Bullbear Buffett

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.

Wednesday, 15 August 2012

My Investing Objective

My investing objective:
To grow my whole portfolio by 15% per year over many years, that is, doubling the portfolio value every 5 years.

For every 5 stocks, expect 3 to do averagely, 1 to do exceptionally well and 1 to underperform. Sell the underperformer and keep the winners. By ensuring that you do not lose or lose small (not big), the modest gains from your stocks will translate into good gains for your overall portfolio.

For every 5 years in the stock market, expect 4 bull years and 1 bear year. If you can avoid investing in a bubble market, you will often be safe with your carefully chosen and implemented philosophy and strategy.

There are many variables affecting the returns of your investing.

Choose a long term time horizon (>10 years) for your investing. The reasoning is as below.

You can see here why stocks are considered a good long-term investment, but a horrible short-term investment. This chart shows that for any 25-year period within 1950-2005, the very worst you would have done was +7.9% annually while the best was +17.2%. However, for a 1-year time horizon, the possible returns vary wildly.

"Invest to increase your wealth"

(68)

Reward-risk Chart

Everyone will fall on different parts of the below reward-risk graph.

The goal is to get to the fourth quadrant (high reward, low risk; bottom right hand corner). Thumbs Up

Of course the ideal quadrant is the Low Risk, High Reward quadrant.
Yet many times, investors end up in the High Risk, Low Reward quadrant.

Always understand the risk-reward relationship in your investments and your work.

The Ratio of Successful and Unsuccessful Traders

Multiple Streams of Income

QMV approach

QMV approach

Q = Quality of the Business
M = Integrity and Efficiency of the Management
V = Value or Valuation

To reach large sums, you only need to save smaller amounts early on.

For selected good quality growth/value stocks, over a 10 years investing horizon, the upside reward/downside risk
= 100% upside gains / 0% downside loss. Thumbs Up

Investment Life Cycle versus Business Ownership Life Cycle

The three most important words in the books of Benjamin Graham

Yes, these are the three most important words in the books of Benjamin Graham.

If you have to take home a message from his thick books, it is knowing everything about "Margin of Safety".

Better still, tattoo these three words to your body, so that you can be reminded every minute of the day. Smiley

The "Good Investment". Clarify your Investment Goals.

By pinpointing what you think represents value, you can now create your definition of a good investment. You should be able to summarize it in one sentence.

Consider these examples:

Warren Buffett: a good business that can be purchased for less than the discounted value of its future earnings.

George Soros: an investment that can be purchased (or sold) prior to a reflexive shift in market psychology/fundamentals that will change its perceived value substantially.

Benjamin Graham: a company that can be purchased for substantially less than its intrinsic value.

A few more examples:

The Corporate Raider: companies whose parts are worth more than the whole.

The Technical Analyst: an investment where technical indicators have identified a change in the price trend.

The Real Estate Fixer-Upper: run-down properties that can be sold for much more than the investment required to purchase and renovate them.

The Arbitrageur: an asset that can be bough low in one market and sold simultaneously in another at a higher price.

The Crisis Investor: assets that can be bought at fire-sale prices after some panic has hammered a market down.

Coming to your definition of a good investment is easy - if you're clear about the kinds of investments that interest you and have clarified your beliefs about prices and values.

Choose Your Mentor

The fastest way to master anything is to study with a Master of the Art.

If someone has already perfected the method of investing that appeals to you, why reinvent the wheel? Seek him out. If necessary, offer to work for him for nothing (as Buffett offered to Graham).

If that's not possible you can still adopt your mentor by long distance. Read and study everything you can about him and his methods. When you're thinking about making an investment always ask yourself: "What would he do?"

Spending money is simple - anyone can do it. Making money is not.

Living below your means

Frugality is a natural aspect of Buffett's character. As his wealth increased, he indulged in minor extravagances. He bought an executive jet he named The Indefensible.

But wealth didn't change his natural frugality. It is easy to see how the consequence of living below your means is important when you're starting out. It's the only way you can accumulate capital to invest. What's less obvious is how this mental habit remains crucial to your investment success even after your net worth has soared into the billions.

Very simply, without this attitude to money you won't keep what you have earned. Spending money is simple - anyone can do it. Making money is not. That;s why living below your means is the attitude that underlies the foundation of the Master Investor's success: Preservation of Capital.

Is it working? Always measure and monitor your investments.

You can't tell if something is working unless you measure it.

Set a return on investment for your projects to make a contribution, with a deadline. Monitor the progress towards that at regular (monthly) intervals.

"It worked last time?"

How many of your decisions are based on "It worked last time?"

Take another look, and you might see that some of those successful outcomes are random, or - even worse - lucky.

Don't panic more than you have to. Look at the return over years rather than days.

Don't panic more than you have to. Decide measurable standards for what events are a concern, a worry and a big problem, and what you'll do when they happen.

If the value of your pension drops in a stock-market dip, for example, the best advice is often to do nothing, wait for a recovery and look at the return over years rather than days.

Always look at facts and the statistical basis first.

We like to hear good news, so sometimes we trust unreliable sources. Don't make decisions based on what fits your preconceptions; look at facts and the statistical basis first.

Seek out and stay with the high probability events.

Make sure the majority of your portfolio is geared to offering long-term returns.

When you are investing, by all means look at the daily price shifts for entertainment and mild speculation, but make sure the majority of your portfolio is geared to offering long-term returns. Over ten or twenty years of conservative investment is far more attractive than a meteoric stock.

Sometimes bad things happen to good people

When you review projects that went wrong, make it a search for the truth - not a search for someone to blame.

The greatest threat to your future financial security

The greatest threat to your future financial security is the loss, over time, in the purchasing power of power currencies. A dollar today buys less than 5% of what a dollar bought 100 years ago.

Study the fascinating history and theory of money and use this knowledge as a basis in formulating and guiding your investment philosophy.

The world's investment markets are interconnected.

To be a successful investor it wasn't enough to understand a company's market and competitors on its home turf: you need an appreciation of how foreign companies and economies might affect that company's destiny.

John Templeton

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?