How can the average investor improves his investment returns in stocks?

How can you improve your investment returns in stocks?

The adage, "Buy low and Sell high" and pocket the profit, is well known. I like to also remember it this way: "Never buy high and Never sell low".
The subsequent discussion applies to investing in high quality good stocks bought at a bargain only.

How can the average investor improves his investment returns in stocks? More specifically how can an average investor improves his return to 10% annually? Even better, to above 15% annually and consistently? Let us examine some factors affecting investment returns.


1. Stock selection
This is important. You wish to have a stock that gives you a good total sustainable return over many years. You will need to invest in those stocks with a high ROE of at least 15% or more. Also, these stocks should have good earnings growth (EPS growth) that is consistent and sustainable. Such companies run businesses with a huge competitive advantage over their competitors with a large moat.


2. Buy when the selected stock is selling at a low price.
This is the better way to get superior return - the potential return is higher with concomitant lower risk. Invest in "value stocks". A good portfolio should always have cash available to benefit from a bear market or a correction or panic sell in a bull market/or a specific stock.


3. 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.


4. 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.


5. Diversify, but not overdoing it
According to Buffett, adding the 7th stock to the portfolio reduces the return without reducing the overall non-systemic risk. of the portfolio. Select the best 6 stocks. If you need to add money to your portfolio, buy more of these preexisting stocks when they are offered at a good or bargain price. If you identify a better stock to invest, perhaps, this should replace one of the preexisting stocks in the portfolio.


6. Asset allocate according to your risk taking ability

It is perplexing to know of investors whose days are affected by the swings in the market. You should not bet your total networth into the stock market. Allocate the amount that you are willing to risk.

Many long-term investors are always riding on a significant amount of gains. This means that they will only lose their capital in very unlikely extreme situations.


7. So far so good. The hardest part: getting wired like Buffett!

To invest like what Buffett, you need to be knowledgeable and able to execute 'coldly' (or cooly) without being affected by emotions. These are among the harder skills to master. Have you wondered what drives this blogger to write on investing? Through writing, rather than lurking, you can focus on the facts and solidify your knowledge, philosophy and strategy.

Admittedly, there is no single philosophy or strategy; but you should have one to guide your investing. It prevents you from over-reacting to emotions and circumstances, that may harm your portfolio and investing returns. As this discussion assumes the portfolio contains only good quality stocks, it prevents you from "Buying high and Selling low" due to falling prices in the market. It may allow you to benefit hugely from the volatilities and follies of the market; making volatility your friend.

Understanding and mastering this field of behavioural finance is yet another challenge to higher investment returns for the investors.

=====

Summary:

The core principle is to buy high-quality stocks at a bargain price and avoid the mistake of "buying high and selling low."

Here are the key strategies to achieve consistent annual returns of 10% or more:

1. Stock Selection: Focus on companies with a sustainable competitive advantage ("large moat"), a high Return on Equity (ROE) of at least 15%, and consistent earnings growth (EPS growth).

2. Buy at a Low Price: Purchase these quality stocks when they are undervalued. Always keep some cash available to take advantage of market downturns, corrections, or panic selling.

3. Take Profits Strategically: Sell stocks in two key situations:

   • When they are obviously overpriced.

   • To free up capital for a better investment opportunity.

   • Additionally, sell underperforming stocks early to avoid opportunity costs.

4. Cut Losses Quickly: If a company's fundamentals deteriorate, sell immediately to keep losses small and protect your portfolio.

5. Focused Diversification: Don't over-diversify. A portfolio of around six high-quality stocks is sufficient to manage risk without diluting returns. Add new money to existing winners or replace a current stock with a clearly better one.

6. Appropriate Asset Allocation: Only invest money you are willing to risk. Your investment amount should not cause you stress from normal market swings. Long-term investors who have built up gains are better insulated from losing their initial capital.

7. Master the Psychology: The hardest part is to emulate Warren Buffett's disciplined, unemotional approach. Having a clear investment philosophy and strategy (which can be solidified through activities like writing) helps you avoid emotional decisions and instead use market volatility to your advantage.

Who's Number One? Is Warren Buffett the greatest investor of all time?

Is Warren Buffett the greatest investor of all time?  That question can never be settled.  But a good case can be made for Mr. Buffett.

The table lists a few of the most successful investors in history.

http://spreadsheets.google.com/pub?key=tMLFgBSmLlxG3SxBnf_3eFg&output=html

A couple of them - George Soros and Peter Lynch - show higher compound average annual returns than Mr. Buffett's.  But that doesn't truly settle the debate.

Mr. Lynch, for example, compiled a sparkling 29% annual return as manager of the Fidelity Magellan Fund.  At first blush, that seems to top Mr. Buffett's 27% annual return.  However, during the 13-year stretch when Mr. Lynch was burning up the track, Mr. Buffett did even better:  up 39% a year, according to Morningstar, Inc.

Mr.  Soros, manager of Quantum Fund, also has a higher annual return than Mr. Buffett.  But Mr. Buffett has maintained his performance for a longer time.  Also, notes Edward Macheski, a money manager in Chatham, N.Y.,  Mr. Buffett racked up his king-sized returns without much use of leverage, or debt, to magnify investment results.  Hedge funds, such as those run by Mr. Soros, Michael Steinhardt, and Julian Robertson, often use heavy leverage.

The Buffett record shown in the table is a composite.  From 1957 to 1969, his main investment vehicle was Buffett Partnership Ltd.  In 1965, the partnership acquired a controlling interest in Berkshire, which became Mr. Buffett's main vehicle in 1970.

Source:  John R. Dorfman, The Wall Street Journal, August 18, 1995.

Can you, or indeed anyone, consistently beat the market?

Can you, or indeed anyone, consistently beat the market?

In other words, is the market efficient?  This is a question that every investor needs to think about because it has direct, practical implications for investing and portfolio management.



If you think the market is relatively efficient,

• then your investment strategy should focus on minimizing costs and taxes.  
• Asset allocation is your primary concern, and you will still need to establish the risk level you are comfortable with.  
• But beyond this, you should be a buy-and-hold investor, transacting only when absolutely necessary.  Investments such as low-cost, low-turnover mutual funds make a lot of sense.  
• Tools for analysing the market, particularly the tools of technical analysis, are irrelevant at best.  
• Thus, in some ways, the appropriate investment strategy is kind of boring, but it's the one that will pay off over the long haul in an efficient market.

In contrast, if you think the market is not particularly efficient,

• then you've got to be a security picker.  
• You also have to decide what tools - technical analysis, fundamental analysis, or both - will be the ones you use.  
• This is also true if you are in the money management business; you have to decide which specific stocks or bonds to hold.

In the end, the only way to find out if you've got what it takes to beat the market is to try.

• Be honest with yourself:  You think you can beat the market; most novice investors do.  Some change their minds and some don't. 
• As to which tools to use, try some and see if it works for you.  If it does, great.  If not, well, there are other tools at your disposal.  

Six Significant Dividend Increases

Six Significant Dividend Increases

By: Dividend Growth Investor   Monday, March 01, 2010 9:50 AM

Any company could afford to boost distributions in a single year. Any type of business could also have a high yield, especially if it distributes all of its cash flows to shareholders. It takes a special kind of a business model to afford a proper balance between investing back into the business and distributing excess profits to shareholders. It is even more exciting when those distributions have been increased regularly for over ten consecutive years. I have highlighted six dividend stocks each of which has consistently raised distributions for over two decades. Altria Group, Inc. (MO: 20.4, 0.06), through its subsidiaries, engages in the manufacture and sale of cigarettes, wine, and other tobacco products in the United States and internationally. The company's board of directors raised its quarterly dividend by 2.90% to 35 cents/share. This is the 43rd consecutive dividend increase for Altria Group. The only reason why the company is not on the dividend aristocrat list is because its dividend payment is lower due to the spin-off of Phillip Morris International (PM: 50.65, 0.68) in 2008 and Kraft Foods (KFT: 29.06, 0.07) in 2007. The company does have a policy to return approximately 75% of earnings to shareholders in the form of cash distributions. Stock currently yields 7%. (analysis)

Kimberly-Clark Corporation, (KMB: 60.01, 0.02) together with its subsidiaries, engages in the manufacture and marketing of various health care products worldwide. The company's board of directors raised distributions by 10% to 66 cents/share. This is the 38th consecutive annual dividend increase for this dividend aristocrat. The stock yields 4.40%.


The Chubb Corporation (CB: 51.21, 0.09), through its subsidiaries, provides property and casualty insurance to businesses and individuals. The company raised its quarterly dividend by 5.7% to 37 cents/share. This was the 45th consecutive annual dividend increase for this dividend aristocrat. The stock currently yields 2.90%.

CenturyTel, Inc. (CTL: 34.13, -0.44), together with its subsidiaries, operates as an integrated communications company. The company raised its quarterly distributions by 3.60% to 72.50 cents/share. This increase would represent the 37th consecutive year where this dividend aristocrat has boosted annual distributions to shareholders. The stock currently yields 8.50%.

Piedmont Natural Gas Company, Inc. (PNY: 26.38, -0.12), an energy services company, distributes natural gas to residential, commercial, industrial, and power generation customers in portions of North Carolina, South Carolina, and Tennessee. The company boosted distributions by 3.70% to 28 cent/share, marking the 32nd consecutive annual dividend increase. This high yield dividend aristocrat yields 4.30%.

Donaldson Company, Inc. (DCI: 42.37, 0.1), together with its subsidiaries, engages in the manufacture and sale of filtration systems and replacement parts worldwide. The company's board of directors raised distributions by 4% to 12cents/share marking the 24th consecutive year of dividend increases. This dividend achiever currently yields 1.20%.

I view Kimberly-Clark (KMB: 60.01, 0.02) and Chubb (CB: 51.21, 0.09) as attractively valued stocks. I plan adding to my position in Chubb (CB) this month. Piedmont Natural Gas Company (PNY) looks like an interesting company for further research. Altria (MO: 20.4, 0.06) and CenturyLink (CTL: 34.13, -0.44) are two high yielding dividend growth stocks, which also spot high dividend payout ratios. I would choose tobacco over telecom however, because once you are addicted to it is difficult to stop using the product. With telecom you could easily cancel your telephone and get a cell phone or simply use Skype instead. Donaldson (DCI) does seem like a company that could be included in the dividend aristocrat list over the next one or two years. The problem is the low current yield, the anemic dividend growth rate and the high price/earnings multiple of 27.

http://www.istockanalyst.com/article/viewarticle/articleid/3904657

Malaysia Increases Interest Rate as Recession Ends

Malaysia Increases Interest Rate as Recession Ends
March 04, 2010, 6:33 AM EST


By Shamim Adam

March 4 (Bloomberg) -- Malaysia’s central bank raised its benchmark interest rate for the first time in almost four years, saying record-low borrowing costs were no longer warranted as the economy emerges from recession and inflation accelerates.

The ringgit rose as economists predicted central bank Governor Zeti Akhtar Aziz will continue to raise rates. Asia is leading the global recovery from the worst recession since World War II and Australia, China, India and Vietnam have tightened monetary policy to fight inflation and avert asset bubbles.

“We should expect a few more upward adjustments,” Suhaimi Ilias, chief economist at Maybank Investment Bank Bhd. in Kuala Lumpur, said after the decision. “The central bank has the luxury of time to raise rates gradually. Other central banks will look at domestic conditions before making their moves.”

Indonesia’s central bank left its reference rate at a record-low 6.5 percent today. Australia this week raised its benchmark for the fourth time in five meetings, by 0.25 percentage point to 4 percent.

“The overnight policy rate was reduced to historic lows in early 2009 as a key measure to avert a severe and fundamental economic downturn,” the central bank said in a statement today. “These conditions no longer prevail. The domestic economy has since improved significantly and is now on a path of recovery.”

Ringgit Rises

Malaysia’s ringgit rose to 3.3585 a dollar after the rate decision, the strongest level in six weeks. The currency has gained 1.5 percent this year, making it the best performer after the Thai baht in Asia outside Japan.

“The Monetary Policy Committee decided to adjust the overnight policy rate towards normalizing monetary conditions and preventing the risk of financial imbalances that could undermine the economic recovery process,” the central bank said. “The stance of monetary policy continues to remain accommodative and supportive of economic growth.”

Asian policy makers risk creating asset bubbles and fueling inflation by keeping interest rates “too low for too long” in their attempts to boost domestic demand, Standard & Poor’s said in a report yesterday.

Malaysia’s Zeti has said in the past month that any increase in rates should be viewed as a “normalization” and not a “tightening.”

Exports Climb

Southeast Asia’s third-largest economy emerged from its first recession in a decade last quarter, and Prime Minister Najib Razak has said he expects this year’s expansion to beat the official growth forecast of as much as 3 percent.

Malaysia’s exports may climb this year at twice the 3.5 percent pace predicted earlier as the global recovery revives overseas sales of Sime Darby Bhd.’s palm oil and Intel Corp.’s computer chips, International Trade and Industry Minister Mustapa Mohamed said this week.

Before today, the benchmark rate was at its lowest level since it was introduced in April 2004, and had been unchanged since February last year. Malaysia’s borrowing costs are among the lowest in Asia, below the Philippines’ 4 percent benchmark.

The benchmark FTSE Bursa Malaysia KLCI Index fell 0.2 percent at the close today.

Attract Capital

“A rate increase may be good to attract some capital inflows,” Geoffrey Ng, who manages $1.2 billion of assets as chief executive officer at HLG Asset Management Sdn. in Kuala Lumpur, said before the decision. “The foreign-exchange reserves have been rather flattish in recent months and the country has been facing quite a bit of capital outflows. On the flipside, the risk is that the equity market will take it in a wrong way.”

Malaysia’s consumer prices rose for a second month in January, climbing 1.3 percent from a year earlier.

Inflation may accelerate later this year as the government studies a revamp of its fuel subsidy. Malaysia aims to come up with a new fuel-subsidy system before presenting the nation’s annual budget in October, Domestic Trade and Consumer Affairs Minister Ismail Sabri Yaakob said today.

Prices will increase “gradually” this year and inflation should remain “moderate,” the central bank said. It’s forecast for inflation takes into account possible adjustments in “administered prices” and rising global commodity and food prices, it said.

Bank Negara policy makers next meet to review interest rates on May 13. The central bank kept the statutory reserve requirement unchanged today. The measure determines the amount of money lenders need to set aside as reserves.

--With assistance from Michael Munoz in Hong Kong and David Yong in Singapore. Editors: Stephanie Phang, Lily Nonomiya

http://www.businessweek.com/news/2010-03-04/malaysia-increases-interest-rate-as-recession-ends-update1-.html

• MARCH 4, 2010, 10:35 A.M. ET

Malaysia Raises Rates 

By ALEX FRANGOS

In a sign of the rapidly improving economic fortunes across Asia, Malaysia's central bank raised its benchmark interest rate Thursday and noted the "economic recovery is firmly established."

Malaysia is the first of the medium-sized, export-oriented economies in Asia to raise its target interest rate. Its move will be closely watched in the region, where policymakers have moved gingerly away from the extraordinary policy stimulus put in place during the global financial crisis.

Similar macroeconomic conditions in Taiwan, South Korea, Thailand, Singapore are likely to lead to rate hikes in coming months. All have benefited from their exposure to China and the restocking of inventory in the U.S. and Europe, especially for technology-related goods. Indonesia's central bank kept its interest rate steady on Thursday, saying that inflation remains under control.

"Now that Malaysia has moved, other central banks in the region may feel more comfortable doing so as well," said Matt Hildebrandt, economist with J.P. Morgan in Singapore. He added, though, that tightening would happen only gradually amid concern about the global economic outlook.

Malaysia's rate increase comes after China and India tightened credit through raising bank reserve requirements. Australia, whose economy is heavily reliant on Asian demand, has raised its benchmark rate four times since October, most recently on Tuesday. Vietnam raised rates in December to fight off speculation on its weakening currency.

In recent weeks, Malaysia and other area economies including China, Taiwan and Thailand, announced stronger than expected fourth quarter growth, surprising government economists and hastening the need to return interest rates to more normal levels. Prices have begun to rise across Asia. That combined with the ultra-low interest rates, could spark a dangerous bout of inflation.

"Growth is expected to strengthen further," Bank Negara Malaysia said in its statement accompanying the quarter percentage point hike in the benchmark overnight policy rate, to 2.25%. "Prices will gradually increase during the year," it said, while predicting that "inflation is expected to remain moderate." The bank noted the risks of "rising global commodity and food prices."

Thursday's hike was the first move by Malaysia's central bank since it dropped rates for the final time in February 2009. It was the first rate increase since 2006.

The tightening of monetary policy in the region highlights the gap between recoveries in emerging economies, especially in Asia, and the developed world, where interest rates are expected to remain at rock bottom levels for several more months if not longer. That dichotomy could lead to investors to shift money into the higher interest rates of Asian currencies and away from the U.S. dollar, the euro and the yen.

In the policy statement, the Malaysian central bank cited the "continued improvement" in exports, "particularly from the regional economies," an allusion to the strength of trade within Asia. Traditionally, Asia's export-led economies have relied substantially on demand from the U.S. and Europe. Malaysia's economy grew 4.5% in the last quarter of 2009 compared to the year earlier, helped along by strong consumer spending and trade.
While that relationship between the consumer in the developed world and the producers in the emerging world remains intact, there are signs that growing demand from consumers and businesses within the emerging markets, especially in China, has the potential to fill in for the sluggish buying power among Western consumers.

"A higher proportion of our trade is now with the region," said Malaysia's central bank governor, Zeti Akhtar Aziz, in an interview last week. She said more and more of the products Malaysia ships to China are for Chinese consumers, rather than components that will be assembled into goods for Americans and Europeans. "That's a new development and it has intensified," she said.

Write to Alex Frangos at Alex.Frangos@wsj.com

http://online.wsj.com/article/SB10001424052748704187204575101031978300278.html?mod=googlenews_wsj  

What BNM's normalisation of policy means
http://tauke-saham.blogspot.com/2010/03/what-bnms-normalisation-of-policy-means.html

Buffett's tips for new investors

3/2/2010 12:01 PM ET
Buffett's tips for new investors

The world's most famous investor lays out his basic principles in this year's annual letter to Berkshire Hathaway shareholders.

By The Wall Street Journal

Every few years, critics say Warren Buffett has lost his touch. He's too old and too old-fashioned, they claim. He doesn't get it anymore. This time he's wrong.

Quiz: How much risk can you tolerate?
It happened during the dot-com bubble, when Buffett was mocked for refusing to join the party. And it happened again last year. As the Dow Jones Industrial Average ($INDU) tumbled below 7,000, Buffett came under fire for having jumped into the crisis too early and too boldly, making big bets on Goldman Sachs (GS, news, msgs) and General Electric (GE, news, msgs) during the fall of 2008, and urging the public to plunge into shares.

Now it's time for those critics to sit down for their traditional three-course meal: humble pie, their own words and crow.

On Saturday, Buffett's Berkshire Hathaway (BRK.A, news, msgs) reported that net earnings rocketed 61% last year to $5,193 per share, while book value jumped 20% to a record high. Berkshire's Class A shares, which slumped to nearly $70,000 last year, have rebounded to $120,000.

Those bets on GE and Goldman? They've made billions so far. And anyone who took Buffett's advice and invested in the stock market in October 2008, even through a simple index fund, is up about 25%.

This is nothing new, of course. Anyone who held a $10,000 stake in Berkshire Hathaway at the start of 1965 has about $80 million today.

How does he do it? Buffett explained his beliefs to new investors in his letter to stockholders Saturday:

Inside the Berkshire Empire


Stay liquid. "We will never become dependent on the kindness of strangers," he wrote. "We will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses."

Buy when everyone else is selling. "We've put a lot of money to work during the chaos of the last two years. It's been an ideal period for investors: A climate of fear is their best friend. . . . Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."

Don't buy when everyone else is buying. "Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance," Buffett wrote. The obvious corollary is to be patient. You can only buy when everyone else is selling if you have held your fire when everyone was buying.

Value, value, value. "In the end, what counts in investing is what you pay for a business -- through the purchase of a small piece of it in the stock market -- and what that business earns in the succeeding decade or two."

Don't get suckered by big growth stories. Buffett reminded investors that he and Berkshire Vice Chairman Charlie Munger "avoid businesses whose futures we can't evaluate, no matter how exciting their products may be."


Diversify your portfolio
Most investors who bet on the auto industry in 1910, planes in 1930 or TV makers in 1950 ended up losing their shirts, even though the products really did change the world. "Dramatic growth" doesn't always lead to high profit margins and returns on capital. China, anyone?

Understand what you own. "Investors who buy and sell based upon media or analyst commentary are not for us," Buffett wrote.

"We want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it's one that follows policies with which they concur."

Defense beats offense. "Though we have lagged the S&P in some years that were positive for the market, we have consistently done better than the S&P in the 11 years during which it delivered negative results. In other words, our defense has been better than our offense, and that's likely to continue."

Timely advice from Buffett for turbulent times.

This article was reported by Brett Arends for The Wall Street Journal.


http://articles.moneycentral.msn.com/learn-how-to-invest/buffetts-tips-for-new-investors.aspx

icapital.biz is 'unpopular' and 'unloved' during this bull run!

29.7.2009:  NAV per share of icapital.biz was RM1.87; icapital.biz share price was around RM1.80.


3.3.2010:  NAV per share of icapital.biz was RM2.08; icapital.biz share price closed at RM1.72.  This price was a 17.3% discount to its NAV.

.  
Also read: Closed-ended funds: Why a discount, anyway?

Learn to be long-term greedy when others are short-term fearful.

The bullish lesson?
Learn to be long-term greedy when others are short-term fearful. Going against the herd is never easy, but if you truly believe in a company's long-run demand story, major downturns can offer the very best buying opportunities. 

As Warren Buffett reminds us, "Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

The bearish takeaway? 

There's just no substitute for knowing a business model cold.  The only way to reasonably predict a company's fortunes is to know exactly what sort of strategies management is pursuing, and questioning if they can actually create value by doing so.

As Buffett once wrote, "Equity Investment Strategy = Evaluate the Business in Its Entirety."

The final Foolish move
Investors often focus strictly on stock price movements, without realizing that developing a proper stock-picking process counts most.

http://www.fool.com/investing/general/2010/03/03/tuesdays-hottest-stocks.aspx

Buying and holding can be very profitabe until the facts change

Buy and Hold Isn't Extinct, But It Needs to Evolve

By Kristin Graham Mar 03, 2010 1:10 pm

It can be very profitable if investors execute it with the mindset of buying and holding until the facts change.

At a recent CFA market outlook dinner, the guest speakers concurred that long-term buy and hold will under-perform in 2010 and will continue be a difficult strategy to employ in the future.

This is by no means revolutionary. Buy-and-hold naysayers emerged immediately following the financial crisis and housing bubble crash that caused disarray throughout capital markets.

But it was a shocking message coming from a panel at a CFA affair. As a candidate in the program, I am familiar with the CFA Institute’s intense focus on fundamental analysis.

On the one hand, there is some value to this proposition. Throughout the decade, technology has changed the playing field of the market and allowed short-term strategies to succeed. The ability for new news to be almost instantaneously priced into the market upon announcement can cause stock prices to fluctuate irrationally, sometimes based on just numbers or speculation alone rather than the actual analysis of a company.

Further, more frequent and intense bubbles and collapses have caused drastic market-wide swings that cause mass divergence between a company’s intrinsic value and its stock price. The 2008 global financial crisis is a solid case in point.

However, suggesting that buy and hold is dead essentially means that the fundamentals of a company are worthless. The thought of that notion is ludicrous.

(See also,  Five Investing Myths Debunked)

In many cases,  investors are extremists. One group believes in solely analyzing fundamentals and buys a stock to hold forever. Another group covers up the name of the company andtrades only on quantitative factors.

But extremism tends to fail. I witnessed it first-hand in the  investment industry during employment at my last firm. Die-hard buy-and-hold-forever investors refused to let go of overvalued companies they believed in for the long run and snubbed macro event market movement only to eventually end up deep in the red.

Like anything, investment strategies need to change. And they need to be modernized to remain relevant. Finding great  stocks to hold for a long time combined with trading on macro news and changing valuations seems more realistic than holding a stock forever.

This is precisely why Warren Buffett and his  Berkshire Hathaway (BRK.A) holding company have remained so successful. As one of the greatest buy-and-hold investors of all times, Buffett’s philosophy has been studied and talked about extensively. Interestingly enough though, his strategy is widely misunderstood.

(See also,  What Buffett Got Wrong)

Buffett undoubtedly focuses on fundamental values of a company and purchases stocks with a buy-and-hold mindset. He looks for companies with strong brand names, like  Coca-Cola(KO), Kraft (KFT), Goldman Sachs (GS), and General Electric (GE). But he still trades on macro news and sells when investments become overvalued. In the past, he soldMcDonald's (MCD) and Disney (DIS) when he no longer felt they were worth his capital.

In other words, buy and hold can be a very profitable investment strategy provided investors execute it with the mindset of buying and holding  until the facts change.

Purchasing a fundamentally strong company when its price is attractive works. Loading up on more of that stock if the price slips on short-term news works. When either a company becomes overvalued or its business model begins to negatively change, selling works.

Exact market timing isn’t necessary. The strategy is simply picking solid stocks and using common sense.

The bottom line is that the buy-and-hold portfolio is not extinct. It just needs to evolve.


http://www.minyanville.com/businessmarkets/articles/buy-hold-sell-strategies-warren-buffett/3/3/2010/id/27112

Basic Steps on How to Find Profitable High Performance Stocks

Basic Steps on How to Find Profitable High Performance Stocks
March 2, 2010

Stock picking can be a extremely perplexing procedure and investors have very different ideas on how to achieve the desired outcome. Nevertheless, it may be very wise to follow some basic steps which will assist you to minimize the risk of the investments that you end up choosing.

This article will outline some basic steps for picking those high performance stocks that we all aspire to find.

You must have firmly placed in your mind exactly the time frame and the general strategy of the stock. This step is very important because it will influence as to the type of stocks you buy.

We shall presume that you have decided to be a long term investor. Therefore you would then be wanting to locate stocks that possess sustainable,good competitive advantages along with stable or increasing growth for the future.

The way to locating these High Performance stocks is by considering the historical performance of each stock over the past couple of years.Once you have found a likely stock you would then need to do a simple business S.W.O.T.analysis on the company. Swot basically means: Strength-Weakness-Opportunity-Threat.)

If you have decided instead to become a short term investor, it might be a good idea to a stick to one of the following couple of strategies:

1. Momentum Trading.

This useful strategy is to keep an eye open for stocks that have increased in both price and volume over the recent days trading or two. You would most likely find that momentum fluctuates rapidly to begin with and tends to lessen off as traders lose interest. Mind you nothing is guaranteed particularly in today’s market place

Usually most technical analysis will support this trading strategy. But my advice on this strategy is to look only for stocks that have exhibited stable and consistent rises in their share price. We are presuming that the idea is that when the stocks are not so volatile, we can merely ride the up-trend until the trend breaks.

2. Contrarian Strategy.

This second useful strategy is to be on the look for over-reactions that occur in the stock market from time to time. Past research has shown that the stock market is not always efficient as we are led to believe. This basically means that share prices do not always accurately reflect the true value of the stocks. This can be used very much to our advantage.

Take for example when a company has just recently announced bad news,like a predicted downturn in future profit.This is exactly is what is happening here and now. All you have to do is follow the daily stock market news to see this occurring.

Trades who trade with their emotions become disillusioned, become fearful, then panic and sell. As so often happens the share price often drops below the stocks actual fair value.

But before you decide whether to purchase the stock which has over-reacted to a bad news announcement, you should always take into consideration the possibility of recovery from the impact of the bad news.

For example, if the stock price had dropped by 20% after the company had just lost a legal case, but no permanent damage to the either the business’s reputation or the product had occurred, you can then be realistically confident that the market over-reacted. And given time the share price would no doubt rise again to its former level thereby rewarding you with a comfortable profit.

It would be prudent on using this strategy to find a list of stocks that have suffered a recent drop in share prices You could then analyze the potentiality of a reversal occurring by utilizing the well known technical indicator of candlestick analysis).

If the charts did confirm candlestick reversal patterns in the stocks in question, It would then be advisable to look through the recent news to analyze the exact causes of the recent price drops to ascertain that the over-sold opportunities actually existence.

Always do researches that will give you a choice of stocks that fits into to your own personal investment time frames and strategies. It is pointless trading in something you are not happy with or unsure of.

Once you have compiled a list of stocks to possibly purchase in the future, you would then need to diversify them in such a way that gives you the greatest reward/risk ratio. One way of achieving this is to employ a Markowitz analysis for your portfolio. This analysis will give you the exact proportions of money you should then apportion to each stock.

Hopefully these basic steps will get you started in your continuous quest to consistently make good profits in the stock market. Plus they will also broaden your knowledge about how the financial markets perform and react. Ultimately it will provide you with a sense of confidence that will enable you to make better trading decisions and therefore greater profits.

I wish happy profitable trading.

Author: Chris Strudwick
Source: ezinearticles.com
http://sellingstock.getherb.com/tag/stock-picking/

Stock prices are easy to monitor; let's reflect on the long term stock prices.

Here is a theoretical analysis of the behaviour of prices of stocks over a 5 or 10 year period.

Stock prices are easy to monitor.  Over a long period, these stock prices in general reflects the value of the underlying business of the stocks.

These stocks can be grouped according to the behaviour of their prices in these broad groups.

1.  Some stocks performed very well.  Their prices climbed consistently and those who have these stocks enjoy good returns from capital appreciations.

2.  Many stocks performed so-so.  Their stock prices stayed within certain ranges, either broad or narrow.  These stocks did not reward their owners well in returns from capital appreciations.  Those who bought these stocks at low prices might have a small gain, but over many years, these translated to very poor compound annual returns.  Those who bought these stocks at high prices might have irrecoverable losses.  Owning these stocks carried with them opportunity costs, provided the dividends were substantial to overcome these.

3.  Many stocks performed terribly.  Their stock prices declined and continued to decline further over many years.  These stocks caused massive losses to those who own them.  The dividends they provided, if any, were poor compensation to these severe losses.

4.  Many stocks performed very well for a few or many years and then declined when they no longer were able to protect their businesses against competitors or for various other reasons.  Some rose again from the ashes, many faltered into obscurity or permanent demise.

5.  Many stocks performed poorly for many years eroding the patience of their owners.  Some might perform intermittently, though many remained in such states for many more years.

The best stocks to have are those in Group 1.   To capture all the returns from such stocks over a long period, buy and hold is the right strategy.  These stocks are few in number in any bourses and often trade at high valuations.  The ability to pick and buy these stocks at fair or bargain prices will be very rewarding.

Buy and hold strategy is definitely not ideal for the stocks in the other groups.  At best, it provides a meagre or average return in one's investment.   However, holding non-performers or losers over a long period of time compounds the losses further due to opportunity costs.