myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.

Monday 29 March 2010

The Dark Secret of the Best-Performing Stocks

By Matt Koppenheffer

March 25, 2010 | Comments (19)

At this point, I've seen this list of the past decade's top-performing stocks so many times that I can recite most of them from memory. But there's good reason to keep picking apart these top performers, because any one of them had the potential to turn a mediocre portfolio into a market-beater.

Here's a peek at 10 of the top 25 performing stocks of the past decade:

Company	Price Change Jan. 1, 2000, to Jan. 1, 2010
Bally Technologies	5,975%
XTO Energy (NYSE: XTO)	5,917%
Southwestern Energy	5,776%
Clean Harbors	4,669%
Deckers Outdoor	3,775%
Jos. A Bank Clothiers	3,196%
Range Resources	2,246%
FTI Consulting	2,022%
CarMax	1,997%
Terra Industries (NYSE: TRA)	1,960%

Source: Capital IQ, a Standard & Poor's company.

The list may look pretty familiar, but what you may not know is that these companies, and many of the decade's other top performers, share a dark secret.

Skeletons in the closet
If you're thinking I'm going to say that all of the companies above were small and that they beat the pants off of large, well-known stocks like Procter & Gamble (NYSE: PG) and Disney(NYSE: DIS) (which returned 10.7% and 10.3%, respectively), I'm not. It's true, but a number of my colleagues have already done a great job highlighting that very important aspect.

So what is the secret, then? Instead of simply telling you, let's take another look at the companies listed above and see if you can figure it out.

Company	Price Change Jan. 1, 1998, to Jan. 1, 2000	Return on Equity in 1999	Debt-to-Equity in Early 2000
Bally Technologies	(84.1%)	Unprofitable	Negative book value
XTO Energy	(45.5%)	19.5%	340.8%
Southwestern Energy	(49%)	5.3%	140.5%
Clean Harbors	(20%)	Unprofitable	230.2%
Deckers Outdoor	(65%)	5.3%	14.6%
JoS. A. Bank Clothiers	(44.2%)	3.2%	35.9%
Range Resources	(80.4%)	Unprofitable	417.5%
FTI Consulting	(60%)	2.9%	206.7%
CarMax	(74.3%)	Unprofitable	62.2%
Terra Industries	(88%)	Unprofitable	77.7%

Source: Capital IQ, a Standard & Poor's company.

Now what would you say ties all of these top-performing companies together?

If you said something to the tune of "they looked like terrible investments," then you get a gold star. Even a quick glance at that chart would send chills up the spine of most fundamental-oriented investors. Many of the companies were unprofitable, the ones that weren't produced lackluster returns on capital, and quite a few were swimming in debt.

Maybe it's not so surprising, then, that the market hated these stocks at the time. Those are some massive declines posted above, and bear in mind that this was over a period when the S&P jumped more than 50%.

Time to scrap everything we know?
Does this mean that we should forget about looking for high-quality companies trading at reasonable prices in favor of looking in the garbage bin? I don't think so.

The list of the decade's top-performing stocks isn't the only place where lousy returns on equity and high debt levels show up. You can also find numbers that look like that on a list of the decade's bankruptcies.

According to Capital IQ, there were 667 publicly traded companies with market caps above $10 million that filed for bankruptcy over the past decade. In 2000, only 22 of those companies could claim a return on equity above 15% and debt-to-equity below 50%. The rest of the companies that went belly up sported numbers that looked a lot like those in the chart above.

In other words, taking fliers on companies with ugly-looking financials could land you a massive winner, but it also gives you a big chance of taking hefty losses.

Swing at good pitches
By sticking to investing in reasonably capitalized and solidly profitable companies that are trading at attractive prices, we may miss out on some of the biggest winners, but we also vastly reduce the chances of sticking ourselves with clunkers headed toward bankruptcy.

And don't worry, there are still plenty of opportunities for big returns. With gains of 9,211% and 7,024%, respectively, Green Mountain Coffee Roasters (Nasdaq: GMCR) andHansen Natural (Nasdaq: HANS) were two of the very best performing stocks of the decade, and both would have fit a "high quality at a reasonable price" strategy back in 2000.

Of course, even companies that produce good-looking numbers can end up being poor investments. Ten years ago, the numbers all seemed to line up for American Capital(Nasdaq: ACAS) and Ethan Allen Interiors, but both stocks ended up getting clobbered.

That's why the team at the Motley Fool Hidden Gems newsletter not only focuses on companies that produce attractive financial returns, but also digs in to evaluate intangibles like competitive moat, growth opportunities, and management effectiveness. The team's research recently led it to buy shares of a fashion retailer for the newsletter's real-money portfolio.

http://www.fool.com/investing/small-cap/2010/03/25/the-dark-secret-of-the-best-performing-stocks.aspx

Sunday 28 March 2010

Risk in Stock Market – Stock Market Risk Management

Risk in the stock market is everywhere. Investing in the stock market is fraught with worry, for good reason. If you lose half of your investment, you must double your return to just breakeven. Warren Buffett, considered by many to be the world’s greatest investor, states his first rule of investing is “do not lose money.” Unfortunately, the risk in the stock market of losing your money is always a possibility. However, without taking some risk there is no reward. Therefore, successful investors employ stock market risk management strategies to minimize their losses. Managing risk in stock market starts with identifying the type of risk and taking action to mitigate the impact of the risk on your investment portfolio.

Risk in the stock market comes in many forms and each can lead to a loss. The most common is the overall trend of the market. Approximately 60 % of the move of an individual stock is attributed to the trend of the stock market. If the stock market is rising, it takes with it most of the other stocks, though not in equal amounts. When the stock market falls, stocks sink with it.

Another big risk in stock market lies with owning an individual stock. While owning the stock of a company can offer greater rewards, it also entails the risk that something might go wrong that can cut the price of the company’s shares in half. It might be news that sales have suddenly fallen due to a new competitor, or a product liability issue has arisen. For whatever the reason, individual stocks are subject to risk associated to them alone.

While there are other risks in the stock market, these encompass the vast majority of the ones you will encounter. Fortunately, investors can employ several strategies as a part of their stock market risk management program.

http://pediaworld.com/risk-in-stock-market-stock-market-risk-management/

Investing in "Fallen Angels"

When it comes to investing, many people are interested in trying to find the "right" stock. Gabriel Wisdom has found a great deal of success in looking for "fallen angels" -- stocks that were once "hot" but have fallen out of favor. In his recent book, Wisdom on Value Investing: How to Profit on Fallen Angels, Wisdom provides helpful hints that you can use to help improve your investing performance. I recently spoke with Wisdom over the phone, and he talked about how you can profit from looking for these fallen angels.

"The old Wall Street used to refer to fallen angels to describe something that was very popular and overpriced for a time before it fell. We've updated the term to refer to stocks and bonds that have fallen -- but that should be rising. Based on revenue and earnings growth, or on balance statements, these are investments that are on sale, and have a great upside potential over time."

Wisdom describes value investing at its finest: Look for fundamentally sound companies that are undervalued, and invest in them for the long term. "It's important, though, to distinguish between 'fallen' and 'falling'," Wisdom points out. "You want a security that has already come close to reaching its bottom."

He also insists that investors need to look at markets in terms of cycles, and what happens during these cycles. "Just like cars, groceries and other items, there are good times to buy stocks and bonds, giving you a better deal. You need to study the market and ideally buy when things are on sale. Then you sell when everyone else is excited about what is happening."

Knowing when to sell is an important part of investing. "It's the hardest part of successful investing," Wisdom says. "J. Paul Getty, possibly the first billionaire of his time, bought when people were complaining and sold when they were celebrating." Wisdom offers three keys to knowing when to sell:

Something has changed fundamentally so that the reason you bought is no longer valid.
Your profits come sooner than anticipated. Wisdom recommends that you should at least sell half if you can't part with the whole investment at once.
A better investment opportunity comes along, and you need the capital to take advantage of it.

In addition to offering the above insights, Wisdom's book also includes other helpful investing hints. The first chapter offers 10 traits of good bargain hunters, and provides you with great information on how to develop these traits. The book then takes you through bottom fishing, cheap and timely securities, Wall Street cycles, time arbitrage, and profit vs. panic. The book also includes a helpful checklist for effective investing. I like this checklist because it forces you to stop, take stock of the situation and make investment decisions (to buy or sell) based on something approaching rational thought, rather than a visceral reaction to what might be happening in the market.

You really can become a better investor if you pay attention to fundamentals, and look for investments that are underpriced but have good upside potential.You may not score big in a year or two, but you are more likely to see steady gains over the years if you employ some of the techniques in Wisdom's book.

http://www.allbusiness.com/banking-finance/financial-markets-investing-securities/13837019-1.html

And the message to all fellow Malaysians is .......

...................................... ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?

http://malaysia-today.net/index.php?option=com_content&view=article&id=30855:dr-m-says-perkasa-champions-malay-rights-due-to-weak-umno-&catid=19:newscommentaries&Itemid=100131

But a bear market isn't all bad news.

Sure, it can hurt when your portfolio takes a hit when stock prices fall. But you'd still better be prepared for the inevitable downturns in the stock market, and remember that the situation is only temporary, after all. In every instance when the overall market dropped, it returned and then grew to greater heights. In fact, the stock market has a 100 percent success rate when it comes to recovering from a bear market! The only thing to remember is that sometimes it takes longer for the bounce-back to occur.

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

The Longs and the Shorts

Longs have unlimited potential.
Shorts have unlimited liabilities.

Related posts:

Don't Be Long and Wrong

Observing Long-Term Investing

Now It's Time for Short-Sellers to Panic

Most look for the bull and neglect the bear. DON'T NEGLECT THE BEAR

Jim Rogers wrote - Don't neglect the Bear - in his book 'A Gift to My Children':

What is it that most investors fail to consider? Most look for the bull and neglect the bear. As an investor, I am always in search of "what is bearish." When people are crazed about an overheated market and are oblivious of other investment possibilities, that's when I find a good deal.

During the stock bubble of 1998, when most people ignored commodities, I started up a commodity index. Commodities had been in the doldrums for years, so no one had made any money. Most people fled the field, and few young people even studied natural resources. Fewer still went into farming or mining (MBAs were all the rage then, remember?). the end result being that we currently have a shortage of farmers and geologists. That is true in other countries as well. These factors led to a multiyear decline in productive capacity, while demand kept rising. The returns show how well commodities have done. The Rogers International Commodity Index, which I founded in 1998, quadrupled over the next ten years, while the Standard and Poor's 500 index of stocks rose about 40 percent.

Also read:

Betting on the Blind Side

Learning from Michael Burry: from being a medical resident to being regarded as one of the greatest investors in recent history.

Should these 'not knowable in advance' factors influence your investing?

The economy, interest rates, fuel prices, commodity prices, foreign exchange, price of gold and geopolitical situations; should not these influence your investing?

Yes, these are hugely important factors. However, they are not predictable and largely out of our control. They are not knowable in advance. It is better to distance oneself from thinking about them when assessing the business to invest in.

Therefore, the approach adopted should generally not be a top-down macroeconomic one, but a bottom-up microeconomic one.

“The implication is with the passage of time, a good business over a long period of time produce results to the investor over time.”

Also read:
The Ultimate Signal to Load Up on Stocks?

Legendary fund manager Peter Lynch famously said that if investors spend 13 minutes thinking about the economy, they've wasted 10 minutes. Granted, Lynch wasn't managing money during a mega-macroeconomic crisis of the sort we're facing ...

Asset Allocation and Economic Hedging in Various Economic Environment

Asset Allocation

This is also referred to as economic hedging and can be defined as a conservative method of diversifying assets so they will react different under various economic conditions.

Successful investing can be based on 4 key characteristics as follows:

Discipline
Patience
Historical Prospective
Common Sense Strategy

Reasons for using asset allocation:

History repeats itself
No one can predict the future – not even the experts
Comfort in knowing you have not painted yourself in a corner
Acts as a hedge against financial risks you cannot control

To protect against risks, the risks must first be identified and then investments set up to diversify around them. Listed below are the main types of economic environments.

Hyper Inflation (100%+/year)
Double Digit Inflation (10%+/year)
High Inflation (5 to 9%/year)
Normal Inflation (2 to 4%/year)
Recession
Depression

Now lets look at a couple examples of how various investment types do in these differing environments.

In a depression we see the following:

Stocks go way down (85-90%)
Real Estate – Also tends to go down
Interest Rates – drops to very low rates
Unemployment – this goes way up
Property – material things tend to lose value
Bonds – These do well, as bonds tend to vary inversely with interest rates.

Recommended investment in a depressed economy then would be high quality, intermediate term (2-4 year), discounted corporate bonds.

On the other hand in a Hyper-Inflation economy the situation would be completely different.

Stocks – do well for a while, then collapse
Real Estate – depends, because it is often bought with debt
Gold – this has done well in keeping its value in hyper-inflation conditions

Of note, the last time the US was in a hyper-inflation economy was during the civil war. However several other countries have been in this situation in recent years.

Now that we know how the environment can affect different investments, let's look at what investments are best for each environment and how to protect your investments in these changing economic times with economic hedging.

http://www.nassbee.com/wealthy/asset_allocation.html

Economic Hedging

Following our discussion on asset allocation, below is a list of the best types of investments for each type of environment.

Economic Environment	Best Investment
Hyper Inflation	Gold
Double Digit Inflation	Real Estate
High Inflation	Real Estate / Stocks
Normal Inflation	Stocks
Recession	Cash
Depression	High Quality Corporate Bonds

How you will allocate your assets will depend on if you are in or near retirement as well as other personal circumstances. Below are two basic allocation structures. You should review your own needs to decide what type of allocation meets your needs best.

Aggressive

Cash	Bonds	REIT	Stocks	Gold
15-20%	15-20%	30%	30%	2-5%

Retired

Cash	Bonds	REIT	Stocks
25%	25%	25%	25%

(These percentages can be vaired slightly to fit in 2% Gold for better hedging.)

Over the past 30 years, average yields for these types of investments has been about as follows:

Investment	Avg Yield
Cash	4%
Bonds	7%
REIT	8%
Stocks	10%

For the retired plan then this would have yielded a safe 7.25% annual return. For the aggressive investor it would closer to 8%.

Rebalance

In order to keep the advantage of asset allocation you should rebalance your investments every year. When this is done is not important as long as it is done at least once per year. By taking profits from the investment types that are doing well and putting the money in those that are down, you are buying low and selling high without any emotional input that may cloud your decision. Rebalancing should then be done as follows:

Periodically (at least once per year)
If there is a major change in your life
If there is a major change in the financial market

http://www.nassbee.com/wealthy/economic_hedging.html

My 18 points guide to Successfully compounding your money in Stocks

Be a good stock picker.
Think as a business owner.
Always look at value rather than the price. Do the homework.
Buy and hold is alright for selected stocks.
Compounding is your friend, get this to work its magic.
Mr. Market is there to be taken advantage of. Do not be the sucker instead. BFS;STS.
Always buy a lot when the price is low.
Never buy when the stock is overpriced.
It is alright to buy when the selected stock is at a fair price.
Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the price is still obviously too high.
Do not time the market for such or any stocks.
By keeping to the above strategy, the returns will be delivered through the growth of the company's business.
So, when do you sell the stock? Almost never, as long as the fundamentals remain sound and the future prospects intact.
The downside risk is protected through only buying when the price is low or fairly priced.
Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.
Sell urgently when the company business fundamental has deteriorated irreversibly.
You may also wish to sell should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality. However, unlike point 16, you can do so leisurely.
In conclusion, a critical key to successful investing is in your stock picking ability.

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html

11 Lessons From Peter Lynch

Peter Lynch taught me:

1. Behind every stock is a company. Find out what it’s doing.
2. Never invest in any idea you can’t illustrate with a crayon.
3. Over the short term, there may be no correlation between the success of a company’s operations and the success of its stock. Over the long term, there’s a 100% correlation.
4. Buying stocks without studying the companies is the same as playing poker – and never looking at your cards.
5. Time is on your side when you own shares of superior companies.
6. Owning stock is like having children. Don’t get involved with more than you can handle.
7. When the insiders are buying, it’s a good sign.
8. Unless you’re a short seller, it never pays to be pessimistic.
9. A stock market decline is as predictable as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.
10. Everyone has the brainpower to make money in stocks. Not everyone has the stomach.
11. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

Lynch’s advice had a profound effect on my stock market approach. He taught me that investment success isn’t the result of developing the right macro-economic view or deciding when to jump in or out of the market. Success is about researching companies to identify those that are likely to report positive surprises.

Capital Expenditure

A great company with a Durable Competitive Advantage will have a ratio of Capital Expenditures to Net Income of less than 25%. Less is better.

Capital Expenditures are expenses on:
- fixed assets such as equipment, property, or industrial buildings
- fixing problems with an asset
- preparing an asset to be used in business
- restoring property
- starting new businesses

A good company will have a ratio of Capital Expenditures to Net Income of less than 50%.

A great company with a Durable Competitive Advantage will have a ratio of less than 25%.

Less is better.

Benjamin Graham's 113 Wise Words

The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

Philip Fisher's Wise Words

"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

The Ultimate Hold-versus-Sell Test

Here is the overriding primary test, followed by observations on why it is so critically important:

Knowing all that you now know and expect about the company and its stock (not what you originally believed or hoped at time of purchase), and assuming that you had available capital, and assuming that it would not cause a portfolio imbalance to do so, would you buy this stock today, at today's price?

No equivocation. Yes or no?

Answers such as maybe or probably are not acceptable since they are ways of dodging the issue. No investor probably buys a stock; they either place an order or do not.

Here is the implication of your answer to that critical test: if you did not answer with a clear affirmative, you should sell; only if you said a strong yes, are you justified to hold.

Some thoughts on Analysing Stocks (KISS)

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.

Margin of Safety Concept: Stocks should be bought like groceries, not like perfume

The high CAGR in the early years of the investing period, due to buying at a discount, tended to decline and approach that of the intrinsic EPS GR of the companies over a longer investment time-frame.

Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?