http://www.thejakartapost.com/news/2007/09/23/what-are-you-bull-bear-chicken-or-owl.html-0
What are you -- a bull, bear, chicken or owl?
The Jakarta Post , Jakarta Sun, 09/23/2007
Financial markets of late have been volatile, to say the least.
After soaring to record highs in June, the U.S. and most other stock markets then fell by up to 10 percent before making a partial recovery. Each day brings surprises with ups and downs reflecting the good or bad news of the day.
Stock markets have also been spooked by the crisis in the lower end of the housing market in the U.S. and the resulting collapse of a number of related hedge funds.
Even a rock-solid UK building society has come under pressure as panicking investors withdraw their savings. The price of oil has hit record highs and gold has gone over the US$700 an ounce mark. (Remember my earlier advice to have holdings in energy and precious metals?)
Are the 'bears' winning?
With housing worries and unemployment growing in the U.S., with consumer confidence and the dollar falling (note that the rupiah has been falling with the dollar), fear of a recession is on everyone's mind. A recession in the U.S. would invariably impact the global economy. In such a scenario the bears will certainly have it.
In case any reader is not familiar with the term, a ""bear"" market technically signifies one that has fallen at least 20 percent, the allusion to the bear being that a bear is ""clawing it down'.
Have the 'bulls' conceded defeat?
Again, for readers unfamiliar with the terminology, a ""bull"" market is one that is rising, the analogy this time being one of a bull ""tossing it upward"".
All is far from being gloom and doom except for those directly affected by the narrow band of assets that have collapsed in value. Most economies are still strong and expanding.
Unemployment is still close to historical lows in many countries and the twin powerhouses of India and China continue to steam ahead supporting commodity-based economies such as Australia.
A lower dollar can also be positive for the U.S. as it will discourage imports and stimulate exports. Another factor that is encouraging for stock markets is that valuations are not particularly expensive.
Many P/E (price-to-earnings ratios) are around 16/1, which means shares are paying dividends of over 5 percent. This compares favorably with bonds and money markets, particularly since stocks have the potential for capital growth over time.
During the height of the technology boom some shares were trading at P/E levels of 300/1 which meant a return of only one-third of 1 percent per annum or, putting it another way, it would take an investor 300 years to get his money back if he relied on the dividend alone.
Of course, people were relying on capital growth but at those P/E levels their hopes were doomed. We do not have that scenario today.
So, overall, a ""crash"" on the scale of 1987 or the bursting of the technology bubble in 2000 seems unlikely, although if the property market or unemployment worsen in coming months the bears could have their way. If markets can limit their fall from previous highs to less than 20 percent, then what is happening now can be written off as a ""correction"".
What does history tell us?
Since 1946 there have been 10 official ""bear"" markets (falls of at least 20 percent) based on the S&P 500 index. During the same period there have been 16 ""corrections"" (falls of at least 10 percent). Anyone who invests in the stock markets should keep this in mind.
How long can it take for markets to recover? Historically, (since 1946) it has taken 669 days on average to recover from a full bear market and 111 days to recover from a correction. Hence the reason for repeated advice to the unwary that investing in the stock markets is not for the short term.
The bulls are unquestionable winners over the long term as stocks invariably rise over time. Their rise is not a constant one, however, and is regularly interrupted by corrections and bear markets.
These are a necessary part of the process; without them, the markets would be driven to unrealistic heights which, in turn, could lead to a serious collapse of the system. A bit like geological faults; when pressure from the earth's crust builds up, it is preferable to have it relieved gradually by minor earthquakes rather than delay until the advent of a major one.
How to win in a bear market
The secret is simply to invest when others are selling. To do this requires resisting our instinct (built into our genes over thousands of years) to follow the herd.
Regular savers also win in a bear market because they continue to buy shares or units when prices have fallen. Provided they keep doing this they will benefit when the next bull market comes along.
Patience and perseverance is the key, since the recovery could take several years, but rest assured, a bull market will follow a bear market as sure as night follows day.
Investing in a hedge fund that ""goes short"" is also a way to make money in falling markets. In this case the fund manager does not invest directly in stocks but actually borrows and sells them.
He then repurchases and returns them at a later date. If he has judged correctly and the repurchase price is lower than what he paid then the difference, less expenses, is pure profit.
Such a fund can be a useful component in a portfolio to soften the impact of a falling market, but much depends on the skill of the manager. It is not something you should try at home!
Where do the chickens come in?
Bulls and bears are part of standard financial terminology. Chickens and owls are not, but I thought I would throw them in to add a bit of color.
Chickens, I would say, are those who panic out of an investment when faced with the grunts of the bear. This is quite a natural reaction. Chickens can live quite comfortably with vegetarian bulls but would not fare well in the proximity of a bear.
In fact, a chicken could come out quite well if it flies out at the top of a bull market. But, in practice, it tends not to react until the market has fallen a long way, then it finally panics.
But it's too late; it has already fallen victim to the bear and is no longer around when the bull comes back onto the scene to save it.
Another group of chickens will not even venture into the fray. They remain with cash under the mattress or in a bank account year after year watching the purchasing power whittle away while others are making their fortunes.
But if they are of a nervous disposition this is probably their best strategy as they would probably come off worse among the bulls and bears.
And finally the owls ...
What does the wise old owl do? It sits quietly on a high branch watching the world go by until a suitable victim is in sight. It then swoops and grabs its prey.
The financial analogy is an investor who quietly and unemotionally watches the markets go up and down and then seizes the opportunity when he spots a bargain. I would place Warren Buffett, the world's most successful stock market investor, in this category.
So who will win?
History and logic tell us the bulls will be the long-term winners. The stock markets represent real assets and global wealth.
Bear markets will still have their day every few years. They can inflict a lot of pain but if we see how they fit into the big picture we can live with them and even profit from them.
While ""bulls"" and ""bears"" are terms describing the markets they can also relate to investors who can be described as ""bullish"" or ""bearish"".
What should we strive to be? Clearly, unless we are bullish we will never get anywhere, but there are times when we may need to be bearish.
There may even be times when it can pay to be a ""chicken"" but it is not easy to judge the timing. It can also pay to be a ""wise old owl""; just stay calm and alert.
You may spot a great opportunity!
Colin Bloodworth is a senior financial adviser with Financial Partners International.
Wednesday 13 August 2008
Thursday 7 August 2008
A crisis mentality among investors
Professionals, even the most seasoned, have the same emotions as everyone else. Learning the ropes professionally does not eliminate human emotion, nor does it elimate urges to buy or sell emotionally. Faced with uncertainties, the tide of emotion surges. How can one resist the surging tide of emotion? Only if one has a framework of disciplines and knowledge within. Controlling emotions and replacing them with the elements of this framework are the secret.
Investment merit at a given PRICE but not at another
Investment Policies (Based on Benjamin Graham)
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.
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Having selected the company to invest based on various parameters, the next consideration will be the price we are willing to pay for owning part of its business.
Price is always an important consideration in investing. At a certain price, the company can be acquired at a bargain, at a fair price or at a high price. Each scenario will impact on our investment returns.
We should ALWAYS buy a good quality company at a BARGAIN PRICE (margin of safety). This allows us to lock in our potential gains at the time of buying at a favourable reward/risk ratio. This maybe when the upside gain: downside loss is at least 3:1.
There maybe FEW exceptional occasions when we may be willing to pay a FAIR PRICE for a good quality company. This is often the case when a good quality company is fancied by many investors and is often quoted in normal time at a high price.
However, we should NEVER (NEVER, NEVER) buy a good quality company at HIGH PRICE, whatever its earnings and growth prospects maybe. To do so will not only diminishes our potential investment returns, but may even results in a loss of our capital due to the unfavourable reward/risk ratio.
Don't time the market, it is difficult. However, there will be time when the market is on sale and the prices of stocks are at a bargain and there will be time when the market is exuberant and the prices of stocks are high or very high.
The market will always be there and we should choose when to buy and when to sell. We should only buy a stock when the PRICE IS RIGHT FOR US and sell a stock when the PRICE IS RIGHT FOR US.
(What is market timing? Timing is a term that refers to investing by buying everything or selling everything on the basis of the (faulty) assumption that one can predict the market's next move. Attempts to time are common, but academicians and practitioners have concluded that success happens through luck only on occasions that are quickly reversed and very costly.)
PRICE: is frequently an essential element, so that a stock (and even a bond) may have investment merit at one price level but not at another.
______________________________________
Having selected the company to invest based on various parameters, the next consideration will be the price we are willing to pay for owning part of its business.
Price is always an important consideration in investing. At a certain price, the company can be acquired at a bargain, at a fair price or at a high price. Each scenario will impact on our investment returns.
We should ALWAYS buy a good quality company at a BARGAIN PRICE (margin of safety). This allows us to lock in our potential gains at the time of buying at a favourable reward/risk ratio. This maybe when the upside gain: downside loss is at least 3:1.
There maybe FEW exceptional occasions when we may be willing to pay a FAIR PRICE for a good quality company. This is often the case when a good quality company is fancied by many investors and is often quoted in normal time at a high price.
However, we should NEVER (NEVER, NEVER) buy a good quality company at HIGH PRICE, whatever its earnings and growth prospects maybe. To do so will not only diminishes our potential investment returns, but may even results in a loss of our capital due to the unfavourable reward/risk ratio.
Don't time the market, it is difficult. However, there will be time when the market is on sale and the prices of stocks are at a bargain and there will be time when the market is exuberant and the prices of stocks are high or very high.
The market will always be there and we should choose when to buy and when to sell. We should only buy a stock when the PRICE IS RIGHT FOR US and sell a stock when the PRICE IS RIGHT FOR US.
(What is market timing? Timing is a term that refers to investing by buying everything or selling everything on the basis of the (faulty) assumption that one can predict the market's next move. Attempts to time are common, but academicians and practitioners have concluded that success happens through luck only on occasions that are quickly reversed and very costly.)
Bargain Conundrum - another cognitive error
A stock has done tremendously well for a period of time. Investors tend to extrapolate linearly, assuming that a company which has done well in the last few years is expected to continue to do so.
Then came the correction. For many buyers, it was an opportunity to get in.
Here lies the bargain conundrum - another cognitive error that consistently lead us to make irrational decisions. The belief is that the price uptrend would resume. That this correction could be a reversal may not feature in the thinking or radar of most.
One risk in the investment world that is often overlooked is behavioural risk. Recognising such flaws which the field of behavioural finance has uncovered is the first step towards being more rational in one's investing.
Also read:
Evaluating Changing Fundamentals (Part 3 of 5)
· Don't automatically buy because a stock falls in price; re-evaluate as if new.
Ask ourselves:
Is the correction a true bargain?
Maybe the price uptrend would resume?
Or, maybe not, this being a reversal of the uptrend?
Obviously, having an idea of where the "fair value" of the stock is, helps.
Then came the correction. For many buyers, it was an opportunity to get in.
Here lies the bargain conundrum - another cognitive error that consistently lead us to make irrational decisions. The belief is that the price uptrend would resume. That this correction could be a reversal may not feature in the thinking or radar of most.
One risk in the investment world that is often overlooked is behavioural risk. Recognising such flaws which the field of behavioural finance has uncovered is the first step towards being more rational in one's investing.
Also read:
Evaluating Changing Fundamentals (Part 3 of 5)
· Don't automatically buy because a stock falls in price; re-evaluate as if new.
Ask ourselves:
Is the correction a true bargain?
Maybe the price uptrend would resume?
Or, maybe not, this being a reversal of the uptrend?
Obviously, having an idea of where the "fair value" of the stock is, helps.
Foreign exchange risks
The roles of the central bankers and the governments are to ensure reasonable GDP growth, to manage inflation and to keep unemployment at a low rate. At anytime, their policies will be driven by the targets they choose to focus on. These can be done through fiscal and monetary policy.
The NZ and Australia government have both chosen to stimulate the growth in their economies by reducing interest rates. Their action will translate into weaker NZ and Australian dollars. Similarly, the interest rate in UK has been reduced to stimulate its weakening economy. The property prices in UK has also fallen by 10% to 20%. Japan has grown its GDP the last 5 years, but this year is likewise facing headwind given the downturn in the world economy. The yen is expected to weaken this year.
The Euro is expected to gain in strength since the ECB has chosen to control inflation by increasing its interest rate. China yuan is expected to continue to strengthen this year. The US dollar decline is not expected to continue and probably has bottomed recently. It may even strengthen slightly going forward.
What of the Malaysian ringgit? Due to the recent large hikes in oil price and electricity tariffs, the Malaysian inflation is at a high at present. This is expected to attenuate going forward. GDP is expected to slow down from 5% - 6% to 4.5% - 5.5% for this year. At present, the central bank has not felt the need to temper with the interest rate given the inflation expectation is not a problem presently. Nevertheless, the cost for borrowing for the public has increased.
My guesses are the UK pound, Australian and NZ dollar and Japanese yen are expected to weaken. The Euro, Chinese yuan and probably the US dollar, are expected to strengthen.
How will these various currency movements affect the KLSE counters that have significant business overseas? How will these movements affect capital flows seeking higher investment returns in the world?
The NZ and Australia government have both chosen to stimulate the growth in their economies by reducing interest rates. Their action will translate into weaker NZ and Australian dollars. Similarly, the interest rate in UK has been reduced to stimulate its weakening economy. The property prices in UK has also fallen by 10% to 20%. Japan has grown its GDP the last 5 years, but this year is likewise facing headwind given the downturn in the world economy. The yen is expected to weaken this year.
The Euro is expected to gain in strength since the ECB has chosen to control inflation by increasing its interest rate. China yuan is expected to continue to strengthen this year. The US dollar decline is not expected to continue and probably has bottomed recently. It may even strengthen slightly going forward.
What of the Malaysian ringgit? Due to the recent large hikes in oil price and electricity tariffs, the Malaysian inflation is at a high at present. This is expected to attenuate going forward. GDP is expected to slow down from 5% - 6% to 4.5% - 5.5% for this year. At present, the central bank has not felt the need to temper with the interest rate given the inflation expectation is not a problem presently. Nevertheless, the cost for borrowing for the public has increased.
My guesses are the UK pound, Australian and NZ dollar and Japanese yen are expected to weaken. The Euro, Chinese yuan and probably the US dollar, are expected to strengthen.
How will these various currency movements affect the KLSE counters that have significant business overseas? How will these movements affect capital flows seeking higher investment returns in the world?
Wednesday 6 August 2008
Growth Stocks: Searching for the Sprinters
Growth Stocks: Searching for the Sprinters
by Douglas Gerlach
Investors who focus on growth try to predict which companies will grow faster in the future -- faster than the rest of the stocks in the market, or faster than other stocks in the same industry. If you're successful in buying a company that does grow faster than other companies, then it's likely that the price of that company's stock will increase as well, and you can make a profit.
(My comment: Provided you did not pay too high a price to buy it.)
The stock of a company that grows its earnings and revenues faster than average is known as a growth stock. These companies usually pay few or no dividends, since they prefer to reinvest their profits in their business.
Peter Lynch primarily used a growth stock approach in managing the Magellan mutual fund. Individuals who invest in growth stocks often prefer it because their portfolio will be made up of established, well-managed companies that can be held onto for many years. Companies like Coca-Cola, IBM, and Microsoft have demonstrated great growth over the years, and are the cornerstones of many portfolios. Most investment clubs stick to growth stocks as well.
by Douglas Gerlach
Investors who focus on growth try to predict which companies will grow faster in the future -- faster than the rest of the stocks in the market, or faster than other stocks in the same industry. If you're successful in buying a company that does grow faster than other companies, then it's likely that the price of that company's stock will increase as well, and you can make a profit.
(My comment: Provided you did not pay too high a price to buy it.)
The stock of a company that grows its earnings and revenues faster than average is known as a growth stock. These companies usually pay few or no dividends, since they prefer to reinvest their profits in their business.
Peter Lynch primarily used a growth stock approach in managing the Magellan mutual fund. Individuals who invest in growth stocks often prefer it because their portfolio will be made up of established, well-managed companies that can be held onto for many years. Companies like Coca-Cola, IBM, and Microsoft have demonstrated great growth over the years, and are the cornerstones of many portfolios. Most investment clubs stick to growth stocks as well.
The bear isn't all bad. What exactly is a bear market?
http://www.douglasgerlach.com/clubs/askdoug/bearmarket.html
The Looming Bear
by Douglas Gerlach
Market headlines of recent days are using words that seem tailored to strike panic in the hearts of investors: fear, suffering, carnage.
Starting with the technology stocks of the Nasdaq, and now spreading even to the blue chip stalwarts of the Dow, this market sell-off is bringing us into territory that smells distinctively bear-ish. After enjoying years of great market news, it's unfamiliar territory for many of us.
But as Peter Lynch likes to point out, "When it's 15 below in Minnesota, they don't panic -- they just wait until spring." The market has gone up and down throughout its history, and it doesn't pay to panic when the market declines.
What exactly is a bear market? It's an extended period when stock prices generally decline. It can last for months, or even for years. A bull market is a period when stock prices generally increase. These terms originated back in the 1800s, but no one really knows how or why they came into use, nor why the bull came to symbolize periods of increasing prices while the bear represents downturns.
When you look at the market from a statistical perspective, you can see that it's very common for the market to experience some serious downturns. From 1928 through 1997, the S&P 500 declined in 20 of those 72 years. In eight of those years, it declined greater than 10 percent, and greater than 20 percent in four of the years. And that's not even counting the times that the market has declined greater than 10 percent or even 20 percent in the middle of a year and then recovered!
On the other hand, the S&P 500 has ended the year higher than it started out in 52 of 72 years. In 41 years, the S&P 500 ended up greater than 10 percent, and in 28 years, it closed the year with a 20 percent or greater gain.
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 Looming Bear
by Douglas Gerlach
Market headlines of recent days are using words that seem tailored to strike panic in the hearts of investors: fear, suffering, carnage.
Starting with the technology stocks of the Nasdaq, and now spreading even to the blue chip stalwarts of the Dow, this market sell-off is bringing us into territory that smells distinctively bear-ish. After enjoying years of great market news, it's unfamiliar territory for many of us.
But as Peter Lynch likes to point out, "When it's 15 below in Minnesota, they don't panic -- they just wait until spring." The market has gone up and down throughout its history, and it doesn't pay to panic when the market declines.
What exactly is a bear market? It's an extended period when stock prices generally decline. It can last for months, or even for years. A bull market is a period when stock prices generally increase. These terms originated back in the 1800s, but no one really knows how or why they came into use, nor why the bull came to symbolize periods of increasing prices while the bear represents downturns.
When you look at the market from a statistical perspective, you can see that it's very common for the market to experience some serious downturns. From 1928 through 1997, the S&P 500 declined in 20 of those 72 years. In eight of those years, it declined greater than 10 percent, and greater than 20 percent in four of the years. And that's not even counting the times that the market has declined greater than 10 percent or even 20 percent in the middle of a year and then recovered!
On the other hand, the S&P 500 has ended the year higher than it started out in 52 of 72 years. In 41 years, the S&P 500 ended up greater than 10 percent, and in 28 years, it closed the year with a 20 percent or greater gain.
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.
Who said it is impossible to make $$$$$ in bear market?
________________________________
Dear 陈全兴,
there r 2 choices for one to invest in bear mkt,
1) Buy high dividend yield blue chip stock esp those traded with PE < 10.
2)even if they r not high dividend payer, buy if blue chip selling to u @ around 7+-, it is still worth 4 consideration.
try to avoid property ,GLC n construction stocks, if u doubt , let see what happen to their shares price by end of this year or begining of next year ^V^
Oil n gas srctor also not a bad choice but u r advice to bottom fish them @ PE < 10 also for safe play.
http://www.samgang.blogspot.com/
http://samgang.blogspot.com/2008/07/v-who-said-it-is-impossible-to-make-in.html
_________________________________
I enjoy visiting the above blog. There are very good advice given on investing by Sam of this blog. I copy and paste here one of his posting above. The advice given are excellent and definitely safe. One can be grateful for such advice given expertly, freely and genuinely.
Dear 陈全兴,
there r 2 choices for one to invest in bear mkt,
1) Buy high dividend yield blue chip stock esp those traded with PE < 10.
2)even if they r not high dividend payer, buy if blue chip selling to u @ around 7+-, it is still worth 4 consideration.
try to avoid property ,GLC n construction stocks, if u doubt , let see what happen to their shares price by end of this year or begining of next year ^V^
Oil n gas srctor also not a bad choice but u r advice to bottom fish them @ PE < 10 also for safe play.
http://www.samgang.blogspot.com/
http://samgang.blogspot.com/2008/07/v-who-said-it-is-impossible-to-make-in.html
_________________________________
I enjoy visiting the above blog. There are very good advice given on investing by Sam of this blog. I copy and paste here one of his posting above. The advice given are excellent and definitely safe. One can be grateful for such advice given expertly, freely and genuinely.
Assessing Investment Risks using B-FLExCo
This is how I assess investment risks of the companies that I wish to invest in. I have shortened this to B-FLExCo.
This abbreviation stands for:
B = Business risk
F = Financial risk
L = Liquidity risk
Ex = Exchange risk
Co = Country risk (Also, known as political risk)
At the moment, there is significant political risk for those investing in the KLSE. Accordingly, many KLSE counters are trading at a discount reflecting this risk and other prevailing risks.
This abbreviation stands for:
B = Business risk
F = Financial risk
L = Liquidity risk
Ex = Exchange risk
Co = Country risk (Also, known as political risk)
At the moment, there is significant political risk for those investing in the KLSE. Accordingly, many KLSE counters are trading at a discount reflecting this risk and other prevailing risks.
Goodbye, Bear Market?
http://www.kiplinger.com/columns/value/archive/2008/va0714.htm
"Believe it or not, history offers surprisingly good news about what the stock market will likely do from here. No, history doesn't always repeat itself, but, as the saying goes, it rhymes. So please don't cash in your stocks for CDs until you read the rest of this article. To ignore history would be folly."
"Do things seem worse than they were during other bear markets? If so, it's partly because of our tendency to forget the distant past and focus instead on the recent past. I submit that the events surrounding many past bear markets were at least as frightening as those of this one. I certainly remember the anxiety surrounding the 1987 crash, when the Dow Jones industrial average plunged 22.6% in one day—eclipsing the 1929 crash. I thought we might well enter a depression. Instead, stocks hit bottom less than two months later."
"Yet, soon after the onset of a bear market, the market generally has risen. One month after breaking the 20% threshold, the S&P had gained 3%, on average, during those nine bear markets. Two months later, it had risen 6%. on average. Three months later, it was up 5%, and six months later, the S&P had returned 7%. Twelve months after the initial decline, the market had surged 17%, on average."
How can the market advance so much so quickly when stocks tumble another 11% after hitting the 20% bear market threshold?
James Stack, president of InvesTech Research, says it's because bear markets tend to be "V"-shaped in their final stages. That is, share prices tend to decline dramatically and quickly as investors capitulate, then rebound just as quickly. "Once a bear market ends, the rally out of that bottom is very sharp and very, very profitable," Stack says.
Yes, we all know that averages and statistics can be misleading. After all, the returns above are for the average bear market. What's to say that this will turn out to be an average bear market, with all the bad news still out there?
"Believe it or not, history offers surprisingly good news about what the stock market will likely do from here. No, history doesn't always repeat itself, but, as the saying goes, it rhymes. So please don't cash in your stocks for CDs until you read the rest of this article. To ignore history would be folly."
"Do things seem worse than they were during other bear markets? If so, it's partly because of our tendency to forget the distant past and focus instead on the recent past. I submit that the events surrounding many past bear markets were at least as frightening as those of this one. I certainly remember the anxiety surrounding the 1987 crash, when the Dow Jones industrial average plunged 22.6% in one day—eclipsing the 1929 crash. I thought we might well enter a depression. Instead, stocks hit bottom less than two months later."
"Yet, soon after the onset of a bear market, the market generally has risen. One month after breaking the 20% threshold, the S&P had gained 3%, on average, during those nine bear markets. Two months later, it had risen 6%. on average. Three months later, it was up 5%, and six months later, the S&P had returned 7%. Twelve months after the initial decline, the market had surged 17%, on average."
How can the market advance so much so quickly when stocks tumble another 11% after hitting the 20% bear market threshold?
James Stack, president of InvesTech Research, says it's because bear markets tend to be "V"-shaped in their final stages. That is, share prices tend to decline dramatically and quickly as investors capitulate, then rebound just as quickly. "Once a bear market ends, the rally out of that bottom is very sharp and very, very profitable," Stack says.
Yes, we all know that averages and statistics can be misleading. After all, the returns above are for the average bear market. What's to say that this will turn out to be an average bear market, with all the bad news still out there?
What to do when the stock markets decline sharply?
http://www.wfic.org/article/page
What to do when the stock markets decline sharply?
By Claus W. Silfverberg, director, WFIC
According to one theory you should stay calm and do nothing. The stock market will eventually climb to new heights. And it is impossible for you to time your investments – the short term development of the stock market is unpredictable, most of the time the market is flat and stable, and positive and negative price developments occur so fast you are not able to react.
According to a second theory you should rebalance your portfolio and buy more stocks. Rebalancing is necessary because you have an investment strategy or an asset allocation, which you believe is just right for you. When the stock market decline the relative value of your stocks diminish and you need to buy more stocks to re-establish the right proportions.
According to a third theory – advanced by a.o. Warren Buffett - you should “be greedy when everybody else is fearful” – i.e. you should buy more stocks. When stock markets decline, investors tend to overreact, and stocks fall to prices well below their long term value.
According to a fourth theory you should have stop losses on all your shares and sell immediately when the price drops below the indicated level. Since this theory mainly applies to individual stocks and not stock markets in general, perhaps we may neglect it when considering declines on the stock market.
According to a fifths theory you should never buy stocks as long as they are falling in prices, but wait until the price fall has stopped. Then you should be an active investor.
According to a sixth theory you should sell your stocks when the short term moving average price falls below the long term moving average price, and only start buying again when the opposite occurs.
What do private investors actually do when the stock market decline?
Most of us stop trading. Most of us act according to the new trend of the stock market with a 6 months delay – both when the stock market collapse, and when a new bull market begins. Most of us overreact based on our short term experience – at one time we are too optimistic, and at another time we are too pessimistic. Some of us loose a terrible lot of money because we have committed a number of sins – we have too few stocks in our portfolio, have stocks in poor quality companies, have illiquid stocks, or have been investing based on borrowed money or money we need for daily consumption.
Conclusion
It is difficult to tell which of the theories is the right one, but looking at our normal behaviour it seems clear to me that we need to invest in a more rational manner – do our homework before choosing the companies in which we invest, base our investment on long term perspectives, base our investment on fundamentals such as p/e figures over a long period of time, base our investments on demographics and macroeconomics, learn about the stock market fundamentals, and last but not least base our investments on our individual investment profile and strategy, and not on whether the stock market goes up or down.
What to do when the stock markets decline sharply?
By Claus W. Silfverberg, director, WFIC
According to one theory you should stay calm and do nothing. The stock market will eventually climb to new heights. And it is impossible for you to time your investments – the short term development of the stock market is unpredictable, most of the time the market is flat and stable, and positive and negative price developments occur so fast you are not able to react.
According to a second theory you should rebalance your portfolio and buy more stocks. Rebalancing is necessary because you have an investment strategy or an asset allocation, which you believe is just right for you. When the stock market decline the relative value of your stocks diminish and you need to buy more stocks to re-establish the right proportions.
According to a third theory – advanced by a.o. Warren Buffett - you should “be greedy when everybody else is fearful” – i.e. you should buy more stocks. When stock markets decline, investors tend to overreact, and stocks fall to prices well below their long term value.
According to a fourth theory you should have stop losses on all your shares and sell immediately when the price drops below the indicated level. Since this theory mainly applies to individual stocks and not stock markets in general, perhaps we may neglect it when considering declines on the stock market.
According to a fifths theory you should never buy stocks as long as they are falling in prices, but wait until the price fall has stopped. Then you should be an active investor.
According to a sixth theory you should sell your stocks when the short term moving average price falls below the long term moving average price, and only start buying again when the opposite occurs.
What do private investors actually do when the stock market decline?
Most of us stop trading. Most of us act according to the new trend of the stock market with a 6 months delay – both when the stock market collapse, and when a new bull market begins. Most of us overreact based on our short term experience – at one time we are too optimistic, and at another time we are too pessimistic. Some of us loose a terrible lot of money because we have committed a number of sins – we have too few stocks in our portfolio, have stocks in poor quality companies, have illiquid stocks, or have been investing based on borrowed money or money we need for daily consumption.
Conclusion
It is difficult to tell which of the theories is the right one, but looking at our normal behaviour it seems clear to me that we need to invest in a more rational manner – do our homework before choosing the companies in which we invest, base our investment on long term perspectives, base our investment on fundamentals such as p/e figures over a long period of time, base our investments on demographics and macroeconomics, learn about the stock market fundamentals, and last but not least base our investments on our individual investment profile and strategy, and not on whether the stock market goes up or down.
The case for Dividend Growth Investing
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
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
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."
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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?
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
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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
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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
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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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