****Strategies for long term investment as markets correct

Strategies for long term investment as markets correct
By Manish Misra on January 29, 2010

The rally in the equity markets has finally taken a breather. A bout of profit-booking was seen last week and it may be early to predict whether this is the start of the much-anticipated downturn in the equity markets. So, what should be your long term strategy to invest in such a scenario?



Investors remain concerned over the pace of the global economic recovery and have turned cautious in their approach to the markets, leading to profit-booking at every rise.

Although the results season was largely positive with most companies reporting earnings in line with or exceeding market expectations, it was weak global sentiment and consistent sell-offs by foreign institutional investor (FII) in last few trading sessions acted as a catalyst for the market correction.

The current rally in the domestic markets was driven mainly by liquidity owing to heavy inflows from FIIs who found the Asian markets poised for a recovery much ahead of their Western peers. While the domestic economy did not disappoint in terms of earnings numbers in the last two quarters, the current prices had already factored in the growth, thereby not leaving much room for a further upside. The market will now look for global cues to decide on the future direction.

The Reserve Bank of India (RBI) in the monetory policy, scheduled to be announced today (29/01/2010) afternoon, is expected to hike the CRR and Reverse Repo rates.

Over the short term, the markets could display increased volatility and this in turn could throw up attractive opportunities for medium to long term investors. While the long term growth story of the domestic economy remains intact, the short term will always be marred with uncertainty. Long-term investors would do well to use this uncertainty to their advantage.

Here are some strategies investors can adopt to ensure their portfolios remain aligned towards growth:

1. Review asset allocation
Investors should stick to their asset allocation across equity, debt and money market instruments depending on their overall investment profile. Reviewing the asset allocation when the markets peak gives an indication of whether to book profits in equity. As the markets correct, an asset allocation review will help investors decide on the amount which should be shifted back to equity in order to balance the asset allocation.

2. Maintain liquidity
Falling markets often present attractive opportunities but it can be made use of only if investors have money to invest. Re-balancing asset allocation can provide some liquidity to the investor and this can be used effectively to pick up desired stocks when the markets correct.

3. Selection of stocks
Stocks, especially in the large-cap category, had a major run-up in the past few months. For investors, it was a risky proposition to enter these stocks at the levels at which they looked more than fairly-valued. A correction in the markets has brought these stocks back to prices which are attractive for medium to long term investors. Hence, investors can identify their target companies and slowly start accumulating these stocks as the markets offer opportunities.

4. Stagger purchases
While the markets have been in a correction mode for the past two weeks, it is difficult to predict whether this phase is temporary or will continue for a while. Hence, it is important to stagger the purchases over a period of time rather than buying in one go. The expected volatility in the markets may give investors many opportunities to pick stocks at desired prices.

Conclusion
Follow these time tested strategies to invest in stock market. Investors who did not get a chance to enter the markets in the last rally can now make use of the opportunity to invest in select stocks at attractive levels to build a robust long-term portfolio.

http://www.personalmoney.in/strategies-for-long-term-investment-as-markets-correct/1458

What management does with cash flow is key to long term performance.

Cash Deployment – After playing the stock-picking game for a while I notice that what management does with cash flow is key to long term performance. Sometimes they can't think of anything better to do than to load up with debt and then go on to spend the proceeds buying back shares at inflated prices. Of course when trouble hits it becomes necessary to raise capital by selling shares at fire sale prices. Readers who have avoided these types of problem during the downturn have done better than I and deserve to be congratulated.

Mr. Market does not like capex. It's a real turnoff, peeing away money that could support a nice special dividend or be used to pump up share prices. Actually risking it in an effort to make money from expanded or more efficient operations is less attractive than the alternatives, in terms of immediate price action.

http://seekingalpha.com/article/184987-why-i-m-staying-with-verizon

Why I usually avoid IPOs

I browsed the local paper for those stocks priced closest to the year low. There were 35 stocks listed: 29 derivatives (warrant) and 6 non-derivatives (mother share). Stemlife was in this list.

This company was listed with much hype in 2006.  Its revenue grew quickly in this virgin medical sector.  Those uninformed customers and investors saw "unlimited" potentials from this new medical technology.  The business model was not one with durable competitiveness.  With new competitors in the market, I can foresee this company's business will be challenging.

Listing in 2006 was the right timing as the stock was chased up to a high level during the bull market then.  At the peak market price of more than MR 6 in 2007,  its market cap was almost MR 900 million.   It was not surprising that a significant large investor (insider) sold when the price was close to its peak; making a huge profit from the shares, locking in many years of future profits that the company can hope to generate through its business.  

At 45 sen per share, its present market cap is MR 74.3 million. What is its intrinsic value?  Interestingly, more major investors sold and exited the company recently.

This is a good company to study as it provides a lot of education on how to select the stocks you wish to invest into.  In general, it is better to avoid IPOs.  IPOs are never priced cheap.  You can always let them build their business for a few years.  Given the track record you can then assess the business fundamentals with more certainties, before you invest.

Some simple rules I follow:

A good company can be a good investment at fair price or bargain price.

A good company may be a bad investment if you overpay.

Avoid a  lousy company at any price.

http://www.klse.com.my/website/bm/listed_companies/company_announcements/changes_in_s_holding/index.jsp

Insiders selling in huge volumes this January, desperate to unload

.

STEMLIFE BERHAD (ACE Market)

====19/01/2010 Notice of Person Ceasing (29C) - The Goldman Sachs International
====19/01/2010 Notice of Person Ceasing (29C) - The Goldman Sachs Group, Inc.
====19/01/2010 Changes in Sub. S-hldr's Int. (29B) - The Goldman Sachs International
Disposed 12/01/2010 5,706,000
====19/01/2010 Changes in Sub. S-hldr's Int. (29B) - The Goldman Sachs Group, Inc.
====18/01/2010 Changes in Sub. S-hldr's Int. (29B) - BERJAYA GROUP BERHAD
Disposed 14/01/2010 4,050,000
====18/01/2010 Changes in Sub. S-hldr's Int. (29B) - BERJAYA CORPORATION BERHAD
====18/01/2010 Changes in Sub. S-hldr's Int. (29B) - JUARA SEJATI SDN BHD
====18/01/2010 Changes in Sub. S-hldr's Int. (29B) - TAN SRI DATO' SERI VINCENT TAN CHEE YIOUN
====18/01/2010 Changes in Sub. S-hldr's Int. (29B) - HOTEL RESORT ENTERPRISE SDN BHD
====13/01/2010 Notice of Person Ceasing (29C) - HSC HEALTHCARE SDN BHD
====13/01/2010 Changes in Sub. S-hldr's Int. (29B) - HSC HEALTHCARE SDN BHD
Disposed 11/01/2010 10,000,000


Fundamentals

INCOME STATEMENT                           12/31/2006    2/31/2007  12/31/2008
Net Turnover/Net Sales	14,578	20,456	18,509
EBITDA	4,634	6,021	195
EBIT	3,719	5,112	327
Net Profit	3,772	5,515	1,317
Ordinary Dividend	-1,650	-1,650	-1,650

Recent Financial Results

Announcement Date		Financial Yr. End		Qtr	Period End		Revenue RM '000		Profit/Lost RM'000		EPS		Amended
04-Mar-10		31-Dec-09		4	31-Dec-09		4,971		-2,610		-1.55		-
24-Feb-10		31-Dec-09		4	31-Dec-09		4,971		-2,241		-1.33		-
26-Nov-09		31-Dec-09		3	30-Sep-09		4,331		410		0.27		-
20-Aug-09		31-Dec-09		2	30-Jun-09		3,691		65		0.09		-

World Markets sentiments as reported in our local newspaper on 28.1.2010

HK stocks at 4-mth closing low, China at 3-mth low

Autralia shares drop 1.6%

Nikkei hits 5-wk closing low

Seoul at lowest close in 7-wks

Taiwan stocks down for 8th day

Vietnam stocks down 2.3%

Singapore stocks down 1.2%

Indonesia down for 5th day

Thai stocks down for 7th day

Indian shares drop for 6th day

FTSE 100 advances

US falls on concern Fed will withdraw more stimulus

HDBSVR: Buy Parkson on share price weakness

HDBSVR: Buy Parkson on share price weakness

Tags: Hwang DBS Vickers Research | Parkson Holdings | Parkson Retail Group

Written by Hwang DBS Vickers Research
Thursday, 28 January 2010 09:17

KUALA LUMPUR: Hwang DBS Vickers Research says PARKSON HOLDINGS BHD []’s share price weakness is a buying opportunity. Its share price has fallen from its recent high of RM6.20 to RM5.51 currently.

“Maintain Buy and RM6.30 TP (RNAV -derived),” it said on Thursday, Jan 28.

Its said the sell-down – which might be due to China’s credit tightening initiatives – is excessive as there is still strong growth potential in China’s huge retail sector.

The December 2009 monthly data showed a 17.5% jump y-o-y (vs Nov 2009’s 15.8%) in retail sales.

Hwang DBS Vickers Research said an added positive is Parkson’s strong balance sheet (RM226 million net cash at end-September 2009) and healthy free cash flow (RM370 million in FY11F).

Foreign interest is returning with 25.4% foreign shareholding in Nov 2009 (versus a low of 20% in early 2009).

“Separately, the discount of Parkson’s market cap to its share of HK-listed Parkson Retail Group’s market cap has narrowed to 30% from a one-year high of 40.5%, but is still above its historical average of 25%. This suggests Parkson may continue to outperform Parkson Retail Group,” it said.

Maybank IB: Market should be 'fundamentals bullish' this year

Maybank IB: Market should be 'fundamentals bullish' this year

Tags: Maybank Investment Bank | Mohammed Rashdan Mohd Yusof

Written by Loong Tse Min
Thursday, 28 January 2010 16:37

KUALA LUMPUR: Maybank Investment Bank is positive on the outlook for the Malaysian equity market, which is underpinned by improving fundamentals including earnings growth and the FBM KLCI should be at about 1,400 by year-end.

Maybank IB chief executive officer Mohammed Rashdan Mohd Yusof said “we are fundamentals bullish".

"There is now clearly a earnings momentum, growth for quite a lot of our corporate sector and that in turn will reflect in a re-rating of the PEs (price-to-earnings) for the broader market area,” he told reporters on Thursday, Jan 28 at the pre-event for this year’s Invest Malaysia scheduled for March 30-31.

Mohammed Rashdan said Maybank IB’s house view was the FBM KLCI level to be about 1,400 at the year-end. The estimate is based on earnings momentum and a re-rating of the market on a broad level slightly higher to trade at about 16 times to 17 times PE.

As for the regional market selldown due led by the China government’s tightening liquidity to cool down its overheating economy, he said, “I also believe that Malaysia has shown its resilience in its fiscal and monetary policy management being shown that we were different in the previous round of tightening in 2007 when everybody else was increasing interest rates, we were not.

“We were proven right when there was a crash. Everybody else had interest rate volatility, we did not have interest rate volatility," he said.

Underscoring corporate earnings growth momentum in Malaysia this year, he said, was “a great deal of” domestic investment as well as foreign direct investment. “That is in essence, why we are fundamentals bullish,” he said.

The Edge

AmResearch: Cyclical bull rally has not prematurely ended

AmResearch: Cyclical bull rally has not prematurely ended

Tags: AmResearch | corporate earnings | cyclical bull rally

Written by AmResearch
Thursday, 28 January 2010 14:30

KUALA LUMPUR: AmResearch Sdn Bhd believes there is more upside for the local stock market and from a fundamental standpoint; it does not think the cyclical bull rally in the market has prematurely ended.

It said on Thursday, Jan 28 that for Malaysia, it expects gross domestic product to rebound by 5.7% in the first quarter 2010 (1Q10) and rise by a further 4.7% in 2Q10 before moderating to below 3% in the last two quarters of this year - as the low base effect tapers off.

“Historically, market performance has been strongest when GDP accelerates, underpinning a macro backdrop for corporate earnings - to expand at an even faster pace than our current estimate of 25% for 2010 (2009: -2%),” it said.

AmResearch retains its fair value of 1,450 for the FBM KLCI, based on 2010’s PE of 16.5 times or one standard deviation above its mean of 14.5 times.

Market should trade above its long-term average because corporate earnings growth of 25% set to rise this year is already more than three times the historical average growth rate of just 7% per annum.

“This market correction, therefore, presents an opportunity to accumulate quality stocks,” it said, adding several “high-beta” stocks on its Buy list that have been sold down in recent days are CIMB, IJM Land, Tenaga Nasional, Ann Joo Resources, AirAsia, Unisem, MPI and Genting Group.

To recap, it said that in recent days, the market rally has been somewhat destabilised by policy tightening surprises in China where it again moved in to curb banks from lending.

The FBM KLCI retraced 43 points (down 3%) on Wednesday from its recent peak of 1,308 on Jan 21 with risk aversion resurfacing.

It said the issue was whether this correction signaled the beginning of a valuation de-rating or a transitory mid-cycle pullback due to profit taking after a strong start since early this year.

AmResearch said it appears unlikely that China’s policy tightening will undermine its economic growth (4Q GDP: 10.7%) and by extension, de-rail the global economic recovery already gathering pace. Its baseline view is that the macro momentum remains robust.

“We continue to believe that the cyclical economic upswing will be most significant in 1H 2010, given a depressed base last year,” it said.

For Malaysia, its analysis of previous earnings-driven rally from trough to peak - in 1998/1999 and 2001/2002 - also indicates that an uptrend has never been shorter than 12 months.

The rallies in 1998/1999 and 2001/2002 sustained for 16 months and 12 months; respectively. Corporate earnings rebounded by a strong 36% in 1999 after contracting 20% in 1998. In 2002, corporate earnings accelerated by 24%, from just 3% in 2001.

“We are only just 10 months from lows seen in March 2009, and corporate earnings are still expanding with upside bias. To be sure, the previous earnings-driven rally from trough to peak - in 1998/1999a and 2001/2002 - was also punctuated by three mid-cycle corrections. Pullback was transitory, stretching no longer than two months. Dips were 15% to 22% off intermittent highs,” it said.

AmResearch said a 15% pullback from the market’s recent high of 1,308 means that it might form a base at 1,112 (or a 2010’s price-to-earnings of 12.8 times), implying a potential downside risk of 12% from the current 1,265.

However, the flipside is that the market will correct to 1,112, if it materialises. This would imply that an earnings-driven rebound to our fair value of 1,450 would also produce an attractive potential return of 30%, outweighing a downside risk of 12%.

“Thus, even though trading conditions might remain volatile at least until concern of policy risk dissipates, the upside potential is greater than downside risk,” it said.

It remained committed to its view that profit drivers - particularly for cyclicals - auto, banks, CONSTRUCTION [], property, transport and TECHNOLOGY [] and media are solidifying as end-demand and margin recovery kick-in to accentuate an earnings rebound.

Hartalega 3Q net profit up 67% to RM37m

Hartalega 3Q net profit up 67% to RM37m
Written by Joseph Chin
Thursday, 28 January 2010 18:44

KUALA LUMPUR: HARTALEGA HOLDINGS BHD []'s earnings rose 67% to RM37.2 million in the third quarter ended Dec 31, 2009 from RM22.23 million a year ago, boosted by higher demand for its gloves.

It said on Thursday, Jan 28 that revenue rose 24.8% to RM148.59 million from RM119.05 million. Earnings per share were 15.35 sen compared with 9.17 sen. It declared five sen dividend per share.

"The significant achievement in revenue and profit before tax is in line with the group's continuous expansion in production capacity, increase in demand and more efficient production process, higher premium nitrile gloves, lower synthetic and natural latex price and favourable exchange rate," it said.

Hartalega said demand for gloves surged substantially due to the outbreak of H1N1, resulted in tight supply for both synthetic and natural latex gloves.

"We have started to build another plant with 10 new advanced high capacity glove production lines in June 2009 and targeted to commission two of the production lines by end of the financial year.

"With continuous growth in demand for gloves from the healthcare and food sector, the group has a positive outlook," it said.

The group's products are sold to the health care industry. It said glove consumption was inelastic in the medical environment because the usage of glove is mandatory for disease control.

It added its nitrile synthetic glove was well accepted by the end users due to it high quality and elastic PROPERTIES [] that mimic that of a natural rubber glove.

"Our protein free and competitive priced nitrile glove has made it more affordable for the acute health care industry to continue switching from the natural rubber to our synthetic nitrile glove to avoid the protein allergy problem," it said.


From The Edge

Make Money From Your Blog

http://www.youtube.com/watch?v=qVgrb4mMNnw&feature=related

****How to make Money in the Stock Market? Video on Value Investing

http://www.youtube.com/watch?v=40RTmUlzOVw

This news is positive for Coastal

Company Name : COASTAL CONTRACTS BHD
Stock Name : COASTAL
Date Announced : 28/01/2010



Type : Announcement
Subject : Coastal Contracts Bhd (“Coastal” or “Company”) – Memorandum of Understanding (“MoU”) between Ramunia Fabricators Sdn Bhd (“RFSB”) and Pleasant Engineering Sdn Bhd (“PESB”)



Contents : The Board of Directors of Coastal is pleased to announce that its wholly-owned subsidiary, PESB, has on 28 January 2010 signed a MoU with RFSB for the proposed collaboration to undertake the tendering, bidding and fabrication in relation to any contract involving the engineering, procurement and construction of any topsides, jackets or any structures for the oil and gas industry.

RFSB is a wholly-owned subsidiary of Ramunia Holdings Bhd (“Ramunia”), and is involved in civil, structural and building maintenance, mechanical engineering and maintenance, as well as offshore facilities and tanks/tanks farm construction.

PESB owns a yard with facilities to carry out fabrication and engineering works at Seguntor, Sandakan, Sabah, measuring approximately 52.37 acres in aggregate.

The MoU shall take effect on the date of its execution and shall continue to be of effect until the occurrence of any of the following, whichever is the earlier:

1. the execution of the appropriate legally binding agreement or agreements regarding the parties’ intended collaboration; or

2. the expiry of a period of 2 years from the date of the MoU’s execution or such later period as mutually agreed between the parties; or

3. the MoU’s early termination by either party by giving 2 months’ written notice of termination.

Except for Lembaga Tabung Haji which is the common substantial shareholder of both Ramunia and Coastal, none of the directors and/or substantial shareholders of the Company and persons connected with them has any interest, direct or indirect, in the above transaction.

http://announcements.bursamalaysia.com/EDMS/edmsweb.nsf/LsvAllByID/0B091A5A5420EC44482576B900324BF2?OpenDocument

Over the long term, shares have proved both less risky and more lucrative than other main forms of investments

Shares less risky in long term

Shares are generally thought of as far more risky than investing in bonds or putting money into a bank account. In many ways they are not.

It is true that if someone puts their life savings into the shares of one or two companies in the expectation of a rapid return they are taking a big risk. If they are lucky they could make a substantial gain but they could equally make large losses.

But there are two main ways in which investment in shares can be made less risky.

• One is to diversify from one or two firms to a mixed basket of different types of shares – this is discussed elsewhere on this site (see Advantages of fund investment).
• The other is to extend the duration of the investment to a longer time span.

The longer an investor’s time horizon the safer it is to invest in shares. For long term investment it is actually safer to invest in shares than in bonds or cash.

One definitive study of this phenomenon is by Jeremy Siegel, a professor of finance at the University of Pennsylvania, in Stocks for the Long Run (McGraw-Hill 2002). From a study of American stockmarket returns from 1802-2001 he shows that shares beat bonds and bills (short term government debt)

• 80% of the time with a 10-year horizon,
• 90% of the time with a 20-year horizon and
• almost all the time with a 30-year horizon.

Article ridiculed

Historically this has meant that even if someone has started to invest in shares at the worst time possible they have generally made good returns in the long term. Indeed Professor Siegel starts his book with a discussion of an article published in the summer of 1929 – just before the Wall Street crash - which argued for regular stockmarket investment. The article was subsequently ridiculed as it was published just before a three-year fall in the market which led to a cumulative decline of 89%. But Professor Siegel estimates that even taking this decline into account an investor who had invested in shares regularly for 30 years from 1929 would have made an average annual return of 13%.

Although Professor Siegel’s study concentrates on America the British market has behaved in a similar way. Over the long term shares have easily outperformed other asset classes.

Perhaps the most definitive study of long-term investment trends in relation to the British market is Triumph of the Optimists (Princeton University Press 2002) – the title itself is based on the fact that shares have outperformed other assets in the long term.

• According to this study an investment of £1 in shares in 1900 would have grown to £16,160 in nominal terms by the end of December 2000.
• In contrast the figure for long-term bonds was just £203 and
• for short term Treasury bills only £149.

Of course once inflation is taken into account the increases are not quite so dramatic. Once the 55-fold increase in prices over the century is incorporated into the calculations the return on

• shares would have been 291 times in real terms,
• on bonds 3.7 and
• on bills 2.7.

Inflation risk

Indeed one advantage of shares over bonds is that they tend to perform much better in periods of high inflation.

• Whereas inflation tends to quickly erode the capital value of bonds the stockmarket generally at least keeps up with rising prices.
• In other words one way in which shares are less risky than bonds is their relative immunity to the risk of inflation.

Another factor that can affect relative returns is taxation.

• For instance, if a government decided to impose a punitive tax on share dividends it would clearly hit returns.
• But historically companies have often found ways round this problem – such as distributing income by buying back their own shares – and all the main political parties now support wider share ownership.

As with all forms of investment the past is not necessarily a guide to the future. Returns in the next two decades may not be nearly as great as during the great bull market of 1982-99.

However, historically there is no doubt that over the long term shares have proved both

• less risky and
• more lucrative

than the other main forms of investment.

http://www.morningstar.co.uk/uk/default.aspx?lang=en-GB

 

When you are caught in a market panic

When you are caught in a market panic

In fact, the only rational thing to do is take courage and make buys. Being gutsy enough to act on our contrarian test - refusing to sell good stocks cheap because Wall Street and Main Street have lost faith for a few days - ensures that your earlier selling at better levels, or not at all, will prove appropriate.

It will be emotionally difficult to buy in a panic. those who can do so are demonstrably rational and therefore also calm enough to sell with discipline as the prior highs approached.

So, should you find yourself in the midst of a crisis in the future, remember:

•Do not engage in panic selling.


•Sit tight and stick to your strategy.


•If you are a long-term, buy-and-hold investor, do hold on.


•If you are an adventurous investor, follow your strategy to buy on dips.


Make sure your overall portfolio is designed to limit your potential losses during a substantial market decline.

http://myinvestingnotes.blogspot.com/2009/10/when-you-are-caught-in-market-panic.html

Fear is your friend

Fear is your friend

When you take a long-term view, the horrific market indicators are actually your friends because they lower prices of the stocks you are interested in. Fear is your buddy. Doom and gloom are close pals. Economic devastation is your friend. In fact, you should want the market to freak out because there is no other easy way to get a fantastic price for a business. Of course, I'm speaking in an investing sense -- obviously a recession is no fun on a day-to-day basis. But fortunes are built in times like these.

Why should you care about a few years of poor results if someone is willing to sell you that business for a song? In two or three years, you could be sitting pretty while the seller will be left with only remorse.

But of course, we want to be choosy with our investments in these turbulent times, so we suggest you focus on:

• Companies with good track records (earnings per share growth, return on equity)
• Companies with strong balance sheets (low debt-to-equity ratios)

http://myinvestingnotes.blogspot.com/2009/04/fear-is-your-friend.html

Graham's thinking was original and he preached value.

Graham preached value - the advantage of paying less for stocks than for the value of the current assets after deducting all liabilities.

One of Graham's favourite teaching strategies was to analyse 2 companies side by side, even if they were in different industries, and compare the balance sheets. 

• He would take Coca-Cola and Colgate, related to one another only by alphabetical proximity, and ask which stock was more of a bargain relative to the net asset values. 
• Graham's primary concern was the margin of safety, a focus which prevented hm from recognising the great growth potential in Coke.

Not all of Graham's tactics worked out.

1.  He would buy a leading company in an industry, such as the Illinos Central Railroad, and sell short a secondary one, like Missouri Kansas Texas, as a hedge. 

• As it turned out, the two securities were not correlated, and the hedge did not work.

2.  Another type of hedge that Graham used repeatedly was to buy a convertible preferred stock and short the common. 

• If the common rose, he was protected by the convertible feature. 
• If it fell, he made money on the short. 
• In either case, he collected the dividend. 
• This approach has become a standard practice in the industry even though it no longer has the tax advantage it once did. 

Graham is seen as a legitimate genius, someone whose thinking was original and often contrary to establish wisdom.  Graham's motivation, was primarily intellectual.  He was more interested in the ideas than in the money, although that too had its rewards.

An equally important strategy: Stay within your circle of competence.

The other term in their strategy is equally important.  This is what the Schlosses shared.


"We don't buy derivatives, indexes or commodities.

We don't short stocks.  We have in the past, and have made some money, but the experience was uncomfortable for us. 

We don't try to time the market, though we do let the market tell us which stocks are cheap.

We did invest in bankrupt bonds at one time, and if the situation presented itself to us, we might again.  But that field has become crowded over the years, and like most value investors, we don't want too much company.

We stay clear of ordinary fixed income investments.  The potential returns are limited, and they can be negative if the interest rates rise.

We buy stocks.  We invest in cheap stocks.

If we find a cheap stock, we may start to buy even before we have completed my research.  We have at least a rudimentary knowledge of many companies and we can consult Value Line or the S&P stock guide for quick check into the company's financial position. 

We believe the only way really to know a security is to own it, so we sometimes stake out our initial postion and then send for the financial statements. 

The market today moves so fast that we are almost forced to act quickly."

Now that the price has fallen ....

"I buy cheap stocks."

Identifying "cheap" means comparing price with value.

What attracts your attention is that the price has fallen. 

Scrutinize the new lows list to find stocks that have come down in price. 

If the price is at a two or three-year low, so much the better.

Some brokers may call with suggestions.  These tend to be at the opposite end of the spectrum from the momentum stocks that most brokers are peddling.

Be especially attracted to stocks that have gapped down in price - stocks where the price decline has been precipitous.

Stock prices sink when investors have been disappointed, either

• by a recent event such as an earnings announcement below expectations, or
• by continued unsatisfactory performance that ultimately induces even patient investors to throw in the towel. 

Some investors put money in

• these companies with shares that have plummeted in price, and
• in those that have slid downward gradually but persistently. 

These companies can be in different industries, and maybe large, medium and small companies. The unifying them is that the stuff they buy is on sale.

More than 70% of traders will lose nearly all their money!

According to the National American Securities Administrators Association, more than 70% of traders will lose nearly all their money! This is solid proof that the majority of traders and investors are dumb money.

What is the Dumb Money Doing Wrong?

First and foremost, the dumb money act as a herd or mob. This group exhibits very little individual decision making. This is exemplified by how the herd follows the financial news so religiously. The financial news is a severe lagging indicator. This is because reporters only report after the fact. It is so silly that people actually think they will gain knowledge that will allow them to have “the edge” in the markets. This isn’t possible because millions of other competing investors are watching the same news! The news is notoriously bullish right before a bear market and bearish right before the market starts soaring.

http://www.stock-market-crash.net/zero-sum.htm

http://myinvestingnotes.blogspot.com/2009/12/does-everyone-lose-in-crash.html

When to Buy, When to Sell: Value Investors Buy too Soon and Sell too Soon

The notion that an investor can buy a stock that has reached the bottom of its fall is a fantasy.  No one can accurately predict tops, bottoms, or anything in between. 

More often than not, value investors will start to buy a stock on the way down.  The disappointments or reduced expectations that have made it cheap are not going away anytime soon, and here will still be owners of the stock who haven't yet given up when the value investor makes an initial puchase.  If it is toward the end of the year, then selling to take advantage of tax losses can drive the price even more.  Because they are aware that they are - to use the industry cliche - catching a falling knife, value investors are likely to try to scale into a position, buying it in stages. 

• For some, such as Warren Buffett, that may not be so easy.  Once the word is out that Berkshire Hathaway is a buyer, the stock shoots up in price. 
• Graham himself, Walter Schloss recounts, confronted this problem.  He divulged a name to a fellow investor over lunch; by the time he was back in the office, the price had risen so much that he could not buy more and still maintain his value discipline. 
• This is one of the reasons why the Schlosses limit their conversations.

Still, when asked to name the mistake he makes most frequently, Edwin Schloss confesses to

• buying too much of the stock on the initial purchase and
• not leaving himself enough room to buy more when the price goes down. 

If it doesn't drop after his first purchase, then he has made the right decision. 

• But the chances are against him. 
• He often does get the opportunity to average down - that is, to buy additional shares at a lower price. 
• The Schlosses have been in the business too long to think that the stock will now oblige them and only rise in price. 

Investing is a humbling profession, but when decades of positive results confirm the wisdom of the strategy, humility is tempered by confidence.

Value investors buy too soon and sell too soon, and the Schlosses are no exceptions. 

• The cheap stocks generally get cheaper. 
• When they recover and start to improve, they reach a point at which they are no longer bargains. 
• The Schlosses start to sell them to investors who are delighted that the prices have gone up. 
• In many instances, they will continue to rise, sometimes dramatically, while the value investor is searching for new bargains. 
• The Schlosses bought the invetment bank Lehman Brothers a few years ago aat $15 a share, below book value.  When it reached $35, they sold out.  A few years later it had passed $130.  Obviously that last $100 did not end up in the pockets of value investors. 
• Over the years, they have had similar experiences with Longines-Wittnauer, Clark Oil, and other stocks that moved from undervalued through fair valued to overvalued without blinking. 
• The money left on the table, to cite yet another investment cliche, makes for a good night's sleep.

The decision to sell a stock that has not recovered requires more judgement then does selling a winner.  At some point, everyone throws in the towel. 

• For value investors like the Schlosses, the trigger will generally be a deterioration in the assets or the earnings power beyond what they had initially anticipated. 
• The stock may still be cheap, but the prospects of recovery have now started to fade. 
• Even the most tolerant investor's patience can ultimately be exhausted. 
• There are always other places to invest the money. 
• Also, a realized loss has at least some tax benefits for the partners, whereas the depressed stock is just a reminder of a mistake.

Footnote: 
Over the entire 45 year period from 1956 through 2000, Schloss and his son Edwin, who joined him in 1973, have provided their investors a compounded return of 15.3% per year. 

For the nine and a half years that Walter Schloss worked for Ben Graham and for some years after he left to run his own partnership, he was able to find stocks selling for less than two thirds of working capital. But sometime after 1960, as the Depressin became a distant memory, those opportunites generally disappeared. Today, companies that meet that requirement are either so burdened by liabilities or are losing so much money that their future is in jeopardy. Instead of a margin of safety, there is an aura of doubt.

****3 Steps To Profitable Stock Picking

3 Steps To Profitable Stock Picking

Stock picking is a very complicated process and investors have different approaches. However, it is wise to follow general steps to minimize the risk of the investments. This article will outline these basic steps for picking high performance stocks.

Step 1. Decide on the time frame and the general strategy of the investment. This step is very important because it will dictate the type of stocks you buy.

Suppose you decide to be a long term investor, you would want to find stocks that have sustainable competitive advantages along with stable growth. The key for finding these stocks is by looking at the historical performance of each stock over the past decades and do a simple business S.W.O.T. (Strength-weakness-opportunity-threat) analysis on the company.

If you decide to be a short term investor, you would like to adhere to one of the following strategies:

a. Momentum Trading. This strategy is to look for stocks that increase in both price and volume over the recent past. Most technical analyses support this trading strategy. My advice on this strategy is to look for stocks that have demonstrated stable and smooth rises in their prices. The idea is that when the stocks are not volatile, you can simply ride the up-trend until the trend breaks.

b. Contrarian Strategy. This strategy is to look for over-reactions in the stock market. Researches show that stock market is not always efficient, which means prices do not always accurately represent the values of the stocks. When a company announces a bad news, people panic and price often drops below the stock's fair value. To decide whether a stock over-reacted to a news, you should look at the possibility of recovery from the impact of the bad news. For example, if the stock drops 20% after the company loses a legal case that has no permanent damage to the business's brand and product, you can be confident that the market over-reacted. My advice on this strategy is to find a list of stocks that have recent drops in prices, analyze the potential for a reversal (through candlestick analysis). If the stocks demonstrate candlestick reversal patterns, I will go through the recent news to analyze the causes of the recent price drops to determine the existence of over-sold opportunities.

Step 2. Conduct researches that give you a selection of stocks that is consistent to your investment time frame and strategy. There are numerous stock screeners on the web that can help you find stocks according to your needs.

Step 3. Once you have a list of stocks to buy, you would need to diversify them in a way that gives the greatest reward/risk ratio. One way to do this is conduct a Markowitz analysis for your portfolio. The analysis will give you the proportions of money you should allocate to each stock. This step is crucial because diversification is one of the free-lunches in the investment world.

These three steps should get you started in your quest to consistently make money in the stock market. They will deepen your knowledge about the financial markets, and would provide a of confidence that helps you to make better trading decisions.

http://tradingindicator.blogspot.com/2010/01/3-steps-to-profitable-stock-picking.html

Comment:  There are many ways to make money.  Investing for the long term is profitable for many investors.  Some of those who employ other strategies can also be profitable too.