result in decent returns. The important thing to remember with your income portfolio is that capital gains taxes will be applied yearly to any income you pull out. Again, improving your tax awareness will help reduce the bite, but it takes time and knowledge to make one million solely from a taxable portfolio. Still, it has been done and will be done again. (See Investing 101 to get started.
How To Make Your First $1 Million
Ramp-Up Your Retirement Savings
Rather than letting your boss's contribution lessen your load, try to put a little extra into your retirement plan whenever you can. Automating your account contributions will make setting your money aside that much easier. That said, making extra contributions a priority will speed up your journey to $1 million and make your golden years that much more golden. You don't have to eat cat food to do this, just keep your retirement in mind when you've got extra cash on hand. (For more in this vein, see Playing Retirement Catch-Up.)
How To Make Your First $1 Million
Build Through Your Boss
If you're looking to save $1 million dollars for retirement, look no further than your boss. With matching contributions, your employer can be your best ally when it comes to building up retirement funds. If you think you need to squirrel away 20% of your income for retirement and your boss puts up 6% in matched contributions, then you're left with a much more manageable 14%. Even if you are your own boss, there are still options under SEPs. (For more on this see Making Salary Deferral Contributions.)
How To Make Your First $1 Million
Crafty Compounding
Time is on your side when you've got compounding working on your savings. The earlier you start saving and the earlier you get your savings into a financial instrument that compounds, the easier your path to $1 million will be. You may be thinking of tenbaggers or hot issues that return 10 times their value in a few weeks, but it is the boring, year-on-year compounding that builds fortune for most people. (To learn more, read Compound Your Way To Retirement.)
How To Make Your First $1 Million
Target Your Taxes
Another leaky hole you need to plug is the parasitic drain of big government. While you are expected to pay your taxes, it's the right of every taxpayer to try and reduce their tax bills to the absolute minimum allowed by law. Increasing your tax awareness means making taxes a quarterly chore rather than an annual scourge. Keeping abreast of allowable deductions, changes to your withholding and changes in tax limits will allow you to keep more of what you earn, so that you can put that money to work for you. (See 10 Steps To Tax Preparation for more.)
How To Make Your First $1 Million
Prune Your Purchases
When you do have to spend, try to get the most utility, not simply the most you can. The difference between great value and utility is a fine line. Buying too much house or too costly a car comes from confusing the two. If you shop for what you need and buy it cheaper than you'd planned, that's a great deal. By keeping the end use of large purchases in mind, you can avoid this drain on your cash. Before paying more than you can afford, remember that Warren Buffet, a man who constantly jockeys for richest person on earth, still lives in his humble Omaha abode. (For more on the value of frugality see Save Money The Scottish Way.)
How To Make Your First $1 Million
Stop Senseless Spending
It's easy to spend your way out of a fortune. Fortunately, the opposite is also true - you can save your way into your first million. Most people working in North America right now will earn well over $1 million during their working lives. The secret to saving $1 million lies in keeping more of what you earn. Just as extending your earnings offers a unique perspective, doing the same with your spending sheds a ghastly light on the waste. If you spend $5 every day of your working life on coffee, snacks, etc., you lose $73,000 of your lifetime earnings, making it that much harder to hit the $1 million mark in savings. (For more, see Squeeze A Greenback Out Of Your Latte.)
How To Make Your First $1 Million
The Millionaire's Mindset
When your grandparents lamented that a dollar just isn't a dollar anymore, they weren't just bellyaching. Inflation attacks the value of a dollar, reducing it as time goes by so you need more dollars as time goes on. That is one of the reasons that $1 million is often thrown around as a retirement goal. Back in 1900, a $1 million retirement would include a mansion and a bevy of servants, but now, it has become a benchmark for the average retirement portfolio. The upside is that it is easier to become a millionaire now than at any time before. While you won't be buying islands, it is still a goal worth shooting for. Read on for 10 ways to make your first million.
Tuesday 18 August 2009
A Relevant Tale Of The Mouse, Frog And Hawk
A Relevant Tale Of The Mouse, Frog And Hawk
Jim Oberweis, Oberweis Report 08.06.09, 5:40 PM ET
If fable-teller Aesop sat down with China's President Hu Jintao and Federal Reserve Chairman Ben Bernanke, the meeting would begin with the story of the Mouse, the Frog and the Hawk:
"A mouse who always lived on the land, by an unlucky chance, formed an intimate acquaintance with a frog, who lived, for the most part, in the water. One day, the frog was intent on mischief. He tied the foot of the mouse tightly to his own. Thus joined together, the frog led his friend the mouse to the meadow where they usually searched for food. After this, he gradually led him toward the pond in which he lived. Upon reaching the banks of the water, he suddenly jumped in, dragging the mouse with him.
"The frog enjoyed the water amazingly, and swam croaking about, as if he had done a good deed. The unhappy mouse was soon sputtered and drowned in the water, and his poor dead body floating about on the surface. A hawk observed the floating mouse from the sky, and dove down and grabbed it with his talons, carrying it back to his nest. The frog, being still fastened to the leg of the mouse, was also carried off a prisoner, and was eaten by the hawk."
Ah, but who is the frog and who is the mouse? Is the mouse an allegorical depiction of the U.S., with the death of its manufacturing powerhouse catalyzed by the subsidies and currency manipulation of the Chinese frog? Or is China the mouse, whose export-based economy remains susceptible to the unsustainable and careless spending of the overleveraged western frog? In the latter scenario, the Chinese mouse's life (or at least savings) lay in the hands of the frog, steep in danger, an eventual victim to the hawk of Inflation.
Let us not forget that most unhappy final twist: the frog dies too, bound at the leg to the mouse. And so might the film roll, with an unhappy ending for the American frog. As the U.S. inflates away the burden of its debt (jargonized as "quantitative easing"), we may have fooled the Chinese this time, but future creditors will vanish, and the U.S.' ability to finance deficit spending on absurdly attractive terms will be relinquished for the foreseeable future.
It doesn't take an expert in game theory to realize that the mouse will try to untie itself before it gets dragged under water. In fact, China recently made waves with a proposal for alternatives to the U.S. dollar as a reserve currency. Bernanke, in fulfilling his patriotic cheerleading duties, recently sought to quell inflation worries with a promise to maintain harmony and balance throughout the universe: "I think that they are misguided in the sense that … the Federal Reserve is able to draw those reserves out and raise interest rates at an appropriate time to make sure that we don't have an inflation problem."
Borrowing a line I recently heard from a Harvard-educated economist, "That's bunk!" How popular will it be to raise rates and curtail economic growth just as the economy edges out of the worst recession since the Great Depression? More important, how will he do that as election season approaches and political pressure intensifies?
Besides the potential for intentional deception, one must also consider the chance for unwillful error, or being too late to the punch. In the same way that it is possible that an elephant guided by a troupe of chimpanzees might learn to ride a bicycle, it just isn't particularly likely. The Fed won't get the equilibrium just right. Bernanke has himself suggested it is better to err on the side of inflation rather than deflation, and it is inflation we expect to see, yet significant inflation is not yet imputed into bond prices, likely because the Fed itself is propping up prices for the moment by scooping up bonds to keep yields low. That sounds a bit like the mouse helplessly trying to stay afloat as the hawk lurks overhead.
Inflation is coming. In an inflationary world, stocks outperform bonds and long-term bonds fare particularly badly. Foreign stocks with undervalued currencies outperform stocks denominated in inflating currencies. For these reasons, equities will outpace fixed income for the decade to come (though not so in every year). Chinese equities will continue to offer their outsized gains over the next several years, even after its amazing run thus far in 2009.
That's not to say there won't be plenty of micro-cap stocks in the U.S. that have carved out growth opportunities, but don't ignore the low hanging fruit. Small-cap growth stocks in China--companies like Asia Info Holdings (ASIA), E-House (EJ), Baidu.com, Ctrip (CTRP), American Dairy (ADP), Perfect World (PFWD) and Rino (RINO)--as well as diversified China mutual funds, offer the benefits of foreign currency exposure and higher Chinese GDP growth to your aggressive growth portfolio.
So what's the moral of the story of The Mouse, the Frog and the Hawk? Be the hawk.
Jim Oberweis, CFA, is editor of the Oberweis Report and manager of several mutual funds focused on small-cap growth stocks and China.
http://www.forbes.com/2009/08/06/baidu-ctrip-asiainfo-personal-finance-investing-ideas-inflation-china_print.html
Jim Oberweis, Oberweis Report 08.06.09, 5:40 PM ET
If fable-teller Aesop sat down with China's President Hu Jintao and Federal Reserve Chairman Ben Bernanke, the meeting would begin with the story of the Mouse, the Frog and the Hawk:
"A mouse who always lived on the land, by an unlucky chance, formed an intimate acquaintance with a frog, who lived, for the most part, in the water. One day, the frog was intent on mischief. He tied the foot of the mouse tightly to his own. Thus joined together, the frog led his friend the mouse to the meadow where they usually searched for food. After this, he gradually led him toward the pond in which he lived. Upon reaching the banks of the water, he suddenly jumped in, dragging the mouse with him.
"The frog enjoyed the water amazingly, and swam croaking about, as if he had done a good deed. The unhappy mouse was soon sputtered and drowned in the water, and his poor dead body floating about on the surface. A hawk observed the floating mouse from the sky, and dove down and grabbed it with his talons, carrying it back to his nest. The frog, being still fastened to the leg of the mouse, was also carried off a prisoner, and was eaten by the hawk."
Ah, but who is the frog and who is the mouse? Is the mouse an allegorical depiction of the U.S., with the death of its manufacturing powerhouse catalyzed by the subsidies and currency manipulation of the Chinese frog? Or is China the mouse, whose export-based economy remains susceptible to the unsustainable and careless spending of the overleveraged western frog? In the latter scenario, the Chinese mouse's life (or at least savings) lay in the hands of the frog, steep in danger, an eventual victim to the hawk of Inflation.
Let us not forget that most unhappy final twist: the frog dies too, bound at the leg to the mouse. And so might the film roll, with an unhappy ending for the American frog. As the U.S. inflates away the burden of its debt (jargonized as "quantitative easing"), we may have fooled the Chinese this time, but future creditors will vanish, and the U.S.' ability to finance deficit spending on absurdly attractive terms will be relinquished for the foreseeable future.
It doesn't take an expert in game theory to realize that the mouse will try to untie itself before it gets dragged under water. In fact, China recently made waves with a proposal for alternatives to the U.S. dollar as a reserve currency. Bernanke, in fulfilling his patriotic cheerleading duties, recently sought to quell inflation worries with a promise to maintain harmony and balance throughout the universe: "I think that they are misguided in the sense that … the Federal Reserve is able to draw those reserves out and raise interest rates at an appropriate time to make sure that we don't have an inflation problem."
Borrowing a line I recently heard from a Harvard-educated economist, "That's bunk!" How popular will it be to raise rates and curtail economic growth just as the economy edges out of the worst recession since the Great Depression? More important, how will he do that as election season approaches and political pressure intensifies?
Besides the potential for intentional deception, one must also consider the chance for unwillful error, or being too late to the punch. In the same way that it is possible that an elephant guided by a troupe of chimpanzees might learn to ride a bicycle, it just isn't particularly likely. The Fed won't get the equilibrium just right. Bernanke has himself suggested it is better to err on the side of inflation rather than deflation, and it is inflation we expect to see, yet significant inflation is not yet imputed into bond prices, likely because the Fed itself is propping up prices for the moment by scooping up bonds to keep yields low. That sounds a bit like the mouse helplessly trying to stay afloat as the hawk lurks overhead.
Inflation is coming. In an inflationary world, stocks outperform bonds and long-term bonds fare particularly badly. Foreign stocks with undervalued currencies outperform stocks denominated in inflating currencies. For these reasons, equities will outpace fixed income for the decade to come (though not so in every year). Chinese equities will continue to offer their outsized gains over the next several years, even after its amazing run thus far in 2009.
That's not to say there won't be plenty of micro-cap stocks in the U.S. that have carved out growth opportunities, but don't ignore the low hanging fruit. Small-cap growth stocks in China--companies like Asia Info Holdings (ASIA), E-House (EJ), Baidu.com, Ctrip (CTRP), American Dairy (ADP), Perfect World (PFWD) and Rino (RINO)--as well as diversified China mutual funds, offer the benefits of foreign currency exposure and higher Chinese GDP growth to your aggressive growth portfolio.
So what's the moral of the story of The Mouse, the Frog and the Hawk? Be the hawk.
Jim Oberweis, CFA, is editor of the Oberweis Report and manager of several mutual funds focused on small-cap growth stocks and China.
http://www.forbes.com/2009/08/06/baidu-ctrip-asiainfo-personal-finance-investing-ideas-inflation-china_print.html
Monday 17 August 2009
Latexx
Price 2.10
latest eps 5.86
annualised eps 23.4
annualised PE = 8.9
Market cap 383.555 m
NAV 72 sen
latest eps 5.86
annualised eps 23.4
annualised PE = 8.9
Market cap 383.555 m
NAV 72 sen
Hartalega
Hartalega
Price 5.20
latest qtr eps 10.88
annualised eps 4x 10.88 = 43.5
annualised PE = 12
Market cap = 1.3 billion
NAV 1.12
Date Announced : 12/08/2009
Type : Announcement
Subject : HARTALEGA HOLDINGS BERHAD ("HARTA and/or Company")
-Director's dealing in shares in HARTA during closed period pursuant to paragraph 14.08(c) of the Listing Requirements of Bursa Malaysia Securities Berhad
Contents : Pursuant to paragraph 14.08(c) of the Bursa Securities Listing Requirements, Encik Sannusi Bin Ngah, a Non-Independent Non-Executive Director of the Company has given a notification that he has disposed a total of 3,000,000 ordinary shares of RM0.50 each in HARTA, details of which are set out in the table below.
Price 5.20
latest qtr eps 10.88
annualised eps 4x 10.88 = 43.5
annualised PE = 12
Market cap = 1.3 billion
NAV 1.12
Date Announced : 12/08/2009
Type : Announcement
Subject : HARTALEGA HOLDINGS BERHAD ("HARTA and/or Company")
-Director's dealing in shares in HARTA during closed period pursuant to paragraph 14.08(c) of the Listing Requirements of Bursa Malaysia Securities Berhad
Contents : Pursuant to paragraph 14.08(c) of the Bursa Securities Listing Requirements, Encik Sannusi Bin Ngah, a Non-Independent Non-Executive Director of the Company has given a notification that he has disposed a total of 3,000,000 ordinary shares of RM0.50 each in HARTA, details of which are set out in the table below.
Saturday 15 August 2009
Glove makers to ride on strong demand growth
Glove makers to ride on strong demand growth
Tags: Hartalega | Kossan | Top Glove
Written by The Edge Financial Daily
Friday, 14 August 2009 12:07
KUALA LUMPUR: Maybank Investment Research remains overweight on Malaysia's glove manufacturing sector, which has the top manufacturers in the world.
The research house said on Aug 14 it had raised the target prices of Hartalega and Top Glove by 19%-23% to RM6.50 and RM8.30. It also retained the Buy calls on Hartalega, Top Glove and Kossan.
It said expectation is for demand to grow by a strong 10%-12% per annum over the next five years, above its 5%-8% forecast.
Maybank Investment Research said the drivers are improved hygiene standards and healthcare awareness in developing countries like Latin America and Asia; higher incidences of major infectious disease outbreaks, an ageing population and rising economic and social conditions, and more outsourcing by large medical companies in US.
The challenges for the sector is the government's stand on foreign labour, double levy and tax benefits; lack of R&D in the industry; volatile latex prices and currencies, and energy issues.
However, glove makers should be able to continue passing on additional costs over time to mitigate exposure.
"We shall see selling prices being adjusted upwards in 3Q09 to accommodate latex prices' current uptrend," it said.
All producers are expected to post above-par core second quarter 2009 earnings, riding on lower material costs and orders surge owing to the H1N1 outbreak. Demand growth should be stronger ahead.
"We have raised Top Glove and Hartalega's FY09-12 net profits by 7%-13% but lowered Kossan's FY09 by 10% due to losses in structured currency product. The combined net profits of the producers are still expected to record a three-year compounded annual growth rate (CAGR) of 14%. Capacity expansion should support demand growth.
"Considering their dominant global market share, the sector's 2009-10 price-to-earnings ratio (PER) of 11 times to 13 times is undemanding relative to the FBM-KLCI 30's 17 times. We raise Hartalega's and Top Glove's TP to RM6.50 (+19%) and RM8.30 (+23%) respectively. We maintain Kossan's TP at RM5.30," it said.
From the Edge
Tags: Hartalega | Kossan | Top Glove
Written by The Edge Financial Daily
Friday, 14 August 2009 12:07
KUALA LUMPUR: Maybank Investment Research remains overweight on Malaysia's glove manufacturing sector, which has the top manufacturers in the world.
The research house said on Aug 14 it had raised the target prices of Hartalega and Top Glove by 19%-23% to RM6.50 and RM8.30. It also retained the Buy calls on Hartalega, Top Glove and Kossan.
It said expectation is for demand to grow by a strong 10%-12% per annum over the next five years, above its 5%-8% forecast.
Maybank Investment Research said the drivers are improved hygiene standards and healthcare awareness in developing countries like Latin America and Asia; higher incidences of major infectious disease outbreaks, an ageing population and rising economic and social conditions, and more outsourcing by large medical companies in US.
The challenges for the sector is the government's stand on foreign labour, double levy and tax benefits; lack of R&D in the industry; volatile latex prices and currencies, and energy issues.
However, glove makers should be able to continue passing on additional costs over time to mitigate exposure.
"We shall see selling prices being adjusted upwards in 3Q09 to accommodate latex prices' current uptrend," it said.
All producers are expected to post above-par core second quarter 2009 earnings, riding on lower material costs and orders surge owing to the H1N1 outbreak. Demand growth should be stronger ahead.
"We have raised Top Glove and Hartalega's FY09-12 net profits by 7%-13% but lowered Kossan's FY09 by 10% due to losses in structured currency product. The combined net profits of the producers are still expected to record a three-year compounded annual growth rate (CAGR) of 14%. Capacity expansion should support demand growth.
"Considering their dominant global market share, the sector's 2009-10 price-to-earnings ratio (PER) of 11 times to 13 times is undemanding relative to the FBM-KLCI 30's 17 times. We raise Hartalega's and Top Glove's TP to RM6.50 (+19%) and RM8.30 (+23%) respectively. We maintain Kossan's TP at RM5.30," it said.
From the Edge
Warren Buffett Was Right
Warren Buffett Was Right
By: Zacks Investment Research
Friday, August 07, 2009 6:35 PM
Did you follow Warren Buffett's advice last year to buy American stocks? In that now famous October 17, 2008 Op-Ed piece in the New York Times, Buffet shared his simple rule for buying stocks: "Be fearful when others are greedy, and be greedy when others are fearful." Certainly at that time fear had gripped the markets and investors were fleeing equities into cash.
Well if you did buy at that time, then you are one of the few, the proud, and the bold value investors who made a prudent call that is now paying off handsomely. And if you didn’t buy then lets review the lessons that Warren was trying to share and how it will benefit you going forward.
1. The Markets Rebound Long Before the Economy
Buffett believed that equities would far outperform other asset classes, especially cash, over the next 5, 10 or 20 years as the stock market rises in anticipation of an economic recovery, even if we weren't in one yet.
A perfect example is the Dow's behavior during the Great Depression. Buffett wrote that it took several years for the Dow to hit its low of 41 on Jul 8, 1932. But you wouldn't have known that that was "the bottom" based on economic conditions. The economy continued to worsen until March 1933, when Franklin Roosevelt took office.
Meanwhile, from the market lows in July 1932 to March 1933, the Dow rebounded 30%.
We've seen a similar rebound in the last 5 months but no one knows how long the rally will last or if it's the start of a new bull market. Still, while your cash is getting virtually no interest in this zero-rate interest environment, equities are paying a dividend yield and have the possibility of more upside. In this kind of environment, cash is not king.
2. Long-Term Outlook For Equities Is Good
The stock markets have been around much longer than any of us. During that time, the world suffered through world wars, influenza outbreaks, terrorist attacks, recessions and one depression but still, businesses created new products and made profit. They will continue to do so in the future.
Consider Apple and the iPhone. Even in the midst of this recession, millions of people bought the iPhone around the world. Investors who understood that Apple was still selling its products at a fast clip were rewarded with a stock that jumped over 90% from the beginning of the year.
Apple won't be the last company to cash in on its powerful brand and host of good products. The key for investors is to find other companies that will be next to do the same.
3. Prepare for Inflation
Buffett wrote that greater inflation was a possibility as the government printing presses work overtime to alleviate the recession and liquidity enters the economic system. Cash is where you will NOT want to be. The value of your cash will actually decline under those conditions.
There are now exchange-traded funds (ETFs) and other instruments available to investors to prepare for inflation including owning TIPs, Treasury-Inflation Protected Securities, and the precious metals through the gold or silver ETFs or precious metal mining stocks.
4. Finding Great Stocks
The great thing about being an investor is that there are always hidden gems to be uncovered in any kind of market.
Despite the massive rally we've seen on the markets in the past few months, you can still hunt for undervalued stocks that will see a big upside when investors figure out that the fundamentals are great and the stock is cheap.
For example, in May, well after the rally began, the Value Trader portfolio, which buys a basket of stocks with a holding period of 3 months, bought shares of Western Digital and sold in late July for a 23.44% profit.
We try and find these kind of stocks every day.
5. It's Not Too Late to Invest
By March, it seemed that Buffett's advice to buy equities was very, very wrong. But that was his point. You can't time it. He said he had no idea what stocks would do in the short term. But it's not too late.
http://www.istockanalyst.com/article/viewarticle/articleid/3402145
By: Zacks Investment Research
Friday, August 07, 2009 6:35 PM
Did you follow Warren Buffett's advice last year to buy American stocks? In that now famous October 17, 2008 Op-Ed piece in the New York Times, Buffet shared his simple rule for buying stocks: "Be fearful when others are greedy, and be greedy when others are fearful." Certainly at that time fear had gripped the markets and investors were fleeing equities into cash.
Well if you did buy at that time, then you are one of the few, the proud, and the bold value investors who made a prudent call that is now paying off handsomely. And if you didn’t buy then lets review the lessons that Warren was trying to share and how it will benefit you going forward.
1. The Markets Rebound Long Before the Economy
Buffett believed that equities would far outperform other asset classes, especially cash, over the next 5, 10 or 20 years as the stock market rises in anticipation of an economic recovery, even if we weren't in one yet.
A perfect example is the Dow's behavior during the Great Depression. Buffett wrote that it took several years for the Dow to hit its low of 41 on Jul 8, 1932. But you wouldn't have known that that was "the bottom" based on economic conditions. The economy continued to worsen until March 1933, when Franklin Roosevelt took office.
Meanwhile, from the market lows in July 1932 to March 1933, the Dow rebounded 30%.
We've seen a similar rebound in the last 5 months but no one knows how long the rally will last or if it's the start of a new bull market. Still, while your cash is getting virtually no interest in this zero-rate interest environment, equities are paying a dividend yield and have the possibility of more upside. In this kind of environment, cash is not king.
2. Long-Term Outlook For Equities Is Good
The stock markets have been around much longer than any of us. During that time, the world suffered through world wars, influenza outbreaks, terrorist attacks, recessions and one depression but still, businesses created new products and made profit. They will continue to do so in the future.
Consider Apple and the iPhone. Even in the midst of this recession, millions of people bought the iPhone around the world. Investors who understood that Apple was still selling its products at a fast clip were rewarded with a stock that jumped over 90% from the beginning of the year.
Apple won't be the last company to cash in on its powerful brand and host of good products. The key for investors is to find other companies that will be next to do the same.
3. Prepare for Inflation
Buffett wrote that greater inflation was a possibility as the government printing presses work overtime to alleviate the recession and liquidity enters the economic system. Cash is where you will NOT want to be. The value of your cash will actually decline under those conditions.
There are now exchange-traded funds (ETFs) and other instruments available to investors to prepare for inflation including owning TIPs, Treasury-Inflation Protected Securities, and the precious metals through the gold or silver ETFs or precious metal mining stocks.
4. Finding Great Stocks
The great thing about being an investor is that there are always hidden gems to be uncovered in any kind of market.
Despite the massive rally we've seen on the markets in the past few months, you can still hunt for undervalued stocks that will see a big upside when investors figure out that the fundamentals are great and the stock is cheap.
For example, in May, well after the rally began, the Value Trader portfolio, which buys a basket of stocks with a holding period of 3 months, bought shares of Western Digital and sold in late July for a 23.44% profit.
We try and find these kind of stocks every day.
5. It's Not Too Late to Invest
By March, it seemed that Buffett's advice to buy equities was very, very wrong. But that was his point. You can't time it. He said he had no idea what stocks would do in the short term. But it's not too late.
http://www.istockanalyst.com/article/viewarticle/articleid/3402145
Friday 14 August 2009
Reviewing my Sell Transactions
http://spreadsheets.google.com/pub?key=t0sOF20dGoiu6n90X-XiAfA&output=html
Reasons for selling:
1. When cash is needed urgently for emergencies. Hopefully you will have cash kept aside for such contingencies.
2. When the fundamentals of the company has deteriorated. The stock should be sold urgently.
3. When the share is deemed overpriced, reducing its upside potential and increasing its downside risk.
4. To switch a stock to another stock with better upside potential and lower downside risk.
Reasons for selling:
1. When cash is needed urgently for emergencies. Hopefully you will have cash kept aside for such contingencies.
2. When the fundamentals of the company has deteriorated. The stock should be sold urgently.
3. When the share is deemed overpriced, reducing its upside potential and increasing its downside risk.
4. To switch a stock to another stock with better upside potential and lower downside risk.
Thursday 13 August 2009
Buffett: Principles of fundamental business analysis should guide investment practice.
Focussed investing: allocating capital by concentrating on businesses with outstanding economic characteristics and run by first-rate manager.
The central theme uniting Buffett's investing is that the principles of fundamental business analysis, first formulated by his teachers Ben Graham and David Dodd, should guide investment practice. Linked to that theme are investment pricniples that define the proper role of corporate managers as the stewards of invested capital, and the proper role of shareholders as the suppliers and owners of capital.
Buffett and Berkshire Vice Chairman Charlie Munger have built Berkshire Hathaway into a $70-plus billion enterprise by investing in business with excellent economic characteristics and run by outstanding managers. While they prefer negotiated acquisitions of 100% of such a business at a fair price, they take a "double-barreled approach" of buying on the open market less than 100% of such businesses when they can do so at a pro-rata price well below what it would take to buy 100%.
The double-barreled approach pays off handsomely. The value of marketable securities in Berkshire's portfolio, on a per share basis, increased from $4 in 1965 to nearly $50,000 in 2000, about a 25% annual increase. Per share operating earnings increased in the same period from just over $4 to around $500, an annual increase of about 18%. According to Buffett, these results follow not from any master plan but from focussed investing - allocating capital by concentrating on businesses with outstanding economic characteristics and run by first-rate manager.
Learning from Buffett
Buffett views Berkshire as a partnership among him, Munger and other shareholders, and virtually all his $20-plus billion net worth is in Berkshire stock. His economic goal is long-term - to maximize Berkshire's per share intrinsic value by owning all or part of a diversified group of businesses that generate cash and above-average returns. In achieving this goal, Buffett foregoes expansion for the sake of expansion and foregoes divestment of businesses so long as they generate some cash and have good management.
Berkshire retains and reinvests earnings when doing so delivers at least proportional increases in per share market value over time. It uses debt sparingly and sells equity only when it receives as much in value as it gives. Buffett penetrates acounting conventions, especially those that obscure real economic earnings.
It is true that investors should focus on fundamentals, be patient, and exercise good judgment based on common sense. Many people speculate on what Berkshire and Buffett are doing or plan to do. Their speculation is sometimes right and sometimes wrong, but always foolish. People would be far better off not attempting to ferret out what specific investments are being made at Berkshire, but thinking about how to make sound investment selections based on Berkshire's teaching. That means they should think about Buffett's writings and learn from them, rather than try to emulate Berkshire's porfolio.
Buffett modestly confesses that most of the ideas were taught to him by Ben Graham. He considers himself the conduit through which Graham's ideas have proven their value. Buffett recognizes the risk of popularizing his business and investment philosophy. But he notes that he benefited enormously from Graham's intellectual generosity and believes it is appropriate that he pass the wisdom on, even if that means creating investment competitors.
-----
Buffett has applied the traditional principles as CEO of Berkshire Hathaway, a company with roots in a group of textile operations begun in the early 1800s. Buffett took the helm of Berkshire in 1964, when its book value per share was $19.46 and its intrinsic value per share far lower. Today (2002), its book value per share is around $40,000 and its intrinsic vlaue far higher. The growth rate in book value per share during that period is about 24% compounded annually.
Berkshire is now a holding company engaged in a variety of businesses, not including textiles. Berkshire's most important business is insurance, carried on through various companies including its 100% owned subsidiary, GEICO Corporation, the sixth largest auto insurer in the United States, and General Re Corporation, one of the four largest reinsurers in the world. Berkshire publishes The Buffalo News and owns other businesses that manufacture or distribute products ranging from carpeting, briks, paint, encyclopedias, home furnishings, and cleaning systems, to chocolate candies, ice cream, jewelry, footwear, uniforms, and air compressors, as well as businesses that provide training to operators of aircrafts and ships worldwide, fractional ownership interests in general aviation aircraft, and electric and gas power generation. Berkshire also wons substantial equity interests in major corporations, including American Express, Coca-Cola, Gillette, The Washington Post, and Wells Fargo.
The central theme uniting Buffett's investing is that the principles of fundamental business analysis, first formulated by his teachers Ben Graham and David Dodd, should guide investment practice. Linked to that theme are investment pricniples that define the proper role of corporate managers as the stewards of invested capital, and the proper role of shareholders as the suppliers and owners of capital.
Buffett and Berkshire Vice Chairman Charlie Munger have built Berkshire Hathaway into a $70-plus billion enterprise by investing in business with excellent economic characteristics and run by outstanding managers. While they prefer negotiated acquisitions of 100% of such a business at a fair price, they take a "double-barreled approach" of buying on the open market less than 100% of such businesses when they can do so at a pro-rata price well below what it would take to buy 100%.
The double-barreled approach pays off handsomely. The value of marketable securities in Berkshire's portfolio, on a per share basis, increased from $4 in 1965 to nearly $50,000 in 2000, about a 25% annual increase. Per share operating earnings increased in the same period from just over $4 to around $500, an annual increase of about 18%. According to Buffett, these results follow not from any master plan but from focussed investing - allocating capital by concentrating on businesses with outstanding economic characteristics and run by first-rate manager.
Learning from Buffett
Buffett views Berkshire as a partnership among him, Munger and other shareholders, and virtually all his $20-plus billion net worth is in Berkshire stock. His economic goal is long-term - to maximize Berkshire's per share intrinsic value by owning all or part of a diversified group of businesses that generate cash and above-average returns. In achieving this goal, Buffett foregoes expansion for the sake of expansion and foregoes divestment of businesses so long as they generate some cash and have good management.
Berkshire retains and reinvests earnings when doing so delivers at least proportional increases in per share market value over time. It uses debt sparingly and sells equity only when it receives as much in value as it gives. Buffett penetrates acounting conventions, especially those that obscure real economic earnings.
It is true that investors should focus on fundamentals, be patient, and exercise good judgment based on common sense. Many people speculate on what Berkshire and Buffett are doing or plan to do. Their speculation is sometimes right and sometimes wrong, but always foolish. People would be far better off not attempting to ferret out what specific investments are being made at Berkshire, but thinking about how to make sound investment selections based on Berkshire's teaching. That means they should think about Buffett's writings and learn from them, rather than try to emulate Berkshire's porfolio.
Buffett modestly confesses that most of the ideas were taught to him by Ben Graham. He considers himself the conduit through which Graham's ideas have proven their value. Buffett recognizes the risk of popularizing his business and investment philosophy. But he notes that he benefited enormously from Graham's intellectual generosity and believes it is appropriate that he pass the wisdom on, even if that means creating investment competitors.
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Buffett has applied the traditional principles as CEO of Berkshire Hathaway, a company with roots in a group of textile operations begun in the early 1800s. Buffett took the helm of Berkshire in 1964, when its book value per share was $19.46 and its intrinsic value per share far lower. Today (2002), its book value per share is around $40,000 and its intrinsic vlaue far higher. The growth rate in book value per share during that period is about 24% compounded annually.
Berkshire is now a holding company engaged in a variety of businesses, not including textiles. Berkshire's most important business is insurance, carried on through various companies including its 100% owned subsidiary, GEICO Corporation, the sixth largest auto insurer in the United States, and General Re Corporation, one of the four largest reinsurers in the world. Berkshire publishes The Buffalo News and owns other businesses that manufacture or distribute products ranging from carpeting, briks, paint, encyclopedias, home furnishings, and cleaning systems, to chocolate candies, ice cream, jewelry, footwear, uniforms, and air compressors, as well as businesses that provide training to operators of aircrafts and ships worldwide, fractional ownership interests in general aviation aircraft, and electric and gas power generation. Berkshire also wons substantial equity interests in major corporations, including American Express, Coca-Cola, Gillette, The Washington Post, and Wells Fargo.
What guides your investing?
It is surprising to know of many remisiers who cannot give you a short account of their investment principles. In conversations, they talk about short term "hot stocks". So and so "smart" investor is buying. So and so "smart" investor is selling. This stock should go up higher soon because of this and that. This is not such a good stock. This is a good stock.
Such "guide" is of little use for a serious investor who seeks to "invest" significant amount into the market for good returns (either for dividend and/or capital gains) over a life-time.
It is surprising why so many investors do not have a "good" guide for their investing. Many understand the buy low and sell high approach (or for some, buy high and sell higher approach), but with little application of fundamental business analysis. They have little control over the controllables, therefore, their approach is very much dependent on the play of the market and chance.
However, by adopting certain investment philosophy and understanding their emotion and behaviour, their investment operations can be safer with a higher probability of a positive moderate return. And there is no need to have a superior IQ to do so.
Such "guide" is of little use for a serious investor who seeks to "invest" significant amount into the market for good returns (either for dividend and/or capital gains) over a life-time.
It is surprising why so many investors do not have a "good" guide for their investing. Many understand the buy low and sell high approach (or for some, buy high and sell higher approach), but with little application of fundamental business analysis. They have little control over the controllables, therefore, their approach is very much dependent on the play of the market and chance.
However, by adopting certain investment philosophy and understanding their emotion and behaviour, their investment operations can be safer with a higher probability of a positive moderate return. And there is no need to have a superior IQ to do so.
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