"Four Bad Bears" comparison.

Bear Turns to Bull?


October 13, 2009 updated each market day

The S&P 500 closed the day 58.6% above the March 9th low, which is 31.4% below the peak in October 2007.

http://dshort.com/articles/2009/bear-turns-to-bull.html

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.

But also be aware of the other adage: "the financial genius in a rising market."

What is the most important question for a stockmarket investor?

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.

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.

http://myinvestingnotes.blogspot.com/2009/08/hidden-desire-of-investors.html

Multi-baggers

"The majority of the multi-baggers owe their stellar returns to the market “re-rating”, rather than an impressive expansion in their earnings."


The above statement is probably true for the short term.  However, over the long term, multi-baggers are the result of their long term earnings growth.

Investing for the long haul: Sell the losers, let the winners run.

This is the time people should review their holdings, keep the stocks with the best potential, sell the losers (not those with the depressed prices but those whose revenues and earnings aren't capable of growing adequately), and buy others with better potential while they're selling cheap.

Sell the losers, let the winners run.  But you shouldn't jump into any "hot stock" without knowing what you're doing.


Read also:
The Ultimate Hold-versus-Sell Test
http://myinvestingnotes.blogspot.com/2009/09/ultimate-test.html

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.

Be an intelligent investor through financial education

In day to day conversations, one can easily gauge that the MAJORITY of "investors" in the market are not intelligent.  An intelligent investor is as defined by Benjamin Graham in his book, The Intelligent Investor.

How can these investors acquire the financial education to guide them through the stock market investment minefields?  How can they acquire the investing philosophy and strategy to help them over many years (or decades) of their investing lifespan?  Above all to ensure that they do not lose their money in the stock market while seeking for a reasonable return.

Inevitably, this will involve acquiring a set of RELEVANT knowledge through their reading, their interactions with the other investors, their interactions with investment professionals and the market.  From personal experience, there is a huge core knowledge that has to be acquired.  This is probably too overwhelming for many potential investors. 

Therefore, though it is good to attend an hour's presentation on investment here and there, or even pay a small sum for a half day session on investment talk, this is not going to transform one into a intelligent investor.   At best, these are introductory sessions to highlight areas of investments where you may wish to explore further. How much knowledge can be acquired in a half day presentation that you cannot acquire from a good book?  At worst, you are "convinced" that you know investing when in fact the small amount of new knowledge you acquire is in fact very detrimental to your long term investing.

There is no substitute to hard work.  You would need to acquire the necessary core financial and investment knowledge.  You do not need very high power investment or financial knowledge.  However, you do need to acquire some simple knowledge in the relevant important fields to guide your investing.  Above all, you will also need to understand behavioural finance to guide your emotions.

By the way, with blogs springing up everywhere, you too have another avenue to observe investing by various individuals.  Learn their good and bad habits.  You will probably find some benefit reading this blog too. 

Good luck in your investing.

http://myinvestingnotes.blogspot.com/2008/12/investment-philosophy-strategy-and.html

http://myinvestingnotes.blogspot.com/2009/09/investing-for-beginners.html

http://myinvestingnotes.blogspot.com/2009/08/learn-to-invest-in-10-steps.html

http://myinvestingnotes.blogspot.com/2009/08/8-signs-of-doomed-stock.html

Characteristics of ideal stock you plan to purchase

Some thoughts on Analysing Stocks

Ideally a stock you plan to purchase should have all of the following charateristics:

•A rising trend of earnings, dividends and book value per share.
•A balance sheet with less debt than other companies in its particular industry.
•A P/E ratio no higher than average.
•A dividend yield that suits your particular needs.
•A below-average dividend pay-out ratio.
•A history of earnings and dividends not pockmarked by erratic ups and downs.
•Companies whose ROE is 15 or better.
•A ratio of price to cash flow (P/CF) that is not too high when compared to other stocks in the same industry.

Keep It Simple and Safe.


Also read: 
8 signs of doomed stock
http://myinvestingnotes.blogspot.com/2009/08/8-signs-of-doomed-stock.html

Buffett's focussed investing

According to Buffett, his results follow not from any master plan but from focussed investing - allocating capital by concentrating on businesses with outstanding economic characteristics and run by first-rate manager.

It is the Business that Matters

Over the long haul, stock prices tend to track the value of the business. When firms do well, so do their shares, and when business suffers, the stock will as well. Always focus on the company's fundamental financial performance.

Analyst upgrades and chart patterns may be fine tools for traders who treat the stock market like a casino, but they're of little use to investors who truly want to build wealth in the stock market. You have to get your hands dirty and understand the businesses of the stocks you own if you hope to be a successful long-term investor.

P/S: Look at Hai-O to learn that price tracks the value of the company's business.

Great Opportunities to buy companies with durable competitive advantage

a) Correction or panic during a bull market:

Any company with a durable competitive advantage will eventually recover after a market correction or panic during a bull market.

b) Bubble-bursting situation:

But beware. In a bubble-bursting situation,during which stock prices trade in excess of 40 times earnings and then fall to single-digit PEs, it may take years for them to fully recover.

After the crash of 1997, it took until 2007 to match the 1990s bull market highs. There are still companies trading today at below their last decade high price. On the other hand, if you bought during the crash, as Warren Buffett often did, it didn't take you long to make a fortune.

Stock market creates buying opportunities

The bull/bear market cycle offers many buying opportunities for the selective contrarian investor.

The most important aspect of these buying opportunities is that they offer the investor the chance to buy into durable-competitive-advantage companies that have nothing wrong with them other than sinking stock prices.

The herd mentality of the shortsighted stock market creates buying opportunities.

One buys in a bear market and sells in a bubble.

One of the interesting differences between bubbles and bear markets is that in a bear market, there are plenty of bulls and bears. In a bubble, the few bears are drowned out by the loud and almost universal bullishness.

It is natural to like momentum and money, but if investors have no disciplines and no sense of bubbles, then they are headed not for the big money, but for quite the opposite.

With bear markets, one wants to use buy and sell disciplines and buy when prices and fundamentals would dictate that.

There are market bubbles once in a great while, perhaps once in a life-time, but individual stock bubbles are more common. All bubbles have some similarities that concern how perceptions, emotions, and a lack of accurate information combine to set an investor trap.

Beware of individual stock bubbles

With bubbles, there is an element of mystery. To cope with that, start with the first step, knowledge, and combine that with your disciplined buy and sell strategies, since in a bubble it is likely that the beliefs of the crowd cannot be supported by real knowledge.


Yet the entire crowd thought in this way about many companies because of incorrect and incomplete information. Emotions temporarily filled that void. A disciplined buy and sell strategy helps you control your emotion.

Behavioral economics supplies a framework for investing

Behavioral economics has gone beyond just trying to provide explanations for why investors behave as they do. It actually supplies a framework for investing and policy making to help people avoid succumbing to emotion-based or ill-conceived investments.

“Adhering to logical, rational principles of ideal economic choice may be biologically unnatural,” says Colin F. Camerer, a professor of behavioral economics at Caltech. Better insight into human psychology gleaned by neuroscientists holds the promise of changing forever our fundamental assumptions about the way entire economies function—and our understanding of the motivations of the individual participants therein, who buy homes or stocks and who have trouble judging whether a dollar is worth as much today as it was yesterday.

http://www.scientificamerican.com/article.cfm?id=the-science-of-economic-bubbles

Market bottoms

A market bottoms when we reach what is known as the "point of maximum pessimism". This means that investors have lost so much money they completely throw in the towel - and shares correct to an undervalued level.

Don't Let a Market Crash Hit You at the Finish Line

Don't Let a Market Crash Hit You at the Finish Line
by Jason Zweig
Tuesday, October 13, 2009


Can you make the risk of stocks go away just by owning them long enough? Many investors still think so.

"Over any 20-year period in history, in any market, an equity portfolio has outperformed a fixed-income portfolio," one reader recently emailed me. "Warren Buffett believes in this rule as well," he added, referring to Mr. Buffett's bullish selling of long-term put options on the Standard & Poor's 500-stock index in recent years. (Selling those puts will be profitable if U.S. stocks go up over the next decade or so.)

As the philosopher Bertrand Russell warned, you shouldn't mistake wishes for facts.


Bonds have beaten stocks for as long as two decades -- in the 20 years that ended this June 30, for example, as well as 1989 through 2008.

Nor does Mr. Buffett believe stocks are sure to beat all other investments over the next 20 years.

"I certainly don't mean to say that," Mr. Buffett told me this week. "I would say that if you hold the S&P 500 long enough, you will show some gain. I think the probability of owning equities for 25 years, and having them end up at a lower price than where you started, is probably 1 in 100."

But what about the probability that stocks will beat everything else, including bonds and inflation? "Who knows?" Mr. Buffett said. "People say that stocks have to be better than bonds, but I've pointed out just the opposite: That all depends on the starting price."

Why, then, do so many investors think stocks become safe if you simply hang on for at least 20 years?

In the past, the longer the measurement period, the less the rate of return on stocks has varied. Any given year was a crapshoot. But over decades, stocks have tended to go up at a fairly steady average annual rate of 9% to 10%. If "risk" is the chance of deviating from that average, then that kind of risk has indeed declined over very long periods.

But the risk of investing in stocks isn't the chance that your rate of return might vary from an average; it is the possibility that stocks might wipe you out. That risk never goes away, no matter how long you hang on.

The belief that extending your holding period can eliminate the risk of stocks is simply bogus. Time might be your ally. But it also might turn out to be your enemy. While a longer horizon gives you more opportunities to recover from crashes, it also gives you more opportunities to experience them.

Look at the long-term average annual rate of return on stocks since 1926, when good data begin. From the market peak in 2007 to its trough this March, that long-term annual return fell only a smidgen, from 10.4% to 9.3%. But if you had $1 million in U.S. stocks on Sept. 30, 2007, you had only $498,300 left by March 1, 2009. If losing more than 50% of your money in a year-and-a-half isn't risk, what is?

What if you retired into the teeth of that bear market? If, as many financial advisers recommend, you withdrew 4% of your wealth in equal monthly installments for living expenses, your $1 million would have shrunk to less than $465,000. You now needed roughly a 115% gain just to get back to where you started, and you were left in the meantime with less than half as much money to live on.

But time can turn out to be an enemy for anyone, not just retirees. A 50-year-old might have shrugged off the 38% fall in the U.S. stock market in 2000 to 2002 and told himself, "I have plenty of time to recover." He's now pushing 60 and, even after the market's recent bounce, still has a 27% loss from two years ago -- and is even down 14% from the beginning of 2000, according to Ibbotson Associates. He needs roughly a 38% gain just to get back to where he was in 2007. So does a 40-year-old. So does a 30-year-old.

In short, you can't count on time alone to bail you out on your U.S. stocks. That is what bonds and foreign stocks and cash and real estate are for.

In his classic book "The Intelligent Investor," Benjamin Graham -- Mr. Buffett's mentor -- advised splitting your money equally between stocks and bonds. Graham added that your stock proportion should never go below 25% (when you think stocks are expensive and bonds are cheap) or above 75% (when stocks seem cheap).

Graham's rule remains a good starting point even today. If time turns out to be your enemy instead of your friend, you will be very glad to have some of your money elsewhere.

Write to Jason Zweig at intelligentinvestor@wsj.com

http://finance.yahoo.com/focus-retirement/article/107943/dont-let-a-market-crash-hit-you-at-the-finish-line.html?mod=fidelity-readytoretire

Investing: When to bet the farm

Our own personalities add complexity to high-risk situations.

Bill Gurtin of Gurtin Fixed Income Management in San Diego points out the risks associated with overly emotional reactions.

"What you don't want to happen is for people to get emotional with the market," he says.

The more emotional we get, the more likely it is we will make a mistake, Gurtin explains.

A company's business prospects can be measured and evaluated statistically, but there is no easy measure for mood swings.

Before making any moves, people contemplating high-risk investments should come to grips with their emotional makeup and know how they are likely to react.

Yet successful investors take major risks all the time. They succeed because

• they do their research,
• can afford to lose the money they invest in high-risk schemes and
• are able to make up any losses they incur with other investments, which frequently involve complementary or counterbalancing risks.

Whether considering an investment in a stock, a privately held startup or a hedge fund -- all high-risk propositions -- investors should start by digging through the details of the business case to figure out how the return on investment is likely to be generated.

• How big a payoff might the investment produce?
• And how likely is success?

Successful investors look hard at the downside as well.

• What would the price of failure be?
• And how likely is that?

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

http://myinvestingnotes.blogspot.com/2008/08/investing-when-to-bet-farm.html

Different PE ratios

Price = estimated EPS x PE

Estimated EPS is based on a number of assumptions about the behaviour of revenues and costs. The reliability of the EPS forecast hinges critically on how realistic are these assumptions.

The other half of the valuation exercise is concerned with the price-earnings ratio which reflects the price investors are willing to pay per cents of EPS. In essence, it represens the market's summary evaluation of a company's prospects.

We will generally use the PE ratio based on current year's expected earnings.

http://myinvestingnotes.blogspot.com/search/label/different%20PE%20ratios

Buy low, improve your chances

The most common investing mistake is throwing good money after bad. (This refers to buying a lousy company.)

The second most common investing mistake is finding and buying a great company (with growth, intrinsic value, supporting fundamentals, and intangibles all there), but paying too much for it.


http://myinvestingnotes.blogspot.com/search/label/buy%20low

Investment merit at a given PRICE but not at another

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

______________________________________

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

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


http://myinvestingnotes.blogspot.com/search/label/investment%20merit