myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.

Thursday 23 December 2010

Trading versus Investing

Saw these interesting postings in Blackspy fundamental blog.

There is a saying: "It is not a sin when you buy a stock at its low price." This implies that one is able to value the stock confidently, thereby knowing the probability of upside is higher than the probability of the stock going down.

What can we learn from the actions of Alam Maritim Chairman below? Many 'investors' in the stock market are using such a strategy already. Is this a strategy one can employ profitably, safely and consistently?

-----

Alam Maritim Chairman disposed 100,000 shares back to market

Still remember DATO' CAPT AHMAD SUFIAN BIN QURNAIN @ABDUL RASHID acquired Alam Maritim 100,000 shares on 10 Dec 2010 at my previous post??
http://hongwei85.blogspot.com/2010/12/alam-maritim-chairman-acquired-100000.html

Now he disposed back all the 100,000 shares to open market again~ sign -_-"

On 10 Dec 2010, he acquired 100,000 shares at the price RM 0.89
On 14 Dec 2010, he disposed 30,000 shares at the price RM 1.04
On 16 Dec 2010, he disposed 25,000 shares at the price RM 1.04
On 17 Dec 2010, he disposed 45,000 shares at the price RM 1.056

Just in one week, Dato earned about RM 15k in open market.

Here is the earlier post of when the Alam Maritim Chairman bought the stocks.

Alam Maritim Chairman acquired 100,000 shares.

DATO' CAPT AHMAD SUFIAN BIN QURNAIN @ABDUL RASHID acquired Alam Maritim 100,000 shares at 10 Dec 2010.

Why he bought it? He has too much cash and do not know where to spend?
No no! He knows somwthing is worth by putting his money in this company. Nobody know how the company is running other than chairman.

Post modified: 23.12.2010
Here is another portfolio of a trader (copied from a blog)

I'm a long term investor, not so much on daily trading, slowly allocating part of my money into short term trading. Below is my year 2010 investment portfolio and total profit received. Can those active short term traders share your portfolio? I would like to benchmark my trading method to see if long / medium term investment is more lucrative or short term active trading is more lucrative.

Purc. Date Stock Buy Value P Unit C Unit Cost Dividend Sell Price Profit Selling Date Total Month Hold
19-Apr-10 GPacket 1.15 3 3 3,495.04 0 0.92 -735.04 11-Oct-10 6
9-Dec-10 Pchem-ca 0.335 10 10 3,390.00 0.41 710.00 9-Dec-10 1
26-Nov-10 Pechem 5.04 2 2 10,080.00 5.4 720.00 8-Dec-10 1
26-Nov-10 Pechem 5.04 6 6 30,240.00 5.6 3,360.00 9-Dec-10 1
4-Oct-10 Supermax 4.18 1 1 4,200.00 0 4.41 210.00 8-Dec-10 3
11-Mar-10 Maybank 7.5 1 1 7,555.25 0 9 1,444.75 11-Oct-10 7
11-Nov-09 Maxis 4.75 1 1 4,780.00 390 5.34 950.00 11-Oct-10 12
18-Feb-10 Genting 6.65 0.5 3,350.00 10 1,650.00 11-Oct-10 8
18-Feb-10 Genting 6.65 0.5 2,850.00 10.8 2,550.00 22-Dec-10 10
23-Feb-10 BJTOTO 4.25 2 2 8,562.55 320 4.17 97.45 8-Nov-10 9
1-Dec-09 Gamuda 2.81 1 1 2,850.00 100 3.83 1000.00 21-Dec-10 12

Total profit made: around 11,957.16 (some of the shares I didn't keep track of brokerage fees)

The amount of capital he employed into his portfolio peaked on 26th November 2010.
The total amount at risk was = 2,850 + 2,850 + 4,200 + 30,240 + 10,080 =50,220.
His profit of 11,957.16 gives a return of 23.8%.
His individual stock holding period returns will be higher.

Since January 2010, the KLCI index has risen from around 1250 to 1500, giving a return of 20% for the year.

Wednesday 22 December 2010

Does crowd mentality influence your investment?

The BSE Sensex has multiplied six-seven times over the last decade. And many stocks have sky-rocketed. Some investors have made money. Others have lost money. And most people continue to lose. Strikingly, most people also do what most other people do. Isn't that quite a coincidence?

In our previous article on crowd mentality, we had emphasised the need to keep away from crowds and to stay focused on company fundamentals. Now let us understand some dynamics of this phenomenon called 'crowd'. We have all had our share of experiences at 'becoming a crowd'. Let's recount some.

Situation/ Activity	Our response in a crowd
Watching a cricket match in a jam packed stadium	We end up yelling and cheering more than we would otherwise if watching alone on TV.
In a professional company meeting	We're prone to agreeing more often than not.
In Bombay local trains	Need we say anything?
The 2007 bull run. The 2008 crash	Remember???

Let's look back at these common experiences with a different perspective. Of all, one thing is quite clear:

Being part of a crowd causes people to behave differently from the way that they would in isolation.

Crowds introduce a very overwhelming emotional and often irrational element to decision-making: making an individual equate his own needs with those of the crowd. This is particularly noticeable in financial markets. At peaks and troughs of the stock market, for example, very few people will be concentrating on the fundamental economic influences. The vast majority will be concerned with only the recent short-term movements in prices themselves. Consequently, this majority will inevitably be on the wrong foot when a price reversal occurs.

People who have spent a decent amount of time investing in stocks must have often felt a two-way pull on their decisions. Their 'personal' approach may suggest one course of action. On the other hand, the lure of the 'herd instinct' may be pulling entirely in the opposite direction. This is true even for a lot of seasoned professionals. The reason for this two-way pull lies in these two primary tendencies-

Self-assertive tendency: the ability to behave in a self-determined way.

Integrative tendency: the willingness to belong to crowds.

What we ultimately do depends on which of these two tendencies stands prominently in us.

A crowd is something other than the sum of its parts

A crowd is a psychological phenomenon. Its formation does not really require the physical presence of its members. All that is needed is a common cause. The most striking peculiarity of a crowd in a financial market is this:

The individuals composing a crowd may be very different from each other. They may differ in their lifestyles, their character, or their intelligence. But the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind. And the way they feel, think and act gets altered drastically.

Doesn't this remind you of chemistry lessons? Two or more different elements combining together. Then transforming into a compound whose characteristics are quite distinct from that of its components. Ditto for investors! Successful investment, therefore, depends on an individual's ability to stand aside from the crowd's influence.

Equimaster

Marc Faber: "If you cannot swallow a 30% correction in whatever you buy, then don't even get up in the morning from your bed."

A 30% correction in emerging markets?

More money than you can imagine. Billions and trillions of currency notes. The Fed's quantitative easing program sent a lot of cheap money floating around the world. This money directly found its way to emerging markets. With high interest rates, and strong economic recoveries, the flow of money in this direction was but obvious.

For a while, increased cash makes everyone feel happy. FIIs pumped in a total of US$ 29.3 bn in India so far in 2010. This sent stock prices soaring. The very same stocks which were selling at their lows a year back, reached their lifetime highs. Stock markets climbed quickly to their previous peaks.

But, was the excess money even needed in the first place? Increased inflows of money have led to inflationary pressure, currency appreciation and asset bubbles forming in these countries. According to Nobel Prize-winning economist Joseph Stiglitz, these are "considerable risks". So, how do the emerging markets react? Well, economies from San Paulo to New Delhi have been trying hard to control these volatile capital inflows. Brazil raised its taxes on foreign bond purchases by almost three times. India tried to raise interest rates to stem rampant inflation.

But now, India has inadvertently done something to further reduce FII inflows. The recent bribery scams, stock price riggings and political uncertainty led to FIIs dropping Indian stocks like hot potatoes. The pace of FII inflows has slowed down considerably over the past three months. Marc Faber believes that emerging markets could easily see a 20-30% correction. Tightening monetary conditions, high crude prices and food supply concerns are all adding to the mess.

But, if you bought the right stocks at the right valuations and with the right management, you may still be safe. We believe that Faber has it right by saying that if you cannot swallow a 30% correction in whatever you buy, then don't even get up in the morning from your bed.

Equimaster

Do you invest in what you don't understand?

Principles of value investing have helped create legends of the likes of Warren Buffett and Peter Lynch. The principles are simple and easy to understand. Pick a sound business that is available at cheap valuations. And then hold it till such time the value is realized.

But the most important principle is to invest only in what you understand. This means to stay within your own circle of competence. As Buffett puts it "Everybody's got a different circle of competence. The important thing is not how big the circle is. The important thing is staying inside the circle." As simple as it sounds, it is the most difficult principle to follow. And wandering away from it can cause investors the biggest harm.

A case in point for this is that of the emerging market guru, Mark Mobius. While Mobius has enjoyed tremendous success with his investment techniques in Asia, his emerging market fund has not done so well outside of the region. In fact, the geographically diverse Emerging Market Fund has ranked only 103 out of 236 funds over 10 years in total returns.

So does it mean that Mobius has changed his style of investing? No he has not. He still sticks to his principles of picking value buys. However, it may be possible that he has just stepped outside his circle of competence.

Do you stick to your own circle of competence while choosing your investments?

http://www.equitymaster.com/

QL Resources Bhd

• Riding uptrend in demand for food commodities
Initiate coverage on QL Resources (QL with a Buy recommendation and
target price of RM7.30) based on 20x CY11 P/E. QL’s products will benefit
directly from the rising global demand and price trend for food
commodities. The group is one of Asia’s largest surimi manufacturers and
a Malaysian market leader in livestock feed trading, fishmeal and egg
production.

• Sustainable earnings growth
We have forecast a 3-year forward forecast EPS CAGR of 17.3% (FY11-
13), that will be driven by strong demand for QL’s marine, livestock feed,
poultry products and palm oil, with rising population and disposable
income, as well as the group’s steady capacity expansion. Diversification
reduces earnings volatility by smoothening out cyclicality of its resourcebased activities.

• Assertive regionalisation drive
QL’s expansion plan is both local and regional, with total group capex set
to increase by 60% in the next 2 years to RM200m annually. The group is
replicating its business model in the ASEAN region with new poultry farms
in Tay Ninh, Vietnam and Cianjur, Indonesia; a new marine plant being
constructed in Surabaya, Indonesia and further planting and palm oil mill
slated for its plantation in Tarakan, Kalimantan, Indonesia.

• Benefits from government incentives for agriculture
QL benefits from the government’s pro-agriculture stance via tax
incentives that translate to a lower tax rate (15% in FY10) and subsidised
diesel for its deep sea fishing operations. The group’s latest venture into
renewable energy is directly in accordance with the government’s
promotion of green technology as contained in the Budget 2011
announcement.

• Further upside to share price
Despite what seems like expensive valuations, we are bullish on QL as we
firmly believe it deserves premium valuation to peers as well as market.
QL’s next 2 years earnings CAGR of 16.1% is impressive as compared to
Malaysian peers of 5.6%. Furthermore, over the last 10 years, QL’s
average 12-month forward earnings growth is impressive at 23%. At our
target price, PEG ratio is undemanding at only 0.9x based on 10-year
average growth rate.

http://www.ecmmoney.com/wp-content/uploads/downloads/2010/12/QLG_101214_Initiating-coverage.pdf

Pimco says 'untenable' policies will lead to eurozone break-up

Pimco says 'untenable' policies will lead to eurozone break-up
Pimco, the world's largest bond fund, has called on Greece, Ireland and Portugal to step outside the eurozone temporarily and restructure their debts unless the currency bloc agrees to a radical change of course.

Bernard Chawmeau-French man against the Euro tears up a mock 100 euro note in the front of the Arc de Triomphe;Paris. Pimco says 'untenable' policies will lead to eurozone break-up

Pimco said current policies are untenable in the absence of fiscal union and will lead to a break-up of the euro

By Ambrose Evans-Pritchard 7:00PM GMT 20 Dec 2010

330 Comments

Andrew Bosomworth, head of Pimco's portfolio management in Europe, said current policies are untenable in the absence of fiscal union and will lead to a break-up of the euro.

"Greece, Ireland and Portugal cannot get back on their feet without either their own currency or large transfer payments," he told German newspaper Die Welt.

He said these countries could rejoin EMU "after an appropriate debt restructuring", adding that devaluation would let them export their way back to health.

Mr Bosomworth said EU leaders were too quick to congratulate themselves on saving the euro last week with a deal for a permanent bail-out fund from 2013.

"The euro crisis is not over by a long shot. Market tensions will continue into 2011. The mechanism comes far too late," he said.

Euro rises as China supports EU debt action
21 Dec 2010
Allied Irish Banks moves £7.9bn loans to 'bad bank'
20 Dec 2010
Euro falls amid continuing debt crisis fears
20 Dec 2010
Citigroup warns of fresh wave of bank failures
21 Dec 2010
ECB raises concerns about rights to Irish bank collateral
20 Dec 2010
EU leaders shocked by Irish debt downgrade
17 Dec 2010

The bond fund argues that the EU strategy of forcing heavily indebted countries to undergo draconian fiscal austerity without offsetting stimulus is unworkable.

The austerity policies are stifling the growth needed to stabilise debt levels.

"Can countries inside a fixed exchange-rate system like the euro grow and tighten budget policy at the same time? I don't think so. It didn't work in Argentina," Mr Bosomworth said.

Pimco also gave warning that the bond vigilantes have lost faith in the policy and are trying to liquidate their holdings of peripheral EMU faster than the European Central Bank (ECB) can buy the debt, causing a relentless rise in yields, and a vicious circle.

Despite this, the ECB said on Monday that it had cut purchases of government debt last week, settling €603m (£509m), down from €2.68bn a week earlier. The withering comments from the world's top investor in EMU sovereign debt is a blow for Portugal and Spain. Both nations are hoping bond spreads will start to narrow before they face a funding crunch in the first quarter of next year.

Jacques Cailloux, chief Europe economist at RBS, agreed that last week's European summit had failed to grasp the nettle.

"None of the policy responses put in place in Europe since the start of the crisis provides a credible backstop to prevent further contagion," Mr Cailloux said.

"We remain most concerned about an escalation of the sovereign debt crisis hitting larger economies in the euro area. Markets continue to underestimate the potential disruption via financial transmission channels that such an event could trigger."

Meanwhile, Spain must cut harder and deeper to rein in its finances, the OECD has warned, calling for an overhaul of its labour laws and employment practices. Madrid is already in the midst of harsh austerity measures, but the influential Paris-based think-tank said more must be done. The Spanish economy should be able to shrink its budget deficit from 11pc of GDP last year to the 6pc target next year, the OECD believes.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/8215358/Pimco-says-untenable-policies-will-lead-to-eurozone-break-up.html

Price of hot chocolate to soar

Price of hot chocolate to soar
Just when it seemed the only respite from the bad weather was curling up in front of the fire with a mug of hot chocolate, there is more bad news.

Photo: Philip Hollis

6:55AM GMT 21 Dec 2010

25 Comments

The price of hot chocolate is to soar after the wholesale cost of cocoa powder jumped by 32 per cent over the last year.

The rise has been blamed on failing crops earlier in the year and disruption from suppliers in Ivory Coast, whose traders suffered following a chaotic general election earlier. Specualtors have been adding to the problem by stocking up.

Cocoa powder as risen to £3,000 a ton a much bigger rise than cocoa butter which is used to make chocolate bars.

The figures were disclosed by commodities analyst Mintec for The Grocer magazine.

'The price of chocolate drinks is coming under pressure and cocoa powder and sugar become more expensive on the world markets," a spokesman for Mintec.

Ivory Coast president orders peacekeepers to leave as crisis escalates
21 Dec 2010
Fears of fresh civil war in Ivory Coast as world calls for "losing" president to quit
21 Dec 2010
At least 20 killed in Ivory Coast clashes
21 Dec 2010
From rare plants to soap: botanical business adventures
21 Dec 2010
Cost of warming porridge breakfast on the rise due to oat harvest slump
21 Dec 2010
Ivory Coast locked down after president loses election
21 Dec 2010

'Over the past few months the price of cocoa powder has been steadily increasing and sugar prices have followed suit propelling the price of chocolate raw materials to record levels.'

It added: 'As chocolate consumption is increasing faster than production, prices for raw materials might not ease quickly.'

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8215194/Price-of-hot-chocolate-to-soar.html

What investment bankers earn in UK

What investment bankers earn
From back office clerk to accountant to head of investment, we list the average salaries – and bonuses – of investment bank employees in the City of London.

City of gold: What investment bankers earn Photo: AFP

8:30AM GMT 18 Dec 2010

25 Comments

Settlements:

Clerk: £30,000-£43,000 (plus 10pc bonus)

Supervisor: £40,000-£55,000 (plus 15pc bonus)

Manager: £48,000-£70,000 (plus 20pc bonus)

Bank bosses summoned as FSA waters down bonus rules
18 Dec 2010
Bankers' pay is not just a problem for regulators
18 Dec 2010
Cable: I can act alone on bonuses
19 Dec 2010
Hedge funds rush bonus payments to dodge new rules
18 Dec 2010
European bonus rules threaten City
18 Dec 2010
JP Morgan pays ?328m in UK bank bonus tax
18 Dec 2010

Trade Support:

0-1 years: £25,000-£30,000 (plus bonus dependent on trader or broker performance)

More than 3 years: £40,000-£60,000 (plus bonus dependent on trader or broker performance)

Financial Control:

Newly qualified: £35,000-£45,000 (plus 5 to 7pc bonus)

Director: £85,000-£130,000 (plus 40 to 60pc bonus)

Regulatory Accountant:

Newly qualified: £35,000-£48,000 (plus 5 to 7pc bonus)

Director: £90,000-£110,000 (plus 40 to 60pc bonus)

Private banker/Client portfolio manager:

1-3 years: £30,000-£45,000 (plus 10 to 30pc bonus)

More than 10 years: £80,000-£100,000 (plus 40 to 100pc bonus)

Investment analyst:

1-3 years: £40,000-£65,000 (plus 0 to 100pc bonus)

More than 10 years: £110,000-£130,000 (plus 0 to 100+pc bonus)

Fund manager:

5-8 years: £70,000-£100,000 (plus 0 to 100pc bonus)

More than 10 years: £110,000-£150,000 (plus 0 to 100+pc bonus)

Chief investment officer/Head of investment:

£130,000 (plus 100+pc bonus)

• Michael Page Financial Services: Salary Survey 2010

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8210778/What-investment-bankers-earn.html

Padini Holdings Berhad

• Direct beneficiary of uptick in consumer spending
We recently hosted a corporate presentation by Padini Holdings (Padini),
a well-established retailer of fashion apparel and footwear, and came
away with a positive medium-term outlook on the company. Strong brand
recognition and large nationwide store network place Padini in favourable
position to capitalise on any strengthening consumer sentiment and
spending.

• Padini Corp and Vincci Ladies continue to lead
Padini Corp and Vincci Ladies are the most significant subsidiaries in
Padini Group, together constituting 70% of FY10 group revenue and 84%
of pretax profit. Padini-branded clothing and footwear with the Vincci label
have consistently resonated with Malaysian consumers thanks to the
group’s effective merchandising strategy.

• Extending ‘Brands Outlet’ store network
The group is expanding its value proposition ‘Brands Outlet’ stores in
response to positive reception by shoppers and to expand its store
network to urban areas beyond the highly saturated Klang Valley. There
are currently 11 ‘Brands Outlet’ stores that account for 27% of the group’s
total retail floor space.

• Potential for dividend upside
Given Padini’s minimal capex requirements in the 2-year forward forecast
period, we believe that the company could pay out higher dividends than
the 15.0 sen DPS in FY10 (or 32% dividend payout ratio).

• Fair value of RM5.33
Utilising a target P/E of 10x applied to CY11 EPS of 53.3 sen, we arrive at
a fair value of RM5.33. Our target P/E is based on a 2x premium to Bonia
Corp, Padini’s closest comparable. We believe that Padini deserves to
trade at higher valuations because it has a larger store network and
higher margin product mix (with larger proportion of fashion apparel).
Target P/E is lower than Padini’s 12-year historical average P/E of 11.7x
(FY99-FY10) however, as we anticipate moderation in earnings growth
moving forward. We have projected a 3-year net profit CAGR (FY10-12) of
6.4%. Our fair value indicates a potential 9% upside to current share
price.

http://www.ecmmoney.com/wp-content/uploads/downloads/2010/12/PAD_101221_Non-rated.pdf

My 18 points guide to Successfully compounding your money in Stocks

Be a good stock picker.
Think as a business owner.
Always look at value rather than the price. Do the homework.
Buy and hold is alright for selected stocks.
Compounding is your friend, get this to work its magic.
Mr. Market is there to be taken advantage of. Do not be the sucker instead. BFS;STS.
Always buy a lot when the price is low.
Never buy when the stock is overpriced.
It is alright to buy when the selected stock is at a fair price.
Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the price is still obviously too high.
Do not time the market for such or any stocks.
By keeping to the above strategy, the returns will be delivered through the growth of the company's business.
So, when do you sell the stock? Almost never, as long as the fundamentals remain sound and the future prospects intact.
The downside risk is protected through only buying when the price is low or fairly priced.
Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.
Sell urgently when the company business fundamental has deteriorated irreversibly.
You may also wish to sell should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality. However, unlike point 16, you can do so leisurely.
In conclusion, a critical key to successful investing is in your stock picking ability.

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html

11 Lessons From Peter Lynch

Peter Lynch taught me:

1. Behind every stock is a company. Find out what it’s doing.
2. Never invest in any idea you can’t illustrate with a crayon.
3. Over the short term, there may be no correlation between the success of a company’s operations and the success of its stock. Over the long term, there’s a 100% correlation.
4. Buying stocks without studying the companies is the same as playing poker – and never looking at your cards.
5. Time is on your side when you own shares of superior companies.
6. Owning stock is like having children. Don’t get involved with more than you can handle.
7. When the insiders are buying, it’s a good sign.
8. Unless you’re a short seller, it never pays to be pessimistic.
9. A stock market decline is as predictable as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.
10. Everyone has the brainpower to make money in stocks. Not everyone has the stomach.
11. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

Lynch’s advice had a profound effect on my stock market approach. He taught me that investment success isn’t the result of developing the right macro-economic view or deciding when to jump in or out of the market. Success is about researching companies to identify those that are likely to report positive surprises.

Capital Expenditure

A great company with a Durable Competitive Advantage will have a ratio of Capital Expenditures to Net Income of less than 25%. Less is better.

Capital Expenditures are expenses on:
- fixed assets such as equipment, property, or industrial buildings
- fixing problems with an asset
- preparing an asset to be used in business
- restoring property
- starting new businesses

A good company will have a ratio of Capital Expenditures to Net Income of less than 50%.

A great company with a Durable Competitive Advantage will have a ratio of less than 25%.

Less is better.

Benjamin Graham's 113 Wise Words

The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

Philip Fisher's Wise Words

"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

The Ultimate Hold-versus-Sell Test

Here is the overriding primary test, followed by observations on why it is so critically important:

Knowing all that you now know and expect about the company and its stock (not what you originally believed or hoped at time of purchase), and assuming that you had available capital, and assuming that it would not cause a portfolio imbalance to do so, would you buy this stock today, at today's price?

No equivocation. Yes or no?

Answers such as maybe or probably are not acceptable since they are ways of dodging the issue. No investor probably buys a stock; they either place an order or do not.

Here is the implication of your answer to that critical test: if you did not answer with a clear affirmative, you should sell; only if you said a strong yes, are you justified to hold.

Some thoughts on Analysing Stocks (KISS)

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

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

Margin of Safety Concept: Stocks should be bought like groceries, not like perfume

The high CAGR in the early years of the investing period, due to buying at a discount, tended to decline and approach that of the intrinsic EPS GR of the companies over a longer investment time-frame.

Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?