SINGAPORE, Aug 28 — A landmark legal action by the authorities against a prominent Singapore fund manager who handles more than US$1 billion (RM3.5 billion) of assets got under way in the High Court yesterday.
The Government of Singapore Investment Corporation (GIC) is among the manager's major clients.
Dr Tan Chong Koay, one of Singapore's pioneering boutique fund managers, is founder and chief executive of the Singapore unit, Pheim Asset Management (Asia), and Pheim Asset Management (Malaysia). The market-rigging lawsuit against Tan and the Malaysian unit has been brought by the Monetary Authority of Singapore (MAS).
It is being closely watched in the investment community, as Tan is well-known in fund management circles. Also, the case touches on the practice of “window-dressing” where big investors may try to ramp up or push down share prices — a key concern at the year-end when the value of a fund is determined.
MAS has accused Tan and Pheim Malaysia of market rigging and market manipulation and is asking for civil penalties such as monetary payments. Under the Securities and Futures Act, Section 197 (1) (b), a person should not create or do anything intended or likely to create a false or misleading appearance over the market or price of securities.
In Pheim Malaysia's case, MAS says it created a false market in the shares of China water player United Envirotech, a company which listed on the Singapore Exchange in April 2004. The case centres on the three days from Dec 29 to Dec 31 in 2004 when Tan and Pheim Malaysia allegedly instructed Tang Boon Siah, then a broker at UOB Kay Hian, to buy United Envirotech shares.
On Dec 29, Pheim Malaysia bought 65,000 shares at 38.4 cents. The next day, 210,000 shares were bought at 42.9 cents. On Dec 31, 85,000 shares were bought at 43.9 cents. Over the three days, the share price had jumped about 17 per cent.
MAS said: “This was not the conduct of a genuine buyer seeking to buy shares at the lowest possible price. They 'saturated the market for United Envirotech shares with 88 per cent of the purchases in the last three trading days of 2004.”
The trades occurred towards the end of each trading day, except for the trade on Dec 30, which allowed Pheim to “fix the closing prices at significantly higher prices than the previous day”.
MAS added that Tan and Pheim “are not naive individual investors. They are experienced professionals who knew full well... the effect that such targeted trading would have on the market”.
The regulator said that with the rise in the share price at the year-end, Pheim Singapore was able to exceed certain benchmarks for its fund.
Pheim Malaysia's case is it had already invested in the company when it was floated on the stock exchange earlier in the year. Its investment committee was keen to buy more United Envirotech shares, on the back of its success in investing in Hyflux.
There were three funds in question — but under Malaysian rules, each fund could not hold more than 10 per cent of foreign (non-Malaysian) stocks.
So it was only after these three funds had sold off some Singapore stocks on Dec 28, that the firm was able to buy into United Envirotech. Pheim Malaysia argues that it was a genuine investor, believing the shares were undervalued in 2004.
Tan says it was not he who told the broker to buy the shares, but another staff member.
This point was raised at the hearing yesterday, before Justice Lai Siu Chiu. MAS is arguing that there were phone calls from Tan to Tang at the time the trades were supposed to have been done. MAS' lawyer, Senior Counsel Cavinder Bull from Drew & Napier, called a StarHub representative to give evidence of this.
Tan is represented by Senior Counsel Michael Hwang, and Pheim by Foo Maw Shen of Rodyk & Davidson. Foo cross-examined a witness from SingTel who said numbers dialled from a landline such as the broker's could not be retrieved unless the subscriber had signed up for itemised billing.
Tan has not yet taken the stand while the broker, Tang, is expected to take the stand today.
This is only the second time that MAS has taken civil action in the courts against players in the financial industry, and the first under this section.
Earlier this year, for the first time, MAS took a civil suit, on insider trading against former WBL Corp executive Kevin Lew. That case is ongoing. — Straits Times
Friday 28 August 2009
Thursday 27 August 2009
Maybank sees much better FY10
Maybank sees much better FY10
Tags: An Binh Bank Bank Internasional Indonesia BII commercial banking Corporate banking Datuk Seri Abdul Wahid Omar FY10 Impairment charge LEAP30 Maybank MCB Bank Ltd NPLs Overseas acquisitions SME
Written by Ellina Badri
Wednesday, 26 August 2009 11:01
KUALA LUMPUR: MALAYAN BANKING BHD [] (Maybank) is looking forward to a better performance in the financial year ending June 30, 2010 (FY10), driven by its domestic commercial banking business and its international operations, especially in its 97.5%-owned Bank Internasional Indonesia (BII).
This follows a 76% year-on-year decline in net profit to RM691.88 million in FY09, mainly due to impairment charges stemming from its overseas acquisitions.
Revenue grew 8.92% to RM17.59 billion in FY09, while earnings per share fell to 12 sen from 53.32 sen. It declared a final dividend of eight sen per share less tax.
Maybank president and CEO Datuk Seri Abdul Wahid Omar said the group’s management was confident of a significantly improved performance in FY10, driven by the economic recovery and broad-based growth.
“FY09 was a challenging year for Maybank for three reasons. Firstly, we had to deal with the global financial crisis, which ultimately affected the global economy and to that extent, Malaysia has not been spared from an economic perspective.
“Secondly, we had to deal with various issues surrounding our three major acquisitions, in BII, MCB Bank Ltd and An Binh Bank.
Abdul Wahid (left) and CFO Khairussaleh Ramli at the press conference to announce Maybank’s financial results yesterday. Photo by Mohd Izwan Mohd Nazam
“Thirdly, we had to raise significant long-term capital, both in the form of debt and equity, totalling some RM15.1 billion, in a very challenging environment,” Maybank president and CEO Datuk Seri Abdul Wahid Omar told reporters here yesterday.
In 4QFY09, the bank posted a RM1.12 billion net loss, against a RM703.21 million net profit in 4QFY08. Revenue rose 8.24% to RM4.86 billion.
The bank had acquired BII, a 20% stake in Pakistan’s MCB Bank and 15% in Vietnam’s An Binh Bank last year. Wahid said Maybank was awaiting approval from Vietnam’s prime minister for it to raise its stake in An Binh Bank to 20%, which could be forthcoming in the next two weeks.
The group’s FY09 performance was hit by an impairment charge of RM1.62 billion on goodwill of the group from BII’s operations and an impairment loss of RM353 million in MCB.
However, Wahid said based on its purchase price allocation exercise undertaken in accordance with Financial Reporting Standard 3 (FRS3, for business combination), and FRS 138 (intangible assets guidelines), in relation to its BII and MCB acquisitions, Maybank did not expect to make any further impairments on the acquisitions.
On why the banking group’s core net profit for FY09 was lower than FY08’s RM2.93 billion, even after stripping out the impairment charges, Wahid said this was due to a RM445 million interest charge on its issuance of RM9.1 billion in capital securities and subordinated debt, higher loan loss provisions, slower capital market activities and lower income from its insurance arm.
Its loan loss provisions were 109.7% higher, at RM1.7 billion, due to higher provisions of RM401.4 million at Maybank, RM121.2 million at its subsidiaries, and from the consolidation of BII’s loan loss provisions for the first time in FY09, by RM366.2 million.
Despite the higher provisions, the group achieved higher loan loss coverage in FY09, which stood at 112.9% as at June 30, compared with 101.1% in FY08.
Also, notwithstanding its various setbacks, the banking group posted a 9% higher net interest income of RM5.92 billion in FY09, driven by higher loans growth and improved lending margins in BII. Its net interest margins, meanwhile, remained relatively stable at 2.72%.
Non-interest income grew to RM3.38 billion in FY09 from RM3.17 billion in FY08. Overhead costs, however, grew to RM5.56 billion from RM4.25 billion, which also included RM584 million overhead costs from BII.
Loans growth at its Malaysian operations rose 6.4%, while overseas loans grew 28.9%. Asset quality continued to improve, with its net non-performing loan (NPL) ratio declining to 1.64% as at June 30, from 1.92% in June 2008.
Wahid said while Maybank had braced for a deterioration in asset quality, it had also taken steps to ensure it did not occur or worsen. He added that while it remained cautious on any uptick in NPLs, it was expected to be manageable.
He also said it could see higher NPLs from small and medium-sized enterprises, but the ratio was not expected to go beyond 2%.
Its core capital ratio and risk-weighted capital ratio, after deducting dividend payable, stood at 10.81% and 14.81%, respectively.
Of its international portfolio, the Singapore operations accounted for 61.9% of total loans, followed by Indonesia with 19.6%.
Pre-tax profit at its Singapore arm grew 5.9% to S$247.7 million, driven by a 24.2% increase in fund-based income. Provisions there rose 42.7%, but the gross NPL ratio decreased to 1%.
MCB reported a pre-tax profit of RM92.4 million, as total income grew 34.5% while its gross NPL ratio stood at 7.6%.
BII has yet to announce its results for the period ended June 30, 2009, but Wahid said the Indonesian bank had made a small contribution to the group’s FY09 results.
On Maybank’s plans for BII, he said with its full management team and growth strategies now in place, it was expected to be profitable in the future.
Wahid said after the bank had turned around its motor financing business this year, it could focus on strengthening its consumer, SME and corporate banking segments.
Meanwhile, on the group’s LEAP30 transformation plan embarked upon last year, he said as at end-June, total financial benefits from the initiatives amounted to RM40 million in pre-tax profit contribution, in addition to RM143 million cost savings.
Wahid said Maybank would launch four more initiatives before year-end, following the 16 launched earlier.
The new measures were the upgrading of its commercial banking model, strengthening of its equity capital markets, brokerage and merger and acquisition capabilities, establishing governance and operating model for its international businesses, and capturing value from BII, he said.
He added that beyond its domestic operations, it would focus on driving performance at BII, with particular emphasis on loans growth in the fast-growing Indonesian economy. He noted that the banking industry there had traditionally grown at a faster rate than the gross domestic product.
http://www.theedgemalaysia.com/business-news/148087-maybank-sees-much-better-fy10.html
Tags: An Binh Bank Bank Internasional Indonesia BII commercial banking Corporate banking Datuk Seri Abdul Wahid Omar FY10 Impairment charge LEAP30 Maybank MCB Bank Ltd NPLs Overseas acquisitions SME
Written by Ellina Badri
Wednesday, 26 August 2009 11:01
KUALA LUMPUR: MALAYAN BANKING BHD [] (Maybank) is looking forward to a better performance in the financial year ending June 30, 2010 (FY10), driven by its domestic commercial banking business and its international operations, especially in its 97.5%-owned Bank Internasional Indonesia (BII).
This follows a 76% year-on-year decline in net profit to RM691.88 million in FY09, mainly due to impairment charges stemming from its overseas acquisitions.
Revenue grew 8.92% to RM17.59 billion in FY09, while earnings per share fell to 12 sen from 53.32 sen. It declared a final dividend of eight sen per share less tax.
Maybank president and CEO Datuk Seri Abdul Wahid Omar said the group’s management was confident of a significantly improved performance in FY10, driven by the economic recovery and broad-based growth.
“FY09 was a challenging year for Maybank for three reasons. Firstly, we had to deal with the global financial crisis, which ultimately affected the global economy and to that extent, Malaysia has not been spared from an economic perspective.
“Secondly, we had to deal with various issues surrounding our three major acquisitions, in BII, MCB Bank Ltd and An Binh Bank.
Abdul Wahid (left) and CFO Khairussaleh Ramli at the press conference to announce Maybank’s financial results yesterday. Photo by Mohd Izwan Mohd Nazam
“Thirdly, we had to raise significant long-term capital, both in the form of debt and equity, totalling some RM15.1 billion, in a very challenging environment,” Maybank president and CEO Datuk Seri Abdul Wahid Omar told reporters here yesterday.
In 4QFY09, the bank posted a RM1.12 billion net loss, against a RM703.21 million net profit in 4QFY08. Revenue rose 8.24% to RM4.86 billion.
The bank had acquired BII, a 20% stake in Pakistan’s MCB Bank and 15% in Vietnam’s An Binh Bank last year. Wahid said Maybank was awaiting approval from Vietnam’s prime minister for it to raise its stake in An Binh Bank to 20%, which could be forthcoming in the next two weeks.
The group’s FY09 performance was hit by an impairment charge of RM1.62 billion on goodwill of the group from BII’s operations and an impairment loss of RM353 million in MCB.
However, Wahid said based on its purchase price allocation exercise undertaken in accordance with Financial Reporting Standard 3 (FRS3, for business combination), and FRS 138 (intangible assets guidelines), in relation to its BII and MCB acquisitions, Maybank did not expect to make any further impairments on the acquisitions.
On why the banking group’s core net profit for FY09 was lower than FY08’s RM2.93 billion, even after stripping out the impairment charges, Wahid said this was due to a RM445 million interest charge on its issuance of RM9.1 billion in capital securities and subordinated debt, higher loan loss provisions, slower capital market activities and lower income from its insurance arm.
Its loan loss provisions were 109.7% higher, at RM1.7 billion, due to higher provisions of RM401.4 million at Maybank, RM121.2 million at its subsidiaries, and from the consolidation of BII’s loan loss provisions for the first time in FY09, by RM366.2 million.
Despite the higher provisions, the group achieved higher loan loss coverage in FY09, which stood at 112.9% as at June 30, compared with 101.1% in FY08.
Also, notwithstanding its various setbacks, the banking group posted a 9% higher net interest income of RM5.92 billion in FY09, driven by higher loans growth and improved lending margins in BII. Its net interest margins, meanwhile, remained relatively stable at 2.72%.
Non-interest income grew to RM3.38 billion in FY09 from RM3.17 billion in FY08. Overhead costs, however, grew to RM5.56 billion from RM4.25 billion, which also included RM584 million overhead costs from BII.
Loans growth at its Malaysian operations rose 6.4%, while overseas loans grew 28.9%. Asset quality continued to improve, with its net non-performing loan (NPL) ratio declining to 1.64% as at June 30, from 1.92% in June 2008.
Wahid said while Maybank had braced for a deterioration in asset quality, it had also taken steps to ensure it did not occur or worsen. He added that while it remained cautious on any uptick in NPLs, it was expected to be manageable.
He also said it could see higher NPLs from small and medium-sized enterprises, but the ratio was not expected to go beyond 2%.
Its core capital ratio and risk-weighted capital ratio, after deducting dividend payable, stood at 10.81% and 14.81%, respectively.
Of its international portfolio, the Singapore operations accounted for 61.9% of total loans, followed by Indonesia with 19.6%.
Pre-tax profit at its Singapore arm grew 5.9% to S$247.7 million, driven by a 24.2% increase in fund-based income. Provisions there rose 42.7%, but the gross NPL ratio decreased to 1%.
MCB reported a pre-tax profit of RM92.4 million, as total income grew 34.5% while its gross NPL ratio stood at 7.6%.
BII has yet to announce its results for the period ended June 30, 2009, but Wahid said the Indonesian bank had made a small contribution to the group’s FY09 results.
On Maybank’s plans for BII, he said with its full management team and growth strategies now in place, it was expected to be profitable in the future.
Wahid said after the bank had turned around its motor financing business this year, it could focus on strengthening its consumer, SME and corporate banking segments.
Meanwhile, on the group’s LEAP30 transformation plan embarked upon last year, he said as at end-June, total financial benefits from the initiatives amounted to RM40 million in pre-tax profit contribution, in addition to RM143 million cost savings.
Wahid said Maybank would launch four more initiatives before year-end, following the 16 launched earlier.
The new measures were the upgrading of its commercial banking model, strengthening of its equity capital markets, brokerage and merger and acquisition capabilities, establishing governance and operating model for its international businesses, and capturing value from BII, he said.
He added that beyond its domestic operations, it would focus on driving performance at BII, with particular emphasis on loans growth in the fast-growing Indonesian economy. He noted that the banking industry there had traditionally grown at a faster rate than the gross domestic product.
http://www.theedgemalaysia.com/business-news/148087-maybank-sees-much-better-fy10.html
Wednesday 26 August 2009
Malaysia Food and Drink Report Q4 2009
Malaysia Food and Drink Report Q4 2009
Malaysia Food and Drink Report Q4 2009 - new market report recently published
www.companiesandmarkets.com/Summary-Market-Report/malaysia-food-
..
Malaysia continues to feel the effects of the current global economic crisis and as such the report has revised down its 2009 GDP growth forecast from an expansion of 0.5% to a contraction of 1.9%. Amid this tough economic climate many companies are feeling the pressure from weakening private consumption and declining consumer confidence and it is therefore not surprising that this quarter has seen little significant merger and acquisition activity and only minimal expansion activity .
Despite the weak economic outlook, many of the country’s food and beverage manufacturers continue to invest in the country indicating that Malaysia is still seen as a key market. One such company is Nestlé Malaysia, which unveiled plans this quarter to dramatically increase capital expenditure to MYR320mn for 2009, to enable it to put in place a strategy aimed at protecting market share and sales throughout the economic downturn. KFC Holdings (M) Bhd (KFCH) and Berjaya Krispy Kreme Doughnuts Sdn Bhd also continue to invest in the country, the former announcing in Q309 that despite the downturn it would spend MYR32mn on opening new outlets this year, while the latter opened the first of 20 planned Krispy Kreme doughnut shops in Malaysia .
Elsewhere in the drinks industry, Malaysia’s second largest brewer Guinness Anchor Berhad (GAB) reported that for Q309 revenue had slipped 4.2% to MYR314.8mn and pre-tax profit had fallen 11.3% to MYR43.6mn. Despite these disappointing results, Managing Director Charles Ireland stated that he is confident that full year revenue and profit figures will exceed those reported for FY08. Fraser and Neave are also confident of satisfactory FY09 results following positive results for H109, revenue increased 1.3% to MYR1.83bn while operating profit rose 12.5% to MYR158.5mn. This quarter has also seen Carlsberg Malaysia announce that it hopes to take advantage of the weak domestic economy to search for favourable acquisition targets .
Moving to the mass grocery retail sector, both Aeon Malaysia and Tesco Malaysia announced plans to expand in 2009. Aeon Malaysia is to invest approximately MYR150mn on expansion activities while Tesco Malaysia has stated that it will open at least five more stores this year. While BMI is forecasting MGR sales growth to stand at 2.1% in 2009, in the longer term we are expecting sales through modern retail outlets to increase by 35% to MYR18.3bn in 2013 .
However, not all producers are riding out the current downturn with positivity; Yeo Hiap Seng (Malaysia) has announced a pre-tax loss of MYR8.91mn for Q109. This serves to highlight the pressures food and drink manufacturers are under in the current financial climate.
Malaysia Food and Drink Report Q4 2009 - new market report recently published
www.companiesandmarkets.com/Summary-Market-Report/malaysia-food-
..
Malaysia continues to feel the effects of the current global economic crisis and as such the report has revised down its 2009 GDP growth forecast from an expansion of 0.5% to a contraction of 1.9%. Amid this tough economic climate many companies are feeling the pressure from weakening private consumption and declining consumer confidence and it is therefore not surprising that this quarter has seen little significant merger and acquisition activity and only minimal expansion activity .
Despite the weak economic outlook, many of the country’s food and beverage manufacturers continue to invest in the country indicating that Malaysia is still seen as a key market. One such company is Nestlé Malaysia, which unveiled plans this quarter to dramatically increase capital expenditure to MYR320mn for 2009, to enable it to put in place a strategy aimed at protecting market share and sales throughout the economic downturn. KFC Holdings (M) Bhd (KFCH) and Berjaya Krispy Kreme Doughnuts Sdn Bhd also continue to invest in the country, the former announcing in Q309 that despite the downturn it would spend MYR32mn on opening new outlets this year, while the latter opened the first of 20 planned Krispy Kreme doughnut shops in Malaysia .
Elsewhere in the drinks industry, Malaysia’s second largest brewer Guinness Anchor Berhad (GAB) reported that for Q309 revenue had slipped 4.2% to MYR314.8mn and pre-tax profit had fallen 11.3% to MYR43.6mn. Despite these disappointing results, Managing Director Charles Ireland stated that he is confident that full year revenue and profit figures will exceed those reported for FY08. Fraser and Neave are also confident of satisfactory FY09 results following positive results for H109, revenue increased 1.3% to MYR1.83bn while operating profit rose 12.5% to MYR158.5mn. This quarter has also seen Carlsberg Malaysia announce that it hopes to take advantage of the weak domestic economy to search for favourable acquisition targets .
Moving to the mass grocery retail sector, both Aeon Malaysia and Tesco Malaysia announced plans to expand in 2009. Aeon Malaysia is to invest approximately MYR150mn on expansion activities while Tesco Malaysia has stated that it will open at least five more stores this year. While BMI is forecasting MGR sales growth to stand at 2.1% in 2009, in the longer term we are expecting sales through modern retail outlets to increase by 35% to MYR18.3bn in 2013 .
However, not all producers are riding out the current downturn with positivity; Yeo Hiap Seng (Malaysia) has announced a pre-tax loss of MYR8.91mn for Q109. This serves to highlight the pressures food and drink manufacturers are under in the current financial climate.
Monday 24 August 2009
The Three Golden Rules of Investing
The Three Golden Rules of Investing
First of all you need to know your capabilities.
First Golden Rule of Investing: Know who you are before you start investing in assets that have risk—don’t use the marketplace to find out.
Second Golden Rule of Investing: Know why you are buying a particular stock—don’t wait until its price goes up or down to think about it.
Third Golden Rule of Investing: Take your time—you are investing for the rest of your life.
John Price, PhD
Perhaps you have recently been walking in the forest. Or maybe you went on a picnic. Or even went swimming in a river; all wonderful, refreshing activities. In each case, however, you have to know what you are doing. Otherwise you could walk into a patch of poison ivy, get swept by the current, or even get seriously injured.
The same applies to the marketplace. If you treat it in a casual way without proper planning and preparation, you could get hurt. Financially, not physically. Of course, the marketplace is not something natural like a forest or an ocean. Quite the opposite—it is an extreme example of something structured by humans. Nevertheless, there is an important similarity. It is so huge and complex, with so many facets and nuances that, just like nature, no single individual can fully understand it.
When it comes to walking in a forest or swimming in a river, we have grown up with simple rules such as ‘stay on the path’ or ‘don’t swim beyond your depth.’ As we become more experienced, we may strike off into the trees or swim across a river. Even here, there are rules or principles, and it is these that I want to examine to see if they can help us in the marketplace.
First of all you need to know your capabilities. For example, how far can you walk—or swim? You don’t start on 20 mile hike if you have never walked more that a mile or two. So my first golden rule is:
First Golden Rule of Investing: Know who you are before you start investing in assets that have risk—don’t use the marketplace to find out.
Some questions you can ask yourself include: Do I like to work things out for myself or do I prefer to rely on other people? Do I like getting information by talking to people or by reading? What type of information do I prefer, technical or expository? What is my risk tolerance? How would I feel if stock I bought for $20 went to $10 overnight? What if it stayed there for a week? a month? a year?
Coming back to walking and swimming, you don’t want to find yourself halfway across a one-mile lake and then start asking yourself why are you there. Yet the same thing happens repeatedly with investors. They buy a particular stock but don’t have any clear reason for doing so. Their brother-in-law said it was a sure thing. Or they read something in the Wall Street Journal. Or the stock had a low p/e ratio, or a high return on equity. In the right context, each one of these might be a perfectly good reason for making a purchase. However, frequently it is the case that people buy a stock because of a vague combination of a whole lot of reasons such as these. Then, when the market conditions change, they have no framework for deciding what to do next because they are not sure why they made the purchase in the first place.
When you know why you bought Intel, for example, you will have a stronger basis for knowing what to do when its price goes up, or down, or even stays the same. For instance, if Intel starts to go down in price and you bought it as a momentum play, then you will probably want to sell as quickly as possible. But if you bought it as an undervalued stock, and if the fundamentals have not changed, then you might want to buy more.
This brings me to my second golden rule.
Second Golden Rule of Investing: Know why you are buying a particular stock—don’t wait until its price goes up or down to think about it.
In my investment workshops I teach people how to analyze companies and then make a two-minute presentation to the whole group on their suitability as a stock purchase. This helps them to focus on substantial issues regarding these companies and gives a sound basis for making a buy/pass decision. They are also encouraged to maintain a stock book in which they list the pros and cons of each stock they are interested in.
Warren Buffett said that when he looked back over his investments in his early partnerships, the larger investments always did better than his smaller ones. He attributed this to a "threshold of examination and criticism and knowledge that has to be overcome or reached in making a big decision that you can get sloppy about on small decisions."
Finally, we know that to enjoy nature we shouldn’t be in a rush. This is also very true with the marketplace. So my final golden rule is:
Third Golden Rule of Investing: Take your time—you are investing for the rest of your life.
Buffett said recently that he doesn’t get paid for activity, just for being right. "As to how long we’ll wait," he continued, "we’ll wait indefinitely." No one makes you buy a stock. If you know what type of investor you are, and why you would buy a particular stock, then you will be better able to determine a reasonable price to pay for it. Then you can quietly wait until Mr. Market offers it to you at your price. Wishing you happy and successful investing!
http://www.conscious-investor.com/articles/articles/article0009.asp
First of all you need to know your capabilities.
First Golden Rule of Investing: Know who you are before you start investing in assets that have risk—don’t use the marketplace to find out.
Second Golden Rule of Investing: Know why you are buying a particular stock—don’t wait until its price goes up or down to think about it.
Third Golden Rule of Investing: Take your time—you are investing for the rest of your life.
John Price, PhD
Perhaps you have recently been walking in the forest. Or maybe you went on a picnic. Or even went swimming in a river; all wonderful, refreshing activities. In each case, however, you have to know what you are doing. Otherwise you could walk into a patch of poison ivy, get swept by the current, or even get seriously injured.
The same applies to the marketplace. If you treat it in a casual way without proper planning and preparation, you could get hurt. Financially, not physically. Of course, the marketplace is not something natural like a forest or an ocean. Quite the opposite—it is an extreme example of something structured by humans. Nevertheless, there is an important similarity. It is so huge and complex, with so many facets and nuances that, just like nature, no single individual can fully understand it.
When it comes to walking in a forest or swimming in a river, we have grown up with simple rules such as ‘stay on the path’ or ‘don’t swim beyond your depth.’ As we become more experienced, we may strike off into the trees or swim across a river. Even here, there are rules or principles, and it is these that I want to examine to see if they can help us in the marketplace.
First of all you need to know your capabilities. For example, how far can you walk—or swim? You don’t start on 20 mile hike if you have never walked more that a mile or two. So my first golden rule is:
First Golden Rule of Investing: Know who you are before you start investing in assets that have risk—don’t use the marketplace to find out.
Some questions you can ask yourself include: Do I like to work things out for myself or do I prefer to rely on other people? Do I like getting information by talking to people or by reading? What type of information do I prefer, technical or expository? What is my risk tolerance? How would I feel if stock I bought for $20 went to $10 overnight? What if it stayed there for a week? a month? a year?
Coming back to walking and swimming, you don’t want to find yourself halfway across a one-mile lake and then start asking yourself why are you there. Yet the same thing happens repeatedly with investors. They buy a particular stock but don’t have any clear reason for doing so. Their brother-in-law said it was a sure thing. Or they read something in the Wall Street Journal. Or the stock had a low p/e ratio, or a high return on equity. In the right context, each one of these might be a perfectly good reason for making a purchase. However, frequently it is the case that people buy a stock because of a vague combination of a whole lot of reasons such as these. Then, when the market conditions change, they have no framework for deciding what to do next because they are not sure why they made the purchase in the first place.
When you know why you bought Intel, for example, you will have a stronger basis for knowing what to do when its price goes up, or down, or even stays the same. For instance, if Intel starts to go down in price and you bought it as a momentum play, then you will probably want to sell as quickly as possible. But if you bought it as an undervalued stock, and if the fundamentals have not changed, then you might want to buy more.
This brings me to my second golden rule.
Second Golden Rule of Investing: Know why you are buying a particular stock—don’t wait until its price goes up or down to think about it.
In my investment workshops I teach people how to analyze companies and then make a two-minute presentation to the whole group on their suitability as a stock purchase. This helps them to focus on substantial issues regarding these companies and gives a sound basis for making a buy/pass decision. They are also encouraged to maintain a stock book in which they list the pros and cons of each stock they are interested in.
Warren Buffett said that when he looked back over his investments in his early partnerships, the larger investments always did better than his smaller ones. He attributed this to a "threshold of examination and criticism and knowledge that has to be overcome or reached in making a big decision that you can get sloppy about on small decisions."
Finally, we know that to enjoy nature we shouldn’t be in a rush. This is also very true with the marketplace. So my final golden rule is:
Third Golden Rule of Investing: Take your time—you are investing for the rest of your life.
Buffett said recently that he doesn’t get paid for activity, just for being right. "As to how long we’ll wait," he continued, "we’ll wait indefinitely." No one makes you buy a stock. If you know what type of investor you are, and why you would buy a particular stock, then you will be better able to determine a reasonable price to pay for it. Then you can quietly wait until Mr. Market offers it to you at your price. Wishing you happy and successful investing!
http://www.conscious-investor.com/articles/articles/article0009.asp
Sunday 23 August 2009
To Invest or Not to Invest: That is NOT the Question
To Invest or Not to Invest: That is NOT the Question
John Price, Ph.D.
Sorry Mr. Shakespeare. There is just no question about this one. And by invest, I mean investing for the long-term in quality companies.
Let's start by looking at some alternatives. Suppose you think that stocks are too much of a gamble and you like plain old fashioned CDs or treasury bonds. Perhaps you remember the good times from 1979 to 1981 when the average 3-month CD rate was 13.4%. Just ask yourself, why did banks back then pay such a high rate? The simple answer is that they had to because inflation at the time was at a record high. For the years just mentioned the average inflation rate was 11.58%. And don't forget the tax you would have paid on your interest.
In fact, when you include income tax and factor in the inflation rates for each year, you find that the annual return on investing in 3-month CDs is negative, around -1%. CDs may be fine as a temporary parking place for cash held for emergencies. But they are a non-starter for building long-term wealth.
How about real estate? There is no question that if you bought at the right time in the right location, you made a lot of money. But the stakes are high when you buy investment property and you really have to know what you are doing.
No matter how you do the calculations, I think that the best return for the average investor is going to be in a portfolio of stocks in great companies with proven records. Of course, there are risks. To get a handle on these, suppose we try something very simple and just invest in an index fund based on the S&P 500. But perhaps I invest at the wrong time, you might be thinking. Perhaps I will always invest when the market is at its peak. Well, let's have a look at that.
Consider two friends, Mr. High and Mrs. Low. For the past eleven years they have invested $10,000 each year in an S&P 500 index fund. Mr. High had the misfortune of investing when the index was at the highest point for the year. In contrast, Mrs. Low was much more fortunate. Each time she invested the index was at its lowest annual point.
Their wealth will increase over the years. And, of course, the average annual return of Mrs. Low is going to exceed that of Mr. High. But by how much? Before reading on, have a guess at what is going to be the difference.
Let's make a start. The high point for 1987 was 336.75 and occurred on August 25. By the end of the year it had dipped to 247.10 which means that Mr. High's $10,000 would be reduced to $7,337.79. Not an auspicious start.
In contrast, Mrs. Low would have invested on December 4 when the index 223.90. This converted her investment to $11,036.18, a much better result. The difference is even more stark when you annualize their returns. The annualized return for Mr. High is a dismal -58.63% whereas that of Mrs. Low, because it is over such a short period, is a whopping 279.18%.
In the following year Mr. High would have invested his next $10,000 on October 21 when the index was at a high of 283.65. By the end of the year it had dropped to 277.70. Using the $7,337.79 from the end of the previous year, his cumulative wealth at the end of 1988 would be $18,036.71. This gives him an annualized return of -12.5%. Similar calculations for Mrs. Low give her an annualized return of 19.0%.
Notice how the annualized returns become closer together. For example, repeating this for 1989 we would find that their returns are now 7.1% and 24.0%.
In fact, it is always the case that the difference between investing regularly at the market lows or at the market highs becomes less and less. Jumping forward to the end of 1998, the annualized return for Mr. High would be 15.77% and that for Mrs. Low would be 18.17%. You can think of these as the two extremes and you can see that there is not a lot of difference between them. Most regular investment strategies would be somewhere in the middle. But even Mr. High would have a portfolio of over $300,000 at the end of 11 years growing from his outlay of $120,000. (Please e-mail me if you would like a spreadsheet with the calculations.)
We all know that the last ten years has been a boom time in the stock market. Can we be confident of another ten years of record highs? Of course we can't. But we can be confident that the stock market will outperform CD rates. Remember the -1% mentioned above.
For a truly rosy picture I recommend the book "The Roaring 2000s" by Harry Dent. Basing his argument on the fact that the baby boomers are just reaching their peak spending years, he predicts that the Dow will continue to soar and will eventually reach at least 21,500, and possibly 35,000, by 2008.
So, with all respects to Mr. Shakespeare, the question is not whether to invest or not, but just how soon you can set up and follow through on a regular investment plan.
http://www.conscious-investor.com/articles/articles/article0007.asp
John Price, Ph.D.
Sorry Mr. Shakespeare. There is just no question about this one. And by invest, I mean investing for the long-term in quality companies.
Let's start by looking at some alternatives. Suppose you think that stocks are too much of a gamble and you like plain old fashioned CDs or treasury bonds. Perhaps you remember the good times from 1979 to 1981 when the average 3-month CD rate was 13.4%. Just ask yourself, why did banks back then pay such a high rate? The simple answer is that they had to because inflation at the time was at a record high. For the years just mentioned the average inflation rate was 11.58%. And don't forget the tax you would have paid on your interest.
In fact, when you include income tax and factor in the inflation rates for each year, you find that the annual return on investing in 3-month CDs is negative, around -1%. CDs may be fine as a temporary parking place for cash held for emergencies. But they are a non-starter for building long-term wealth.
How about real estate? There is no question that if you bought at the right time in the right location, you made a lot of money. But the stakes are high when you buy investment property and you really have to know what you are doing.
No matter how you do the calculations, I think that the best return for the average investor is going to be in a portfolio of stocks in great companies with proven records. Of course, there are risks. To get a handle on these, suppose we try something very simple and just invest in an index fund based on the S&P 500. But perhaps I invest at the wrong time, you might be thinking. Perhaps I will always invest when the market is at its peak. Well, let's have a look at that.
Consider two friends, Mr. High and Mrs. Low. For the past eleven years they have invested $10,000 each year in an S&P 500 index fund. Mr. High had the misfortune of investing when the index was at the highest point for the year. In contrast, Mrs. Low was much more fortunate. Each time she invested the index was at its lowest annual point.
Their wealth will increase over the years. And, of course, the average annual return of Mrs. Low is going to exceed that of Mr. High. But by how much? Before reading on, have a guess at what is going to be the difference.
Let's make a start. The high point for 1987 was 336.75 and occurred on August 25. By the end of the year it had dipped to 247.10 which means that Mr. High's $10,000 would be reduced to $7,337.79. Not an auspicious start.
In contrast, Mrs. Low would have invested on December 4 when the index 223.90. This converted her investment to $11,036.18, a much better result. The difference is even more stark when you annualize their returns. The annualized return for Mr. High is a dismal -58.63% whereas that of Mrs. Low, because it is over such a short period, is a whopping 279.18%.
In the following year Mr. High would have invested his next $10,000 on October 21 when the index was at a high of 283.65. By the end of the year it had dropped to 277.70. Using the $7,337.79 from the end of the previous year, his cumulative wealth at the end of 1988 would be $18,036.71. This gives him an annualized return of -12.5%. Similar calculations for Mrs. Low give her an annualized return of 19.0%.
Notice how the annualized returns become closer together. For example, repeating this for 1989 we would find that their returns are now 7.1% and 24.0%.
In fact, it is always the case that the difference between investing regularly at the market lows or at the market highs becomes less and less. Jumping forward to the end of 1998, the annualized return for Mr. High would be 15.77% and that for Mrs. Low would be 18.17%. You can think of these as the two extremes and you can see that there is not a lot of difference between them. Most regular investment strategies would be somewhere in the middle. But even Mr. High would have a portfolio of over $300,000 at the end of 11 years growing from his outlay of $120,000. (Please e-mail me if you would like a spreadsheet with the calculations.)
We all know that the last ten years has been a boom time in the stock market. Can we be confident of another ten years of record highs? Of course we can't. But we can be confident that the stock market will outperform CD rates. Remember the -1% mentioned above.
For a truly rosy picture I recommend the book "The Roaring 2000s" by Harry Dent. Basing his argument on the fact that the baby boomers are just reaching their peak spending years, he predicts that the Dow will continue to soar and will eventually reach at least 21,500, and possibly 35,000, by 2008.
So, with all respects to Mr. Shakespeare, the question is not whether to invest or not, but just how soon you can set up and follow through on a regular investment plan.
http://www.conscious-investor.com/articles/articles/article0007.asp
Wealth Eroding Companies
Wealth Eroding Companies
The Conscious Investor® selection process starts by eliminating risky stocks. Stocks that have high levels of debt, poor cash flow and unpredictable earnings growth. For example, consider the earnings history below of the two companies, the Celadon Group (low stability stock ) and Bed bath and Beyond Inc (high stability stock ).
Example of a High Stability Stock
Example of a Low Stability Stock
One of the primary things that Conscious Investor does is to identify companies with growth and stability like Bed bath and Beyond on the right and avoid companies like Celadon on the left.
Many high profile companies – that you may be investing in now – are potentially wealth eroding! The Demo Videos will show you the high price you pay for being a part of the “crowd”.
The demonstration will show you how you can avoid “cash-poor” and wealth eroding companies, including those that are promoted heavily by brokers and the media.
You will also learn simple, common sense tests to determine the financial health of thousands USA, Canadian and Australian listed companies.
Most significantly, you will learn how proprietary intellectual property within Conscious Investor® allows our clients to forecast earnings growth (and therefore future stock prices). Conscious Investor allows you to forecast earnings with five times the accuracy of Analysts Forecasts ... [ more details ].
By avoiding wealth destroying companies, $10,000 invested in the USA Conscious Investor Model Portfolio in March 2003 would have would now have a value of $16,940.81 as of August 2005.. The same investment in the Australian portfolio would have a value of $15,991.
Something that is perhaps even more important. Just imagine how much enjoyable your life would be if you didn’t have to be continually worrying whether you have been landed with a stock that is gong to turn out to be a series of disasters.
How Do You Select Your Stocks?
Recent research by Brad Barber and Terrence Odean of the University of California shows that individual investors tend to purchase stocks on the days after there is some sort of attention-grabbing activity. Specifically, they tend to purchase stocks on the days after there was high trading volume, when there were extreme movements in the price whether up or down, and when the stocks were in the news.
Earlier studies by Barber and Odean showed that investors were systematically reluctant to sell their stocks for a loss. We hate to have to admit that we have made a mistake. So we hang on to losers even though from a tax perspective it is better to declare our losses as soon as possible. Even more significant is the fact that by hanging on to their losers, investors were hurting their overall performance.
In this recent study the authors set out to look at the other side. Why do investors choose to buy particular stocks? This is a formidable problem for investors. In the USA there are over 10,000 stocks to choose from. In Australia, over 1,500.
They looked at the trading accounts of over 700,000 individual investors and 43 professional money managers. The results show that there is a difference between methods used by individual investors and professional investors. It seems that professional investors are less likely to invest in attention-grabbing stocks. Possibly this is because they have more time and resources, including computer programs such as Conscious Investor, for monitoring a larger range of companies.
In contrast, individual investors with limited resources are more likely to purchase stocks that capture their attention in the ways mentioned above such as stocks that are in the news.
Of course, there is nothing wrong with this approach if their choices turn out to be profitable. Alas, on average this does not turn out to be the case. Consider momentum investors who believe that if a stock rises in price, it is likely to keep rising. The researchers found that more people bought a stock when there was an abnormally high return on the previous day. Yet this resulted in underperformance over the next month against the stocks that were sold and against the overall market.
A similar result held for contrarian investors who believe that if there is an abnormal dip in price, then there will be a profitable rebound. Once again the outcome was underperformance over the following month.
You can see the details in the following chart for the four attention-grabbing categories: high volume, abnormally high return, abnormally low return and news releases.
BETTING ON THE WRONG HORSE
Underperformance Over the Following Year
Share Category: High Volume / High Return / Low Return / News
Underperformance: -4.27% / -6.10% / -7.77% / -2.82%
Source: Brad Barber and Terrance Odean. We assume the strategy is rolled over each month.
When these results are looked at in the context of research by Daniel Kahneman, the 2002 Nobel Prize winner in economic sciences, we shouldn’t be surprised. Kahneman showed that we make evaluations of an extended experience based on the most extreme component of the experience and by the most recent component. Everything else is given less importance. He refers to it as the peak/end rule.
An extremely painful surgical procedure will be reported as less severe if a less painful period is added at the end. The painful period can even be extended by the medical practitioner so long as the end is less painful.
In the case of the stock market, suppose we are thinking of making a purchase. The peak/end rule would bias us towards those stocks that have drawn our attention most strongly or about which we have the most recent news. And if these happen to be the same event such as recent high volume, then the relevant stock will be even more dominant in our mind as a stock to buy.
Not everyone believes that investors can be so easily influenced or that share prices are so rubbery. One of these is Myron Scholes, the Nobel Prize-winning economist, a supporter of the school that teaches that the share price always describes the true value of the company.
When he expressed this opinion to Bill George, the former CEO of the billion dollar company Medtronic, George replied, “Myron, I sit in the CEO’s chair, and I can tell you how easy it is to raise our stock price in the short term… We can go out and hype the stock.” The story goes that Scholes flung his pencil down on the table.
The point is that whatever the short-term effect, Barber and Odean’s research shows that any resulting price rises are not likely to stay for long. All in all, investors would be well to take heed of the saying known to the old prospectors—all that glitters is not gold.
http://www.conscious-investor.com/whatis/eroding.asp
The Conscious Investor® selection process starts by eliminating risky stocks. Stocks that have high levels of debt, poor cash flow and unpredictable earnings growth. For example, consider the earnings history below of the two companies, the Celadon Group (low stability stock ) and Bed bath and Beyond Inc (high stability stock ).
Example of a High Stability Stock
Example of a Low Stability Stock
One of the primary things that Conscious Investor does is to identify companies with growth and stability like Bed bath and Beyond on the right and avoid companies like Celadon on the left.
Many high profile companies – that you may be investing in now – are potentially wealth eroding! The Demo Videos will show you the high price you pay for being a part of the “crowd”.
The demonstration will show you how you can avoid “cash-poor” and wealth eroding companies, including those that are promoted heavily by brokers and the media.
You will also learn simple, common sense tests to determine the financial health of thousands USA, Canadian and Australian listed companies.
Most significantly, you will learn how proprietary intellectual property within Conscious Investor® allows our clients to forecast earnings growth (and therefore future stock prices). Conscious Investor allows you to forecast earnings with five times the accuracy of Analysts Forecasts ... [ more details ].
By avoiding wealth destroying companies, $10,000 invested in the USA Conscious Investor Model Portfolio in March 2003 would have would now have a value of $16,940.81 as of August 2005.. The same investment in the Australian portfolio would have a value of $15,991.
Something that is perhaps even more important. Just imagine how much enjoyable your life would be if you didn’t have to be continually worrying whether you have been landed with a stock that is gong to turn out to be a series of disasters.
How Do You Select Your Stocks?
“Neon stocks not the best buys”
[Australian Financial Review, 3/10/2003. Author: John Price, Executive Chairman, Conscious Investing Pty Ltd]
"How do Mr and Mrs Average Investor choose their stocks? Careful analysis of reports from stockbrokers? No time. Interviewing members of the board and senior management of the company? It's unlikely their calls would be returned.
How about looking at stocks with extreme price changes? Now you're getting closer.
If you add the "glitter" stocks that are in the news or have abnormally high trading volume, you'll have the bases well covered." [read the entire article]
[Australian Financial Review, 3/10/2003. Author: John Price, Executive Chairman, Conscious Investing Pty Ltd]
"How do Mr and Mrs Average Investor choose their stocks? Careful analysis of reports from stockbrokers? No time. Interviewing members of the board and senior management of the company? It's unlikely their calls would be returned.
How about looking at stocks with extreme price changes? Now you're getting closer.
If you add the "glitter" stocks that are in the news or have abnormally high trading volume, you'll have the bases well covered." [read the entire article]
Recent research by Brad Barber and Terrence Odean of the University of California shows that individual investors tend to purchase stocks on the days after there is some sort of attention-grabbing activity. Specifically, they tend to purchase stocks on the days after there was high trading volume, when there were extreme movements in the price whether up or down, and when the stocks were in the news.
Earlier studies by Barber and Odean showed that investors were systematically reluctant to sell their stocks for a loss. We hate to have to admit that we have made a mistake. So we hang on to losers even though from a tax perspective it is better to declare our losses as soon as possible. Even more significant is the fact that by hanging on to their losers, investors were hurting their overall performance.
In this recent study the authors set out to look at the other side. Why do investors choose to buy particular stocks? This is a formidable problem for investors. In the USA there are over 10,000 stocks to choose from. In Australia, over 1,500.
They looked at the trading accounts of over 700,000 individual investors and 43 professional money managers. The results show that there is a difference between methods used by individual investors and professional investors. It seems that professional investors are less likely to invest in attention-grabbing stocks. Possibly this is because they have more time and resources, including computer programs such as Conscious Investor, for monitoring a larger range of companies.
In contrast, individual investors with limited resources are more likely to purchase stocks that capture their attention in the ways mentioned above such as stocks that are in the news.
Of course, there is nothing wrong with this approach if their choices turn out to be profitable. Alas, on average this does not turn out to be the case. Consider momentum investors who believe that if a stock rises in price, it is likely to keep rising. The researchers found that more people bought a stock when there was an abnormally high return on the previous day. Yet this resulted in underperformance over the next month against the stocks that were sold and against the overall market.
A similar result held for contrarian investors who believe that if there is an abnormal dip in price, then there will be a profitable rebound. Once again the outcome was underperformance over the following month.
You can see the details in the following chart for the four attention-grabbing categories: high volume, abnormally high return, abnormally low return and news releases.
BETTING ON THE WRONG HORSE
Underperformance Over the Following Year
Share Category: High Volume / High Return / Low Return / News
Underperformance: -4.27% / -6.10% / -7.77% / -2.82%
Source: Brad Barber and Terrance Odean. We assume the strategy is rolled over each month.
When these results are looked at in the context of research by Daniel Kahneman, the 2002 Nobel Prize winner in economic sciences, we shouldn’t be surprised. Kahneman showed that we make evaluations of an extended experience based on the most extreme component of the experience and by the most recent component. Everything else is given less importance. He refers to it as the peak/end rule.
An extremely painful surgical procedure will be reported as less severe if a less painful period is added at the end. The painful period can even be extended by the medical practitioner so long as the end is less painful.
In the case of the stock market, suppose we are thinking of making a purchase. The peak/end rule would bias us towards those stocks that have drawn our attention most strongly or about which we have the most recent news. And if these happen to be the same event such as recent high volume, then the relevant stock will be even more dominant in our mind as a stock to buy.
Not everyone believes that investors can be so easily influenced or that share prices are so rubbery. One of these is Myron Scholes, the Nobel Prize-winning economist, a supporter of the school that teaches that the share price always describes the true value of the company.
When he expressed this opinion to Bill George, the former CEO of the billion dollar company Medtronic, George replied, “Myron, I sit in the CEO’s chair, and I can tell you how easy it is to raise our stock price in the short term… We can go out and hype the stock.” The story goes that Scholes flung his pencil down on the table.
The point is that whatever the short-term effect, Barber and Odean’s research shows that any resulting price rises are not likely to stay for long. All in all, investors would be well to take heed of the saying known to the old prospectors—all that glitters is not gold.
http://www.conscious-investor.com/whatis/eroding.asp
The Hidden Desire of Investors
The Hidden Desire of Investors
John Price, PhD
What is the most important question for a stockmarket investor?
Whether the market is undervalued or overvalued? No!
Whether interest rates will go up or down? No!
Whether a particular company is undervalued or overvalued? No!
Whether you should buy ABC or XYZ? No!
Whether Joe Bloggs, the famous analyst, says it is a great buy? No!
Tempting as it is to look for answers to these, we will soon see that they are misleading.
Yet, there are whole office buildings full of people pumping out answers to these questions. from their side they are not trying to mislead you. They are just trying to supply answers to these questions because people keep asking them and are willing to pay large amounts of money for the answers.
Even if they could be answered, the answers will not help you reach your financial goals. Why? Because they are the wrong questions.
Focusing on these questions will give you the illusion that you are a serious investor. Long hours reading all the articles and books, perhaps even poring over charts and financial reports, will only keep you locked in the system of struggle and mediocre success.
For others, the questions will give you an illusion of confidence and comfort because you are acting on the advice the latest Wall Street hotshot.
But illusions hold you in bondage. As Morpheus in the film The Matrix explains, "Like everyone else, you were born into bondage. Born into a prison that you cannot taste or smell or touch. A prison ... for your mind."
Chasing answers to these questions will keep you in this prison. At best you may from time to time do better than the S&P500 or some other index. At worst you will see your money slipping away with poor returns and excessive fees.
Consider the case of trying to determine whether a company is undervalued or overvalued. It may turn out to be undervalued using some academic model. And there are hundreds of books describing such models. But if it stays undervalued for the next 10 years it is not going to be much of an investment.
Even the whole notion of what is value is flawed. Suppose you go into a jewelry store and decide to buy an emerald ring for $2,000. The jeweler assures you that it is really worth a lot more and even arranges to get an insurance certificate for $4,000. Great! You are now congratulating yourself for buying something that is valued at 100% more than you paid for it.
What if you split up with the person you were going to give the ring to. No worries, you are thinking. "I'll just sell it back to the store." But when you go back in you are told that they will only pay $1,000 to buy it back. What you thought you were getting for 50% of its true value turns out to be overvalued by 100%.
All the other questions asked above can be dealt with in a similar manner. For example, Warren Buffett said that he has no idea what the market is going to do and whether it is undervalued or overvalued, whatever that may mean. What is more, he is not interested in knowing.
The same applies to interest rates. Buffett once said, "If the Federal Reserve Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn't change one thing I do."
There is only one question. Underneath it all, there is only one question. What is my profit rate or percentage return going to be?
The core activity of an investor is to estimate with confidence the percentage return over a specified holding period when buying stock in a company. And you want to be able to do this based on reliable numbers and information.
When you can do this with a range of companies you have a rational basis to decide when to buy stock in a particular company, when to hold, and when to sell. You can decide between companies. You can even decide between investing in a particular company or in bonds.
You are in control. The market is now working for you instead of against you. Because you know the expected return on a range of quality companies, you can wait until Mr. Market offers to sell you stock in one of these companies that will give you the return that you want.
You can do this and more in a few minutes with the Conscious Investor Investment System.
http://www.conscious-investor.com/articles/articles/article0005.asp
John Price, PhD
What is the most important question for a stockmarket investor?
Whether the market is undervalued or overvalued? No!
Whether interest rates will go up or down? No!
Whether a particular company is undervalued or overvalued? No!
Whether you should buy ABC or XYZ? No!
Whether Joe Bloggs, the famous analyst, says it is a great buy? No!
Tempting as it is to look for answers to these, we will soon see that they are misleading.
Yet, there are whole office buildings full of people pumping out answers to these questions. from their side they are not trying to mislead you. They are just trying to supply answers to these questions because people keep asking them and are willing to pay large amounts of money for the answers.
Even if they could be answered, the answers will not help you reach your financial goals. Why? Because they are the wrong questions.
Focusing on these questions will give you the illusion that you are a serious investor. Long hours reading all the articles and books, perhaps even poring over charts and financial reports, will only keep you locked in the system of struggle and mediocre success.
For others, the questions will give you an illusion of confidence and comfort because you are acting on the advice the latest Wall Street hotshot.
But illusions hold you in bondage. As Morpheus in the film The Matrix explains, "Like everyone else, you were born into bondage. Born into a prison that you cannot taste or smell or touch. A prison ... for your mind."
Chasing answers to these questions will keep you in this prison. At best you may from time to time do better than the S&P500 or some other index. At worst you will see your money slipping away with poor returns and excessive fees.
Consider the case of trying to determine whether a company is undervalued or overvalued. It may turn out to be undervalued using some academic model. And there are hundreds of books describing such models. But if it stays undervalued for the next 10 years it is not going to be much of an investment.
Even the whole notion of what is value is flawed. Suppose you go into a jewelry store and decide to buy an emerald ring for $2,000. The jeweler assures you that it is really worth a lot more and even arranges to get an insurance certificate for $4,000. Great! You are now congratulating yourself for buying something that is valued at 100% more than you paid for it.
What if you split up with the person you were going to give the ring to. No worries, you are thinking. "I'll just sell it back to the store." But when you go back in you are told that they will only pay $1,000 to buy it back. What you thought you were getting for 50% of its true value turns out to be overvalued by 100%.
All the other questions asked above can be dealt with in a similar manner. For example, Warren Buffett said that he has no idea what the market is going to do and whether it is undervalued or overvalued, whatever that may mean. What is more, he is not interested in knowing.
The same applies to interest rates. Buffett once said, "If the Federal Reserve Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn't change one thing I do."
There is only one question. Underneath it all, there is only one question. What is my profit rate or percentage return going to be?
The core activity of an investor is to estimate with confidence the percentage return over a specified holding period when buying stock in a company. And you want to be able to do this based on reliable numbers and information.
When you can do this with a range of companies you have a rational basis to decide when to buy stock in a particular company, when to hold, and when to sell. You can decide between companies. You can even decide between investing in a particular company or in bonds.
You are in control. The market is now working for you instead of against you. Because you know the expected return on a range of quality companies, you can wait until Mr. Market offers to sell you stock in one of these companies that will give you the return that you want.
You can do this and more in a few minutes with the Conscious Investor Investment System.
http://www.conscious-investor.com/articles/articles/article0005.asp
Identify the Right Company
How Conscious Investor Helps You Identify the Right Company
-- and What Price to Pay for It.
Conscious Investor® is a sophisticated, yet user-friendly, analysis tool that has been designed to allow all investors to follow a systematic, business-like approach to buying and selling stocks.
Until now, selecting outstanding companies and calculating what price to pay for them has been excessively challenging and time consuming, if not downright impossible.
Conscious Investor® completely changes the face of the selection process, and gives you an edge that has never before been available to ordinary investors. You will quickly gain immunity from all the conflicting opinions expressed daily by the talking heads, the gurus, the newsletters, and even your neighbors.
1. The first step is to scan individual sectors, or even the whole market, to find the small minority of stocks that meet our stringent “Buffett-style” criteria. This scanning combines crucial company information with proprietary tools to estimate future profitability of an investment in any of the companies.
These scanners alone will save you literally hours of time researching potentially wealth-eroding companies.
2. The second step is to perform more analyses on any of the companies that have been passed through the initial filters.
3. The third step is calculating the right price to pay. This is where the power of Conscious Investor really comes to the fore. It is not a question of whether a stock is undervalued or overvalued according to some theoretical model. Rather, what Conscious Investor does is calculate precisely what return you can expect under your own margin of safety.
http://www.conscious-investor.com/whatis/identify.asp
The next step is to use Conscious Investor to do further analysis on the companies that have lasted to this point. This is followed by the third step to determine if now is the time to buy stock in the remaining companies or to sell them if they are already in your portfolio.
If the current price is still too high to make a purchase (remember Warren Buffett says that you can pay too much for even the best of companies), then Conscious Investor will help you calculate a target price . This is the maximum price that you can pay to get your desired return under your margin of safety.
Similarly, if you are thinking of selling the stock, but the price is still too low, Conscious Investor will help you calculate a target price for selling.
-- and What Price to Pay for It.
Conscious Investor® is a sophisticated, yet user-friendly, analysis tool that has been designed to allow all investors to follow a systematic, business-like approach to buying and selling stocks.
Until now, selecting outstanding companies and calculating what price to pay for them has been excessively challenging and time consuming, if not downright impossible.
Conscious Investor® completely changes the face of the selection process, and gives you an edge that has never before been available to ordinary investors. You will quickly gain immunity from all the conflicting opinions expressed daily by the talking heads, the gurus, the newsletters, and even your neighbors.
1. The first step is to scan individual sectors, or even the whole market, to find the small minority of stocks that meet our stringent “Buffett-style” criteria. This scanning combines crucial company information with proprietary tools to estimate future profitability of an investment in any of the companies.
These scanners alone will save you literally hours of time researching potentially wealth-eroding companies.
2. The second step is to perform more analyses on any of the companies that have been passed through the initial filters.
3. The third step is calculating the right price to pay. This is where the power of Conscious Investor really comes to the fore. It is not a question of whether a stock is undervalued or overvalued according to some theoretical model. Rather, what Conscious Investor does is calculate precisely what return you can expect under your own margin of safety.
http://www.conscious-investor.com/whatis/identify.asp
The next step is to use Conscious Investor to do further analysis on the companies that have lasted to this point. This is followed by the third step to determine if now is the time to buy stock in the remaining companies or to sell them if they are already in your portfolio.
If the current price is still too high to make a purchase (remember Warren Buffett says that you can pay too much for even the best of companies), then Conscious Investor will help you calculate a target price . This is the maximum price that you can pay to get your desired return under your margin of safety.
Similarly, if you are thinking of selling the stock, but the price is still too low, Conscious Investor will help you calculate a target price for selling.
Earnings Forecasts Made Easy
Earnings Forecasts Made Easy
John Price, PhD
This article describes research on a new test that is included in the Conscious Investor Investment System. The result is that we can provide earnings forecasts on selected stocks that are five times more accurate than the average of analysts' forecasts.
In the long run, the value of a stock is the discounted value of the cash that can be taken out of the company during its remaining life. The usual analysis requires two inputs.
John Price, PhD
This article describes research on a new test that is included in the Conscious Investor Investment System. The result is that we can provide earnings forecasts on selected stocks that are five times more accurate than the average of analysts' forecasts.
In the long run, the value of a stock is the discounted value of the cash that can be taken out of the company during its remaining life. The usual analysis requires two inputs.
- Firstly, a forecast of how much cash the company is going to generate year by year. This is generally written as a percentage growth rate starting with the current cash.
- Secondly, a rate at which this cash should be discounted.
There are two extra ingredients that are often pushed to the background.
- The first is what do we mean by the cash that can be taken out of the company. The simple answer is the earnings. A better answer is one of the variations of free cash flow. I’ll talk about this in a later article. To keep things straightforward, here I will just use earnings.
- The second extra ingredient is confidence. How confident are we with the earnings forecasts? I have seen investors' eyes glaze over as they started imagining the yacht they were going to buy. They had found a stock and forecast its earnings to grow at 30% per annum. The market had missed it and now our starry-eyed investors were ready to make a killing. Alas, even though this was the forecast, what are the odds of it being accurate?
First, lets consider how well the professional do. In 1997 Lawrence Brown published a study in the Financial Analysts Journal looking at 130,000 forecasts by analysts from 1985 to 1996. He found that the average absolute error was a whopping 91.6 percent.
The difficulty is that analysts are starting behind the eight ball. They are assigned a group of companies and told to forecast their earnings. Unfortunately the earnings of companies such as Chiquita Brands and the Venator Group have more ups and downs and twists and turns than The Beast roller coaster in Cincinnati.
But we do not have this problem. No one tells us which companies to analyze. We have 10,000 companies to choose from so why not turn the problem around and focus on those companies about which we can have confidence?
One way to do this is to eyeball the historical earnings of companies and pick out those companies with earnings that grew smoothly. Next, extrapolate the data for these companies to forecast future earnings. This works to some extent, but I wanted to automate the selection/forecasting process.
This is where STAEGR™ enters, a new test I developed for my investment software Conscious Investor. It measures the stability of earnings growth from year to year and expresses it as a percentage. The maximum figure of 100% represents earnings that go up, or down, by the same percentage each year. The calculations are based on fitting an exponential curve to the historical data with more emphasis on the stability of the growth of recent earnings. Special adjustments are made for negative earnings, for extreme outliers, and for earnings near zero.
Using Value Line data, I considered all the companies with eleven years of earnings data from 1988 to 1998 inclusive. Next I divided the companies into ten groups ranging from those with the highest STAEGR over the ten years from 1988 to 1997 to those with the lowest STAEGR over this period. Each group contained 115 companies.
The next step was to calculate the earnings growth over the ten-year period using another Conscious Investor function. Earnings in 1998 were forecast using 1997 data and this historical growth figure. Finally the forecasted earnings were compared with the actual earnings in 1998.
The result of most interest to us was that the forecasted earnings of the high STAEGR group were extremely accurate. For the technically minded, the forecasted earnings explained 98 percent of the variation of the actual earnings. This can be seen in the accompanying chart.
The points represent the earnings figures, forecast and actual, of the companies in the group. Most of the points lie on or near a straight line which means that actual earnings were very close to the forecasts using historical earnings. The STAEGR of this group of 115 companies was 93% and up.
Another way of describing the results is that the average absolute error for this group of was 16 percent compared to the analyst error of 91.6 percent for all stocks. The difference is even more significant than it appears since the forecasts for the STAEGR method were for a full year whereas those of the analysts were only for the next quarter.
The results for the second group of stocks was similar. Their STAEGR ranged from 90% to 93%. This means that when we focus on stocks with the highest levels of STAEGR, say 90% and up, then the past growth or earnings is a statistically reliable predictor of earnings for the following year.
The accompanying chart shows the data for group of stocks with the lowest STAEGR.
In contrast, to the previous chart, clearly the dispersion of the data points is much higher. Notice that for some of the points the forecast is negative while the actual earnings are positive and for other points the opposite holds, positive forecasts resulting in negative outcomes.
The way these points are scattered is typical of the groups of stocks with lower STAEGR. In each case, the accuracy of the predictions using historical data was lower in two ways. Firstly the data points were more dispersed. Secondly the line of best fit had slopes further away from 1 and in many cases it was negative.
The study shows that you can have more confidence that earnings will continue to grow as in the past for stocks with a high level of STAEGR.
Here are some of the companies with the highest levels of STAEGR.
Company Ticker STAEGR
William Wrigley Jr. WWY 99.80%
Trustco Bank Corp TRST 97.20%
Bed Bath & Beyond Inc. BBBY 98.90%
Westamerica Bancorporation WABC 98.90%
Harley-Davidson, Inc. HDI 98.60%
Matthew's International MATW 98.50%
Johnson & Johnson JNJ 98.50%
C.H. Robinson Worldwide, Inc. CHRW 98.20%
Quality Systems, Incorporated QSII 97.50%
Old Second Bancorp, Inc. OSBC 97.30%
FactSet Research Systems, Inc. FDS 97.20%
Companies with the lowest levels of STAEGR were Chiquita Brands CQB (1.0%) and the Venator Group Z (0.8%).
Of course, just because we have confidence in our forecasts of future earnings of a company does not mean that we should rush out and buy it. But it does provide a solid basis for any buy/sell/hold analysis. Sorting stocks with the high levels of STAEGR for earnings as well as sales is another of the unique features of Conscious investor.
http://www.conscious-investor.com/articles/articles/article0008.asp
Is finding undervalued stocks still a mystery for you?
Is finding undervalued stocks still a mystery for you?
Do you know the story of the person looking under a street lamp for a coin that he lost? A passerby offered to help and asked where he lost it. The answer he received was that it was further up the street but there was no light there to search properly!
It is much the same in the stock market. People look for value amongst the arcane models and methods put out by academics and copied by the investment professionals. But they are looking in the wrong place.
They are searching for value in terms of trying to answer questions such as whether or not a particular stock is 30 percent undervalued or 20 percent overvalued. Then they wonder why their performance is mediocre at best. Remember that around 70-80 percent of fund managers, the main people who use these methods, actually under perform the market.
The problem is that they are confusing various static definitions of value with value in terms of performance. No wonder finding undervalued stocks is a mystery for most people.
The aim of successful investing boils down to one thing—being confident that you will get a healthy return. In other words value for an investor needs to be tied to future performance and not whether it appears to be a bargain at the moment.
A key quote from Warren Buffett explains how he approaches this.“Unless we see a very high probability of at least 10% pre-tax returns," he wrote, "we will sit on the sidelines.” You might be thinking, “Wait a minute, Buffett gets a much higher return than this.” You would be right in thinking this.
The point is that this is really his worst case scenario. It is like locking in a minimum of 10 percent and leaving open the possibility of much higher returns which in Buffett’s case is an average of over 20 percent per year.
In other words, a true undervalued stock is first of all a quality company and secondly it is selling at a price so that under a margin of safety you can be confident of receiving a strong return.
This is precisely what Conscious Investor® does.
Do you know the story of the person looking under a street lamp for a coin that he lost? A passerby offered to help and asked where he lost it. The answer he received was that it was further up the street but there was no light there to search properly!
It is much the same in the stock market. People look for value amongst the arcane models and methods put out by academics and copied by the investment professionals. But they are looking in the wrong place.
They are searching for value in terms of trying to answer questions such as whether or not a particular stock is 30 percent undervalued or 20 percent overvalued. Then they wonder why their performance is mediocre at best. Remember that around 70-80 percent of fund managers, the main people who use these methods, actually under perform the market.
The problem is that they are confusing various static definitions of value with value in terms of performance. No wonder finding undervalued stocks is a mystery for most people.
The aim of successful investing boils down to one thing—being confident that you will get a healthy return. In other words value for an investor needs to be tied to future performance and not whether it appears to be a bargain at the moment.
A key quote from Warren Buffett explains how he approaches this.“Unless we see a very high probability of at least 10% pre-tax returns," he wrote, "we will sit on the sidelines.” You might be thinking, “Wait a minute, Buffett gets a much higher return than this.” You would be right in thinking this.
The point is that this is really his worst case scenario. It is like locking in a minimum of 10 percent and leaving open the possibility of much higher returns which in Buffett’s case is an average of over 20 percent per year.
In other words, a true undervalued stock is first of all a quality company and secondly it is selling at a price so that under a margin of safety you can be confident of receiving a strong return.
This is precisely what Conscious Investor® does.
- It starts by identifying great companies in terms such as management performance, strong and consistent growth and minimum debt.
- Once you have decided on a particular company, the second step is to calculate the expected return over your investment period under your margin of safety. For example, you can calculate your performance over the next five years if the growth in earnings dropped by 50 percent from its past rate.
In this way Conscious Investor helps you hone in on companies that give you true value as an investor.
http://www.conscious-investor.com/whatis/findingvalue.asp
Maladies of get-evenitis and consolidatus profitus.
Get-Evenitis and Other Investor Maladies
By John Price, Ph.D.
What happens when you buy a stock and it drops by 30 percent? Do you sell or do you hang on hoping that it will come back to its original price? If you usually hang on, then you may be suffering from get-evenitis, a highly contagious disease particularly among males.
If you buy XYZ for $20 and it drops to $12, you now own a $12 stock. It does not matter how it arrived at this price. The question now becomes, "If I had $12, would I buy a unit of XYZ or would I buy something else?" If the answer is to buy XYZ, then hang on to it. Otherwise sell it. Unfortunately our ego will goad us into all sorts of rationalizations why we should not sell at a loss.
We want to be able to say, "It's only a paper loss. Don't worry. It will come back." Worse than having our teeth pulled is being forced to utter "I made a mistake." Even "There was a downturn in the market which caused XYZ to go south" is hard for most of us to say. Just as in real life, sometimes we have to face our mistakes and accept a loss before we can move on.
In 1995 Nicholas Leeson became famous for causing the collapse of Barings Bank, his employer. Over the previous years he had some serious losses. Instead of admitting them, in his own words, he "gambled on the stock market to reverse his mistakes and save the bank." But things just got worse and he ended up losing $1.4 billion.
It is unlikely that any of us are going to catch such an acute case of get-evenitis. More likely it will be a low-grade infection that eats away at our investing profits.
Get-evenitis has an associated disease called consolidatus profitus. Where you see one, you usually see the other. Sufferers of consolidatus profitus are often heard intoning "You can't lose money by taking a profit."
You may not lose money for that particular stock, but in the end what makes the difference is what we do with our profits. What if we put the money from the sale into a stock that is a major underperformer? We may be able to say that we made a profit on a particular stock. What we are not saying is that our portfolio went down because of the way we spent the profits.
If ABC goes from $20 to $30, then you now own a $30 stock. In the same way that you examined the loser above, think what you would do with $30. If you would buy ABC for $30, then keep the stock. If not, then sell it.
Of course, in real life things are a bit more complicated since we have to take into account transaction costs and taxes. But I think the general idea is clear-evaluate your stocks on what return you expect to get from them in the future, not on what they have done in the past.
Just how wide-spread are these diseases follows from a large-scale study carried out by Terrance Odean of the University of California in Davis. Reporting in the Journal of Finance, 1998, he found that people tended to trade out of winners into stocks that performed less well. Overall he found that people would have been better to sell their losers and keep their winners. Instead, they did the opposite, namely keep their losers and sell their winners.
To get a rough idea of the size of the losses, imagine an investor that has two stocks to sell, one a past winner and the other a past loser. Using data from Odean's study, the average return on the past winner over the next year was 2.4 percent above the market average compared to a 1 percent loss on the past loser.
This means that holding on to your winner would put you 2.4 percent ahead of the market during the next year. In contrast, holding on to the loser would put you 1 percent behind the market. But this is just what the average investor did. On average, investors choose to sell their winners more often than their losers.
The difference between the two strategies is even more marked when taxes are taken into account. When you claim a loss you are getting a tax rebate and so you want this as early as possible. In contrast, with a profit you are paying tax so you want to delay this as long as possible. But, as we just learned, the average investor tends to take profits early and losses late ending up on the wrong side of the taxman.
Actually, some investors are aware of these tax consequences. The above findings are actually for the months of January to November. In December, there was a slight tendency in the opposite direction with losers being sold more often than winners.
There are two primary explanations as to why investors sell winners more often than losers. The first explanation is what was described above, the aversion to having to admit that you made a loss is greater than the joy of being able to announce a success.
The second explanation is that investors generally believe in mean reversion for stock prices. This is the concept that over the longer term, stocks that go down will move back up to their original price whereas stocks that go up will come back down to their original price. Alas, if only the stock market was so simple. The results of Odean's study indicate that the opposite is more likely to happen, stocks that have gone up will go up even more, and stocks that have gone down will go down even more.
Of course, none of the above would come as a surprise to people familiar with the world of trading where the maxim "cut your losses short and let your profits run" is a basic tenet. In his famous book How to Make Money in Stocks, William O'Neil wrote, "If you want to make money in the stock market, you need a specific defensive plan for cutting your losses quickly and you need to develop the decisiveness and discipline to make these tough, hard-headed decisions without wavering."
The moral is to take a hard look at the stocks in your portfolio using objective criteria such as contained in Conscious Investor. Make your buy/hold/sell decisions on a careful appraisal of the profit you expect from them in the future and not on emotional attachment or pride. If you do this you will have inoculated yourself against the maladies of get-evenitis and consolidatus profitus.
http://www.conscious-investor.com/articles/articles/article0020.asp
By John Price, Ph.D.
What happens when you buy a stock and it drops by 30 percent? Do you sell or do you hang on hoping that it will come back to its original price? If you usually hang on, then you may be suffering from get-evenitis, a highly contagious disease particularly among males.
If you buy XYZ for $20 and it drops to $12, you now own a $12 stock. It does not matter how it arrived at this price. The question now becomes, "If I had $12, would I buy a unit of XYZ or would I buy something else?" If the answer is to buy XYZ, then hang on to it. Otherwise sell it. Unfortunately our ego will goad us into all sorts of rationalizations why we should not sell at a loss.
We want to be able to say, "It's only a paper loss. Don't worry. It will come back." Worse than having our teeth pulled is being forced to utter "I made a mistake." Even "There was a downturn in the market which caused XYZ to go south" is hard for most of us to say. Just as in real life, sometimes we have to face our mistakes and accept a loss before we can move on.
In 1995 Nicholas Leeson became famous for causing the collapse of Barings Bank, his employer. Over the previous years he had some serious losses. Instead of admitting them, in his own words, he "gambled on the stock market to reverse his mistakes and save the bank." But things just got worse and he ended up losing $1.4 billion.
It is unlikely that any of us are going to catch such an acute case of get-evenitis. More likely it will be a low-grade infection that eats away at our investing profits.
Get-evenitis has an associated disease called consolidatus profitus. Where you see one, you usually see the other. Sufferers of consolidatus profitus are often heard intoning "You can't lose money by taking a profit."
You may not lose money for that particular stock, but in the end what makes the difference is what we do with our profits. What if we put the money from the sale into a stock that is a major underperformer? We may be able to say that we made a profit on a particular stock. What we are not saying is that our portfolio went down because of the way we spent the profits.
If ABC goes from $20 to $30, then you now own a $30 stock. In the same way that you examined the loser above, think what you would do with $30. If you would buy ABC for $30, then keep the stock. If not, then sell it.
Of course, in real life things are a bit more complicated since we have to take into account transaction costs and taxes. But I think the general idea is clear-evaluate your stocks on what return you expect to get from them in the future, not on what they have done in the past.
Just how wide-spread are these diseases follows from a large-scale study carried out by Terrance Odean of the University of California in Davis. Reporting in the Journal of Finance, 1998, he found that people tended to trade out of winners into stocks that performed less well. Overall he found that people would have been better to sell their losers and keep their winners. Instead, they did the opposite, namely keep their losers and sell their winners.
To get a rough idea of the size of the losses, imagine an investor that has two stocks to sell, one a past winner and the other a past loser. Using data from Odean's study, the average return on the past winner over the next year was 2.4 percent above the market average compared to a 1 percent loss on the past loser.
This means that holding on to your winner would put you 2.4 percent ahead of the market during the next year. In contrast, holding on to the loser would put you 1 percent behind the market. But this is just what the average investor did. On average, investors choose to sell their winners more often than their losers.
The difference between the two strategies is even more marked when taxes are taken into account. When you claim a loss you are getting a tax rebate and so you want this as early as possible. In contrast, with a profit you are paying tax so you want to delay this as long as possible. But, as we just learned, the average investor tends to take profits early and losses late ending up on the wrong side of the taxman.
Actually, some investors are aware of these tax consequences. The above findings are actually for the months of January to November. In December, there was a slight tendency in the opposite direction with losers being sold more often than winners.
There are two primary explanations as to why investors sell winners more often than losers. The first explanation is what was described above, the aversion to having to admit that you made a loss is greater than the joy of being able to announce a success.
The second explanation is that investors generally believe in mean reversion for stock prices. This is the concept that over the longer term, stocks that go down will move back up to their original price whereas stocks that go up will come back down to their original price. Alas, if only the stock market was so simple. The results of Odean's study indicate that the opposite is more likely to happen, stocks that have gone up will go up even more, and stocks that have gone down will go down even more.
Of course, none of the above would come as a surprise to people familiar with the world of trading where the maxim "cut your losses short and let your profits run" is a basic tenet. In his famous book How to Make Money in Stocks, William O'Neil wrote, "If you want to make money in the stock market, you need a specific defensive plan for cutting your losses quickly and you need to develop the decisiveness and discipline to make these tough, hard-headed decisions without wavering."
The moral is to take a hard look at the stocks in your portfolio using objective criteria such as contained in Conscious Investor. Make your buy/hold/sell decisions on a careful appraisal of the profit you expect from them in the future and not on emotional attachment or pride. If you do this you will have inoculated yourself against the maladies of get-evenitis and consolidatus profitus.
http://www.conscious-investor.com/articles/articles/article0020.asp
Friday 21 August 2009
What’s your sell discipline?
What’s your sell discipline?
Jim Yih B.Comm, PRP, CSA, EPC, RDB
Saturday, September 15, 2007
With any investment, there are two key decisions that have to be made. The first is when to buy and the second is when to sell.
In the investment world, a lot of time is spent on which investments to buy. You can find hot tips everywhere you look. For most investors, very little time is spent understanding when to sell and yet it is equally important as the decision to buy. This week, I met Jack who bought a penny stock a year ago and the stock has more than tripled. When I asked him when he was planning to sell the stock, he had no plans to sell since the outlook for the company still looked great.
Buy your winners and sell your losers
The problem with not having a sell strategy is that selling becomes a reaction to emotion. Investing is an emotional game to begin with. We love investments that make money and we tend to buy more or hold on as investments go up. On the other hand when investments drop, we tend to panic and sell.
Take a look at your portfolio today. Rank your investments from best to worst. Chances are, your natural instinct is to keep your winners and get rid of your losers. It's human nature to react in this fashion but the real strategy that works is buy low, sell high.
When I think of the best money managers, stock brokers or the best financial advisors, typically they have a good understanding of both the buy and the sell side of investing. Here are some thoughts on when it might be appropriate to sell an investment.
1.You got it wrong. We all make mistakes from time to time. Sometimes investors are lead to hang onto an investment because the industry promotes the merits of buy and hold. The problem is the industry has both good investments and bad investments. If you buy a bad investment and hold a bad investment, you will always have a bad investment. Sometimes it's best to cut your losses when you make that bad investment.
2.Something Fundamental has changed. Whether you invested in a stock or mutual fund, remember that everything changes. Sometimes changes are for the better but naturally it can change for the worse too. It is important to monitor your investments in case there is a fundamental change for the worse.
3.Your personal circumstances have changed. One thing the investment industry is very concerned about is whether investments are 'suitable for the investor'. Inevitably, your personal financial circumstances will change form time to time, which may lead you to be more conservative or more aggressive. Make sure your portfolio is adjusted accordingly.
4.Re balancing. Rebalancing is a strategy that forces you to sell your winners and buy more of your losers. In other words buy lower and sell higher. I highly recommend that you rebalance a portfolio from time to time for this very reason.
5.Profit taking. If you go back to the example of Jack who has tripled his investment. Probably the most prudent strategy for Jack is to take profits and maybe sell a third of his investment. This way he will take out his original investment and only be speculating with money he never had.
6.Set sell targets from the start. Many professional money managers set sell targets at the time they make the buy. This ensures there is some logic and discipline put into place to help keep emotions from running the show.
When it comes to investing, make sure you devote some time to understanding the sell side of investing. If you are using a professional maybe one good question to ask is "What is your sell strategy?"
Jim Yih is the author of the Best Selling Mutual Fundamentals and also Seven Strategies to Guarantee Your Investments. He is a Financial Expert who writes a regular weekly syndicated column and lectures as a professional speaker on wealth, retirement and personal finance. For more information you can visit his any of his other websites http://www.jimyih.com/, http://www.retirehappy.ca/ or http://www.thinklots.com/. Inquiries can be emailed to feedback@WealthWebGurus.com
Jim Yih B.Comm, PRP, CSA, EPC, RDB
Saturday, September 15, 2007
With any investment, there are two key decisions that have to be made. The first is when to buy and the second is when to sell.
In the investment world, a lot of time is spent on which investments to buy. You can find hot tips everywhere you look. For most investors, very little time is spent understanding when to sell and yet it is equally important as the decision to buy. This week, I met Jack who bought a penny stock a year ago and the stock has more than tripled. When I asked him when he was planning to sell the stock, he had no plans to sell since the outlook for the company still looked great.
Buy your winners and sell your losers
The problem with not having a sell strategy is that selling becomes a reaction to emotion. Investing is an emotional game to begin with. We love investments that make money and we tend to buy more or hold on as investments go up. On the other hand when investments drop, we tend to panic and sell.
Take a look at your portfolio today. Rank your investments from best to worst. Chances are, your natural instinct is to keep your winners and get rid of your losers. It's human nature to react in this fashion but the real strategy that works is buy low, sell high.
When I think of the best money managers, stock brokers or the best financial advisors, typically they have a good understanding of both the buy and the sell side of investing. Here are some thoughts on when it might be appropriate to sell an investment.
1.You got it wrong. We all make mistakes from time to time. Sometimes investors are lead to hang onto an investment because the industry promotes the merits of buy and hold. The problem is the industry has both good investments and bad investments. If you buy a bad investment and hold a bad investment, you will always have a bad investment. Sometimes it's best to cut your losses when you make that bad investment.
2.Something Fundamental has changed. Whether you invested in a stock or mutual fund, remember that everything changes. Sometimes changes are for the better but naturally it can change for the worse too. It is important to monitor your investments in case there is a fundamental change for the worse.
3.Your personal circumstances have changed. One thing the investment industry is very concerned about is whether investments are 'suitable for the investor'. Inevitably, your personal financial circumstances will change form time to time, which may lead you to be more conservative or more aggressive. Make sure your portfolio is adjusted accordingly.
4.Re balancing. Rebalancing is a strategy that forces you to sell your winners and buy more of your losers. In other words buy lower and sell higher. I highly recommend that you rebalance a portfolio from time to time for this very reason.
5.Profit taking. If you go back to the example of Jack who has tripled his investment. Probably the most prudent strategy for Jack is to take profits and maybe sell a third of his investment. This way he will take out his original investment and only be speculating with money he never had.
6.Set sell targets from the start. Many professional money managers set sell targets at the time they make the buy. This ensures there is some logic and discipline put into place to help keep emotions from running the show.
When it comes to investing, make sure you devote some time to understanding the sell side of investing. If you are using a professional maybe one good question to ask is "What is your sell strategy?"
Jim Yih is the author of the Best Selling Mutual Fundamentals and also Seven Strategies to Guarantee Your Investments. He is a Financial Expert who writes a regular weekly syndicated column and lectures as a professional speaker on wealth, retirement and personal finance. For more information you can visit his any of his other websites http://www.jimyih.com/, http://www.retirehappy.ca/ or http://www.thinklots.com/. Inquiries can be emailed to feedback@WealthWebGurus.com
5 Investing Adages That Are Still Relevant Today
5 Investing Adages That Are Still Relevant Today
Written By Soo L.
Being able to rely on long standing investing adages can help you keep a level head when investing. Human nature hasn't changed much since the birth of investing, which makes many adages relevant for years and years. If you're new or old to investing, here are a handful of adages that can help you stay on top of your game.
1. Bulls And Bears Get Rich, But (Greedy)Pigs Get Slaughtered
This is a classic investing adage with an important message. If someone is overly greedy, he/she will end up getting slaughtered. Greed can be a big problem if you let it control you. When greed makes your decisions, you can be hasty and uncareful in what you do, which can cost you big when making investments. If you don't do your homework and due diligence on your next investment and make an impulsive buy, you could easily get slaughtered.
The adage states that bulls and bears get rich, meaning those who don't succumb to greed get rich. This isn't true in all cases, but the message is still valid. If you stay disciplined and careful, it doesn't matter which side of the fence you're playing (either a bull or a bear), you can still make a handsome profit. To help put this adage to work in your investing life, remember to keep your your emotions and greed in check.
2. Be Fearful When Others Are Greedy, And Greedy When Others Are Fearful
When others are fearful, there is less demand, and when there is less demand, and prices are lower. This adage teaches that it is important to take advantage of these types of situations because, like greed and other emotions, fear can make people act irrationally. If you follow the crowd and are greedy when others are greedy and fearful when others are fearful, you'll just be following the trends and playing catch up with the crowd. This type of investing strategy is hardly effective because usually all of the profits are taken before everyone else learns about it.
The adage teaches to take advantage of opportunities in markets where fear has an unrealistic effect on the price of things. An example of this was on September 11th, 2001 where stocks plummeted so quickly that the US markets had to close. Fear had a tremendous effect on the entire stock market and there were certainly bargains for any investor.
As with any investment, there is no certainty in anything you do, Even if you are greedy when others are fearful won't automatically make you rich, but having a non-herd mentality can give you an edge. The first adage on this list gives a warning about the danger of greed, which is still relevant to this adage. Even though it recommends being greedy, it is still important to keep your greed under control.
3. Never Try Catching A Falling Knife
This adage is an important counter to the previous one. While it is important to not be another sheep in the herd, it is also important to not be too much of a contrarian. If you see other people are fearful over a certain investment and are selling, there is a chance that they're letting their fears get the best of them, or there is a very legitimate reason why people are selling. If you get involved in an investment that's plummeting and you try to catch it like a falling knife, you could get cut.
Again as the first adage states, it is always important to not be too greedy. You have to do your homework and research before getting into any investment. If you don't, you might as well gamble your money at the casino. By avoiding falling knife investments, you'll be able to protect yourself from seriously damaging your portfolio. Stay away from industries and sectors that really have no future. Investments are only successful if they increase in value, which is impossible in a dying industry or sector.
4. A Rising Tide Lifts All Boats
When the economy is doing well, most companies do well as a result. This is the reasoning behind this old adage. If you ignore rising tides in economies, industries, and sectors, you could miss out on big profits. Missing out on these types of profits can hurt you because trend following is one of the easiest and most reliable investing strategies (as long as you're not the last one that follows).
If you see trends forming early on in any market, and invest in that market, you can make a very nice profit. The important part again, is to do your homework to identify the most credible trends and take advantage of them before anyone else. The earlier you get in on an upward trend, the better off you'll be.
5. Let Your Winners Run, Cut Your Losers
When you invest, it is easy to sell your successful investments and keep your failing ones. This is what comes intuitively to most investors but can end up costing you a lot of potential profits. By selling your winners too early, you could miss out on huge gains. By keeping your losers too long, you could realize many losses. This isn't always true, but it makes mathematical sense; if you keep your money in losing investments instead of winning ones, you'll more likely end up losing money.
If you have an investment that has been performing consistently well, there is no good reason to sell it. As the adage states, it is important to let your winners run. By selling too early, you could miss out on a lot more than holding onto a losing investment for too long. When holding onto a losing investment too long, you can only lose the money you initially spent. If you sell too early, you could lose many times the amount of money you initially spent. By letting your winners run, and cutting your losers, you can do much better than doing the opposite. As with all investments, it is still important to do your homework.
http://www.manhelper.com/money_career/5_investing_adages_that_are_still_relevant_today
Written By Soo L.
Being able to rely on long standing investing adages can help you keep a level head when investing. Human nature hasn't changed much since the birth of investing, which makes many adages relevant for years and years. If you're new or old to investing, here are a handful of adages that can help you stay on top of your game.
1. Bulls And Bears Get Rich, But (Greedy)Pigs Get Slaughtered
This is a classic investing adage with an important message. If someone is overly greedy, he/she will end up getting slaughtered. Greed can be a big problem if you let it control you. When greed makes your decisions, you can be hasty and uncareful in what you do, which can cost you big when making investments. If you don't do your homework and due diligence on your next investment and make an impulsive buy, you could easily get slaughtered.
The adage states that bulls and bears get rich, meaning those who don't succumb to greed get rich. This isn't true in all cases, but the message is still valid. If you stay disciplined and careful, it doesn't matter which side of the fence you're playing (either a bull or a bear), you can still make a handsome profit. To help put this adage to work in your investing life, remember to keep your your emotions and greed in check.
2. Be Fearful When Others Are Greedy, And Greedy When Others Are Fearful
When others are fearful, there is less demand, and when there is less demand, and prices are lower. This adage teaches that it is important to take advantage of these types of situations because, like greed and other emotions, fear can make people act irrationally. If you follow the crowd and are greedy when others are greedy and fearful when others are fearful, you'll just be following the trends and playing catch up with the crowd. This type of investing strategy is hardly effective because usually all of the profits are taken before everyone else learns about it.
The adage teaches to take advantage of opportunities in markets where fear has an unrealistic effect on the price of things. An example of this was on September 11th, 2001 where stocks plummeted so quickly that the US markets had to close. Fear had a tremendous effect on the entire stock market and there were certainly bargains for any investor.
As with any investment, there is no certainty in anything you do, Even if you are greedy when others are fearful won't automatically make you rich, but having a non-herd mentality can give you an edge. The first adage on this list gives a warning about the danger of greed, which is still relevant to this adage. Even though it recommends being greedy, it is still important to keep your greed under control.
3. Never Try Catching A Falling Knife
This adage is an important counter to the previous one. While it is important to not be another sheep in the herd, it is also important to not be too much of a contrarian. If you see other people are fearful over a certain investment and are selling, there is a chance that they're letting their fears get the best of them, or there is a very legitimate reason why people are selling. If you get involved in an investment that's plummeting and you try to catch it like a falling knife, you could get cut.
Again as the first adage states, it is always important to not be too greedy. You have to do your homework and research before getting into any investment. If you don't, you might as well gamble your money at the casino. By avoiding falling knife investments, you'll be able to protect yourself from seriously damaging your portfolio. Stay away from industries and sectors that really have no future. Investments are only successful if they increase in value, which is impossible in a dying industry or sector.
4. A Rising Tide Lifts All Boats
When the economy is doing well, most companies do well as a result. This is the reasoning behind this old adage. If you ignore rising tides in economies, industries, and sectors, you could miss out on big profits. Missing out on these types of profits can hurt you because trend following is one of the easiest and most reliable investing strategies (as long as you're not the last one that follows).
If you see trends forming early on in any market, and invest in that market, you can make a very nice profit. The important part again, is to do your homework to identify the most credible trends and take advantage of them before anyone else. The earlier you get in on an upward trend, the better off you'll be.
5. Let Your Winners Run, Cut Your Losers
When you invest, it is easy to sell your successful investments and keep your failing ones. This is what comes intuitively to most investors but can end up costing you a lot of potential profits. By selling your winners too early, you could miss out on huge gains. By keeping your losers too long, you could realize many losses. This isn't always true, but it makes mathematical sense; if you keep your money in losing investments instead of winning ones, you'll more likely end up losing money.
If you have an investment that has been performing consistently well, there is no good reason to sell it. As the adage states, it is important to let your winners run. By selling too early, you could miss out on a lot more than holding onto a losing investment for too long. When holding onto a losing investment too long, you can only lose the money you initially spent. If you sell too early, you could lose many times the amount of money you initially spent. By letting your winners run, and cutting your losers, you can do much better than doing the opposite. As with all investments, it is still important to do your homework.
http://www.manhelper.com/money_career/5_investing_adages_that_are_still_relevant_today
Investing is a Loser’s Game
We wish to examine the field of investments from simple game theoretical considerations.
What determines success and what determines failure? Are there principles that can be understood to help the individual invest more successfully? I believe that the best principle that can be adopted by the individual investor is to ignore the market, minimize trading expenses, think a bit like a business owner, invest long-term, and, most crucially, know your limitations as an investor.
There are two types of games: "Winner’s Games" and "Loser’s Games." Now this doesn’t mean that losers play only certain games, while winners play other games. It has nothing to do with personality characteristics. By "Loser’s Game," I don’t mean that investors are losers. It is just a way to classify games to help us understand them better.
The outcome of any competitive game depends upon the actions of both the winner and the loser of the game. This does not always imply the winner’s actions will dominate the outcome. Many games are not won, but rather, are lost. It is important to understand the distinction.
Winner’s Games are those games whose outcome is largely determined by the actions of the winner. Loser’s Games are those games whose outcome is largely determined by the actions of the loser.
Amateur tennis is a loser’s game. Non-highly-trained players do not possess the skills to deliver excellent serves and returns with consistency. An attempt to try harder to deliver superior shots, compared to the opponent, will not meet with success, but double faults and shots that go out of bounds. Trying harder to make great shots will mean that you are giving the opponent points. The player is not only competing against the other player, but also against the inherent difficulties of the game. The more competitive the amateur tries to be, the more the inherent difficulties of the game will beat him down.
The amateur who has not mastered the fundamentals of the game is far better off just trying to deliver a shot within the tennis court bounds than trying to outplay the opponent. Keep the ball in play and give the opponent the opportunity to mess up the shot. And, the harder the opponent tries, the more likely he will mess up!
If you were playing a professional tennis player, the situation would change drastically. Professional tennis is a winner’s game. Professional tennis players have mastered the fundamentals of the game. You must not only master the fundamentals of the game to win, but you must also deliver superior shots. You must outplay your opponent to win. Returning the ball within court bounds is not enough. The opponent probably won’t mess up and might well force a shot you can’t return.
In amateur tennis, having the opportunity to hit the ball is an opportunity for the opponent. In professional tennis, hitting the ball is an opportunity for the hitter. Professionals look upon having the serve as an advantage. Amateurs are better off the less contact they need to have with the ball!
Loser’s games are the competitive person’s bane until the fundamentals of the game are mastered. When I was younger, I once lost about twenty-six tennis matches in a row to a friend. The further behind I felt, the more I tried to cream the ball and deliver a killer shot.
I remember one shot actually being in bounds and drilling right through the fence behind the court. Wow! What Power! That was fun. What potential I had! Unfortunately, for that one shot, there were many more shots that hit the net, went out-of-bounds, or, in some other way, cost me a point. The more I tried to deliver superior play, the further behind I got. I had not mastered the fundamentals of the game. Nor, would I ever.
Competitive people want to win. Often, they derive much of their sense of self-worth from winning. So, as the competitive person loses more and more, he will either try harder and harder to win, or else give up. That is a natural human tendency. With tennis, an individual who really wants to win will, in time, learn that by just easing up a bit, more games are won.
Some people make excellent amateur tennis players. They learn just to keep the ball in play. Sometimes, they even feel they will be able to become a professional. Then, they find they are never able to beat the better, more professional players. They have been able to win consistently, despite never really mastering the fundamentals of the game and constantly pushing themselves to improve as players. They win, by letting the other amateur lose.
The very best players have mastered the game and work to improve, to learn to force more shots. With tennis, there is the potential to master the game and learn to force good shots, if only you work enough at it.
So, the best players will start to develop a unique approach to play as they grow in ability. They will play conservatively when it is needed. But, if they are far enough ahead, they will push themselves to force a few shots. In that way they can grow from being a good amateur into having a more professional level of play. In time, the best will learn to play tennis as a winner’s game. If they continue to count on the opponent's messing up to win games, they will never move to a professional level.
You now have a complete understanding of the difference between winner's games and loser's games.
Investing is a loser’s game. It is a loser’s game, not only at the amateur level, but also at the professional level. Over time, trying harder to achieve superior returns will usually lead to inferior returns. Trying to time the stock market, day trading, buying options, and most active investment advice approaches investing as though it were a winner’s game—believing you can actually conquer and beat the market.
If, for example, you had felt that the stock market was overvalued and due for a correction, and you had remained out of the stock market for the year 1995, you would have missed one of the market’s best years ever. But, maybe, you also missed the big market drop of 1987. What could you conclude from this? Probably, as with my streak of tennis losses, you would tend to remember the victories (or, near victory shots that led to losing the game!) and forget the defeats.
You reason that if only all your tennis shots or investment decisions had been as great as the best ones you remember, you would have won decisively! But, seeking that one great shot is what cost you the match.
You would tend to explain your victory as confirming proof of market timing and your skill to do it, while the defeat would be interpreted as only indicating a need to improve your methods slightly! You are interpreting investing, and more specifically, market timing, as though it were a winner’s game. It is not! It has never been shown that anyone, I repeat anyone, can master stock market timing.
Looking for stocks you feel might go up ten or twenty times from their present price in a few short years is also a form of trying to invest in the stock market as though it were a winner’s game. Or, given the late 1990’s you might be seeking growth stocks that go up 100 times or more in a few short years!
After all, you recall Dell, Cisco, Yahoo, and other companies which shot up by amazing amounts. To buy such speculative stocks implies you feel confident in finding opportunities that are grossly misevaluated by the market. Usually, you will not invest in the next Dell or Cisco, but, rather, the next He-Ro apparel company of the day. That is to say, a lousy investment. This can lead to huge losses.
Individual investors usually have not mastered business evaluation and fundamental analysis sufficiently to actively select the very best aggressively-chosen stocks from among the larger market. But don't feel bad. The professionals who are paid millions of dollars haven't done much better.
Yet, the human need to try to force a shot now and then reoccurs. If you must try to invest on winner’s game terms, I will show you what I feel are two of the best strategies.
One is investing in turnaround companies. Those are stocks that have hit bad times and are largely disliked by most investors. I can’t show you how to select the real winners from the pack of dogs. No one really can. But, I can help you learn to protect yourself from investing in obviously crummy companies. That is a skill well worth having.
The other strategy is seeking out growth companies. Again, I can’t tell you how to find the next Microsoft. No one can. But, I can help give you some general principles to keep in mind. Things to watch out for. Things that help you decide not to invest in a potential growth company. This is my sunscreen advice. If you must sit out in the blazing sun, protect yourself as best as you can!
Understanding that investing is a loser’s game at heart should keep you from trying to force too many shots. Rather than looking for one big winner, aim for consistency in your results. The bulk of an intelligent investor’s portfolio should be invested in high-quality, larger companies purchased at reasonable prices. Such a portfolio will likely beat, not only a market timer’s portfolio, but also a speculative portfolio of "carefully" selected, aggressive stocks on a risk-adjusted basis.
High portfolio turnover is indicative of trying to play the investment game as though it were a winner’s game. Shifting money rapidly from one investment to another indicates a belief that you can place the two possible investments on a scale of their relative merit with a high degree of accuracy. Further, you are expecting that the market will, in short order, realize just how knowledgeable you are and correct the valuations!
Any individual investor who buys individual stocks must be able to make an estimate of the relative merit of two stocks. However, we must be realistic about our ability to distinguish opportunities. Often the difference between two stocks, as far as investment desirability is concerned, is so slight that there is no way to distinguish which one will prove superior. This is assuming, of course, that the market rewards the superior stock with a higher valuation!
But, don't assume this will happen in the very near future. Undervalued stocks will not instantly increase in stock price, just because you now own them. But, we can say this: Companies that prosper as businesses, companies that grow their sales revenue and profits over the years will almost certainly appreciate in stock price. And, even if appreciation is not tremendous, a steady stream of growing dividends will probably be paid to the investor, providing an excellent return on his investment.
We must avoid shifting money between indistinguishable opportunities. Commissions and taxes will kill performance. This is the motto of "Sell reluctantly." Today, with Internet stock trading, commissions are sufficiently low that excessive portfolio turnover is no longer the concern it once was. Yet, high portfolio turnover seldom enhances overall return.
Playing investment like a loser’s game means taking advantage of long-term compounding, diversification, managing risk, and controlling the urge to imbibe in speculative excess. If you understand only this single concept, that investing is a loser’s game, you will do well as an investor throughout your life.
*The Speech, "Everybody's Free To Wear Sunscreen" was incorrectly attributed to Kurt Vonnegut who, in fact, never delivered this particular speech to any college. The speech was actually based upon a Chicago Tribune article by Mary Schmich. The speech was so popular, Baz Luhrmann had it made into a popular song. Radio stations everywhere played the song and incorrectly attributed it to Kurt's commencement address at MIT. Where did all the confusion and misinformation come from? Rumors and e-mail on the Internet. Fortunately, investors aren't subject to such foolishness. Unlike the mass media, they'll be sure to check their information over carefully.
http://www.hcmpublishing.com/Investment/sample-chapter-losers-game.html
What determines success and what determines failure? Are there principles that can be understood to help the individual invest more successfully? I believe that the best principle that can be adopted by the individual investor is to ignore the market, minimize trading expenses, think a bit like a business owner, invest long-term, and, most crucially, know your limitations as an investor.
There are two types of games: "Winner’s Games" and "Loser’s Games." Now this doesn’t mean that losers play only certain games, while winners play other games. It has nothing to do with personality characteristics. By "Loser’s Game," I don’t mean that investors are losers. It is just a way to classify games to help us understand them better.
The outcome of any competitive game depends upon the actions of both the winner and the loser of the game. This does not always imply the winner’s actions will dominate the outcome. Many games are not won, but rather, are lost. It is important to understand the distinction.
Winner’s Games are those games whose outcome is largely determined by the actions of the winner. Loser’s Games are those games whose outcome is largely determined by the actions of the loser.
Amateur tennis is a loser’s game. Non-highly-trained players do not possess the skills to deliver excellent serves and returns with consistency. An attempt to try harder to deliver superior shots, compared to the opponent, will not meet with success, but double faults and shots that go out of bounds. Trying harder to make great shots will mean that you are giving the opponent points. The player is not only competing against the other player, but also against the inherent difficulties of the game. The more competitive the amateur tries to be, the more the inherent difficulties of the game will beat him down.
The amateur who has not mastered the fundamentals of the game is far better off just trying to deliver a shot within the tennis court bounds than trying to outplay the opponent. Keep the ball in play and give the opponent the opportunity to mess up the shot. And, the harder the opponent tries, the more likely he will mess up!
If you were playing a professional tennis player, the situation would change drastically. Professional tennis is a winner’s game. Professional tennis players have mastered the fundamentals of the game. You must not only master the fundamentals of the game to win, but you must also deliver superior shots. You must outplay your opponent to win. Returning the ball within court bounds is not enough. The opponent probably won’t mess up and might well force a shot you can’t return.
In amateur tennis, having the opportunity to hit the ball is an opportunity for the opponent. In professional tennis, hitting the ball is an opportunity for the hitter. Professionals look upon having the serve as an advantage. Amateurs are better off the less contact they need to have with the ball!
Loser’s games are the competitive person’s bane until the fundamentals of the game are mastered. When I was younger, I once lost about twenty-six tennis matches in a row to a friend. The further behind I felt, the more I tried to cream the ball and deliver a killer shot.
I remember one shot actually being in bounds and drilling right through the fence behind the court. Wow! What Power! That was fun. What potential I had! Unfortunately, for that one shot, there were many more shots that hit the net, went out-of-bounds, or, in some other way, cost me a point. The more I tried to deliver superior play, the further behind I got. I had not mastered the fundamentals of the game. Nor, would I ever.
Competitive people want to win. Often, they derive much of their sense of self-worth from winning. So, as the competitive person loses more and more, he will either try harder and harder to win, or else give up. That is a natural human tendency. With tennis, an individual who really wants to win will, in time, learn that by just easing up a bit, more games are won.
Some people make excellent amateur tennis players. They learn just to keep the ball in play. Sometimes, they even feel they will be able to become a professional. Then, they find they are never able to beat the better, more professional players. They have been able to win consistently, despite never really mastering the fundamentals of the game and constantly pushing themselves to improve as players. They win, by letting the other amateur lose.
The very best players have mastered the game and work to improve, to learn to force more shots. With tennis, there is the potential to master the game and learn to force good shots, if only you work enough at it.
So, the best players will start to develop a unique approach to play as they grow in ability. They will play conservatively when it is needed. But, if they are far enough ahead, they will push themselves to force a few shots. In that way they can grow from being a good amateur into having a more professional level of play. In time, the best will learn to play tennis as a winner’s game. If they continue to count on the opponent's messing up to win games, they will never move to a professional level.
You now have a complete understanding of the difference between winner's games and loser's games.
Investing is a loser’s game. It is a loser’s game, not only at the amateur level, but also at the professional level. Over time, trying harder to achieve superior returns will usually lead to inferior returns. Trying to time the stock market, day trading, buying options, and most active investment advice approaches investing as though it were a winner’s game—believing you can actually conquer and beat the market.
If, for example, you had felt that the stock market was overvalued and due for a correction, and you had remained out of the stock market for the year 1995, you would have missed one of the market’s best years ever. But, maybe, you also missed the big market drop of 1987. What could you conclude from this? Probably, as with my streak of tennis losses, you would tend to remember the victories (or, near victory shots that led to losing the game!) and forget the defeats.
You reason that if only all your tennis shots or investment decisions had been as great as the best ones you remember, you would have won decisively! But, seeking that one great shot is what cost you the match.
You would tend to explain your victory as confirming proof of market timing and your skill to do it, while the defeat would be interpreted as only indicating a need to improve your methods slightly! You are interpreting investing, and more specifically, market timing, as though it were a winner’s game. It is not! It has never been shown that anyone, I repeat anyone, can master stock market timing.
Looking for stocks you feel might go up ten or twenty times from their present price in a few short years is also a form of trying to invest in the stock market as though it were a winner’s game. Or, given the late 1990’s you might be seeking growth stocks that go up 100 times or more in a few short years!
After all, you recall Dell, Cisco, Yahoo, and other companies which shot up by amazing amounts. To buy such speculative stocks implies you feel confident in finding opportunities that are grossly misevaluated by the market. Usually, you will not invest in the next Dell or Cisco, but, rather, the next He-Ro apparel company of the day. That is to say, a lousy investment. This can lead to huge losses.
Individual investors usually have not mastered business evaluation and fundamental analysis sufficiently to actively select the very best aggressively-chosen stocks from among the larger market. But don't feel bad. The professionals who are paid millions of dollars haven't done much better.
Yet, the human need to try to force a shot now and then reoccurs. If you must try to invest on winner’s game terms, I will show you what I feel are two of the best strategies.
One is investing in turnaround companies. Those are stocks that have hit bad times and are largely disliked by most investors. I can’t show you how to select the real winners from the pack of dogs. No one really can. But, I can help you learn to protect yourself from investing in obviously crummy companies. That is a skill well worth having.
The other strategy is seeking out growth companies. Again, I can’t tell you how to find the next Microsoft. No one can. But, I can help give you some general principles to keep in mind. Things to watch out for. Things that help you decide not to invest in a potential growth company. This is my sunscreen advice. If you must sit out in the blazing sun, protect yourself as best as you can!
Understanding that investing is a loser’s game at heart should keep you from trying to force too many shots. Rather than looking for one big winner, aim for consistency in your results. The bulk of an intelligent investor’s portfolio should be invested in high-quality, larger companies purchased at reasonable prices. Such a portfolio will likely beat, not only a market timer’s portfolio, but also a speculative portfolio of "carefully" selected, aggressive stocks on a risk-adjusted basis.
High portfolio turnover is indicative of trying to play the investment game as though it were a winner’s game. Shifting money rapidly from one investment to another indicates a belief that you can place the two possible investments on a scale of their relative merit with a high degree of accuracy. Further, you are expecting that the market will, in short order, realize just how knowledgeable you are and correct the valuations!
Any individual investor who buys individual stocks must be able to make an estimate of the relative merit of two stocks. However, we must be realistic about our ability to distinguish opportunities. Often the difference between two stocks, as far as investment desirability is concerned, is so slight that there is no way to distinguish which one will prove superior. This is assuming, of course, that the market rewards the superior stock with a higher valuation!
But, don't assume this will happen in the very near future. Undervalued stocks will not instantly increase in stock price, just because you now own them. But, we can say this: Companies that prosper as businesses, companies that grow their sales revenue and profits over the years will almost certainly appreciate in stock price. And, even if appreciation is not tremendous, a steady stream of growing dividends will probably be paid to the investor, providing an excellent return on his investment.
We must avoid shifting money between indistinguishable opportunities. Commissions and taxes will kill performance. This is the motto of "Sell reluctantly." Today, with Internet stock trading, commissions are sufficiently low that excessive portfolio turnover is no longer the concern it once was. Yet, high portfolio turnover seldom enhances overall return.
Playing investment like a loser’s game means taking advantage of long-term compounding, diversification, managing risk, and controlling the urge to imbibe in speculative excess. If you understand only this single concept, that investing is a loser’s game, you will do well as an investor throughout your life.
*The Speech, "Everybody's Free To Wear Sunscreen" was incorrectly attributed to Kurt Vonnegut who, in fact, never delivered this particular speech to any college. The speech was actually based upon a Chicago Tribune article by Mary Schmich. The speech was so popular, Baz Luhrmann had it made into a popular song. Radio stations everywhere played the song and incorrectly attributed it to Kurt's commencement address at MIT. Where did all the confusion and misinformation come from? Rumors and e-mail on the Internet. Fortunately, investors aren't subject to such foolishness. Unlike the mass media, they'll be sure to check their information over carefully.
http://www.hcmpublishing.com/Investment/sample-chapter-losers-game.html
Ride Your Winners, Dump Your Losers
Ride Your Winners, Dump Your Losers
www.mastersuniverse.net
Assume that you have invested into two stocks - Stock A and Stock B. You made 50% on Stock A and lost 50% on Stock B. If you need to liquidate one stock to get some cash, which stock would you sell? It is human nature for people to take profits on Stock A and keep the losing trade until Stock B rebounds. Chances are Stock A is so wonderful that it will keep going up after you sold, and Stock B will keep going down and your loss becomes bigger. The bigger your loss, the more reluctant you are to sell and eventually you will end up with a bunch of losers.
Ride Your Winners
Momentum Trading
According to the “Ride Your Winners, Dump Your Losers” theory, if you manage to fight off your human nature and keep the winners instead of the losers, you will make money. This seems to fit in well with the theory of momentum trading – buy the strongest stocks with the highest momentum, i.e. the stocks that are increasing quickly on higher volume than the market. Disciplined momentum traders would buy with the flow of the market, if a trade goes against them, they would sell without hesitation. They follow the market trend with no question ask.
As the theory goes, you should not be emotionally attached to your trade. If you have invested in a dud, you should just admit your mistake and cut the loss. This theory sounds credible and sensible.
Value Investing
This theory may make sense for a short-term momentum trader, but it certainly does not make sense for a long-term value investor. Assuming that you have done your homework and the two stocks were the same valuation at the time of investment, the fact that Stock A has gone up and Stock B has gone down means that Stock A is now far more expensive than Stock B. A prudent value investor would switch out of the expensive Stock A and switch into the much better valued Stock B, provided the fundamentals of the two stocks have not changed.
Instead of blindly selling the losers until all you have are winners, you should really look at whether the fundamentals have changed for the stocks. There may indeed be a good reason for the relative underperformance of Stock B – e.g. poor management or grim industry outlook. However if nothing has changed and you thought Stock B was good value when you first bought it, it must be an absolute bargain after dropping an extra 50%! Shouldn’t you be buying more instead of selling?
Winners Always Outperform Losers?
The key question in deciding whether this is a valid theory is whether winners are more likely to outperform the losers? If that is the case, the same group of winners should always dominate the world economy. Taking the component stocks of the Dow Jones Industrial as examples, which are the winners of the winners. Do these blue chip winners always outperform the market? Looking at the original dozen component stocks of the Dow in 1896:
American Sugar Now Domino Foods, Inc., part of Sweden’s Assa Abloy
American Cotton Oil Now Bestfoods, part of Unilever
North American Company Electric company broken up in the 1940s
Chicago Gas
Now a subsidiary of Integrys Energy Group, Inc
Laclede Gas Still in operation as The Laclede Group
National Lead Now NL Industries
Tennessee Coal & Iron Swallowed by U.S. Steel
American Tobacco Broken up into Fortune Brands and R.J. Reynolds
Distilling & Cattle Feeding Predecessor of Millennium Chemical, part of LyondellBasell
U.S. Leather Liquidated in 1952
U.S. Rubber Company Merged with B.F. Goodrich, now part of Michelin
General Electric Only one that is still around
The only company that you may still recognize is General Electric (even General Electric has been dropped from the Dow for 9 years). The rests have either been taken over or wound up. Had your great great grandpa set up a family trust to invest in these winners 100 years ago, there would probably not be a lot inheritance left for you.
In fact, some academics have noticed the opposite effect - “the small stock anomaly”. For example, Rolf W. Banz has shown that smaller companies (which tend to include a lot of “losers”) from 1926 to 1980 outperformed the larger companies.
The Winner Takes It All
It Really Comes Down to Your Trading Style
Ultimately it really depends on your trading style. If you are a momentum trader that trade purely on the basis of a surge in price and high trading volume, it is wise to scramble for the exit when the stock loses its momentum. However if you have picked the stock on the basis of its valuation, the fact that it drops more means it is even better value – time to buy more instead of sell. Obviously if the fundamentals (future prospects and changing sector conditions) of the company have deteriorated, you may need to admit your mistake and sell.
This theory sounds more credible than it really is in countering the human tendency to keep the losers. The fact that it identifies a stock as a winner or loser on the basis of the entry price already introduces an element of subjectivity. An emotion free investor would only look objectively at the fundamentals and the valuation of the stock, instead of getting hung up on the entry price.
www.mastersuniverse.net
Assume that you have invested into two stocks - Stock A and Stock B. You made 50% on Stock A and lost 50% on Stock B. If you need to liquidate one stock to get some cash, which stock would you sell? It is human nature for people to take profits on Stock A and keep the losing trade until Stock B rebounds. Chances are Stock A is so wonderful that it will keep going up after you sold, and Stock B will keep going down and your loss becomes bigger. The bigger your loss, the more reluctant you are to sell and eventually you will end up with a bunch of losers.
Ride Your Winners
Momentum Trading
According to the “Ride Your Winners, Dump Your Losers” theory, if you manage to fight off your human nature and keep the winners instead of the losers, you will make money. This seems to fit in well with the theory of momentum trading – buy the strongest stocks with the highest momentum, i.e. the stocks that are increasing quickly on higher volume than the market. Disciplined momentum traders would buy with the flow of the market, if a trade goes against them, they would sell without hesitation. They follow the market trend with no question ask.
As the theory goes, you should not be emotionally attached to your trade. If you have invested in a dud, you should just admit your mistake and cut the loss. This theory sounds credible and sensible.
Value Investing
This theory may make sense for a short-term momentum trader, but it certainly does not make sense for a long-term value investor. Assuming that you have done your homework and the two stocks were the same valuation at the time of investment, the fact that Stock A has gone up and Stock B has gone down means that Stock A is now far more expensive than Stock B. A prudent value investor would switch out of the expensive Stock A and switch into the much better valued Stock B, provided the fundamentals of the two stocks have not changed.
Instead of blindly selling the losers until all you have are winners, you should really look at whether the fundamentals have changed for the stocks. There may indeed be a good reason for the relative underperformance of Stock B – e.g. poor management or grim industry outlook. However if nothing has changed and you thought Stock B was good value when you first bought it, it must be an absolute bargain after dropping an extra 50%! Shouldn’t you be buying more instead of selling?
Winners Always Outperform Losers?
The key question in deciding whether this is a valid theory is whether winners are more likely to outperform the losers? If that is the case, the same group of winners should always dominate the world economy. Taking the component stocks of the Dow Jones Industrial as examples, which are the winners of the winners. Do these blue chip winners always outperform the market? Looking at the original dozen component stocks of the Dow in 1896:
American Sugar Now Domino Foods, Inc., part of Sweden’s Assa Abloy
American Cotton Oil Now Bestfoods, part of Unilever
North American Company Electric company broken up in the 1940s
Chicago Gas
Now a subsidiary of Integrys Energy Group, Inc
Laclede Gas Still in operation as The Laclede Group
National Lead Now NL Industries
Tennessee Coal & Iron Swallowed by U.S. Steel
American Tobacco Broken up into Fortune Brands and R.J. Reynolds
Distilling & Cattle Feeding Predecessor of Millennium Chemical, part of LyondellBasell
U.S. Leather Liquidated in 1952
U.S. Rubber Company Merged with B.F. Goodrich, now part of Michelin
General Electric Only one that is still around
The only company that you may still recognize is General Electric (even General Electric has been dropped from the Dow for 9 years). The rests have either been taken over or wound up. Had your great great grandpa set up a family trust to invest in these winners 100 years ago, there would probably not be a lot inheritance left for you.
In fact, some academics have noticed the opposite effect - “the small stock anomaly”. For example, Rolf W. Banz has shown that smaller companies (which tend to include a lot of “losers”) from 1926 to 1980 outperformed the larger companies.
The Winner Takes It All
It Really Comes Down to Your Trading Style
Ultimately it really depends on your trading style. If you are a momentum trader that trade purely on the basis of a surge in price and high trading volume, it is wise to scramble for the exit when the stock loses its momentum. However if you have picked the stock on the basis of its valuation, the fact that it drops more means it is even better value – time to buy more instead of sell. Obviously if the fundamentals (future prospects and changing sector conditions) of the company have deteriorated, you may need to admit your mistake and sell.
This theory sounds more credible than it really is in countering the human tendency to keep the losers. The fact that it identifies a stock as a winner or loser on the basis of the entry price already introduces an element of subjectivity. An emotion free investor would only look objectively at the fundamentals and the valuation of the stock, instead of getting hung up on the entry price.
Flip the losers, let the winners run
Thursday, April 2, 2009
Sell the losers, let the winners run
Why selling is a common problem
Published: 2009/02/04
Most investors tend to agree that the decision to sell a stock is one of the most difficult to make. Sometimes it is more difficult to decide when and what to sell than to buy. Ever wondered why?
* People tend to sell winners too soon and hold on to losers too long
You will find that regardless of whether the market is running hot or is coming down, there are still a lot of people out there who either sell their stocks too early only to realize that the prices continue to soar, or hold on to losers for too long only to see them continue to bleed further.
From a behavioural finance standpoint, this phenomenon is held by Hersh Shefrin and Meir Statman (1985) as the "disposition effect". This was discovered from their research entitled, "The disposition to sell winners too early and ride losers too long: theory and evidence".
Based on research, individual investors are more likely to sell stocks that have gone up in value, rather than those that have gone down. By not selling, they are hoping that the price of the losers will eventually go back to their purchase price or even higher, saving them from experiencing a painful loss.
In the end, most investors will end up selling good quality stocks the minute the prices move up and hold on to those poor fundamental stocks for the long term, while the performances of these stocks continue to deteriorate.
* People tend to forget their original objectives
In stock market investment, there are two types of investment activities, trading versus investing. Trading means "buy and sell" while investing means "buy and hold". The stock selection criteria for these two types of activities are entirely different.
Most of the time those involved in trading will choose stocks based on factors which will affect the price movement in short term, paying less attention to the companies' fundamentals whereas those involved in investment will go for good quality stocks which are more suitable for long-term holding.
However, you will find that many people get their objectives mixed up in the process. They get distracted by external factors so much so that some panic when the market goes in the direction that is not in line with their expectation, and as a result, end up selling the stocks that they find too expensive to buy back later.
On the other hand, some force themselves to change the status of the stocks that were originally meant for short-term trading into long-term investment as they are unable to face the harsh fact that they have to sell the stocks at a loss, even though they know that the stocks are not good fundamental stocks that can appreciate in value.
So, when to sell then?
There are few different schools of thoughts on this. Based on the advice from the investments gurus, like Benjamin Graham, Warren Buffet and Philip Fisher, when you buy a stock, you need to make sure that you understand the companies that you are buying, and these are good fundamental stocks, which will provide good income and appreciate in value in long term.
Therefore, you will be treating your stock purchase as a business you bought, which is meant for long term. You should not be affected by any temporary price movement due to overall market volatility.
You will only consider selling the company if the growth of the company's intrinsic value falls below "satisfactory" level or you find out that a mistake was made in the original analysis as you grow more familiar to the business or industry.
However, if you find that your investment portfolio is highly concentrated on one single company, then you might want to consider diversifying your portfolio and lowering your risk.
Any single investment that is more than 10 per cent to 15 per cent of your portfolio value should be reconsidered no matter how solid the company performance or prospect is, suggested Pat Dorsey of Morningstar.
Last but not least, if you find that by selling the stock, you can invest the money in a better option, then that is a good reason to sell.
In summary, successful investing is highly dependent on your self-discipline, taking away the emotional factors and not going with the crowd. It should always be backed by sound investment principles.
Always remember there is no short cut in investment, only hard work and patience.
Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC2/Article/index_html
Sell the losers, let the winners run
Why selling is a common problem
Published: 2009/02/04
Most investors tend to agree that the decision to sell a stock is one of the most difficult to make. Sometimes it is more difficult to decide when and what to sell than to buy. Ever wondered why?
* People tend to sell winners too soon and hold on to losers too long
You will find that regardless of whether the market is running hot or is coming down, there are still a lot of people out there who either sell their stocks too early only to realize that the prices continue to soar, or hold on to losers for too long only to see them continue to bleed further.
From a behavioural finance standpoint, this phenomenon is held by Hersh Shefrin and Meir Statman (1985) as the "disposition effect". This was discovered from their research entitled, "The disposition to sell winners too early and ride losers too long: theory and evidence".
Based on research, individual investors are more likely to sell stocks that have gone up in value, rather than those that have gone down. By not selling, they are hoping that the price of the losers will eventually go back to their purchase price or even higher, saving them from experiencing a painful loss.
In the end, most investors will end up selling good quality stocks the minute the prices move up and hold on to those poor fundamental stocks for the long term, while the performances of these stocks continue to deteriorate.
* People tend to forget their original objectives
In stock market investment, there are two types of investment activities, trading versus investing. Trading means "buy and sell" while investing means "buy and hold". The stock selection criteria for these two types of activities are entirely different.
Most of the time those involved in trading will choose stocks based on factors which will affect the price movement in short term, paying less attention to the companies' fundamentals whereas those involved in investment will go for good quality stocks which are more suitable for long-term holding.
However, you will find that many people get their objectives mixed up in the process. They get distracted by external factors so much so that some panic when the market goes in the direction that is not in line with their expectation, and as a result, end up selling the stocks that they find too expensive to buy back later.
On the other hand, some force themselves to change the status of the stocks that were originally meant for short-term trading into long-term investment as they are unable to face the harsh fact that they have to sell the stocks at a loss, even though they know that the stocks are not good fundamental stocks that can appreciate in value.
So, when to sell then?
There are few different schools of thoughts on this. Based on the advice from the investments gurus, like Benjamin Graham, Warren Buffet and Philip Fisher, when you buy a stock, you need to make sure that you understand the companies that you are buying, and these are good fundamental stocks, which will provide good income and appreciate in value in long term.
Therefore, you will be treating your stock purchase as a business you bought, which is meant for long term. You should not be affected by any temporary price movement due to overall market volatility.
You will only consider selling the company if the growth of the company's intrinsic value falls below "satisfactory" level or you find out that a mistake was made in the original analysis as you grow more familiar to the business or industry.
However, if you find that your investment portfolio is highly concentrated on one single company, then you might want to consider diversifying your portfolio and lowering your risk.
Any single investment that is more than 10 per cent to 15 per cent of your portfolio value should be reconsidered no matter how solid the company performance or prospect is, suggested Pat Dorsey of Morningstar.
Last but not least, if you find that by selling the stock, you can invest the money in a better option, then that is a good reason to sell.
In summary, successful investing is highly dependent on your self-discipline, taking away the emotional factors and not going with the crowd. It should always be backed by sound investment principles.
Always remember there is no short cut in investment, only hard work and patience.
Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC2/Article/index_html
Thursday 20 August 2009
Trading Versus Investing
Trading Versus Investing
Not only is technical analysis more short term in nature than fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach.
In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment.
Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price.
The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools.
http://www.investopedia.com/university/technical/techanalysis2.asp
Not only is technical analysis more short term in nature than fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach.
In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment.
Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price.
The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools.
http://www.investopedia.com/university/technical/techanalysis2.asp
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