Stocks that pay dividends provide a nice inflation hedge since their revenues and net income would be affected by an increase in overall prices paid by consumers.
Dividends soften losses during bear markets, and they provide the only sources for investment gains in troublesome times.
In addition, dividend income takes away the need to sell large chunks of your portfolio in a declining market.
Retirement income could be solely derived from dividends and their growth would compensate the dividend investor for the erosion in the purchasing power of the dollar.
If a retiree holds a diversified portfolio of stocks which have the ability to grow their dividend payments over time, they would be well prepared for retirement.
They should be focusing on stocks with high yields and ability to grow dividends; stocks with average yields but with above average dividend growth and some domestic and foreign index funds for diversification.
http://dividendgrowth.blogspot.com/2008/03/case-for-dividend-investing-in.html
Wednesday 6 August 2008
KLSE Counters on my radar screen.
Here is a list of counters in the KLSE I am tracking. I may or may not own these shares presently.
Consumer
DLady, Guinness, LionDiv, Nestle
Padini, PPB, QL, UMW
Industrial
APM, CBIP, Coastal, Esso
ICP, KNM, Kossan, Petgas
Shell, Tongher
Trading/Services
BCorp, Genting, HaiO, Integrax
KPJ, MUI, Maybulk, Parkson
Petdag, POS, Resorts, Tenaga
VADS
IPC
Puncak
Finance
KAF, HLB, Maybank, OSK
PBB, TA
Properties
Crescendo, OSKProp
Plantations
BStead
Closed-end fund
i-Cap
Consumer
DLady, Guinness, LionDiv, Nestle
Padini, PPB, QL, UMW
Industrial
APM, CBIP, Coastal, Esso
ICP, KNM, Kossan, Petgas
Shell, Tongher
Trading/Services
BCorp, Genting, HaiO, Integrax
KPJ, MUI, Maybulk, Parkson
Petdag, POS, Resorts, Tenaga
VADS
IPC
Puncak
Finance
KAF, HLB, Maybank, OSK
PBB, TA
Properties
Crescendo, OSKProp
Plantations
BStead
Closed-end fund
i-Cap
Games people play
Essentially, there are 3 types of games people can play. These are:
1. Positive sum games
2. Negative sum games
3. Zero sum games
In positive sum games, the odds of winning are high and there are many winners.
In negative sum games, the odds of losing are high and there are many losers.
In zero sum games, the odds of winning equal those of losing, the winners are at the expense of the losers.
It is important to choose the games one wishes to play. It is very important to know the types of games one chooses to play in.
To win, choose the one in the category of the positive sum game.
Avoid playing in those negative sum games. For those wishing to "win" (try their luck or gamble) in negative sum games, their best chance of coming out the "winner" is probably just to place ONE bet with the amount they can afford to risk and hope for a lucky win. To be engaged in such a negative sum game over many bets will surely mean ending the loser.
What about zero sum games? How to be the winner here? Often, the player with the most capital wins in the long run. This is because the player maybe struck with a string of bad luck and the player with the least capital may be out of capital earlier than the player with more capital.
To be a winner, choose the games one wishes to play in carefully. Investing is likewise not dissimilar. One need to have the investing knowledge before "playing this game" intelligently, lest one ends up not winning but losing.
1. Positive sum games
2. Negative sum games
3. Zero sum games
In positive sum games, the odds of winning are high and there are many winners.
In negative sum games, the odds of losing are high and there are many losers.
In zero sum games, the odds of winning equal those of losing, the winners are at the expense of the losers.
It is important to choose the games one wishes to play. It is very important to know the types of games one chooses to play in.
To win, choose the one in the category of the positive sum game.
Avoid playing in those negative sum games. For those wishing to "win" (try their luck or gamble) in negative sum games, their best chance of coming out the "winner" is probably just to place ONE bet with the amount they can afford to risk and hope for a lucky win. To be engaged in such a negative sum game over many bets will surely mean ending the loser.
What about zero sum games? How to be the winner here? Often, the player with the most capital wins in the long run. This is because the player maybe struck with a string of bad luck and the player with the least capital may be out of capital earlier than the player with more capital.
To be a winner, choose the games one wishes to play in carefully. Investing is likewise not dissimilar. One need to have the investing knowledge before "playing this game" intelligently, lest one ends up not winning but losing.
My strategies for buying and selling (KISS version)
Strategies for buying and selling.
For buying (ABC):
A. Assess Quality, Management and Valuation (QMV)
B. Buy good quality stocks.
C. Buy these stocks at a discount (Margin of Safety)
(If you select your stocks carefully, often one can hold them for long periods. The idea is to allow compounding over the long period to work in your favour.)
For selling (1,2,3,4):
1. If you need cash for emergency. (But then, hopefully, you will have separate money for such emergencies. The cash invested into the market should be separate.)
2. You will need to sell URGENTLY (QUICKLY) if there is something wrong with the fundamental of your stock (example: fraudulent accounting, etc). At other instances, you do have the time to SELL at leisure.
3. Your stock has gone up too high. By your assessment, at that price the upside return is less, but the downside risk is more, then you may wish to sell to REINVEST INTO ANOTHER STOCK WITH MORE FAVOURABLE UPSIDE REWARD/DOWNSIDE RISK RATIO.
4. On occasions, you have identified a very good BARGAIN, you may wish to sell some of your stocks to REINVEST into these stocks to capture a higher upside/downside reward risk ratio that these stocks offer.
Defensive Portfolio Management = 2.
This is to prevent harm to the portfolio.
Urgent attention needed.
Offensive Portfolio Management = 3 & 4.
This is to optimise returns of the portfolio.
Have the time to sell at leisure.
BB
"Investing should be fun and not a game."
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QMV
Quality = Points 1 to 6
Management = Point 7
Valuation = Point 8
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Additional Related Notes:
Why do you Sell and When?
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Related:
For buying (ABC):
A. Assess Quality, Management and Valuation (QMV)
B. Buy good quality stocks.
C. Buy these stocks at a discount (Margin of Safety)
(If you select your stocks carefully, often one can hold them for long periods. The idea is to allow compounding over the long period to work in your favour.)
For selling (1,2,3,4):
1. If you need cash for emergency. (But then, hopefully, you will have separate money for such emergencies. The cash invested into the market should be separate.)
2. You will need to sell URGENTLY (QUICKLY) if there is something wrong with the fundamental of your stock (example: fraudulent accounting, etc). At other instances, you do have the time to SELL at leisure.
3. Your stock has gone up too high. By your assessment, at that price the upside return is less, but the downside risk is more, then you may wish to sell to REINVEST INTO ANOTHER STOCK WITH MORE FAVOURABLE UPSIDE REWARD/DOWNSIDE RISK RATIO.
4. On occasions, you have identified a very good BARGAIN, you may wish to sell some of your stocks to REINVEST into these stocks to capture a higher upside/downside reward risk ratio that these stocks offer.
Defensive Portfolio Management = 2.
This is to prevent harm to the portfolio.
Urgent attention needed.
Offensive Portfolio Management = 3 & 4.
This is to optimise returns of the portfolio.
Have the time to sell at leisure.
BB
"Investing should be fun and not a game."
@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@
QMV
Quality = Points 1 to 6
Management = Point 7
Valuation = Point 8
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Additional Related Notes:
Why do you Sell and When?
Reducing serious loss
When the fundamentals of a stock have deteriorated, sell to protect your portfolio. This decision should be make quickly based on the facts and situations, in order to keep your losses small.
Taking profit
Profit should be realised from sales of stocks in the following situations:
(I) when the stock is obviously overpriced, or
(II) when the sale of the stock frees the capital to be reinvested into another stock with potentially better return.
Not taking profit in the above situations can harm your portfolio and compromise its returns. In other circumstances, let the winners run.
Underperforming stocks should also be sold early. Hanging onto underperforming stocks is costly too. There is the opportunity cost that the capital can be better employed for higher return. Also, hanging onto these lack-lustre stocks reduces the overall return of your portfolio.
http://myinvestingnotes.blogspot.com/2011/02/why-do-you-sell-and-when.html
When the fundamentals of a stock have deteriorated, sell to protect your portfolio. This decision should be make quickly based on the facts and situations, in order to keep your losses small.
Taking profit
Profit should be realised from sales of stocks in the following situations:
(I) when the stock is obviously overpriced, or
(II) when the sale of the stock frees the capital to be reinvested into another stock with potentially better return.
Not taking profit in the above situations can harm your portfolio and compromise its returns. In other circumstances, let the winners run.
Underperforming stocks should also be sold early. Hanging onto underperforming stocks is costly too. There is the opportunity cost that the capital can be better employed for higher return. Also, hanging onto these lack-lustre stocks reduces the overall return of your portfolio.
http://myinvestingnotes.blogspot.com/2011/02/why-do-you-sell-and-when.html
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Related:
- The first is when you need money to make an investment in an even better company at a better price, which occasionally happens.
- The second is when the company looks like it is going to lose it durable competitive advantage. A questionable competitive advantage is not where you want to keep your money long-term. (An example: Nokia's Cautionary Tale)
- The third is during bull markets when the stock market, in an insane buying frenzy, sends the prices of these fantastic businesses through the ceiling.
Monday 4 August 2008
Detail version of To Sell or to Hold & Portfolio Management
To Sell or to Hold (Part 1 of 5)
http://forums.prospero.com/n/pfx/forum.aspx?tsn=1&nav=messages&webtag=ws-naic&tid=27826&redirCnt=1
_____________________
Introduction
Decisions on whether to hold or to sell are rarely easy, and often there are no "right" answers. Everyone makes mistakes. Those who are wise learn from their mistakes.
Both individuals and clubs face the question of whether to sell or to hold stocks numerous times during their years of investing. If stocks are carefully selected, sell decisions are apt to be less serious and less frequent.
Although NAIC investors adhere to a buy-and-hold philosophy, they should not buy stocks and forget them. Over time, the management,industry, political climate, or economy can change. Sometimes, an original SSG may have included overly optimistic judgment. In either case, the original SSG needs to be adjusted.
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1. Guidelines for when to sell
2. Guidelines for when to hold
3. Common selling mistakes
4. Common holding mistakes
5. Worksheet to aid in making decisions on whether to sell or to hold.
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When to Sell? (Part 2 of 5)
First, we'll deal with when to sell.
Arguably, the most important reason for selling is because you need cash for retirement, college education, or other life events. You will still need to choose which stock or stocks to sell.
1. You could sell a stock that will improve your portfolio's diversification. You may want to sell some of the shares of a stock whose value exceeds the percentage of your portfolio that you set for it. For example, if one stock out of your portfolio of 15 comprises20% of the value of your holdings, you may want to sell some of its shares.
2. You could maximize your potential return by selling those stocks with lowest potential total return. Be sure your SSGs and PERTs are updated. Sort your portfolio on projected total return.(Click on the thumbnail projtr.ppt below to open up an example. You will need PowerPoint or the PowerPoint viewer to view this attachment.) Remember some of those stocks with potentially lower returns may be your least risky stocks.
3. You could sell a stock that will improve the quality of your portfolio. For example, consider selling stocks with erratic sales and EPS growth as shown in Section 1 of the SSG.
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When to Hold? (Part 3 of 5)
Let's talk about when to hold a stock.
I won't dwell on this, as it mostly follows from the selling guidelines. If you don't sell, you've made the decision to hold. There are just a few points I want to emphasize.
1. Hold a stock when there is temporary bad news. That is, if the bad news concerns a problem that is short-term in nature, consider holding the stock or even adding to your shares. This is easy to say, but it is not always easy to determine if the problem is temporary or long-term. If you read all you can about the company, its competitors, the industry and the economy, you will be better able to determine if the problem is temporary or not. Again, if you keep notes on your companies, you will understand them and the industry much better. Review your notes to help you decide if the problem may be long-term or not.
2. If it is near the end of the quarter, consider waiting to see the earnings release, especially if it's a high quality company - however you define quality. Some companies provide indications of what the sales and earnings are likely to be before the end of the quarter. In those cases, changes are likely to be built into the stock price. Some companies do not do this, so you may not know about new products, changes in growth an so on until after the earnings press release after the quarter ends.
3. Hold a stock if the price is down, but the fundamentals are strong. In the long run, the price will follow the fundamentals. In the short term, it may not. This may be an opportunity to add to your position.
Do you have any comments or questions?
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Common Selling Mistakes (Part 4 of 5)
Let's talk about some common selling mistakes.
Although some mistakes in selling or holding stocks are due to lack of knowledge, most are due to emotion and/or irrational thinking. A vast collection of research shows that people often process complex information illogically. Thus, it is not unusual for people to make selling and holding mistakes. Some common selling mistakes follow.
1. Selling a stock just because the price goes down when the fundamentals remain solid. Some investors lose confidence in their judgments when a stock price goes down. They may adjust all SSG judgments downward due to the doom and gloom they feel from the downward price movements. During this last bear market, there were many comments on this Forum and on the I-Club-List indicating pessimism and fear. Think about how you feel when you check your stock prices and see lots of your stocks went down or one stock went down a lot or your stocks have gone down day after day after day. Do you feel happy? Worried? Nothing?
If the fundamentals remain sound, you may want to add to a holding, as buying at low valuations can bring a high return when investor fear and pessimism dissipates. NYSE stock prices fluctuate almost 50% in a given year on average, so don't panic if the price drops for no rational reason.
2. Selling a stock when there are short-term problems. Evaluate the long-term impact to prevent making sudden decisions that you may ultimately regret. Is this a company-specific problem? If it's due to the industry or economy, the problem is less likely to be long-term. Some company-specific problems may be short-term in nature too. Review your notes.
3. Selling winners too soon to "lock in gains." Investors sometimes become afraid that their winners will collapse if they hold them. They want certainty, so they sell out of fear. If you sell all your winners, you will be left with a portfolio of losers. Would you lay off your most productive employees when they exceed your expectations? Should your favorite baseball team trade its best player just because he has become such a big winner?
4. Selling a stock when its price has reached a predetermined price above or below the current price or your purchase price without regard to fundamentals. An executed stop-loss order will bring you less money than a sale at the current price. A limit order at a higher price, without regard to the fundamentals, may generate additional taxes and eliminate your chances of future gains. It doesn't matter where the price was when the stock was purchased. It matters where it is headed, and ultimately it will follow the fundamentals.
Do you have any experiences that you are willing to share?
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Common Holding Mistakes (Part 5 of 5)
Let's talk about some common holding mistakes
1. One mistake is to hold grossly overvalued stocks. Even the best run companies can become overvalued and be poor investments despite their good fundamentals. As soon as something diminishes investor enthusiasm for the stock, the price can plummet. Remember what happened with the computer hardware companies during late 1990s and early 2000? In the attached hardware.ppt, you can see how the prices of some well known hardware companies skyrocketed and then plunged when the Internet bubble burst.
We know we shouldn't hold grossly overvalued stocks, so why do we do it? A few reasons follow.
Investors often become attached to their stocks and see them through rose-colored glasses, particularly if they have owned them for many years and have large gains. Long-time employees who own shares of company stock are especially prone to attachment.
Some Investors avoid selling stock that is grossly overvalued to avoid paying taxes. By holding an overvalued stock, they assume more risk. Remember that you will have more after-tax funds if you sell when it is overvalued than if you sell after the price comes back to Earth.
Greed often blinds investors. They continue to hold stocks that are substantially overvalued, because they hope that the stocks will become even more overvalued. This is wishful thinking.
2. A second mistake is to hold stocks with deteriorating fundamentals. Sometimes you may buy a stock for sound reasons, such as growing fundamentals, but the company or industry subsequently changes. If the reasons you bought the stock no longer are in place, don't hold it. Ask yourself if you would buy the stock today under the current circumstances. If the answer is "no," holding it is likely a mistake. One example is the telecommunications industry. Can you think of other industries or specific companies where it changed?
Many investors become "married" to stocks and don't want to sell them even when the fundamentals deteriorate seriously, as they see their stocks through rose-colored glasses and wait for the company to turn around. This attachment is even more likely when it is the stock of one's employer, as it may seem disloyal to sell it. The latter situation is even more risky, as one could lose both employment and stock value if the company's condition worsens. You should have no sacred cows. It is prudent to cut your losses when things go wrong.
The difference between average and above average portfolio performance can hinge on what an investor does after making mistakes. All investors make mistakes, but most don't want to admit them. They focus on the amount of money they spent on the losers, and as long as they don't sell, they can cling to the hope of getting even. This strategy may cost money, as tax savings might be realized if the loser were sold to offset capital gains. The past cannot be changed; what matters is the future. You don't have to prove you were right, but you want to keep what you currently have. What is the best investment for the money? Do SSGs and SCGs on other stocks to see if another stock would provide a better return and less risk. Learn from your mistakes and move on.
Cognitive dissonance is the discomfort that is felt when someone encounters information that does not support a past decision. Investors have access to much information on the Internet, and there is data that will support almost any point of view. When investors encounter information that does not support a current holding, they tend to filter it out or discount it and focus on positive information. By doing so, they avoid cognitive dissonance. When I'm making notes on one of my companies, I find I have a tendency to filter out the negative news or risks. It is something I have to watch in myself.
3. When someone inherits a portfolio from a spouse or parent, misplaced loyalty can cause that person to hold investments that are not appropriate for his or her current circumstances. For example, the portfolio may be full of income investments when the inheritor needs growth stocks. The inheritor identifies the portfolio with the deceased and views changes to it as betrayal. It is important to realize that the loved on wanted you to make money, not to hold those investments forever.
4. Sometimes a stock can become a large percentage of one's portfolio. It may be overvalued or the company's fundamentals may have grown rapidly. Consider adding to other stocks in your portfolio. If you don't have money to add to other positions in your portfolio, consider trimming back the number of shares of the dominant stock, especially if it is the stock of your employer.
5. Some investors think that "buy and hold" means "buy and forget." They don't keep up with their companies and don't adjust their SSGs.
Have you encountered other holding mistakes? Do you have any comments or questions to share?
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Defensive and Offensive Portfolio Management (Ellis Traub)
http://biwiki.editme.com/portfoliodesignandphilosophy
Portfolio Management
Portfolio Management is the buying and selling of stocks primarily based upon their fundamentals and secondarily based upon their valuation to optimize your portfolio's return.
After you've purchased a stock
We'll assume you have purchased a selection of 12 stocks that are well diversified by size of sales, sector, & industry. This is the job of BetterInvesting's Stock Selection Guide & Stock Comparison Guide.
These forms aid you in finding a quality company at a reasonable price. Now how do you manage them?
Portfolio Management Terms
Two terms you will constantly run into are defense and offense. These terms are used by Ellis Traub in hisToolKit 5 manual and in his book, Take Stock. They are taken from his experiences playing football.
Defense is practiced when the other team has the football. Withexcellent defense you'll prevent the other team from ever scoring and the worst you'll do is end in a tied game 0 - 0. With poor defense you could lose 0 - 70. Defense is important. Very Important.
Offense is practiced when your team has the football. It earns youpoints. If you have a strong defense and a strong offense could win 70 - 0. Defense prevented them from scoring any points and offense scored you a lot of points.
PERT Report
The PERT Report is the primary BetterInvesting tool used to follow a portfolio. To learn more about the PERT Report, click here.
Defensive Portfolio Management
With a portfolio of twelve stocks your goal will be to monitor their quality by quarterly checking that their fundamentals of sales, pre-tax profit,and eps growth and pre-tax profit margin are meeting or exceeding your forecasts.
This is called defensive portfolio management. If you don't check on your stocks and one develops a serious problem you will be holding a stock whose price is not rising because sales or earnings are not rising. If you sold this stock and bought another whose sales and earnings are still rising you would see a price increases. By holdingthe troubled stock you lose the potential return from the healthly stock.
This damage from holding a fundamentally flawed stock is the most important problem to avoid.
Offensive Portfolio Management
Once you have checked that your stock's fundamentals are intact you can proceed to offensive portfolio management.
The other case you'll have to look out for is when the stock's price gets way ahead of what its sound fundamentals will support. It has become grossly overvalued. Another way of looking at this is that the price has climbed much further than one would expect and will either come back down or just stay there until the fundaments catch up with it.
You could replace this fundamentally sound stock with another of equal quality whose price is in line with its fundamentals or behind its fundamentals and capture the excess profit of the first stock. You'd be capturing some extra profit.
Replacing quality (fundamentally sound), grossly overvalued stock with stock of equal quality and fair value to capture excess profit is called offensive portfolio management.
It is less important than defensive portfolio management, but to obtain maximum return potential you'll need to practice both. You don't have to perform offensive management. You must do defensive management.
Monitor Diversification
You started your portfolio with guidelines for the number of stocks you'd like, the maximum percentage of the portfolio you'd like in one stock and a desire to not be concentrated in too few sectors or industries.. You need to check these values periodically
Portfolio Management - Defensive & Offensive strategies
Strategies for maintaining your portfolio as advocated by Better Investing is simple and can be followed. You sell your shares if you:
1) need cash for emergencies
2) defensive management of your portfolio when a stock's fundamental has turned bad, and
3) offensive management of your portfolio to maximise/optimise returns.
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http://biwiki.editme.com/portfoliodesignandphilosophy
_______________________________________
1) need cash for emergencies
2) defensive management of your portfolio when a stock's fundamental has turned bad, and
3) offensive management of your portfolio to maximise/optimise returns.
_______________________________________
http://biwiki.editme.com/portfoliodesignandphilosophy
_______________________________________
Selling and Holding mistakes Checklist (Part 5 of 5)
A. Common Selling Mistakes
Price is down, but fundamentals remain solid
Prices fluctuate for reasons that are not always rational.
The price will follow fundamentals in the long run.
Consider buying more shares.
The company has short-term problems
Do not make a rapid decision.
Look at the long-term impact of the news.
Selling winners to lock in gains
If you sell all your winners, you will be left with losers.
If your winners are high quality companies, they are likely to
become even bigger winners.
Selling because the price reaches a predetermined limit
An executed stop-loss order will bring you less money than if
you sell at the current price.
A limit order at a higher price, without regard to fundamentals,
may generate additional taxes and eliminate your chance of
future gains.
B. Common Holding Mistakes
When fundamentals deteriorate
If your evaluation indicates this is a long-term problem, holding it
is likely a mistake.
If you wouldn't buy this company today, don't hold it.
Trying to get even when you have a paper loss
You can't change the past; what matters is the future.
Would another stock be a better investment? Prepare an SCG.
Remember the NAIC Rule of 5.
You may be able to offset some capital gains with this loss.
Holding inherited stocks out of loyalty
These stocks may be inappropriate for your financial situation.
The person who left you the stocks would want you to do what is
best for your circumstances.
Not following your stocks after purchase
"Buy and hold" does not mean "buy and forget." Companies change.
Keep up with the news on the company.
Maintain your SSG and PERT.
To Sell or to Hold Checklist (Part 4 of 5)
http://forums.prospero.com/n/docs/docDownload.aspx?webtag=ws-naic&guid=4221d628-880b-401f-b302-c9bf73bf5ce1
To Sell or to Hold Checklist
Company: ______________________________
Ticker:_______________
Prepared by: ____________________________
Date: _______________
A. Consider Selling
If you need cash
Consider selling shares that will improve diversification.
Consider selling the stock with lowest potential return.
Consider selling the lowest quality stock .
If company's fundamentals deteriorating
Slowing or falling sales growth is warning sign.
Check TTM growth rates in PERT A.
Read about peers, industry, and economy to determine if problems
short or long term. Sell if problems appear long term.
Consider selling if management keeps making excuses.
Increasing long-term debt may be warning. Look at graph in NAIC
Stock Analyst or your favorite financial website.
Adverse management changes
CFO departs unexpectedly
Several key executives depart
Death of several key executives
Significant increase in competition
Watch to see if it affects profit margins in SSG and PERT A.
Product problems
Decline in pipeline, e.g., drug companies
Same-store sales declining, e.g., retail companies
Worsening product mix
Increasing dependence on one or two products
Customer problems
Customer base shrinking
Company becoming overly dependent on one or two customers
Company's debt rating has been lowered
Can be forewarning of future problems
Indications of fraud or accounting problems
Investors will be last to know if company falsifying financial data.
If the source of information is credible, sell fast.
Uncontrolled raw material costs
If company doesn't hedge, it may have to pay higher prices for the
materials, which will hurt profit margins.
Stock appears significantly overvalued
Update SSG. Do not use overly conservative judgments.
Forward RV is over 150%
Upside-downside ratio is below 1
Potential total return is less than money market fund or CD
If you want to diversify your portfolio
If one stock becomes large percentage of portfolio, try to add to
other positions.
If you don't have money to add to smaller holdings, sell a portion of
the large position.
If stock is a very small percentage of portfolio, add to it or sell it.
If you want to improve portfolio quality
Look for a higher quality company and compare them with SCG
If company is acquired
Do SSG on acquiring company. Sell your stock if SSG of acquirer
doesn't meet your standards.
Take capital loss
Can sell stocks in taxable account at a loss to offset capital gains
Can use another $3,000 of capital losses to offset ordinary income
Evaluate stock for repurchase after 30 days to avoid wash sale.
B. Consider Holding
When there is temporary bad news
Read about peers, industry, and economy to determine if
problems are temporary.
If it is near the end of the quarter
Consider holding to see the earnings release
The price is down, but the fundamentals are strong
Update your SSG and PERT and check the fundamentals
To Sell or to Hold Checklist
Company: ______________________________
Ticker:_______________
Prepared by: ____________________________
Date: _______________
A. Consider Selling
If you need cash
Consider selling shares that will improve diversification.
Consider selling the stock with lowest potential return.
Consider selling the lowest quality stock .
If company's fundamentals deteriorating
Slowing or falling sales growth is warning sign.
Check TTM growth rates in PERT A.
Read about peers, industry, and economy to determine if problems
short or long term. Sell if problems appear long term.
Consider selling if management keeps making excuses.
Increasing long-term debt may be warning. Look at graph in NAIC
Stock Analyst or your favorite financial website.
Adverse management changes
CFO departs unexpectedly
Several key executives depart
Death of several key executives
Significant increase in competition
Watch to see if it affects profit margins in SSG and PERT A.
Product problems
Decline in pipeline, e.g., drug companies
Same-store sales declining, e.g., retail companies
Worsening product mix
Increasing dependence on one or two products
Customer problems
Customer base shrinking
Company becoming overly dependent on one or two customers
Company's debt rating has been lowered
Can be forewarning of future problems
Indications of fraud or accounting problems
Investors will be last to know if company falsifying financial data.
If the source of information is credible, sell fast.
Uncontrolled raw material costs
If company doesn't hedge, it may have to pay higher prices for the
materials, which will hurt profit margins.
Stock appears significantly overvalued
Update SSG. Do not use overly conservative judgments.
Forward RV is over 150%
Upside-downside ratio is below 1
Potential total return is less than money market fund or CD
If you want to diversify your portfolio
If one stock becomes large percentage of portfolio, try to add to
other positions.
If you don't have money to add to smaller holdings, sell a portion of
the large position.
If stock is a very small percentage of portfolio, add to it or sell it.
If you want to improve portfolio quality
Look for a higher quality company and compare them with SCG
If company is acquired
Do SSG on acquiring company. Sell your stock if SSG of acquirer
doesn't meet your standards.
Take capital loss
Can sell stocks in taxable account at a loss to offset capital gains
Can use another $3,000 of capital losses to offset ordinary income
Evaluate stock for repurchase after 30 days to avoid wash sale.
B. Consider Holding
When there is temporary bad news
Read about peers, industry, and economy to determine if
problems are temporary.
If it is near the end of the quarter
Consider holding to see the earnings release
The price is down, but the fundamentals are strong
Update your SSG and PERT and check the fundamentals
Evaluating Changing Fundamentals (Part 3 of 5)
Stock
Selling
Guide
Company: ___________________
Ticker: ___________________
Prepared by: ___________________
Date: ___________________
Douglas Gerlach http://www.douglasgerlach.com
C. EVALUATING CHANGING FUNDAMENTALS
REASONS CONSIDERATIONS
o EPS or revenue growth is slowing or falling.
· Company may be entering a new stage of slower growth or stagnation.
· If considering additional purchase, use caution. The worse a company performs, the better a value it may appear on the SSG.
o Quarterly pre-tax profits are falling.
· Use PERT graph to evaluate PTP.
· Three quarters of consecutive declining PTP are a danger sign.
· Five consecutive declining quarters are usually a definitive sign to sell.
o Cash flow is diverging from net income.
· If free cash flow is falling while net income is stable or rising, company may be "propping up" profits.
o Other fundamentals are deteriorating.
· Accounts receivable rising faster than sales.
· Inventories rising faster than sales.
o There has been an uncertain change of management.
· Dynamic company leader retires, replacement has questionable qualifications.
· Senior executives leave en masse.
· Those responsible for past success are no longer with the company.
o Company faces direct or indirect competition.
· Competitors threaten to affect the company's long-term prosperity.
· Companies with very high profit margins are often susceptible to increased, cutthroat competition.
o Company faces uncertain product cycle.
· Company is too dependent on single product.
· No new products in pipeline (such as pharmaceutical companies).
o Company has uncontrolled raw material costs.
· Can harm profit margins.
· If company doesn't hedge, they may have no option but to pay higher prices for necessary materials.
o Company is the victim of fraud or "accounting irregularities."
· If the books are being cooked, investors will be last to know.
· No way for investors to know if management is lying, or auditors are covering up.
· Get out fast; these are not quality companies.
o Company's debt rating has been lowered.
· Can often be an early warning sign of greater problems in the future.
D. FINAL CONSIDERATIONS
· Don't hesitate to sell in retirement accounts where taxes aren't an issue.
· Don't automatically buy because a stock falls in price; re-evaluate as if new.
· If you won't purchase additional shares of a fallen stock, why would you continue to hold it?
· Don't "wait to get your money back" from the stock – it doesn't know you own it.
· Don't be paralyzed by uncertainty.
· Don't be an ostrich with your head in the sand – face up to the problem.
· Remember NAIC's Rule of Five.
· Use Challenge Tree to continually upgrade your portfolio.
· Think "replace," not "remove."
Selling
Guide
Company: ___________________
Ticker: ___________________
Prepared by: ___________________
Date: ___________________
Douglas Gerlach http://www.douglasgerlach.com
C. EVALUATING CHANGING FUNDAMENTALS
REASONS CONSIDERATIONS
o EPS or revenue growth is slowing or falling.
· Company may be entering a new stage of slower growth or stagnation.
· If considering additional purchase, use caution. The worse a company performs, the better a value it may appear on the SSG.
o Quarterly pre-tax profits are falling.
· Use PERT graph to evaluate PTP.
· Three quarters of consecutive declining PTP are a danger sign.
· Five consecutive declining quarters are usually a definitive sign to sell.
o Cash flow is diverging from net income.
· If free cash flow is falling while net income is stable or rising, company may be "propping up" profits.
o Other fundamentals are deteriorating.
· Accounts receivable rising faster than sales.
· Inventories rising faster than sales.
o There has been an uncertain change of management.
· Dynamic company leader retires, replacement has questionable qualifications.
· Senior executives leave en masse.
· Those responsible for past success are no longer with the company.
o Company faces direct or indirect competition.
· Competitors threaten to affect the company's long-term prosperity.
· Companies with very high profit margins are often susceptible to increased, cutthroat competition.
o Company faces uncertain product cycle.
· Company is too dependent on single product.
· No new products in pipeline (such as pharmaceutical companies).
o Company has uncontrolled raw material costs.
· Can harm profit margins.
· If company doesn't hedge, they may have no option but to pay higher prices for necessary materials.
o Company is the victim of fraud or "accounting irregularities."
· If the books are being cooked, investors will be last to know.
· No way for investors to know if management is lying, or auditors are covering up.
· Get out fast; these are not quality companies.
o Company's debt rating has been lowered.
· Can often be an early warning sign of greater problems in the future.
D. FINAL CONSIDERATIONS
· Don't hesitate to sell in retirement accounts where taxes aren't an issue.
· Don't automatically buy because a stock falls in price; re-evaluate as if new.
· If you won't purchase additional shares of a fallen stock, why would you continue to hold it?
· Don't "wait to get your money back" from the stock – it doesn't know you own it.
· Don't be paralyzed by uncertainty.
· Don't be an ostrich with your head in the sand – face up to the problem.
· Remember NAIC's Rule of Five.
· Use Challenge Tree to continually upgrade your portfolio.
· Think "replace," not "remove."
Stock Sale Considerations (Part 2 of 5)
B. WHY ARE YOU CONSIDERING A SALE?
REASONS CONSIDERATIONS
_________________________________________________________
Not so good reasons
_________________________________________________________
x To "lock in a profit."
· WARNING: Trading results in higher taxes and commissions, and lower returns.
· Concentrate on cutting losses instead of "protecting your gains"
x Stock has reached predetermined limit.
· WARNING: Sell limit orders generate certain tax liability, possibly at higher rates.
· Eliminates the chance of any future growth in that stock.
x "Stock hasn't done anything."
· WARNING: Prices don't move in linear, consistent fashion, but in spurts.
· Remember that price growth follows profits, eventually.
· Determine if a stock is languishing for a reason.
x Company is subject of temporary bad news.
· WARNING: Avoid knee-jerk reactions, though market may respond negatively.
· Re-evaluate to determine possible long-term impact of news.
x Company has missed earnings estimates by small amount.
· WARNING: Focus on long-term, not short-term results.
· Re-evaluate to determine if there is a fundamental shift underway at the company.
x An analyst has downgraded the stock.
· WARNING: Analysts have short-term, not long-term, objectives.
· May have lowered rating to protect realized gains, not due to long-term potential.
____________________________________________
Good reasons
____________________________________________
o To raise cash.
· Consider it an opportunity to prune underperformers.
· If you don't have any underperformers, then consider tax impact of selling.
o To raise cash for club withdrawal.
· Consider it an opportunity to prune underperformers.
· Don't sell highly appreciated stock, transfer shares to departing member instead.
o The stock is possibly overvalued.
· Relative Value using forward PE is greater than 150%.
· Stock is in sell zone on SSG.
· Projected total return less than long-term returns on bonds.
o To take a capital loss.
· Sell stocks at loss in taxable accounts to offset any gains.
· Part of year-end portfolio review.
· After offsetting losses, can use $3,000 of capital gains to offset ordinary income.
· Evaluate for repurchase after 30 days (to avoid wash sale rule)
o To upgrade quality or expected return of portfolio.
· Determine round trip cost, amount to invest in new stock after taxes and commissions.
· Use Toolkit Challenger or Stock Analyst Cost of Switching tool to evaluate.
· Use NAIC Challenge Tree to evaluate.
o Because fundamentals have changed.
Proceed to Section C*. (*See next post)
http://myinvestingnotes.blogspot.com/2008/08/stock-selling-guide-part-3.html
REASONS CONSIDERATIONS
_________________________________________________________
Not so good reasons
_________________________________________________________
x To "lock in a profit."
· WARNING: Trading results in higher taxes and commissions, and lower returns.
· Concentrate on cutting losses instead of "protecting your gains"
x Stock has reached predetermined limit.
· WARNING: Sell limit orders generate certain tax liability, possibly at higher rates.
· Eliminates the chance of any future growth in that stock.
x "Stock hasn't done anything."
· WARNING: Prices don't move in linear, consistent fashion, but in spurts.
· Remember that price growth follows profits, eventually.
· Determine if a stock is languishing for a reason.
x Company is subject of temporary bad news.
· WARNING: Avoid knee-jerk reactions, though market may respond negatively.
· Re-evaluate to determine possible long-term impact of news.
x Company has missed earnings estimates by small amount.
· WARNING: Focus on long-term, not short-term results.
· Re-evaluate to determine if there is a fundamental shift underway at the company.
x An analyst has downgraded the stock.
· WARNING: Analysts have short-term, not long-term, objectives.
· May have lowered rating to protect realized gains, not due to long-term potential.
____________________________________________
Good reasons
____________________________________________
o To raise cash.
· Consider it an opportunity to prune underperformers.
· If you don't have any underperformers, then consider tax impact of selling.
o To raise cash for club withdrawal.
· Consider it an opportunity to prune underperformers.
· Don't sell highly appreciated stock, transfer shares to departing member instead.
o The stock is possibly overvalued.
· Relative Value using forward PE is greater than 150%.
· Stock is in sell zone on SSG.
· Projected total return less than long-term returns on bonds.
o To take a capital loss.
· Sell stocks at loss in taxable accounts to offset any gains.
· Part of year-end portfolio review.
· After offsetting losses, can use $3,000 of capital gains to offset ordinary income.
· Evaluate for repurchase after 30 days (to avoid wash sale rule)
o To upgrade quality or expected return of portfolio.
· Determine round trip cost, amount to invest in new stock after taxes and commissions.
· Use Toolkit Challenger or Stock Analyst Cost of Switching tool to evaluate.
· Use NAIC Challenge Tree to evaluate.
o Because fundamentals have changed.
Proceed to Section C*. (*See next post)
http://myinvestingnotes.blogspot.com/2008/08/stock-selling-guide-part-3.html
Stock Selling Guide - Gain/Loss Worksheet (Part 1 of 5)
Douglas Gerlach http://www.douglasgerlach.com
A. GAIN/LOSS WORKSHEET
1 Cost basis of shares owned (Total amount invested) $
2 Total value as of this date $
3 Pre-tax loss/gain $ (= 1 - 2 )
4 Capital gains taxes due (if any) $
5 Round-trip commissions (to sell, then buy a replacement) $
6 After-tax loss/gain* $ (= 3 - 4 - 5)
(* This is also the starting amount of potential new investment)
A. GAIN/LOSS WORKSHEET
1 Cost basis of shares owned (Total amount invested) $
2 Total value as of this date $
3 Pre-tax loss/gain $ (= 1 - 2 )
4 Capital gains taxes due (if any) $
5 Round-trip commissions (to sell, then buy a replacement) $
6 After-tax loss/gain* $ (= 3 - 4 - 5)
(* This is also the starting amount of potential new investment)
Friday 1 August 2008
Investment, speculation and gambling
It is commonly thought that investment, is good for everybody and at all times. Speculation, on the other hand, may be good or bad, depending on the conditions and the person who speculates.
It should be essential, therefore, for anyone engaging in financial operations to know whether he is investing or speculating and, if the latter, to make sure that his speculation is a justifiable one.
Investment, speculation and gambling (Security Analysis, Ben Graham.):
1. Graham defined investment thus: An INVESTMENT OPERATION is one which, upon THOROUGH ANALYSIS, promises SAFETY OF PRINCIPAL and a SATISFACTORY RETURN. Operations NOT meeting these requirements are speculative.
The difference between investment and speculation, when the two are thus opposed, is understood in a general way by nearly everyone; but it can be difficult to formulate it precisely. In fact something can be said for the cynic's definition that an investment is a successful speculation and a speculation is an unsuccessful investment.
The failure properly to distinguish between investment and speculation was in large measure responsible for the market excesses and calamities that ensued, as well as, for much continuing confusion in the ideas and policies of would-be investors.
2. Graham's addition criterion of investment: An investment operation is one that can be justified on BOTH QUALITATIVE and QUANTITATIVE grounds.
Investment must always consider the PRICE as well as the QUALITY of the security.
Main points:______________
INVESTMENT OPERATION: rather than an issue or a purchase.
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.
DIVERSIFICATION: An investment might be justified in a group of issues, which would not be sufficiently safe if made in any one of them singly.
ARBITRAGE AND HEDGING: it is also proper to consider as investment operations certain types of arbitrage and hedging commitments which involve the sale of one security against the purchase of another. In these rather specialised operations the element of SAFETY is provided by the combination of purchase and sale.
THOROUGH ANALYSIS: the study of the facts in the light of established standards of safety and value, including all quality of thoroughness.
SAFETY: The SAFETY sought in investment is not absolute or complete; the word means, rather, protection against loss under all normal or reasonably likely conditions or variations. A safe stock is one which holds every prospect of being worth the price paid except under quite unlikely contingencies. Where study and experiences indicate that an appreciable chance of loss must be recognized and allowed for, we have a speculative situation.
SATISFACTORY RETURN: is a wider expression than "adequate income", since it allows for capital appreciation or profit as well as current interest or dividend yield. "Satisfactory" is a subjective term; it covers any rate or amount of return, however low, which the investor is willing to accept, provided he acts with reasonable intelligence.
_______________
For investment, the future is essentially something to be guarded against rather than to be profited from. If the future brings improvement, so much the better; but investment as such cannot be founded in any important degree upon the expectation of improvement.
Speculation, on the other hand, may always properly – and often soundly – derive its basis and its justification from prospective developments that differ from past performances.
GAMBLING: represents the creation of risks not previously existing – e.g. race-track betting.
SPECULATION: applies to the taking of risks that are implicit in a situation and so must be taken.
INTELLIGENT SPECULATION: the taking of a risk that appears justified after careful weighing of the pros and cons.
UNINTELLIGENT SPECULATION: risk taking without adequate study of the situation.
It should be essential, therefore, for anyone engaging in financial operations to know whether he is investing or speculating and, if the latter, to make sure that his speculation is a justifiable one.
Investment, speculation and gambling (Security Analysis, Ben Graham.):
1. Graham defined investment thus: An INVESTMENT OPERATION is one which, upon THOROUGH ANALYSIS, promises SAFETY OF PRINCIPAL and a SATISFACTORY RETURN. Operations NOT meeting these requirements are speculative.
The difference between investment and speculation, when the two are thus opposed, is understood in a general way by nearly everyone; but it can be difficult to formulate it precisely. In fact something can be said for the cynic's definition that an investment is a successful speculation and a speculation is an unsuccessful investment.
The failure properly to distinguish between investment and speculation was in large measure responsible for the market excesses and calamities that ensued, as well as, for much continuing confusion in the ideas and policies of would-be investors.
2. Graham's addition criterion of investment: An investment operation is one that can be justified on BOTH QUALITATIVE and QUANTITATIVE grounds.
Investment must always consider the PRICE as well as the QUALITY of the security.
Main points:______________
INVESTMENT OPERATION: rather than an issue or a purchase.
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.
DIVERSIFICATION: An investment might be justified in a group of issues, which would not be sufficiently safe if made in any one of them singly.
ARBITRAGE AND HEDGING: it is also proper to consider as investment operations certain types of arbitrage and hedging commitments which involve the sale of one security against the purchase of another. In these rather specialised operations the element of SAFETY is provided by the combination of purchase and sale.
THOROUGH ANALYSIS: the study of the facts in the light of established standards of safety and value, including all quality of thoroughness.
SAFETY: The SAFETY sought in investment is not absolute or complete; the word means, rather, protection against loss under all normal or reasonably likely conditions or variations. A safe stock is one which holds every prospect of being worth the price paid except under quite unlikely contingencies. Where study and experiences indicate that an appreciable chance of loss must be recognized and allowed for, we have a speculative situation.
SATISFACTORY RETURN: is a wider expression than "adequate income", since it allows for capital appreciation or profit as well as current interest or dividend yield. "Satisfactory" is a subjective term; it covers any rate or amount of return, however low, which the investor is willing to accept, provided he acts with reasonable intelligence.
_______________
For investment, the future is essentially something to be guarded against rather than to be profited from. If the future brings improvement, so much the better; but investment as such cannot be founded in any important degree upon the expectation of improvement.
Speculation, on the other hand, may always properly – and often soundly – derive its basis and its justification from prospective developments that differ from past performances.
GAMBLING: represents the creation of risks not previously existing – e.g. race-track betting.
SPECULATION: applies to the taking of risks that are implicit in a situation and so must be taken.
INTELLIGENT SPECULATION: the taking of a risk that appears justified after careful weighing of the pros and cons.
UNINTELLIGENT SPECULATION: risk taking without adequate study of the situation.
Investment Policies (Based on Benjamin Graham)
Summary of Investment Policies
A. INVESTMENT FOR FIXED INCOME:
US Savings Bonds (FDs or Amanah Sahams for Malaysians)
B. INVESTMENT FOR INCOME, MODERATE LONG-TERM APPRECIATION AND PROTECTION AGAINST INFLATION:
(1) INVESTMENT FUNDS bought at reasonable price.
(2) Diversified list of primary common stocks (BLUE CHIPS) bought at reasonable price.
C. INVESTMENT CHIEFLY FOR PROFIT: 4 approaches are open to both the small and the large investors:
(1) Representative common stocks bought when the MARKET level is clearly LOW.
(2) GROWTH STOCKS, when these can be obtained at reasonable prices in relation to actual accomplishment – GROWTH INVESTING.
(3) Purchase of securities selling well BELOW INTRINSIC VALUE – VALUE INVESTING.
(4) Purchase of WELL-SECURED PRIVILEGED SENIOR ISSUES (bonds and preferred shares).
(5) SPECIAL SITUATIONS: Mergers, arbitrages, cash pay-outs.
D. SPECULATION:
(1) Buying stock in new or virtually new ventures (IPOs) .
(2) TRADING in the market.
(3) Purchase of "GROWTH STOCKS" at GENEROUS PRICES.
_______________
For DEFENSIVE INVESTORS: Portfolio A & B
(Portfolio A: Cash, FDs, Bonds Portfolio B: Mutual funds, Blue chips)
For ENTERPRISING INVESTORS: Portfolio A & B & C
(Portfolio C: Buy in Low Market, Buy Growth stocks at fair value, Buy value stocks i.e. bargains, High grade bonds and preferred shares, Arbitrages)
For SPECULATORS: Portfolio D
(Should set aside a sum for this separate from their money in investing.)
________________
________________
Types of Investors
Graham felt that individual investors fell into two camps : "defensive" investors and "aggressive" or "enterprising" investors.
These two groups are distinguished not by the amount of risk they are willing to take, but rather by the amount of "intelligent effort" they are "willing and able to bring to bear on the task."
Thus, for instance, he included in the defensive investor category professionals (his example--a doctor) unable to devote much time to the process and young investors (his example--a sharp young executive interested in finance) who are as-yet unfamiliar and inexperienced with investing.
Graham felt that the defensive investor should confine his holdings to the shares of important companies with a long record of profitable operations and that are in strong financial condition. By "important," he meant one of substantial size and with a leading position in the industry, ranking among the first quarter or first third in size within its industry group.
Aggressive investors, Graham felt, could expand their universe substantially, but purchases should be attractively priced as established by intelligent analysis. He also suggested that aggressive investors avoid new issues.
Read also:
Are You an Intelligent Investor?
http://www.investinvalue.com/0/styles.php
(Check out the table in this site for rules for defensive versus enterprising investors.)
A. INVESTMENT FOR FIXED INCOME:
US Savings Bonds (FDs or Amanah Sahams for Malaysians)
B. INVESTMENT FOR INCOME, MODERATE LONG-TERM APPRECIATION AND PROTECTION AGAINST INFLATION:
(1) INVESTMENT FUNDS bought at reasonable price.
(2) Diversified list of primary common stocks (BLUE CHIPS) bought at reasonable price.
C. INVESTMENT CHIEFLY FOR PROFIT: 4 approaches are open to both the small and the large investors:
(1) Representative common stocks bought when the MARKET level is clearly LOW.
(2) GROWTH STOCKS, when these can be obtained at reasonable prices in relation to actual accomplishment – GROWTH INVESTING.
(3) Purchase of securities selling well BELOW INTRINSIC VALUE – VALUE INVESTING.
(4) Purchase of WELL-SECURED PRIVILEGED SENIOR ISSUES (bonds and preferred shares).
(5) SPECIAL SITUATIONS: Mergers, arbitrages, cash pay-outs.
D. SPECULATION:
(1) Buying stock in new or virtually new ventures (IPOs) .
(2) TRADING in the market.
(3) Purchase of "GROWTH STOCKS" at GENEROUS PRICES.
_______________
For DEFENSIVE INVESTORS: Portfolio A & B
(Portfolio A: Cash, FDs, Bonds Portfolio B: Mutual funds, Blue chips)
For ENTERPRISING INVESTORS: Portfolio A & B & C
(Portfolio C: Buy in Low Market, Buy Growth stocks at fair value, Buy value stocks i.e. bargains, High grade bonds and preferred shares, Arbitrages)
For SPECULATORS: Portfolio D
(Should set aside a sum for this separate from their money in investing.)
________________
________________
Types of Investors
Graham felt that individual investors fell into two camps : "defensive" investors and "aggressive" or "enterprising" investors.
These two groups are distinguished not by the amount of risk they are willing to take, but rather by the amount of "intelligent effort" they are "willing and able to bring to bear on the task."
Thus, for instance, he included in the defensive investor category professionals (his example--a doctor) unable to devote much time to the process and young investors (his example--a sharp young executive interested in finance) who are as-yet unfamiliar and inexperienced with investing.
Graham felt that the defensive investor should confine his holdings to the shares of important companies with a long record of profitable operations and that are in strong financial condition. By "important," he meant one of substantial size and with a leading position in the industry, ranking among the first quarter or first third in size within its industry group.
Aggressive investors, Graham felt, could expand their universe substantially, but purchases should be attractively priced as established by intelligent analysis. He also suggested that aggressive investors avoid new issues.
Read also:
Are You an Intelligent Investor?
http://www.investinvalue.com/0/styles.php
(Check out the table in this site for rules for defensive versus enterprising investors.)
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