Stock Market Investing Will Be Made Simpler, By Making Use Of These Guidelines

02.03.2010 | Author: Tom Kearney | Posted in Stock Market

There is certainly a state of flux in the present day stock markets but that is no reason why you should not learn more about stock market investing. The good news is that there are many useful tips available that will help you understand how to invest your money profitably in the best stocks.

At the very outset, it must be emphasized that success in stock market investing only comes to those who plan their activities before investing their money. In fact, it is also safe and wise to distribute your investments and in addition you will need to also make regular investments plus you should invest with a long term plan in mind.

The sooner you start making investments the better it will be for you as then you can reap benefits that will come your way through compounding. In fact, you should consider time to be the magical key that will unlock the secrets to turning cents into dollars. However, be sure that you also learn to avoid investing in derivatives and also in futures.

The third most important tip is that it does not pay to try leveraging as this is very difficult and in many instances, is even impossible because you cannot accurately predict how stock market trends in the near term will pan out. Instead of this, it makes sense to not buy into a market and the right course of action is to invest only in good stocks.

Now, when it comes to picking individual stocks you need to choose stocks that are a mirror of the much broader indexes and at the same time you need to ensure that you do not purchase single or even handful of stock exposures. It is always safer to spread your risk across different market segments so that even if a particular stock fails, you will have other stocks that can help cover the losses.

Also, before you actually go out and buy stocks, you must determine how well a particular company has been performing and if the performance is up to the mark, then you can go ahead and purchase the stock of that company. You should not allow yourself to be swayed by stock prices that often give an incorrect impression and which seldom give accurate pointers as to the health and profitability of a company.

In addition, when some of your stocks turn out to be duds, you must not hesitate in selling them off as soon as is possible. If you have erred in buying stocks, then you should admit this and get rid of the duds and in this way cut your losses.

When buying stocks, you need to also ensure that you buy into value and not into momentum. Also, be sure that you base your buying of stock decisions according to what your head says, and not what your heart is telling you.

It also means that when your brain tells you to buy a stock, you should buy the stock and not make the mistake of purchasing stocks based on emotions. Buying into large company stocks is always prudent as the chances of earning profits in the long run are higher as compared to other stocks.

This means that it always pays to pick big stocks and at the same time avoid investing in penny stocks because when you are going to invest in small and middle sized stocks, it would require strong expertise to evaluate their profitability, which is not something that every ordinary investor can do.

Check out more about stock market investing and how you can make money. With ETF trading steps you may be able to bring in a nice profit. Head online and find out more now.

Buy the Unloved, 2010 Style

It pays to go against the grain.

If chasing hot performers hasn't gotten you very far, consider doing the opposite.

Categories with the greatest inflows tend to underperform and those with the greatest outflows tend to outperform. Net flows tend to be driven by past returns, so, in effect, they are telling you what areas have gotten relatively overpriced and underpriced. If the market and fund investors were perfectly efficient and logical, flows and prices would only adjust so that everything had a similar potential risk/reward profile.


However, markets and fund investors generally overdo things in both directions, as the markets of the past two years illustrate vividly.


http://news.morningstar.com/articlenet/article.aspx?id=327599

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Dividends Are Dumb

Dividends Are Dumb

By Anand Chokkavelu, CFA 
February 26, 201

Question everything.

It's a good motto if you ever find yourself in a government-conspiracy movie. And it'll also serve you well any time money's involved.

The folks who question seemingly self-evident principles can make an absolute killing.

• Ask the Super Bowl bettors who took the so-called suckers' bet of the Giants over an 18-0 Patriots team.
• Ask hedge fund manager John Paulson, who made more than $10 million a day in 2007 ($3.7 billion total) because he figured out housing prices could actually fall.  
• Or ask some guy named Craig who questioned the virtual monopoly that newspapers had on classifieds (yes, that's a craigslist reference).

So when I heard the argument recently that dividends are actually a bad thing, I was willing to listen.

In fact, it's a more compelling argument than you may think.

These dividends are just dumb
Why do we invest money in a company? Ultimately, it's because we think that company can grow our money by using that money to invest in its growth.

When a company turns around and gives us that money right back (creating a taxable event in the process), it defeats the purpose. If we want out, we can simply sell our shares. And do so on our own timetables.

Hence, anti-dividend people maintain that even the modest dividends that companies likeHalliburton (NYSE: HAL), General Electric (NYSE: GE), and Microsoft (Nasdaq: MSFT)pay out are just plain dumb.

But hear them out. The case against dividends gets stronger given the reason folks buy dividend stocks in the first place.

Frequently, investors who buy shares of companies that pay large dividends are seeking safety and stability. Why? Because a company that commits to a regular dividend payment is signaling exactly that -- safety and stability.

So it's ironic that a dividend can act like debt -- an obligation that makes the bad times worse. Although paying dividends is optional (while missing debt payments leads to bankruptcy), a company that chooses to cut its dividend signals weakness, often leading to a further weakening of its stock price. That's a double whammy no investor wants to face.

Yet I still heart dividends
So why am I still bullish on dividend payers?

I'll leave aside the empirical evidence that dividend payers have handily outperformed non-payers historically. Instead, let's look at a company's life cycle.

Early in a company's history, it feeds on cash like a baby sucks down formula. Investors don't care, though, because the company needs that capital to fuel its growth. Soon enough, that company either fails or becomes bigger and stronger.

At some point, it starts producing more cash than it's consuming. It can then build a war chest to ensure its survival through good times and bad.

But then what? If there aren't any compelling internal opportunities, a company has four choices:  

• Sit on the cash.
• Buy back shares.
• Make acquisitions.
• Pay dividends.

When you look at all four options carefully, dividends make a heck of a lot of sense.

Dividends stand alone
Sitting on cash is safe, but it’s a drag on a company's return on capital -- especially when interest rates are hugging 0%. Apple's (Nasdaq: AAPL) chosen this path, hoarding more than $20 billion. But few companies have the amazing innovation-driven growth that can hide this drag.

Buying back shares is almost like a dividend with no tax consequences. In fact, if a company can buy back its stock at low points, it can really juice returns to current shareholders. Unfortunately, most managements don't do a good job of timing. Even Goldman Sachs(NYSE: GS), the reputed master of the markets, made massive repurchases of its stock throughout the heady bubble years only to have to sell new stock to raise cash when its stock price was hammered. Classic "buy high, sell low" behavior.

Acquisitions are the scariest of all. You see, management is often judged on its ability to grow the business, specifically earnings per share. That's why they’ll buy back shares at inopportune times. And that's why they'll pursue ill-advised acquisitions and poorly conceived internal projects with such gusto. This growth at an unreasonable price helps management but hurts shareholders.   

Which leads to the reason I love dividends. The issuance of a regular dividend instills management discipline by removing some capital from consideration. You can't waste what you can't touch.

Meanwhile, as shareholders, we get a nice income stream ... the classic stock play that yields like a bond.

With 10-year Treasury bonds currently yielding just 3.6%, dividend stocks are that much more attractive. Because of this, let me share three dividend plays that the dividend hounds at ourMotley Fool Income Investor newsletter have identified and recommended.

Company	Description	Dividend Yield
Paychex (Nasdaq: PAYX)	America's largest payroll processor for small and medium-sized businesses	4.1%
Clorox (NYSE: CLX)	Maker of Clorox bleach, Glad trash bags, Kingsford charcoal, and Pine-Sol	3.3%
Philippine Long Distance Telephone	The Philippines' leading fixed and mobile telecom provider	4.9%

One of the companies above is a "buy first" recommendation -- and only six companies get that nod from the Income Investor analysts.

http://www.fool.com/investing/dividends-income/2010/02/26/dividends-are-dumb.aspx?source=ihpdspmra0000001&lidx=3

Buffett Overpaid, and It Made Sense

By Morgan Housel 
March 1, 2010 | 

"Buffett overpaid for Burlington Northern Santa Fe Corp. and ... should have instead returned the company's excess cash to investors."

That quote, pulled from a news article, is a common attitude when it comes toBerkshire Hathaway's (NYSE: BRK-A)(NYSE: BRK-B) November purchase of railroad giant Burlington Northern.

The $100-per-share buyout represented a 30% premium on Burlington's stock price -- a stock that had already gained 50% over the previous eight months. By any valuation metric, Buffett was coughing up top dollar for Burlington. Coming from the guy who coined the phrase, "price is what you pay, value is what you get," and who built his reputation buying companies like Coca-Cola (NYSE:KO) and American Express (NYSE: AXP) at fire-sale prices, this was a puzzle. Berkshire suddenly looked more like Blackstone (NYSE: BX).

Buffett also partially financed the deal with Berkshire's common stock, a rare move for him, and one he often later regretted. And since he was willing to use Berkshire's stock as currency, he was sending a clear signal to the market: Either Berkshire shares were fully valued (if not overvalued), or he was using an undervalued stock to buy Burlington, making the deal even more expensive than it looked.

Please don't tell me he's lost his marbles
On Saturday, Berkshire released its 2009 letter to shareholders. Within, Buffett went into detail on the mechanics and valuation of the Burlington acquisition. In short, yes, Berkshire paid a full price. Yes, Berkshire shares were probably undervalued at the time. And yes, that means the full price could turn into a dear price.

But the decision nonetheless made sense. Here's exactly what Buffett had to say:

In our [Burlington] acquisition, the selling shareholders quite properly evaluated our offer at $100 per share. The cost to us, however, was somewhat higher since 40% of the $100 was delivered in our shares, which Charlie and I believed to be worth more than their market value ...

In the end, Charlie [Munger] and I decided that the disadvantage of paying 30% of the price through stock was offset by the opportunity the acquisition gave us to deploy $22 billion of cash in a business we understood and liked for the long term. It has the additional virtue of being run by Matt Rose, whom we trust and admire. We also like the prospect of investing additional billions over the years at reasonable rates of return. But the final decision was a close one. If we had needed to use more stock to make the acquisition, it would in fact have made no sense. We would have then been giving up more than we were getting.

The price of being huge
One of the unfortunate rules of finance is that returns wither with size. As individual investors, we can meaningfully buy any stock in the market universe, since the few thousand bucks we'll invest probably won't contort the company's stock price. Our tiny investments mean nothing to the market, but they can mean big bucks for our humble portfolios. The world is our oyster.

Not so for big investors like Berkshire. Heck, Berkshire makes more than $1,000 a minute in dividends on its stakes in General Electric (NYSE: GE) and Goldman Sachs (NYSE: GS) -- and that's a fairly small portion of the overall portfolio. When cash piles up that fast, you have to be able to deploy it in massive chunks -- billions at a time -- to make a dent in the portfolio. That purges most small investment opportunities, forcing investors like Berkshire to settle for lower returns.

That's exactly what happened with Burlington. Paying an overvalued price made sense because it provided the opportunity to deploy tens of billions of cash at reasonable, but not great, returns.

For decades, Buffett has repeated a similar line in Berkshire's annual letters: "[O]ur performance advantage has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue ... huge sums forge their own anchor and our future advantage, if any, will be a small fraction of our historical edge."

After the Burlington deal, it's clear he isn't kidding.

http://www.fool.com/investing/general/2010/03/01/buffett-overpaid-and-it-made-sense.aspx?source=irysithln0000001