Monday, 3 January 2011
Saturday, 1 January 2011
When to Sell? The QVM approach to Selling Stocks
Taking profit
Profit should be realised from sales of stocks in the following situations:
(I) when the stock is obviously overpriced, or
(II) when the sale of the stock frees the capital to be reinvested into another stock with potentially better return.
Not taking profit in the above situations can harm your portfolio and compromise its returns. In other circumstances, let the winners run.
Underperforming stocks should also be sold early. Hanging onto underperforming stocks is costly too. There is the opportunity cost that the capital can be better employed for higher return. Also, hanging onto these lack-lustre stocks reduces the overall return of your portfolio.
Reducing serious loss
When the fundamentals of a stock have deteriorated, sell to protect your portfolio. This decision should be make quickly based on the facts and situations, in order to keep your losses small.
How can the average investor improves his investment returns in stocks?
Profit should be realised from sales of stocks in the following situations:
(I) when the stock is obviously overpriced, or
(II) when the sale of the stock frees the capital to be reinvested into another stock with potentially better return.
Not taking profit in the above situations can harm your portfolio and compromise its returns. In other circumstances, let the winners run.
Underperforming stocks should also be sold early. Hanging onto underperforming stocks is costly too. There is the opportunity cost that the capital can be better employed for higher return. Also, hanging onto these lack-lustre stocks reduces the overall return of your portfolio.
Reducing serious loss
When the fundamentals of a stock have deteriorated, sell to protect your portfolio. This decision should be make quickly based on the facts and situations, in order to keep your losses small.
How can the average investor improves his investment returns in stocks?
Are Cyclical stocks also Value stocks? Value stocks usually earn money, turnaround stocks may not.
What are the characteristics of value stocks?
When is a cyclical stock also a value stock?
Many investors view cyclical stocks as value stocks. Cyclical stocks are value stocks only if they sell at an earnings (P/E) discount to their peers and meet the book value criteria as mentioned above.
When is a cyclical stock not value stocks but a turnaround stock?
If the company is selling at a discount to its tangible bookvalue, but its earnings have disappeared, it becomes a possible turnaround situation and not a value stock.
- True value investors only buy if a stock is trading substantially below its tangible book value. It’s hard finding these types of situations in all your investments. Use this as a guide and not as a “must have.” Over the years, you will have noticed these types of values in the banking, energy and chemical industries, among others.
- Another factor you need to find in a value stock is a low price to earnings (“P/E”) ratio. You are looking for a beaten down stock in an out-of-favor industry. A nice P/E discount is 20% to 50% of the industry average over a few years. You then have the potential to make a nice return on both the natural rotation of the industry to a higher timeliness, as well as the stock regaining market favor.
When is a cyclical stock also a value stock?
Many investors view cyclical stocks as value stocks. Cyclical stocks are value stocks only if they sell at an earnings (P/E) discount to their peers and meet the book value criteria as mentioned above.
When is a cyclical stock not value stocks but a turnaround stock?
If the company is selling at a discount to its tangible bookvalue, but its earnings have disappeared, it becomes a possible turnaround situation and not a value stock.
Value Investing is a time tested investment strategy that works in most market environments.
Value investing is finding a good quality stock that you are proud to own for an inexpensive or bargain price.
Basically, a value stock has a low price to book value and a low price to earnings ratio. In determining whether a stock is inexpensive or not, one needs to analyze the company’s book value, also known as shareholders’ equity. You need to determine what the true net worth of a company is by calculating a tangible book value.
It’s critical to pick a company with an excellent management team.
http://myinvestingnotes.blogspot.com/2010/07/characteristics-of-value-stocks_23.html
Basically, a value stock has a low price to book value and a low price to earnings ratio. In determining whether a stock is inexpensive or not, one needs to analyze the company’s book value, also known as shareholders’ equity. You need to determine what the true net worth of a company is by calculating a tangible book value.
http://myinvestingnotes.blogspot.com/2010/07/characteristics-of-value-stocks_23.html
Look at the big picture when Investing
How does the company fit into the economy; and is there a need for the company’s products or services.
Look at the company’s business model (found in the company’s SEC form 10k) and determine if it coincides with your thinking, your goals and your investment objectives.
Look at the company’s business model (found in the company’s SEC form 10k) and determine if it coincides with your thinking, your goals and your investment objectives.
It’s also important to see some sort of upward trend in revenues and earnings growth.
It’s also important to see some sort of upward trend in revenues and earnings growth.
Value Line Investment Survey is found in most libraries and does a nice job showing long-term company trends. No one likes a company that constantly does worse than the year before, no matter what the value is! Every company needs some sort of “curb appeal” for you to profit from your investment. At some point, you need to sell in order to make money from your investment.
Upward trends help on the resale side of your investment.
Many investors find it hard to distinguish between “cheap” stocks and value stocks. Most times, stocks are low because they deserve to be low. There is nothing wrong with buying a “cheap” stock as long as you know and understand the risks. There are many stocks out there that have large annual losses, high debt levels and no equity. That does not necessarily mean you can’t make money on them, but you should call it gambling rather than investing.
http://myinvestingnotes.blogspot.com/2010/07/characteristics-of-value-stocks_23.html
Value Line Investment Survey is found in most libraries and does a nice job showing long-term company trends. No one likes a company that constantly does worse than the year before, no matter what the value is! Every company needs some sort of “curb appeal” for you to profit from your investment. At some point, you need to sell in order to make money from your investment.
Upward trends help on the resale side of your investment.
Many investors find it hard to distinguish between “cheap” stocks and value stocks. Most times, stocks are low because they deserve to be low. There is nothing wrong with buying a “cheap” stock as long as you know and understand the risks. There are many stocks out there that have large annual losses, high debt levels and no equity. That does not necessarily mean you can’t make money on them, but you should call it gambling rather than investing.
http://myinvestingnotes.blogspot.com/2010/07/characteristics-of-value-stocks_23.html
Be like Grace
5 Lessons From an Unlikely Millionaire
April 8, 2010
Lake Forest College administrators knew their school would receive most of Grace Groner's estate when she passed on, but they probably didn't expect much. Groner, who died in January at the age of 100, lived in a small one-bedroom house. She'd been a secretary once, but retired long ago.
So the college must have been surprised to receive a whopping $7 million from Groner's estate. How did this modest woman amass such wealth?
1. Buy stocks
Groner's wealth began with $180, which she invested in three shares of her then-employer,Abbott Labs (NYSE: ABT).
Groner's wealth began with $180, which she invested in three shares of her then-employer,Abbott Labs (NYSE: ABT).
Stocks are tied to brick-and-mortar-and-flesh companies -- real businesses that can grow robustly for years to come. That's why companies such as IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ) outperformed the market for so long. When companies increase their profit margins, revenue, and market share over time, their stock prices will likely rise as well.
Over the long haul, stocks have outperformed other investments by leaps and bounds. Check out what just $1 invested in various ways between 1802 and 2006 would have grown to:
Investment | Real Return, in 204 Years |
|---|---|
Dollar | $0.06 |
Gold | $1.95 |
T-bills | $301 |
Bonds | $1,083 |
Stocks | $755,163 |
Data: Jeremy Siegel, Stocks for the Long Run.
2. Respect your circle of competence
It's not just enough to buy stocks, of course -- you've got to buy the right stocks. Every year, public companies go bankrupt, and the money invested in them vanishes.
It's not just enough to buy stocks, of course -- you've got to buy the right stocks. Every year, public companies go bankrupt, and the money invested in them vanishes.
Restricting yourself to companies you understand will go a long way toward protecting your investments. Ms. Groner may or may not have understood pharmaceutical science, but she knew the company she worked for.
That applies to hobbies as well as professions. If you're an inveterate shopper, you'll have a sense of whether Wal-Mart (NYSE: WMT) and Best Buy (NYSE: BBY) are doing well, and you'll likely be able to learn their business models. If you read computer magazines for fun, you probably have a decent handle on the prospects of computer-related companies.
That said, familiarity alone doesn't make a company a good buy. If it isn't turning a profit, can't pay down its debt, or simply demands too lofty a price for its shares, you're better off looking elsewhere.
3. Be patient
Groner bought her three shares of Abbott Labs in 1935. That gave her 75 years of compounded growth!
Groner bought her three shares of Abbott Labs in 1935. That gave her 75 years of compounded growth!
The power of compounding is critical to developing wealth. If you average just 8% returns annually for 75 years, that's enough to turn $5,000 into $1.6 million.
Odds are you don't have 75 years left in you -- but even shorter periods are still quite powerful. For most of us, 30 years is a more realistic time frame. Combining three decades of compounded growth with strong, flourishing companies can make quite a difference indeed.
Company | Time Span | Avg. Annual Growth | Would Turn $10,000 Into... |
|---|---|---|---|
PepsiCo | 30 years | 17.0% | $1.1 million |
ExxonMobil (NYSE: XOM) | 30 years | 15.4% | $740,000 |
3M (NYSE: MMM) | 30 years | 12.7% | $357,000 |
Data: Yahoo! Finance. Average annual growth includes splits and dividends.
Of course, we're never guaranteed long-term growth from one company, but a nest egg diversified across a bunch of solid and growing companies will tend to do well over long periods.
Just remember that letting a winner keep winning for decades means resisting the urge to sell just because the market swoons. Sell if the company no longer seems promising; otherwise, hold on.
4. Don't be afraid to start small
Groner's gift also demonstrates the power of modest amounts of money. Remember, she began with an investment of just $180 in 1935. Adjusted for inflation, that's the equivalent of less than $3,000 in today's dollars -- still not a king's ransom.
Groner's gift also demonstrates the power of modest amounts of money. Remember, she began with an investment of just $180 in 1935. Adjusted for inflation, that's the equivalent of less than $3,000 in today's dollars -- still not a king's ransom.
In other words, every little bit helps. Small sums invested regularly can go a long way to making us wealthy.
5. Reinvest those dividends
Instead of taking the payouts from her Abbott shares, Groner used them to buy additional shares of stock, which then grew on their own, paying out their own dividends. Over 75 years -- or even 20 or 30 -- those ever-accumulating payouts can become quite powerful.My colleague Rich Greifner has pointed out that between January 1926 and December 2006, 41% of the S&P 500's total return came from dividends, not price appreciation. Over that time span (just a little longer than Groner had), an investment of $10,000 would have grown to $1 million without dividends. But with dividends reinvested, it would have totaled $24 million. Yowza.
Be like Grace
The five lessons listed above helped an amateur investor turn $180 into $7 million. Who knows where they might lead you?
The five lessons listed above helped an amateur investor turn $180 into $7 million. Who knows where they might lead you?
http://www.fool.com/investing/dividends-income/2010/04/08/5-lessons-from-an-unlikely-millionaire.aspx
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