The 3 key variables in any investing plan

Why You Shouldn't Give Up on Stocks
By Dan Caplinger
January 20, 2010

You'd think that with all the good news investors have gotten lately, all the doomsayers would be laying low. Yet even after the stock market's big rally from last year's lows, some pundits still question whether investing is a hopeless cause.

Keeping your head above water
An article in The Wall Street Journal earlier this week took a close look at the unrealistic expectations that many investors have about the returns they can generate from their portfolios. After a decade during which the broad stock market has laid a big fat goose egg in the return column, a survey showed that investors expect average annual returns of nearly 14% over the next 10 years.

Yet that isn't the most sobering fact about the misconceptions people have about the financial markets. When asked how much they could expect to keep in terms of purchasing power, after accounting for the impact of taxes, investing costs, and inflation, a group of financial advisers estimated a return of between 6% and 9% annually.

Should you hope for returns that are that good? You bet. But should you count on earning them? No way. Fortunately, if you're smart about how you structure your investment plan, you don't have to earn that high a return from your portfolio.

Keep it real
It's easy to understand how people mislead themselves about how much they can earn from investing in stocks. The secret comes down to success stories: We hear the most about winning stocks, while the much larger group of mediocre performers tends to get lost in the shuffle. Take this group of stellar stocks, for instance:

Stock
20-Year Average Annual Return

Dell (Nasdaq: DELL)
32.9%

Oracle (Nasdaq: ORCL)
21.7%

Altria Group (NYSE: MO)
15.4%

United Technologies (NYSE: UTX)
15.2%

Hewlett-Packard (NYSE: HPQ)
14.5%

Source: Yahoo! Finance. As of Jan. 19.

Combine the bull market of the 1990s with the lost decade since 2000, and you'll see that these stocks have greatly outperformed the overall market. Yet when you take away a few percentage points for inflation, a few more for taxes, and another point or so for trading costs, you'll notice that only the best performers manage to stay in double-digit territory.

More importantly, recall that these are the big winners. For every stock like this, there are several like Dow Chemical (NYSE: DOW) and Citigroup (NYSE: C) that have languished with much smaller gains -- and others, such as General Motors, that have contributed substantial losses to the overall picture.

Stay on target
But don't let the sobering reality of the investing world convince you that it's impossible to reach your financial goals. There are three key variables in any investing plan:

• how much you can save,
• how much you earn on your investments, and
• how much you need to spend.

Investors tend to focus almost solely on their portfolios' earning potential and think a lot less about the other keys to financial success.

If you're not making the most of your financial situation to save as much as you can, then you're making a huge mistake with your money. By saving less than you could afford to save, you'll take bigger risks than you need to. Sometimes, those risks will go sour, costing you what would have been an easily attainable financial goal. Just as millions of investors learned too late that their portfolios included more high-risk investments than they really needed, you could be making big bets that you don't need to make in order to have a safe, secure retirement.

You'll get there
What you do need to do, though, is have realistic expectations. If you're more conservative about the return assumptions you make, you'll have to find more savings to reach a certain target value for your portfolio. But you'll also have more options to help you get there, rather than relying on finding tomorrow's top performers at all cost.

If you can do that, then you won't be fooling yourself about your investing. As hard as it is to rein in expectations during a roaring rally, doing so will leave you in a better condition to make rational decisions about your portfolio -- decisions that are likely to lead to exactly the returns you need to reach your goals.

Many people are nervous about 2010's prospects.

http://www.fool.com/retirement/general/2010/01/20/why-you-shouldnt-give-up-on-stocks.aspx

We Are Due for a Pullback!

Stocks have made an epic run but it won't last. "The economy isn't strong enough" to support a new bull market reports The Wall Street Journal. We are overdue for a big pullback.

You have a choice: Stay the course and suffer big losses or go on the offense!

The Four Essentials of Successful Investing

In brief, here are the four rules:

Start early in life to invest.


Invest in common stocks.


Be thrifty.


Pick the right investment.

The Best Reason for Buying Low

"Buying low makes it a lot easier to sell high."

Some rights issues are good, others can be very bad

Some rights issues are good, others can be very bad

Like most things in investment, rights issues are not simple matters.

Rights are not automatically "good things" from the shareholders' point of view. Some of the rights are good, others can be very bad.

Investors have to be careful and they should not rush in every time there is an annoucement of rights. They should classify the rights issue they are considering in accordance with the three categories indicated below:

 (1) The case of the improperly managed companies

(2) The case of moving into new business area
(3) The case of the very fast growing company

 They should purchase only those of the last category.

Many will protest that they have neither the time nor the knowledge to carry out a detailed analysis of the company which announces the rights.

It is not possible for each and every one to carry out a careful analysis but there is an easier way out for the small timers. The dividend yield approach to stock valuation can be readily used to value a rights issue.

Why Companies Have to Make Rights Issue?

To put it bluntly, a company only needs to make a rights issue when it is short of money.

A business, any business, requires investment in various forms of assets in order to carry out its operations. A company is usually required to continually buy new assets in order to carry on its business either because its old assets have to be replaced or its expanding business requires more assets. To buy new assets, it will need new capital.

A company can obtain necessary money to purchase its assets from any one of three sources or a combination of all three.

• It can borrow the money,
• retain part or all of its profit or
• it can sell new shares.

 Under the normal circumstances, a company should be able to finance its additional purchase of assets from either retained earnings or new borrowing or a combination of the two. There are many examples of very fast growing businesses in Malaysia that have prospered without recourse to issuing rights (for examples: Nestle and BAT )

 But, companies may have to raise new capital by making rights issues under three types of abnormal circumstances. These three cases are:

(1) The company is improperly managed such that it is either not very profitable (or even losing a lot of money) such that the incoming cash is not adequate to support the need to purchase more assets. Or owing to poor management of its assets, it now requires a lot more assets to support its operations.

 (2) The company is moving into another line of business which is large relative to its current size and it requires a great deal of additional capital to start up the new venture.

(3) The company is in a very fast growing business. In fact, it is so fast growing that retained earnings and new borrowing alone are insufficient to sustain the growth.

 In order to be a prudent investor, we must analyse the situation of the company which has announced a rights issue carefully to see which category it falls into in the first place.

 Depending on which category of rights it is issuing, we can then carry out a further analysis to decide whether the rights issue is a good or a bad one.

Through examining each type of rights issue, an intelligent investor can tell the wolves from the sheep.

Pricing the rights also requires proper evaluation.

 http://myinvestingnotes.blogspot.com/2009/09/why-companies-have-to-make-rights-issue.html

Also read:
So Many Cash Calls In OuR Market!
http://whereiszemoola.blogspot.com/2010/01/so-many-cash-calls-in-our-market.html

How Buffett avoided mistakes by staying within his circle of competence

Understanding Your Circle of Competence

If Buffett cannot understand a company's business, then it lies beyond his circle of competence, and he won't attempt to value it.

Although it might seem obvious that investors should stick to what they know, the temptation to step outside one's circle of competence can be strong.

Buffett has written that he isn't bothered when he misses out on big returns in areas he doesn't understand, because investors can do very well (as he has) by simply avoiding big mistakes.

Buffett is simply a better investor than just about any other in the world. Brilliant, consistently rational, and blessed with a superb mind for business, he has managed to avoid the mistakes that have crushed so many portfolios. Let's look at two examples.

• In early 2000, Berkshire Hathaway's portfolio had underperformed funds that enjoyed spectacular returns by loading up on stocks of technology companies and Internet startups. Buffett avoided all tech stocks. He told his investors that he refused to invest in any company whose business he did not fully understand - and he didn't claim to understand the complicated, fast-changing technology business - or where he could not figure out how the business model would sustain a growing stream of earnings. Some said he was an old fuddy-duddy. Buffett had the last laugh when Internet-related stocks came crashing back to earth.
• In 2005 and 2006, Buffett largely avoided the mortgage-backed securities and derivatives that found their way into many investment portfolios. Again, his view was that they were too complex and opaque. He called them "financial weapons of mass destruction." When they brought down many a financial institution (and ravaged our entire financial system), Berkshire Hathaway avoided the worst of the meltdown.

http://bursabulltrader.blogspot.com/2010/01/6-biggest-investing-mistakes.html

Burton G. Malkiel, Princeton economics professor and author of 'A Random Walk Down Wall Street,' and Charles D. Ellis, author of 'Winning the Loser's Game,' have teamed up to write 'The Elements of Investing.' He commented: 

"We're both in our seventies. So is Warren Buffett. The main difference between his spectacular results at Berkshire Hathaway and our good results is not the economy and not the market, but the man from Omaha. "

Will this rally continue?

Will This Rally Continue?
By Rich Greifner
January 19, 2010

 

Will the recent rally continue? Or is the stock market overheated after a 65% surge?

 

I have no idea -- and frankly, I don't care.

 

Here's why you shouldn't care, either

 

http://www.fool.com/investing/general/2010/01/19/will-this-rally-continue.aspx

 

 

Here's why you shouldn't care, either
Of course it would be wonderful to be able to forecast stock gyrations, deftly jumping in and out as the market ebbs and flows. But unfortunately, it simply isn't possible to accomplish such a feat on a consistent basis, and investors' attempts to anticipate the market's short-term movements only cost them money in the long run.

 

According to a study from Dalbar Inc., the S&P 500 produced an 8.35% annual return from 1988 through 2008. However, the average equity investor realized an annual return of just 1.87% over the same period thanks to the adverse effects of market timing.

• That means an investment of $10,000 in 1988 would have grown to $49,725 over the past two decades if left untouched.
• But investors who panicked at market bottoms and chased returns as the market rose would have only $14,485 today.

 

This problem has become so widespread that in 2006, Morningstar introduced an "investor return" measure to illustrate the impact of investors' timing their purchases and sales.

• Not surprisingly, a recent Morningstar study found that investor returns trailed fund returns over the past five years in each of the 14 mutual fund categories that Morningstar tracks.

 

Still not convinced that trying to time the market is a bad idea? One final example should drive the point home.

• Thanks to big bets on Goldman Sachs (NYSE: GS), Mosaic (NYSE: MOS), and PotashCorp (NYSE: POT), Ken Heebner's CGM Focus Fund was the best-performing equity mutual fund of the past decade.
• But while CGM Focus posted an 18% annual gain over the past 10 years, the average investor in the fund lost 11% a year!

 

So rather than obsess over which way the stock market is headed next, heed these wise words from investing legend Peter Lynch: "Market timing is speculating and it rarely, if ever, pays off."

 

What does pay off?
"I don't believe in predicting markets," Lynch wrote in his classic One Up On Wall Street. "I believe in buying great companies -- especially companies that are undervalued and/or underappreciated. … Pick the right stocks and the market will take care of itself."

 

That strategy worked pretty well for Lynch, who posted 29% annual returns during his 13 years at the helm of Fidelity's Magellan Fund (sadly, most Magellan investors realized much lower returns during Lynch's tenure due to their attempts to time the market).

 

But Lynch famously focused on consumer-facing companies whose products he enjoyed, like Taco Bell (now owned by Yum! Brands (NYSE: YUM), Hanes (NYSE: HBI), and Chrysler (now owned by the U.S. government). With unemployment at a 26-year high and the U.S. consumer on the ropes, where should investors look to find the right stocks today?

 

The right stocks
That's the question I posed to Jeff Fischer, lead advisor for Motley Fool Pro. Like Lynch, Jeff and his team don't get swept up in trying to forecast short-term market movements. Instead, they seek out companies with

• sustainable competitive advantages,
• significant recurring revenue,
• diverse customer bases,
• strong free cash flow, and
• healthy balance sheets.

Here are two picks that Jeff believes will serve investors well whether the stock market heads up, down, or sideways:

 

 

 

 

5 Dumb Investing Mistakes to Avoid

5 Dumb Investing Mistakes to Avoid
by Gary Belsky | Jan 19, 2010

In his newly revised book, Why Smart People Make Big Money Mistakes and How to Correct Them, co-author Gary Belsky says irrational behavior often leads us to make dumb and costly financial decisions. In this excerpt, Belsky reveals the investing secrets that will help you avoid such goofs.

We all commit financial follies that cost us hundreds or thousands of dollars each year. Worse, we’re often blissfully ignorant of the causes of our monetary missteps and clueless about how to correct them. But by knowing these five big investing mistakes, you can change your behavior to put more money in your pocket.

1. Letting Losses Hurt More Than Gains Please You
People generally are “loss averse.” The pain felt from losing $100 is much greater than the pleasure from gaining the same amount. That’s why people behave inconsistently when it comes to taking investment risks. You might act conservatively to protect gains (by selling your winners to guarantee the profits) but act recklessly to avoid losses (by holding onto losers, hoping they’ll bounce back). Loss aversion causes some investors to sell all their holdings during periods of market turmoil, but trying to time the market doesn’t work in the long run.

2. Placing Too Much Emphasis on Unusual Events
Many people still recall the stock market crash of 2008 with anxiety, forgetting that stocks have offered the most consistent investment gains over time. As MoneyWatch blogger Nathan Hale has written, investors often pour money into mutual funds that performed well recently on the mistaken belief that the funds’ success is the result of something other than dumb luck.

3. Being Paralyzed by Investment Choices
You can’t let yourself get so overwhelmed by a surfeit of options that you penalize your finances through inaction. Some people won’t move money out of ultra-conservative, low-yielding retirement funds because they can’t bear having to select a better alternative. So limit your choices. Find “trusted screeners” whose judgment you admire to pare down your choices or even make them for you.


4. Ignoring the ‘Small’ Numbers
People have a tendency to ignore what they think are insignificant numbers, such as mutual fund expenses. But doing so can have a deleterious effect of surprising magnitude on your investment returns over time. On a $10,000 investment, an expense ratio of 0.5 percent might cost you about $180 over three years, but a 1.5 percent expense tab could nick you by $500 or so. Over 15 years, a low-expense fund might eat up less than 7 percent of your potential investment return, while a high-expense fund could devour almost 20 percent.

5. Failing to Understand the Odds against Beating the Market
Most investors will fare best by sticking primarily with index funds mirroring the averages. You won’t just keep up with the typical investor this way; you’ll likely do better than all those brave souls who think they can beat the law of averages. High transaction and management expenses, faulty psychology, and the law of averages often burden actively managed portfolios. Index funds take much of the emotion out of investing. And the most successful investors are the ones who don’t let emotions affect their decisions.

From Why Smart People Make Big Money Mistakes and How to Correct Them by Gary Belsky & Thomas Gilovich. Copyright 1999, 2009, by Gary Belsky and Thomas Gilovich. Reprinted by permission of Simon & Schuster, Inc.

http://moneywatch.bnet.com/investing/article/investing-5-dumb-mistakes-to-avoid/384546/

The recipe for truly high growth

The recipe for truly high growth has a handful of necessary ingredients. They are:

• A small company
• A wide market opportunity
• Meaningful macroeconomic tailwinds.  

Think, for example, of Amazon.com (Nasdaq: AMZN) when it launched in 1995. It was a tiny company, one of the first e-tailers, and it had the rising tide of the Internet -- merely the greatest development of the past 25 years -- helping it along. Now ask yourself: Do any of the companies or industry opportunities in your surveillance fit that profile at all?

This Mistake Could Cost You a Fortune

This Mistake Could Cost You a Fortune
By Austin Edwards
January 17, 2010

 

Granted, it's not like I made a big bet on DryShips (Nasdaq: DRYS) at the beginning of last year -- right before it dropped more than 75% (although I know people who did). And I certainly didn’t listen to any of the doom-and-gloom pundits who suggested you short “zombie banks” like JPMorgan Chase (NYSE: JPM) and Morgan Stanley (NYSE: MS) just before their epic rebounds.

 

But I did move back to Big 12 country just in time to see my beloved Oklahoma Sooners lose game after game after game -- not to mention lose their Heisman-winning quarterback, Sam Bradford, to a season-ending shoulder injury mere minutes into their opener.

 

You see, my grandfather played football for Oklahoma, and I've been rooting for them since I was old enough to walk, so 2009 was a pretty painful year for me. But don't worry, I'll always be a Sooners fan -- no matter how bad things get. In sports, that's a virtue.

 

Wall Street, though, is a different ball game
For proof, just ask any longtime "fan" of:

 

Stock
10-Year Return

 

Merck (NYSE: MRK)
(22%)

 

Corning (NYSE: GLW)
(46%)

 

Home Depot (NYSE: HD)
(47%)

 

Sun Microsystems (Nasdaq: JAVA)
(94%)

 

 

Data provided by Yahoo! Finance.

 

 

Or ask my fellow Fools Rich Greifner or Adam Wiederman. Or even ask Jim Cramer. In his book Real Money, Cramer reminds investors, "This is not a sporting event; this is money. We have no room for rooting or hoping."

 

Yet it happens all the time -- and time after time, investors ride stocks right into the ground because they're emotionally attached to a company's story, products, or management.

 

I, for one, am sitting on a major loss in Clearwire. And if we're being honest, the only reason I bought shares in the first place was because I liked that it was backed by Google, Comcast, and a handful of other tech heavyweights.

 

Ditch that loser!
One of the "20 Rules for Investment Success" from Investor's Business Daily is to "cut every loss when it's 8% below your cost. Make no exceptions so you'll avoid any possible huge, damaging losses."

 

To a sports fan, that might seem cruel and unusual, but is it good investment advice?

 

To find out, I dug through David and Tom Gardner's Motley Fool Stock Advisor picks. You see, they often re-recommend a stock even after a big run-up -- or a sharp fall.

 

As it turns out, I found three examples when breaking IBD's rule actually paid off big-time:

 

Stock Advisor Pick
Decline After Recommendation
Gain After Re-Recommendation

 

Netflix
23%
294%

 

Quality Systems
14%
1,189%

 

Dolby Labs
10%
163%

 

 

These weren't flukes, either
In his re-recommendation write-up for Netflix, David Gardner admitted, "We're currently sitting on a 23% loss." But he went on to say, "I think this is one cheap stock at $11, backed by a great management team that's going to create value for us going forward."

 

And he had well-thought-out reasons for continuing to own the stock: "It remains first and best in a growing industry, creates convenience for millions of consumers, and is led by visionary management that markets aggressively." Netflix stock has risen 313% since then.

 

So when do you sell?
Many investors have hard-and-fast numerical rules. Others -- like the Gardners -- stick to a more analytical and intellectual approach to determine when to recommend that their Stock Advisor subscribers sell a stock. So when do David and Tom Gardner consider dumping a stock? Primarily when they encounter:

• Untrustworthy management.
•  Deteriorating financials.
•  Mergers, acquisitions, and spinoffs that could damage the business.

The debate rages on
Investors may never agree on when or why to sell a stock. But it is important to have an emotionless, well-thought-out strategy in place. If you don't, you may suffer major losses -- or miss out on massive gains.

 

For what it's worth, David and Tom Gardner rarely sell, and it works for them. In fact, Tom's average Stock Advisor pick is performing more than 35 percentage points better than a like amount invested in the S&P 500. Meanwhile, David's are performing 66 points better on average.

 

http://www.fool.com/investing/general/2010/01/17/this-mistake-could-cost-you-a-fortune.aspx?source=irasitlnk0000001&lidx=3

Charlie Munger is negative about the economy, but positive about stocks

The strategy sounds simple enough, but Mr Munger says few investors practise it.

“You can’t believe the way that conventional wisdom invests money,” he explains. “They tend to rush into whatever fad has worked lately. In my opinion, a lot of them are going to get creamed.”


17th May 2009: Today he's negative about the economy, but positive about stocks -- a bullish sign. In the late 1990s, Munger complained that he didn't see much to buy. The market quickly proved him right. But, at current market prices, Munger sees many long-term investment opportunities.

"I am willing to buy common stocks with long-term money at these prices," Munger said. "Is Coca-Cola worth what it's selling for? Yes. Is Wells Fargo? Yes." He owns both.

"If you wait until the economy is working properly to buy stocks, it's almost certainly too late," he said. "I have no feeling that just because there's more agony ahead for the economy you should wait to invest."

But you need to be selective.

Is Value Investing Dead?

Is Value Investing Dead?
By Jordan DiPietro
January 14, 2010

Every year thousands of people make the trip to Omaha for Berkshire Hathaway's annual shareholder meeting. They come in fanatical droves -- from as far away as South Africa and Singapore -- to see the man whose extraordinary success has been largely attributed to one strategy: value investing.

Unfortunately, the original value crusaders, Benjamin Graham and David Dodd, are long gone, while Warren Buffett has become a touchstone in an investing landscape riddled with leveraged corpses, speculative traders, and overzealous CEOs.

We've squeezed almost every gem of wisdom from his meetings and transcripts, and we've analyzed his moves from every conceivable angle. All of this ultimately raises one question: Once Warren is gone, will the end of an era also mark the end of value investing?

Old school values
When Graham and Dodd's seminal piece, Security Analysis, was written in 1934, it was much easier to be a value investor.

First, the time was right. Still reeling from the Great Depression and unemployment of up to 25%, the Dow had lost about 90% of its value in three years. The tenets of Graham and Dodd -- to buy stocks for prices significantly below their intrinsic values and even their book values -- were especially applicable because prices were distorted, and many stocks were significantly undervalued.

Second, with most of the Dow 30 comprised of metal, oil, or manufacturers, balance sheets were pretty straightforward. Valuing stocks wasn't necessarily easy, but there were some pretty common elements to look for: book value, tangible assets, etc.

Third, if you look at all the value crusaders, they all share one unique attribute: tenacity. They had the doggedness to perform painstakingly tedious work, laboring over worksheets, completing arithmetic by hand. They just seemed to work, well, the hardest.

New school values
Seventy years have come and gone, and value investing has come under increasing criticism. In fact, I've seen money managers tell their clients that if their time horizon is less than two decades away, value investing is not for them.

Why? Take a look at the comparative performance of value versus growth over the last five years.

Indices
Top Holdings
2009 Return
3-Year Return
5-Year Return

Russell 1000 Value Index (IWD)
JPMorgan Chase (NYSE: JPM), General Electric (NYSE: GE)
19.2%
(7.9%)
(1%)

Russell 1000 Growth Index (IWF)
Cisco Systems (Nasdaq: CSCO), Wal-Mart (NYSE: WMT)
36.7%
(2.1%)
2.5%


What gives? Well, business is much more complex than it used to be. With intellectual property rights, patents, and licensing fees, studying balance sheets is a bit murky. Companies like Qualcomm (Nasdaq: QCOM), Pfizer (NYSE: PFE), and Merck (NYSE: MRK) are all wrapped up in intangibles, and its simply harder to predict future earnings.

In addition, the days of sweating over spreadsheets are over. Computer programs and stock screeners make it simple to find a company that fits a certain mold -- even the laymen can whittle down enormous loads of data and draw conclusions. The advantage of having the fortitude to do the "hard work" is gone, lost in a sea of statistics and a market inundated with information.

And finally, being a value investor requires a temperament few have -- especially given the above considerations. Asset manager Jean-Marie Eveillard said, in response to the question of why there aren't more value investors, given Buffett's success, "If you are a value investor, every now and then you lag, or experience what consultants call tracking error. It can be very painful. To be a value investor, you have to be willing to suffer pain."

So does this mean value investing is dead?

WWWD?
Value investing isn't dead -- but it's not going to look the same in the 21st century as it did in the 20th.

We just have to look at Buffett, who, like always, adapts to the times. As the market collapsed around us and blue chips fell by the wayside, he scooped up some $3 billion worth of General Electric, and recently invested in ExxonMobil and Nestle. He lent Goldman Sachs $5 billion and locked in 10% annual gains -- and of course negotiated an option that has already netted him close to $2.4 billion.

Deliberate, prudent, unyielding -- classic Buffett.

Today's market offers something unique to the 21st century -- a plethora of booms and busts. There have been more financial crashes in the last 30 years than in any other time period -- and that means there are price distortions that investors can take advantage of, just like Buffett has done lately. Value investing isn't dead, nor is it immaterial.

Don't get distracted by puzzling trading strategies or speculate on leveraged financials (thank you, Citigroup). Understand a business and invest in your area of competence -- when it's cheap.

And remember as well that the last five years don't dictate the future. From 1927-2005 (78 years!), value investing has outperformed both small and large cap growth stocks by a substantial margin. From 1975-2005, value stocks outperformed growth stocks in 12 out of 13 developing countries. Clearly, in both the U.S. and abroad, value reigns supreme.

So don't let the naysayers get you down -- there are still plenty of tremendous value stocks out there! Our Motley Fool Inside Value team practices what Warren preaches and scours the market for the best deals each month. This has been a difficult few years for our analysts, but they're still managing to beat the S&P 500 by over seven percentage points -- that's pretty impressive considering the challenging environment.

If you believe like we do that value investing is here to stay, and you want to know the seven value stocks you should be buying right now, we're currently offering a 30-day free trial to Inside Value. Click here for more information.

Fool contributor Jordan DiPietro owns shares of General Electric. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. Berkshire Hathaway, Pfizer, and Wal-Mart Stores are Inside Value recommendations. The Fool owns shares of Berkshire Hathaway. The Fool's disclosure policy is always looking for a discount.

http://www.fool.com/investing/value/2010/01/14/is-value-investing-dead.aspx

4 Ways to Screw Up Your Portfolio

4 Ways to Screw Up Your Portfolio
By Selena Maranjian
January 19, 2010 | Comments (0)

 

Sometimes, it can be easy to make money in the stock market. Dumping the bulk of your nest egg into broad-market index funds can instantly make you a part-owner of such successful companies as Apple (Nasdaq: AAPL), General Electric (NYSE: GE), and UnitedHealth (NYSE: UNH). If you'd rather fly solo, finding the right individual stock can bring you massive gains -- witness Intuitive Surgical (Nasdaq: ISRG) and its 50% average annual returns over the past five years.

 

Sadly, though, it can be even easier to lose money when investing. Some losses just can't be foreseen; they happen even to good investors invested in seemingly solid companies. But other times, investors make a classic error -- and pay the price for it.

 

Here are four blunders you'd do well to avoid:

 

Too few metrics
If you focus only on a single aspect of a given company, such as its price-to-earnings ratio, you could miss out on the bigger picture. Check out the different ratings our CAPS community has assigned to stocks with similarly low P/Es:

 

Company
CAPS Stars (out of five)
P/E

 

Noble (NYSE: NE)
*****
7

 

Merck (NYSE: MRK)
****
10

 

Garmin
***
12

 

Qwest Communications (NYSE: Q)
**
10

 

Data: Motley Fool CAPS.

 

A closer look at these companies' other metrics would likely reveal varying debt and cash levels, growth rates, profit margins, and competitive advantages. It can be useful to seek out low-P/E stocks, since they may have been overly punished and due to rebound. But a low P/E can't and shouldn't be your sole criteria for making an investment.

 

Tax obliviousness
Forgetting about the IRS can lead to another needless error. If you net a $5,000 gain in Home Surgery Kits (Ticker: OUCHH), but sell it less than 365 days after you bought it, you'll be the one wishing you had some anaesthetic. Short-term gains -- stocks held for less than a year -- are taxed at your standard income rate; at 28%, you'd pay $1,400 in tax on that $5,000 profit. Long-term gains -- held for more than a year -- get dinged for a much smaller 15%, or just $750 in our example.

 

Looking the other way
Failing to follow your investments closely enough can be another major mistake. You might buy into a biotechnology or pharmaceutical company, for example, because you're enthusiastic about the exciting drugs in its pipeline. But if one or more of those candidates fail to win FDA approval, or report poor results in clinical trials, the company's future could suddenly become less bright.

 

Wandering too far
Finally, we often stray beyond our circle of competence.

• Do you really understand biotechnology? Or the energy industry? Or telecommunications?
• If you don't have a firm grasp of a company's industry and its position in it, you're at a great disadvantage as an investor.
• You need to be aware of developments in and threats to a given industry, and have a clear sense of its winners and losers, before you start investing there.

 

As you invest, focus not only on all the things you do right, or the amazing companies you come across, but also on mistakes you may be making. The more blunders you eliminate from your repertoire, the better the performance you can expect from your portfolio.

 

http://www.fool.com/investing/value/2010/01/19/4-ways-to-screw-up-your-portfolio.aspx

Relying on a single metric misses out on the bigger picture

Too few metrics

 

If you focus only on a single aspect of a given company, such as its price-to-earnings ratio, you could miss out on the bigger picture. Check out the different ratings our CAPS community has assigned to stocks with similarly low P/Es:

 

Company
CAPS Stars (out of five)
P/E

 

Noble (NYSE: NE)
*****
7

 

Merck (NYSE: MRK)
****
10

 

Garmin
***
12

 

Qwest Communications (NYSE: Q)
**
10

 

 

Data: Motley Fool CAPS.

 

 

A closer look at these companies' other metrics would likely reveal

• varying debt and cash levels,
• growth rates,
• profit margins, and
• competitive advantages.

It can be useful to seek out low-P/E stocks, since they may have been overly punished and due to rebound. But a low P/E can't and shouldn't be your sole criteria for making an investment.

 

http://www.fool.com/investing/value/2010/01/19/4-ways-to-screw-up-your-portfolio.aspx

 

3 Ways to Prepare for the Next Big Drop

3 Ways to Prepare for the Next Big Drop
By Dan Caplinger
January 19, 2010 | Comments (0)

This time last year, even a dart-throwing monkey could have made money in the stock market -- all you needed was the courage to buy at one of the scariest times in history. Now, though, financial markets of all sorts have risen sharply, and there's a lot more to making a winning investment than picking a stock ticker at random and buying shares.

It's a whole new ball game
If you're like many people, you've probably done your best to repress your memories of early 2009. Back then, the stock market was falling apart, after a failed attempt to put together a rally off the lows set during 2008's panic. Everyone was convinced that companies like MGM Mirage (NYSE: MGM) and Bank of America (NYSE: BAC) were just a few steps from bankruptcy, and even the prospects for healthier companies seemed grim.

Now, though, fear has given way to greed. Many of the stocks that seemed most likely to fail instead topped the performance charts for 2009. Stock markets around the world saw huge gains, with the U.S. market's rise relatively small in comparison to jumps in emerging markets like Brazil and China. Moreover, after a terrible end in 2008, commodities also regained much of their lost luster, as gold jumped to new highs and energy prices made a sharp recovery from their huge drop to $30 from nearly $150.

If those big gains make you nervous, you're not alone. If you think it's time for these roller-coaster markets to start another downswing and don't want to go along for the ride, then here are three things to think about for various parts of your portfolio.

1. With stocks, think quality
Amid all the big gains of last year, many stocks have gotten left behind, at least compared to the overall market. Johnson & Johnson (NYSE: JNJ), Procter & Gamble (NYSE: PG), and AT&T (NYSE: T) are among the big-name companies that haven't seen anything close to the gains of even the S&P 500, let alone the multibagger performance that dozens of stocks produced last year.

But there are two reasons to look for lagging sectors. First, as bull markets evolve, they tend to go through sector rotation, in which stocks that haven't performed as well catch up with the top performers. So if this is the beginning of a longer-term bull market, then you can expect large caps that have thus far been left behind to see some gains.

On the other hand, the stocks that have risen the most also have the furthest to fall. If the stock market's rally reverses itself soon, then you can expect stocks that are still value-priced to hold up better than highfliers without the fundamentals to back up their lofty valuations.

2. With bonds, think duration
Everyone's stretching for yield right now, as interest rates have remained low. When you need income from your portfolio to survive, times like these can lead you to take desperate measures.

But you need to resist the urge to buy longer-term bonds just to get higher yields. Rates show signs of rising soon, and if they do, falling prices could wipe out the higher interest you'll receive on long bonds. In contrast, short-term bonds won't pay as much income up front, but they also won't lose as much value per percentage-point move in a rising-rate environment.

Finally, just as speculative stocks may have gotten ahead of themselves, lower-quality corporate bonds have also jumped in front of Treasuries. Consider rebalancing your portfolio to get its risk profile back where you want it.

3. With alternative investments, be wary
Commodities and real estate are becoming more mainstream investments than ever. But while having some exposure can help your portfolio, now isn't the time to make huge bets on them.

Whether you use stocks like Freeport-McMoRan Copper & Gold (NYSE: FCX) and Precision Drilling Trust (NYSE: PDS) as proxies for metals and energy or invest in specialized ETFs with direct exposure to commodities, prices have jumped a lot over the past year. Hedging your holdings, either by selling some of those investments or with other strategies such as writing covered calls or buying puts, can take some risk off the table.

Watch your greed
Most investors are in much better shape now than they were this time last year. But you don't want to lose those hard-fought gains. By taking steps to secure your portfolio, you'll help to keep yourself from enduring the same trials you suffered through during the financial crisis.

With so many stocks seeing big gains, focusing on value stocks might seem hopelessly outdated. Jordan DiPietro takes a closer look at whether value investing is dead.

http://www.fool.com/retirement/general/2010/01/19/3-ways-to-prepare-for-the-next-big-drop.aspx