Thinking of alternative investments?

18-08-2008: Thinking of alternative investments? by Aisyah Lam

http://www.theedgedaily.com/cms/content.jsp?id=com.tms.cms.article.Article_d3e80bfd-cb73c03a-df294000-e5fea09d#

There has been a lot going on in global financial markets. With volatility likely to continue, and general consensus of a slowdown in major economies, the question most frequently asked is: Where and what should I invest in next? Given the uncertainties and increasing challenges, investors are exploring various investment options to stay ahead of the curve, and opportunities to improve long-term returns.

This article will cover some of these investment choices known as alternative investments, which complement traditional investing and have been attracting a growing interest from institutional, high net worth individuals as well as retail investors.

Alternative investments

Investments in our market comprise mainly equity, bonds and property. These are traditional investment vehicles. Over time, with innovation and increased understanding of the markets, other alternatives have started gaining popularity.

Many alternative investments with minimal correlation to traditional benchmarks have proven to be resilient in volatile markets and uncertain economic conditions. This formula has worked well supporting the investment rule of thumb — portfolio diversification — and increasing resilience against risks.

An understanding of alternative investments may be helpful in supporting more informed investment decisions, for exposures to other than just equity and bond markets.

Alternative investments include familiar products such as private equity, real estate and structured products; whilst examples of more sophisticated options include managed futures and hedge funds.

In contrast to traditional investments, alternative investments seek absolute performance and depend on advisers’ skills for performance. They may use leverage and have historically low to moderate correlation with market indices. Typically, it is not as easy to liquidate such investments as there may be fixed periods ranging from monthly to yearly, and may include possible lock-up periods. Charges may generally be higher and in the form of performance fees.

Traditional investments, on the other hand, would seek relative performance where returns depend primarily on market performance. They have historically high correlation with market indices. These forms of investments generally do not employ leverage, offer daily liquidity and charge fixed management fee on assets under management.

Why invest in alternative investments?

Alternative investments offer opportunities to qualified investors to diversify their portfolios by combining alternative strategies with traditional holdings, aimed at generating steady returns and preserving wealth through fluctuating market conditions.

Over the years, while the risk-adjusted returns in the stock and bond markets have become less, modern investment instruments such as alternative investments have helped realise consistent returns over time, as they tend to move in opposite directions to traditional strategies.

Alternative investments have helped preserve opportunities for positive returns even during times when stocks and bonds under perform.

Types of alternative investment

1. Private equity

Private equities are privately negotiated deals that are invested in mostly non-public companies that may be in different business phases or categories. This would include start-ups, companies in the development stage or expanding, a buyout situation, perhaps restructuring. Investments could be in form of venture capital (VC); leveraged buyouts (LBO); mezzanine or distressed debt.

Private equity managers could be stand-alone or fully integrated organisations that may take an active role in a target company’s management with the objective of creating value during the period of investment, and to exit profitably.

2. Real-estate investment

This is probably one of the most commonly known forms of alternative investing. Real-estate investment would have an internal rate of return objective although there is no guarantee of the return objectives being met. Leverage could range from 0-75% and the investment has low correlation with market indices.

There is less volatility compared to equities and fixed income as investments are in physical assets, though investments would be relatively illiquid. Real-estate investment could offer an advantage in the form of potential inflation hedge.

Real-estate investment can be public and debt-based like commercial mortgage-backed securities (CMSB) or public and equity-based like real-estate investment trust (REIT) stocks or real-estate mutual funds. Other forms of investment include private and debt-based like mezzanine debt or senior loans or private equity like open and closed-end funds.

Investors should note that commercial real estate can offer portfolio diversification as historically it has low correlation with other asset classes and has provided steady returns over the long term. It has proven performance versus other investments. It is different from family homes and there is risk/return trade-offs in various real-estate investments.

3. Structured products

Of late, structured products have become popular in the market as it can offer the security of principal protection with the opportunity of further income upside. Structured products can be performance-linked, leveraged/arbitrage products and principal protected.

Performance-linked products may be linked to the performance of a basket of assets such as stocks, bonds or hedge funds; or to indices like Morgan Stanley Capital International (MSCI), FTSE or S&P Indices. They are usually illiquid and have no leverage.

Principal-protected products offer capital assurance with potential upside from returns linked to performance of predetermined assets. Principal protection is only valid if the investment is held till maturity.

Leveraged/arbitrage products are investment products that generate returns based on the spread between assets and financing costs. They normally have limited liquidity, with potential for high returns, which comes with association of high risk.

Structured products can be customised to fit the unique requirements of individual investors and can offer potentially higher yields than of market norms if certain scenarios materialise. The underlying structure could be in forms of various exposures to diversified market sectors — they could be offered in one packaged security or maybe repackaged as credit-enhanced/principal-protected products to be managed actively with the aim of improving the risk/return profile of the investment.

4. Managed futures

Managed futures are essentially an alternative investment strategy that offers access to global futures market via professional money managers called commodity trading advisers (CTAs).

CTAs use trading strategies and money-management techniques to attempt to achieve profits and control risks. They trade in global markets including futures, options and forwards on traditional commodities like gold, crude oil, soybean and crude palm oil. They also trade in financial instruments such as the US Treasury Bond, British Long Gilt and NYSE Stock Index as well as currencies, which include but are not limited to the euro, Japanese yen, Czech kroner and Thai baht.

As in any other forms of investment, there are risks involved. Due to the use of leverage, a small change in market price of a futures contract can produce major gains or losses for a managed futures contract.

Nevertheless, from January 1994 till June 2008, managed futures generated an average rate of return of 7.25% compared with the S&P 500 of 8.65%, Nasdaq of 12.6%, Global Stocks of 7.49% and Global Bonds of 7.83% (Credit Suisse Tremont Hedge Fund Index LLC, Lipper as at July 2008).

Given the sophistication of this investment class, fees are higher than that of traditional funds.

5. Hedge funds

Hedge funds aim to make absolute returns regardless of market conditions. They offer greater flexibility than traditional investment managers and can go long and short on stocks. Use of derivatives and leverage is allowed and normally hedge funds impose a higher minimum investment amount. Performance fees are charged based on returns generated by the managers.

Hedge funds do have liquidity restrictions and are moderately regulated with limits on capacity.

Here are several facts about hedge funds.

i) In the early 90s, the hedge fund industry was dominated by high-risk, aggressive macro players. It has since evolved significantly in terms of AUM as well as sophistication, and in 2007, there were over 10,000 hedge funds with many more diversified strategies. Hedge funds do not apply the same investment strategies as other funds.

ii) Hedge funds are not only for bear markets as they seek low or negative correlation to traditional long-term investing.

iii) Hedge funds do not always lack transparency. Whilst skill-based investing may be less transparent than traditional investing, some hedge fund managers make transparency their selling point.

Generally, hedge funds offer opportunity to improve portfolio efficiency with enhanced returns while potentially reducing risk. It also advocates diversification with low correlation to existing asset classes and the chance to participate in investments managed by top-rated hedge fund managers, using different strategies and employing a wide range of instruments.

A fund of hedge funds is a multi-manager hedge fund that has dedicated and expert teams of managers. The assembling funds of hedge funds create a significant advantage over private investors as it offers the opportunity of exposure to a diverse set of strategies in a single investment.

Multi-manager funds have access to the best managers, who often close quickly and limit allocations to long-term clients who buy and hold. Very importantly, fund of hedge funds offers diversification, as it minimises risks by combining funds and strategies.

Minimum investments are lower than single-strategy funds, hence reducing the strain of high-value investing. Transparency is not an issue as they are able to obtain and interpret complex information, which could be a challenge to private investors.

In a fund of hedge funds, strict due-diligence processes facilitate identification of quality managers, while continuous monitoring and reviews are enforced.

Portfolio construction and readjustments of positions are made throughout the life of the portfolio. These efforts are resource intensive and could not possibly be conducted by a private investor.

It is important for investors to read, research and understand the features, liabilities and benefits offered by alternative investments such as private equity, real estate, structured funds, managed futures and hedge funds. A well-diversified portfolio, which incorporates some form of alternative investment, could help increase returns and lower portfolio volatility overall.

Aisyah Lam is the head for wealth management products, Citibank Berhad

How to analyze the market? Consumer Services

Consumer Services

We generally don’t find a ton of great long-term stock ideas in retail and consumer services because most economic moats for the sector are extremely narrow, if they exist at all. The only way a retailer can earn a wide economic moat is by doing something that keeps consumers shopping at its stores rather than at competitors’. It can do this by offering unique products or low prices. The former method is tough to do on a large scale because unique products rarely remain unique forever. It’s rare to find a retailer or consumer service firm that maintains any kind of economic moat for more than a few years.

The few consumer service firms that have established a wide economic moat:
Home Depot and Lowe’s in the home improvement area
Walgreen’s for prescription drugs and convenience items
Wal-Mart for just about everything.

These firms developed distinctive store prototypes that set them apart from their competitors and they now enjoy vast economies of scale that make it rough for competitors to earn consistent profits. Identifying and investing in firms like these (at the right price) is the best way to make money over the long haul in this classic “buy what you know” area of the market. Although you can also do well buying high-quality specialty and clothing retailers when the industry sees one of its periodic sell-offs, very few of these kinds of firms make great long-term holdings.

Companies we see everyday.
Most of the companies in the consumer services sector are very familiar: We shop at their stores and eat their food just about every day. The sector contains discount stores such as Wal-Mart and Target, drugstores such as Walgreen and CCVS, clothing stores such as Gap, home improvement shops such as Home Depot and Lowe’s, restaurants such as McDonald’s and Outback Steakhouse, and scores of other well-known names. Being able to peruse the aisles of these stores, interact with employees, and sample products is a huge advantage from an investment standpoint.

The consumer services sector has seen strong growth too. Our time-starved culture, with both parents working full time in more families, demands quick and reliable service and is willing to pay for it. Grocery stores offer more ready-to-eat or quick-to-prepare meals, discount stores now almost exclusively have centralized checkouts at the front of stores, and many drugstores stay open 24 hours a day. Companies that provide the best overall service at a competitive price survive and thrive, while those that don’t fade and eventually disappear.

According to the U.S. Census Bureau, the U.S. economy increased from $6 trillion in 1991 to $10.1 trillion in 2001. During that time, consumer spending increased from 66 percent to 69 percent of the economy. Consumer service firms are becoming a bigger piece of the economy, and we expect that trend to continue. It’s not surprising that these companies have outperformed the overall market over the past decade.

Consumer staples versus consumer discretionaries.
Because many consumer purchases other than food (consumer staples) are discretionary (can be put off for later), it’s not surprising that retail stocks generally outperform during periods of economic strength and underperform during times of economic weakness.

How to analyze the market? Health Care

Health Care

Health care companies are often highly profitable, with strong free cash flow and returns on capital. Health care has also benefited from powerful growth trends. Health care firms benefit from consistent demand, as well.

Health care sector includes

1. drug companies,
2. biotechs,
3. medical device firms and
4. health care service organizations.

Of all these areas, drug companies and medical devices firms are usually the most promising because they typically have the widest economic moats. However, investors often get swept away by these companies’ heady growth rates, so valuations can be steep.

Economic moats in health care.

Health care companies often benefit from economic moats in the form of high start-up costs, patent protection, significant product differentiation, and economies of scale. This makes it tough for new players to enter the market, particularly for drug companies with valuable patent rights, managed care organizations with large provider networks, or medical device firms with long clinical track records. These characteristics make for great profitability: The market-weighted return on equity for health care firms has averaged 23 percent over the last 5 years, despite the economic recession.

A Guided Tour of the Stock Market

A Guided Tour of the Stock Market
(Focus on the tools for understanding different areas of the market.)

It’s easier for companies to make money in some industries than in others. Moreover, some industries lend themselves to the creation of economic moats more so than others, and these are the industries where you’ll want to spend most of your time. The economics of some industries are superior to others. Hence, you should spend more time learning about attractive industries than unattractive ones. You should select those stocks that you think will perform better than others and invest heavily in your top-rated stocks.

Every industry has its own unique dynamics and set of jargon and some industries (such as financial services) even have financial statements that look very different from others. Study the different economics of each industry and understand how companies in each industry can create economic moats – which strategies work and how you can identify companies pursuing those strategies.


Where to Look?

Health care
Consumer services
Business services
Banks
Asset management and Insurance
Software
Hardware
Media
Telecom
Consumer Goods
Industrial Materials
Energy
Utilities


Conclusion

There are areas of the market with worthwhile investments because they contain so many wide-moat companies. There are great firms in even the least likely areas of the stock market.

When analyzing a company in a specific area of the market, seek answers to a few essential questions:

How do companies in this industry make money?
How can they create economic moats?
What quirks does this industry have that an investor should know about?
How can you separate successful from unsuccessful firms in each industry?
What pitfalls should you watch out for?

Over the long haul, a big part of successful investing is building a mental database of companies and industries on which you can draw as the need arises. The ability in compiling that mental database will make you a better investor.

Reference: The Five Rules for Successful Stock Investing by Pat Dorsey

What are you -- a bull, bear, chicken or owl?

http://www.thejakartapost.com/news/2007/09/23/what-are-you-bull-bear-chicken-or-owl.html-0



What are you -- a bull, bear, chicken or owl?
The Jakarta Post , Jakarta Sun, 09/23/2007

Financial markets of late have been volatile, to say the least.

After soaring to record highs in June, the U.S. and most other stock markets then fell by up to 10 percent before making a partial recovery. Each day brings surprises with ups and downs reflecting the good or bad news of the day.

Stock markets have also been spooked by the crisis in the lower end of the housing market in the U.S. and the resulting collapse of a number of related hedge funds.

Even a rock-solid UK building society has come under pressure as panicking investors withdraw their savings. The price of oil has hit record highs and gold has gone over the US$700 an ounce mark. (Remember my earlier advice to have holdings in energy and precious metals?)

Are the 'bears' winning?

With housing worries and unemployment growing in the U.S., with consumer confidence and the dollar falling (note that the rupiah has been falling with the dollar), fear of a recession is on everyone's mind. A recession in the U.S. would invariably impact the global economy. In such a scenario the bears will certainly have it.

In case any reader is not familiar with the term, a ""bear"" market technically signifies one that has fallen at least 20 percent, the allusion to the bear being that a bear is ""clawing it down'.

Have the 'bulls' conceded defeat?

Again, for readers unfamiliar with the terminology, a ""bull"" market is one that is rising, the analogy this time being one of a bull ""tossing it upward"".

All is far from being gloom and doom except for those directly affected by the narrow band of assets that have collapsed in value. Most economies are still strong and expanding.

Unemployment is still close to historical lows in many countries and the twin powerhouses of India and China continue to steam ahead supporting commodity-based economies such as Australia.

A lower dollar can also be positive for the U.S. as it will discourage imports and stimulate exports. Another factor that is encouraging for stock markets is that valuations are not particularly expensive.

Many P/E (price-to-earnings ratios) are around 16/1, which means shares are paying dividends of over 5 percent. This compares favorably with bonds and money markets, particularly since stocks have the potential for capital growth over time.

During the height of the technology boom some shares were trading at P/E levels of 300/1 which meant a return of only one-third of 1 percent per annum or, putting it another way, it would take an investor 300 years to get his money back if he relied on the dividend alone.

Of course, people were relying on capital growth but at those P/E levels their hopes were doomed. We do not have that scenario today.

So, overall, a ""crash"" on the scale of 1987 or the bursting of the technology bubble in 2000 seems unlikely, although if the property market or unemployment worsen in coming months the bears could have their way. If markets can limit their fall from previous highs to less than 20 percent, then what is happening now can be written off as a ""correction"".

What does history tell us?

Since 1946 there have been 10 official ""bear"" markets (falls of at least 20 percent) based on the S&P 500 index. During the same period there have been 16 ""corrections"" (falls of at least 10 percent). Anyone who invests in the stock markets should keep this in mind.

How long can it take for markets to recover? Historically, (since 1946) it has taken 669 days on average to recover from a full bear market and 111 days to recover from a correction. Hence the reason for repeated advice to the unwary that investing in the stock markets is not for the short term.

The bulls are unquestionable winners over the long term as stocks invariably rise over time. Their rise is not a constant one, however, and is regularly interrupted by corrections and bear markets.

These are a necessary part of the process; without them, the markets would be driven to unrealistic heights which, in turn, could lead to a serious collapse of the system. A bit like geological faults; when pressure from the earth's crust builds up, it is preferable to have it relieved gradually by minor earthquakes rather than delay until the advent of a major one.

How to win in a bear market

The secret is simply to invest when others are selling. To do this requires resisting our instinct (built into our genes over thousands of years) to follow the herd.

Regular savers also win in a bear market because they continue to buy shares or units when prices have fallen. Provided they keep doing this they will benefit when the next bull market comes along.

Patience and perseverance is the key, since the recovery could take several years, but rest assured, a bull market will follow a bear market as sure as night follows day.

Investing in a hedge fund that ""goes short"" is also a way to make money in falling markets. In this case the fund manager does not invest directly in stocks but actually borrows and sells them.

He then repurchases and returns them at a later date. If he has judged correctly and the repurchase price is lower than what he paid then the difference, less expenses, is pure profit.

Such a fund can be a useful component in a portfolio to soften the impact of a falling market, but much depends on the skill of the manager. It is not something you should try at home!

Where do the chickens come in?

Bulls and bears are part of standard financial terminology. Chickens and owls are not, but I thought I would throw them in to add a bit of color.

Chickens, I would say, are those who panic out of an investment when faced with the grunts of the bear. This is quite a natural reaction. Chickens can live quite comfortably with vegetarian bulls but would not fare well in the proximity of a bear.

In fact, a chicken could come out quite well if it flies out at the top of a bull market. But, in practice, it tends not to react until the market has fallen a long way, then it finally panics.

But it's too late; it has already fallen victim to the bear and is no longer around when the bull comes back onto the scene to save it.

Another group of chickens will not even venture into the fray. They remain with cash under the mattress or in a bank account year after year watching the purchasing power whittle away while others are making their fortunes.

But if they are of a nervous disposition this is probably their best strategy as they would probably come off worse among the bulls and bears.

And finally the owls ...

What does the wise old owl do? It sits quietly on a high branch watching the world go by until a suitable victim is in sight. It then swoops and grabs its prey.

The financial analogy is an investor who quietly and unemotionally watches the markets go up and down and then seizes the opportunity when he spots a bargain. I would place Warren Buffett, the world's most successful stock market investor, in this category.

So who will win?

History and logic tell us the bulls will be the long-term winners. The stock markets represent real assets and global wealth.

Bear markets will still have their day every few years. They can inflict a lot of pain but if we see how they fit into the big picture we can live with them and even profit from them.

While ""bulls"" and ""bears"" are terms describing the markets they can also relate to investors who can be described as ""bullish"" or ""bearish"".

What should we strive to be? Clearly, unless we are bullish we will never get anywhere, but there are times when we may need to be bearish.

There may even be times when it can pay to be a ""chicken"" but it is not easy to judge the timing. It can also pay to be a ""wise old owl""; just stay calm and alert.

You may spot a great opportunity!

Colin Bloodworth is a senior financial adviser with Financial Partners International.

A crisis mentality among investors

Professionals, even the most seasoned, have the same emotions as everyone else. Learning the ropes professionally does not eliminate human emotion, nor does it elimate urges to buy or sell emotionally. Faced with uncertainties, the tide of emotion surges. How can one resist the surging tide of emotion? Only if one has a framework of disciplines and knowledge within. Controlling emotions and replacing them with the elements of this framework are the secret.

Investment merit at a given PRICE but not at another

Investment Policies (Based on Benjamin Graham)

PRICE: is frequently an essential element, so that a stock (and even a bond) may have investment merit at one price level but not at another.

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Having selected the company to invest based on various parameters, the next consideration will be the price we are willing to pay for owning part of its business.

Price is always an important consideration in investing. At a certain price, the company can be acquired at a bargain, at a fair price or at a high price. Each scenario will impact on our investment returns.

We should ALWAYS buy a good quality company at a BARGAIN PRICE (margin of safety). This allows us to lock in our potential gains at the time of buying at a favourable reward/risk ratio. This maybe when the upside gain: downside loss is at least 3:1.

There maybe FEW exceptional occasions when we may be willing to pay a FAIR PRICE for a good quality company. This is often the case when a good quality company is fancied by many investors and is often quoted in normal time at a high price.

However, we should NEVER (NEVER, NEVER) buy a good quality company at HIGH PRICE, whatever its earnings and growth prospects maybe. To do so will not only diminishes our potential investment returns, but may even results in a loss of our capital due to the unfavourable reward/risk ratio.

Don't time the market, it is difficult. However, there will be time when the market is on sale and the prices of stocks are at a bargain and there will be time when the market is exuberant and the prices of stocks are high or very high.

The market will always be there and we should choose when to buy and when to sell. We should only buy a stock when the PRICE IS RIGHT FOR US and sell a stock when the PRICE IS RIGHT FOR US.


(What is market timing? Timing is a term that refers to investing by buying everything or selling everything on the basis of the (faulty) assumption that one can predict the market's next move. Attempts to time are common, but academicians and practitioners have concluded that success happens through luck only on occasions that are quickly reversed and very costly.)

Bargain Conundrum - another cognitive error

A stock has done tremendously well for a period of time. Investors tend to extrapolate linearly, assuming that a company which has done well in the last few years is expected to continue to do so.

Then came the correction. For many buyers, it was an opportunity to get in.

Here lies the bargain conundrum - another cognitive error that consistently lead us to make irrational decisions. The belief is that the price uptrend would resume. That this correction could be a reversal may not feature in the thinking or radar of most.

One risk in the investment world that is often overlooked is behavioural risk. Recognising such flaws which the field of behavioural finance has uncovered is the first step towards being more rational in one's investing.


Also read:
Evaluating Changing Fundamentals (Part 3 of 5)
· Don't automatically buy because a stock falls in price; re-evaluate as if new.
Ask ourselves:
Is the correction a true bargain?
Maybe the price uptrend would resume?
Or, maybe not, this being a reversal of the uptrend?
Obviously, having an idea of where the "fair value" of the stock is, helps.

Foreign exchange risks

The roles of the central bankers and the governments are to ensure reasonable GDP growth, to manage inflation and to keep unemployment at a low rate. At anytime, their policies will be driven by the targets they choose to focus on. These can be done through fiscal and monetary policy.

The NZ and Australia government have both chosen to stimulate the growth in their economies by reducing interest rates. Their action will translate into weaker NZ and Australian dollars. Similarly, the interest rate in UK has been reduced to stimulate its weakening economy. The property prices in UK has also fallen by 10% to 20%. Japan has grown its GDP the last 5 years, but this year is likewise facing headwind given the downturn in the world economy. The yen is expected to weaken this year.

The Euro is expected to gain in strength since the ECB has chosen to control inflation by increasing its interest rate. China yuan is expected to continue to strengthen this year. The US dollar decline is not expected to continue and probably has bottomed recently. It may even strengthen slightly going forward.

What of the Malaysian ringgit? Due to the recent large hikes in oil price and electricity tariffs, the Malaysian inflation is at a high at present. This is expected to attenuate going forward. GDP is expected to slow down from 5% - 6% to 4.5% - 5.5% for this year. At present, the central bank has not felt the need to temper with the interest rate given the inflation expectation is not a problem presently. Nevertheless, the cost for borrowing for the public has increased.

My guesses are the UK pound, Australian and NZ dollar and Japanese yen are expected to weaken. The Euro, Chinese yuan and probably the US dollar, are expected to strengthen.

How will these various currency movements affect the KLSE counters that have significant business overseas? How will these movements affect capital flows seeking higher investment returns in the world?

Growth Stocks: Searching for the Sprinters

Growth Stocks: Searching for the Sprinters

by Douglas Gerlach

Investors who focus on growth try to predict which companies will grow faster in the future -- faster than the rest of the stocks in the market, or faster than other stocks in the same industry. If you're successful in buying a company that does grow faster than other companies, then it's likely that the price of that company's stock will increase as well, and you can make a profit.
(My comment: Provided you did not pay too high a price to buy it.)

The stock of a company that grows its earnings and revenues faster than average is known as a growth stock. These companies usually pay few or no dividends, since they prefer to reinvest their profits in their business.

Peter Lynch primarily used a growth stock approach in managing the Magellan mutual fund. Individuals who invest in growth stocks often prefer it because their portfolio will be made up of established, well-managed companies that can be held onto for many years. Companies like Coca-Cola, IBM, and Microsoft have demonstrated great growth over the years, and are the cornerstones of many portfolios. Most investment clubs stick to growth stocks as well.

The bear isn't all bad. What exactly is a bear market?

http://www.douglasgerlach.com/clubs/askdoug/bearmarket.html

The Looming Bear

by Douglas Gerlach

Market headlines of recent days are using words that seem tailored to strike panic in the hearts of investors: fear, suffering, carnage.

Starting with the technology stocks of the Nasdaq, and now spreading even to the blue chip stalwarts of the Dow, this market sell-off is bringing us into territory that smells distinctively bear-ish. After enjoying years of great market news, it's unfamiliar territory for many of us.

But as Peter Lynch likes to point out, "When it's 15 below in Minnesota, they don't panic -- they just wait until spring." The market has gone up and down throughout its history, and it doesn't pay to panic when the market declines.

What exactly is a bear market? It's an extended period when stock prices generally decline. It can last for months, or even for years. A bull market is a period when stock prices generally increase. These terms originated back in the 1800s, but no one really knows how or why they came into use, nor why the bull came to symbolize periods of increasing prices while the bear represents downturns.

When you look at the market from a statistical perspective, you can see that it's very common for the market to experience some serious downturns. From 1928 through 1997, the S&P 500 declined in 20 of those 72 years. In eight of those years, it declined greater than 10 percent, and greater than 20 percent in four of the years. And that's not even counting the times that the market has declined greater than 10 percent or even 20 percent in the middle of a year and then recovered!

On the other hand, the S&P 500 has ended the year higher than it started out in 52 of 72 years. In 41 years, the S&P 500 ended up greater than 10 percent, and in 28 years, it closed the year with a 20 percent or greater gain.

But a bear market isn't all bad news. Sure, it can hurt when your portfolio takes a hit when stock prices fall. But you'd still better be prepared for the inevitable downturns in the stock market, and remember that the situation is only temporary, after all. In every instance when the overall market dropped, it returned and then grew to greater heights. In fact, the stock market has a 100 percent success rate when it comes to recovering from a bear market! The only thing to remember is that sometimes it takes longer for the bounce-back to occur.

If you follow a long-term approach to investing, then you know that patience is a virtue whenever you're investing in the stock market. It also helps to keep your vision focused on your long-term horizon whenever the market hits some turbulence. By using dollar cost averaging and by investing regularly, you can even make the bear market work for you by taking advantage of generally lower prices with additional purchases. Knowing the market's infallible past record, you can sleep easy -- even when other investors are panicking.

Who said it is impossible to make $$$$$ in bear market?

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Dear 陈全兴,

there r 2 choices for one to invest in bear mkt,

1) Buy high dividend yield blue chip stock esp those traded with PE < 10.

2)even if they r not high dividend payer, buy if blue chip selling to u @ around 7+-, it is still worth 4 consideration.

try to avoid property ,GLC n construction stocks, if u doubt , let see what happen to their shares price by end of this year or begining of next year ^V^

Oil n gas srctor also not a bad choice but u r advice to bottom fish them @ PE < 10 also for safe play.


http://www.samgang.blogspot.com/

http://samgang.blogspot.com/2008/07/v-who-said-it-is-impossible-to-make-in.html

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I enjoy visiting the above blog. There are very good advice given on investing by Sam of this blog. I copy and paste here one of his posting above. The advice given are excellent and definitely safe. One can be grateful for such advice given expertly, freely and genuinely.

Assessing Investment Risks using B-FLExCo

This is how I assess investment risks of the companies that I wish to invest in. I have shortened this to B-FLExCo.

This abbreviation stands for:

B = Business risk
F = Financial risk
L = Liquidity risk
Ex = Exchange risk
Co = Country risk (Also, known as political risk)

At the moment, there is significant political risk for those investing in the KLSE. Accordingly, many KLSE counters are trading at a discount reflecting this risk and other prevailing risks.

Goodbye, Bear Market?

http://www.kiplinger.com/columns/value/archive/2008/va0714.htm

"Believe it or not, history offers surprisingly good news about what the stock market will likely do from here. No, history doesn't always repeat itself, but, as the saying goes, it rhymes. So please don't cash in your stocks for CDs until you read the rest of this article. To ignore history would be folly."

"Do things seem worse than they were during other bear markets? If so, it's partly because of our tendency to forget the distant past and focus instead on the recent past. I submit that the events surrounding many past bear markets were at least as frightening as those of this one. I certainly remember the anxiety surrounding the 1987 crash, when the Dow Jones industrial average plunged 22.6% in one day—eclipsing the 1929 crash. I thought we might well enter a depression. Instead, stocks hit bottom less than two months later."

"Yet, soon after the onset of a bear market, the market generally has risen. One month after breaking the 20% threshold, the S&P had gained 3%, on average, during those nine bear markets. Two months later, it had risen 6%. on average. Three months later, it was up 5%, and six months later, the S&P had returned 7%. Twelve months after the initial decline, the market had surged 17%, on average."

How can the market advance so much so quickly when stocks tumble another 11% after hitting the 20% bear market threshold?

James Stack, president of InvesTech Research, says it's because bear markets tend to be "V"-shaped in their final stages. That is, share prices tend to decline dramatically and quickly as investors capitulate, then rebound just as quickly. "Once a bear market ends, the rally out of that bottom is very sharp and very, very profitable," Stack says.

Yes, we all know that averages and statistics can be misleading. After all, the returns above are for the average bear market. What's to say that this will turn out to be an average bear market, with all the bad news still out there?

What to do when the stock markets decline sharply?

http://www.wfic.org/article/page


What to do when the stock markets decline sharply?

By Claus W. Silfverberg, director, WFIC

According to one theory you should stay calm and do nothing. The stock market will eventually climb to new heights. And it is impossible for you to time your investments – the short term development of the stock market is unpredictable, most of the time the market is flat and stable, and positive and negative price developments occur so fast you are not able to react.

According to a second theory you should rebalance your portfolio and buy more stocks. Rebalancing is necessary because you have an investment strategy or an asset allocation, which you believe is just right for you. When the stock market decline the relative value of your stocks diminish and you need to buy more stocks to re-establish the right proportions.

According to a third theory – advanced by a.o. Warren Buffett - you should “be greedy when everybody else is fearful” – i.e. you should buy more stocks. When stock markets decline, investors tend to overreact, and stocks fall to prices well below their long term value.

According to a fourth theory you should have stop losses on all your shares and sell immediately when the price drops below the indicated level. Since this theory mainly applies to individual stocks and not stock markets in general, perhaps we may neglect it when considering declines on the stock market.

According to a fifths theory you should never buy stocks as long as they are falling in prices, but wait until the price fall has stopped. Then you should be an active investor.

According to a sixth theory you should sell your stocks when the short term moving average price falls below the long term moving average price, and only start buying again when the opposite occurs.


What do private investors actually do when the stock market decline?

Most of us stop trading. Most of us act according to the new trend of the stock market with a 6 months delay – both when the stock market collapse, and when a new bull market begins. Most of us overreact based on our short term experience – at one time we are too optimistic, and at another time we are too pessimistic. Some of us loose a terrible lot of money because we have committed a number of sins – we have too few stocks in our portfolio, have stocks in poor quality companies, have illiquid stocks, or have been investing based on borrowed money or money we need for daily consumption.

Conclusion

It is difficult to tell which of the theories is the right one, but looking at our normal behaviour it seems clear to me that we need to invest in a more rational manner – do our homework before choosing the companies in which we invest, base our investment on long term perspectives, base our investment on fundamentals such as p/e figures over a long period of time, base our investments on demographics and macroeconomics, learn about the stock market fundamentals, and last but not least base our investments on our individual investment profile and strategy, and not on whether the stock market goes up or down.

The case for Dividend Growth Investing

Stocks that pay dividends provide a nice inflation hedge since their revenues and net income would be affected by an increase in overall prices paid by consumers.

Dividends soften losses during bear markets, and they provide the only sources for investment gains in troublesome times.

In addition, dividend income takes away the need to sell large chunks of your portfolio in a declining market.

Retirement income could be solely derived from dividends and their growth would compensate the dividend investor for the erosion in the purchasing power of the dollar.

If a retiree holds a diversified portfolio of stocks which have the ability to grow their dividend payments over time, they would be well prepared for retirement.

They should be focusing on stocks with high yields and ability to grow dividends; stocks with average yields but with above average dividend growth and some domestic and foreign index funds for diversification.

http://dividendgrowth.blogspot.com/2008/03/case-for-dividend-investing-in.html

KLSE Counters on my radar screen.

Here is a list of counters in the KLSE I am tracking. I may or may not own these shares presently.

Consumer
DLady, Guinness, LionDiv, Nestle
Padini, PPB, QL, UMW

Industrial
APM, CBIP, Coastal, Esso
ICP, KNM, Kossan, Petgas
Shell, Tongher

Trading/Services
BCorp, Genting, HaiO, Integrax
KPJ, MUI, Maybulk, Parkson
Petdag, POS, Resorts, Tenaga
VADS

IPC
Puncak

Finance
KAF, HLB, Maybank, OSK
PBB, TA

Properties
Crescendo, OSKProp

Plantations
BStead

Closed-end fund
i-Cap

Games people play

Essentially, there are 3 types of games people can play. These are:

1. Positive sum games
2. Negative sum games
3. Zero sum games

In positive sum games, the odds of winning are high and there are many winners.

In negative sum games, the odds of losing are high and there are many losers.

In zero sum games, the odds of winning equal those of losing, the winners are at the expense of the losers.

It is important to choose the games one wishes to play. It is very important to know the types of games one chooses to play in.

To win, choose the one in the category of the positive sum game.

Avoid playing in those negative sum games. For those wishing to "win" (try their luck or gamble) in negative sum games, their best chance of coming out the "winner" is probably just to place ONE bet with the amount they can afford to risk and hope for a lucky win. To be engaged in such a negative sum game over many bets will surely mean ending the loser.

What about zero sum games? How to be the winner here? Often, the player with the most capital wins in the long run. This is because the player maybe struck with a string of bad luck and the player with the least capital may be out of capital earlier than the player with more capital.

To be a winner, choose the games one wishes to play in carefully. Investing is likewise not dissimilar. One need to have the investing knowledge before "playing this game" intelligently, lest one ends up not winning but losing.

My strategies for buying and selling (KISS version)

Strategies for buying and selling.

For buying (ABC):

A.  Assess Quality, Management and Valuation (QMV)

B.  Buy good quality stocks.

C.  Buy these stocks at a discount (Margin of Safety)

(If you select your stocks carefully, often one can hold them for long periods. The idea is to allow compounding over the long period to work in your favour.)


For selling (1,2,3,4):

1. If you need cash for emergency. (But then, hopefully, you will have separate money for such emergencies. The cash invested into the market should be separate.)

2. You will need to sell URGENTLY (QUICKLY) if there is something wrong with the fundamental of your stock (example: fraudulent accounting, etc). At other instances, you do have the time to SELL at leisure.

3. Your stock has gone up too high. By your assessment, at that price the upside return is less, but the downside risk is more, then you may wish to sell to REINVEST INTO ANOTHER STOCK WITH MORE FAVOURABLE UPSIDE REWARD/DOWNSIDE RISK RATIO.

4. On occasions, you have identified a very good BARGAIN, you may wish to sell some of your stocks to REINVEST into these stocks to capture a higher upside/downside reward risk ratio that these stocks offer.

Defensive Portfolio Management = 2.
This is to prevent harm to the portfolio.
Urgent attention needed.

Offensive Portfolio Management = 3 & 4.
This is to optimise returns of the portfolio.
Have the time to sell at leisure.


BB
"Investing should be fun and not a game."


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QMV
Quality = Points 1 to 6
Management = Point 7
Valuation = Point 8






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Additional Related Notes:

Why do you Sell and When?

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.


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.
http://myinvestingnotes.blogspot.com/2011/02/why-do-you-sell-and-when.html

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Related:

The Time to Sell: How Warren Determines It is Time To Sell

• The first is when you need money to make an investment in an even better company at a better price, which occasionally happens. 
• The second is when the company looks like it is going to lose it durable competitive advantage.  A questionable competitive advantage is not where you want to keep your money long-term. (An example:  Nokia's Cautionary Tale)
• The third is during bull markets when the stock market, in an insane buying frenzy, sends the prices of these fantastic businesses through the ceiling. 

When to Sell?  The QVM Approach to Selling Stocks

Detail version of To Sell or to Hold & Portfolio Management

To Sell or to Hold (Part 1 of 5)

http://forums.prospero.com/n/pfx/forum.aspx?tsn=1&nav=messages&webtag=ws-naic&tid=27826&redirCnt=1

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Introduction

Decisions on whether to hold or to sell are rarely easy, and often there are no "right" answers. Everyone makes mistakes. Those who are wise learn from their mistakes.

Both individuals and clubs face the question of whether to sell or to hold stocks numerous times during their years of investing. If stocks are carefully selected, sell decisions are apt to be less serious and less frequent.

Although NAIC investors adhere to a buy-and-hold philosophy, they should not buy stocks and forget them. Over time, the management,industry, political climate, or economy can change. Sometimes, an original SSG may have included overly optimistic judgment. In either case, the original SSG needs to be adjusted.
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1. Guidelines for when to sell

2. Guidelines for when to hold

3. Common selling mistakes

4. Common holding mistakes

5. Worksheet to aid in making decisions on whether to sell or to hold.

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When to Sell? (Part 2 of 5)

First, we'll deal with when to sell.

Arguably, the most important reason for selling is because you need cash for retirement, college education, or other life events. You will still need to choose which stock or stocks to sell.

1. You could sell a stock that will improve your portfolio's diversification. You may want to sell some of the shares of a stock whose value exceeds the percentage of your portfolio that you set for it. For example, if one stock out of your portfolio of 15 comprises20% of the value of your holdings, you may want to sell some of its shares.

2. You could maximize your potential return by selling those stocks with lowest potential total return. Be sure your SSGs and PERTs are updated. Sort your portfolio on projected total return.(Click on the thumbnail projtr.ppt below to open up an example. You will need PowerPoint or the PowerPoint viewer to view this attachment.) Remember some of those stocks with potentially lower returns may be your least risky stocks.

3. You could sell a stock that will improve the quality of your portfolio. For example, consider selling stocks with erratic sales and EPS growth as shown in Section 1 of the SSG.

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When to Hold? (Part 3 of 5)

Let's talk about when to hold a stock.

I won't dwell on this, as it mostly follows from the selling guidelines. If you don't sell, you've made the decision to hold. There are just a few points I want to emphasize.

1. Hold a stock when there is temporary bad news. That is, if the bad news concerns a problem that is short-term in nature, consider holding the stock or even adding to your shares. This is easy to say, but it is not always easy to determine if the problem is temporary or long-term. If you read all you can about the company, its competitors, the industry and the economy, you will be better able to determine if the problem is temporary or not. Again, if you keep notes on your companies, you will understand them and the industry much better. Review your notes to help you decide if the problem may be long-term or not.

2. If it is near the end of the quarter, consider waiting to see the earnings release, especially if it's a high quality company - however you define quality. Some companies provide indications of what the sales and earnings are likely to be before the end of the quarter. In those cases, changes are likely to be built into the stock price. Some companies do not do this, so you may not know about new products, changes in growth an so on until after the earnings press release after the quarter ends.

3. Hold a stock if the price is down, but the fundamentals are strong. In the long run, the price will follow the fundamentals. In the short term, it may not. This may be an opportunity to add to your position.

Do you have any comments or questions?

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Common Selling Mistakes (Part 4 of 5)

Let's talk about some common selling mistakes.

Although some mistakes in selling or holding stocks are due to lack of knowledge, most are due to emotion and/or irrational thinking. A vast collection of research shows that people often process complex information illogically. Thus, it is not unusual for people to make selling and holding mistakes. Some common selling mistakes follow.

1. Selling a stock just because the price goes down when the fundamentals remain solid. Some investors lose confidence in their judgments when a stock price goes down. They may adjust all SSG judgments downward due to the doom and gloom they feel from the downward price movements. During this last bear market, there were many comments on this Forum and on the I-Club-List indicating pessimism and fear. Think about how you feel when you check your stock prices and see lots of your stocks went down or one stock went down a lot or your stocks have gone down day after day after day. Do you feel happy? Worried? Nothing?

If the fundamentals remain sound, you may want to add to a holding, as buying at low valuations can bring a high return when investor fear and pessimism dissipates. NYSE stock prices fluctuate almost 50% in a given year on average, so don't panic if the price drops for no rational reason.

2. Selling a stock when there are short-term problems. Evaluate the long-term impact to prevent making sudden decisions that you may ultimately regret. Is this a company-specific problem? If it's due to the industry or economy, the problem is less likely to be long-term. Some company-specific problems may be short-term in nature too. Review your notes.

3. Selling winners too soon to "lock in gains." Investors sometimes become afraid that their winners will collapse if they hold them. They want certainty, so they sell out of fear. If you sell all your winners, you will be left with a portfolio of losers. Would you lay off your most productive employees when they exceed your expectations? Should your favorite baseball team trade its best player just because he has become such a big winner?

4. Selling a stock when its price has reached a predetermined price above or below the current price or your purchase price without regard to fundamentals. An executed stop-loss order will bring you less money than a sale at the current price. A limit order at a higher price, without regard to the fundamentals, may generate additional taxes and eliminate your chances of future gains. It doesn't matter where the price was when the stock was purchased. It matters where it is headed, and ultimately it will follow the fundamentals.

Do you have any experiences that you are willing to share?

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Common Holding Mistakes (Part 5 of 5)

Let's talk about some common holding mistakes

1. One mistake is to hold grossly overvalued stocks. Even the best run companies can become overvalued and be poor investments despite their good fundamentals. As soon as something diminishes investor enthusiasm for the stock, the price can plummet. Remember what happened with the computer hardware companies during late 1990s and early 2000? In the attached hardware.ppt, you can see how the prices of some well known hardware companies skyrocketed and then plunged when the Internet bubble burst.

We know we shouldn't hold grossly overvalued stocks, so why do we do it? A few reasons follow.

Investors often become attached to their stocks and see them through rose-colored glasses, particularly if they have owned them for many years and have large gains. Long-time employees who own shares of company stock are especially prone to attachment.

Some Investors avoid selling stock that is grossly overvalued to avoid paying taxes. By holding an overvalued stock, they assume more risk. Remember that you will have more after-tax funds if you sell when it is overvalued than if you sell after the price comes back to Earth.

Greed often blinds investors. They continue to hold stocks that are substantially overvalued, because they hope that the stocks will become even more overvalued. This is wishful thinking.

2. A second mistake is to hold stocks with deteriorating fundamentals. Sometimes you may buy a stock for sound reasons, such as growing fundamentals, but the company or industry subsequently changes. If the reasons you bought the stock no longer are in place, don't hold it. Ask yourself if you would buy the stock today under the current circumstances. If the answer is "no," holding it is likely a mistake. One example is the telecommunications industry. Can you think of other industries or specific companies where it changed?

Many investors become "married" to stocks and don't want to sell them even when the fundamentals deteriorate seriously, as they see their stocks through rose-colored glasses and wait for the company to turn around. This attachment is even more likely when it is the stock of one's employer, as it may seem disloyal to sell it. The latter situation is even more risky, as one could lose both employment and stock value if the company's condition worsens. You should have no sacred cows. It is prudent to cut your losses when things go wrong.

The difference between average and above average portfolio performance can hinge on what an investor does after making mistakes. All investors make mistakes, but most don't want to admit them. They focus on the amount of money they spent on the losers, and as long as they don't sell, they can cling to the hope of getting even. This strategy may cost money, as tax savings might be realized if the loser were sold to offset capital gains. The past cannot be changed; what matters is the future. You don't have to prove you were right, but you want to keep what you currently have. What is the best investment for the money? Do SSGs and SCGs on other stocks to see if another stock would provide a better return and less risk. Learn from your mistakes and move on.

Cognitive dissonance is the discomfort that is felt when someone encounters information that does not support a past decision. Investors have access to much information on the Internet, and there is data that will support almost any point of view. When investors encounter information that does not support a current holding, they tend to filter it out or discount it and focus on positive information. By doing so, they avoid cognitive dissonance. When I'm making notes on one of my companies, I find I have a tendency to filter out the negative news or risks. It is something I have to watch in myself.

3. When someone inherits a portfolio from a spouse or parent, misplaced loyalty can cause that person to hold investments that are not appropriate for his or her current circumstances. For example, the portfolio may be full of income investments when the inheritor needs growth stocks. The inheritor identifies the portfolio with the deceased and views changes to it as betrayal. It is important to realize that the loved on wanted you to make money, not to hold those investments forever.

4. Sometimes a stock can become a large percentage of one's portfolio. It may be overvalued or the company's fundamentals may have grown rapidly. Consider adding to other stocks in your portfolio. If you don't have money to add to other positions in your portfolio, consider trimming back the number of shares of the dominant stock, especially if it is the stock of your employer.

5. Some investors think that "buy and hold" means "buy and forget." They don't keep up with their companies and don't adjust their SSGs.

Have you encountered other holding mistakes? Do you have any comments or questions to share?

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Defensive and Offensive Portfolio Management (Ellis Traub)

http://biwiki.editme.com/portfoliodesignandphilosophy

Portfolio Management

Portfolio Management is the buying and selling of stocks primarily based upon their fundamentals and secondarily based upon their valuation to optimize your portfolio's return.

After you've purchased a stock

We'll assume you have purchased a selection of 12 stocks that are well diversified by size of sales, sector, & industry. This is the job of BetterInvesting's Stock Selection Guide & Stock Comparison Guide.

These forms aid you in finding a quality company at a reasonable price. Now how do you manage them?

Portfolio Management Terms

Two terms you will constantly run into are defense and offense. These terms are used by Ellis Traub in hisToolKit 5 manual and in his book, Take Stock. They are taken from his experiences playing football.

Defense is practiced when the other team has the football. Withexcellent defense you'll prevent the other team from ever scoring and the worst you'll do is end in a tied game 0 - 0. With poor defense you could lose 0 - 70. Defense is important. Very Important.

Offense is practiced when your team has the football. It earns youpoints. If you have a strong defense and a strong offense could win 70 - 0. Defense prevented them from scoring any points and offense scored you a lot of points.

PERT Report

The PERT Report is the primary BetterInvesting tool used to follow a portfolio. To learn more about the PERT Report, click here.

Defensive Portfolio Management

With a portfolio of twelve stocks your goal will be to monitor their quality by quarterly checking that their fundamentals of sales, pre-tax profit,and eps growth and pre-tax profit margin are meeting or exceeding your forecasts.

This is called defensive portfolio management. If you don't check on your stocks and one develops a serious problem you will be holding a stock whose price is not rising because sales or earnings are not rising. If you sold this stock and bought another whose sales and earnings are still rising you would see a price increases. By holdingthe troubled stock you lose the potential return from the healthly stock.

This damage from holding a fundamentally flawed stock is the most important problem to avoid.

Offensive Portfolio Management

Once you have checked that your stock's fundamentals are intact you can proceed to offensive portfolio management.

The other case you'll have to look out for is when the stock's price gets way ahead of what its sound fundamentals will support. It has become grossly overvalued. Another way of looking at this is that the price has climbed much further than one would expect and will either come back down or just stay there until the fundaments catch up with it.

You could replace this fundamentally sound stock with another of equal quality whose price is in line with its fundamentals or behind its fundamentals and capture the excess profit of the first stock. You'd be capturing some extra profit.

Replacing quality (fundamentally sound), grossly overvalued stock with stock of equal quality and fair value to capture excess profit is called offensive portfolio management.

It is less important than defensive portfolio management, but to obtain maximum return potential you'll need to practice both. You don't have to perform offensive management. You must do defensive management.

Monitor Diversification

You started your portfolio with guidelines for the number of stocks you'd like, the maximum percentage of the portfolio you'd like in one stock and a desire to not be concentrated in too few sectors or industries.. You need to check these values periodically