Chapter 7 - Portfolio Policy for the Enterprising Investor: The Positive Side
Graham says that there are four clear areas of activity that an enterprising investor (read: not an ultra-conservative investor) should focus on:
1. Buying in low markets and selling in high markets.
Graham says, in essence, that this is a good strategy in theory, but that it’s essentially impossible to accurately predict (on a mathematical basis) when the market is truly “low” and when it’s truly “high.” Why? Graham says that there’s inadequate data available to be able to accurately predict such situations - he basically believes fifty years of data is needed to make such claims, and as of the book’s writing, he did not believe adequate data was available in the post-1949 modern era. Note, though, that Graham returns to the notion of high and low markets in the next chapter.
2. Buying carefully chosen “growth stocks.”
What about growth stocks - ones that are clearly showing rampant growth? Graham isn’t opposed to buying these, but says that one should look for growth stocks that have a reasonable P/E ratio. He wouldn’t buy a “growth stock” if it had a price-to-earnings ratio higher than 20 over the last year and would avoid stocks that have a price-to-earnings ratio over 25 on average over the last several years. In short, this is a way to filter out “bubble” stocks (one where irrational exuberance is going on) when looking at growth stocks.
3. Buying bargain issues of various types.
Here, Graham finally gets around to the idea of buying so-called “value stocks.” For the most part, Graham focuses on market conditions as they existed in 1959, pointing towards what would constitute value stocks then. What I found most profound, though, is a brief bit on page 169. Here, Graham discusses “filtering” the stocks listed by Standard and Poor’s (essentially a 1950s precursor to the S&P 500) and identifying 85 stocks that meet basic value criteria, then buying them and finding that, over the next two years, most of them beat the overall market.
That’s an index fund, my friends. Graham had basically conceived of the idea in the 1950s - it worked then, and it works now.
4. Buying into “special situations.”
Graham largely suggests avoiding “topical” news as a reason to buy or sell, mostly because it’s hard for investors to gauge how exactly such news will truly affect the stock’s price. Instead, one should simply file away interesting long-term news for later use if you’re going to evaluate the stock. For example, recalling that a company is still paying off an incurred debt from ten years ago and that debt is about to be paid off might be an indication of an upcoming jump in profit for the company - and a possible sign of a good value.
Commentary on Chapter 7
Zweig provides a ton of supporting evidence that market timing doesn’t really work, and that “examples” of market timing that are often used to show how good it can be are cherry picked using the amazing power of hindsight.
He makes a similar argument about growth stocks, saying that there are often periods where growth stocks appear to be taking off like a rocket, but that it’s impossible to know where the top of that rocket ride is. He provides several examples of this and largely seems to agree with Graham that the only growth stocks a person should invest in are ones that are truly sound as a business and not merely the beneficiaries of a lot of hype. How can you do this? Keep a very close eye on the real business numbers of any growth stock you own.
In the end, Zweig argues that the best solution for most investors is pretty simple: diversify, diversify, diversify. Don’t put all your eggs in one basket, ever. Instead, buy lots of different stocks from lots of different industries and from lots of different markets (foreign and domestic).
Ref: The Intelligent Investor: The Positive Side to Portfolio Policy for the Enterprising Investor
Thursday 2 July 2009
The Intelligent Investor: A Negative Approach to Portfolio Policy for the Enterprising Investor
But first, a chapter of cautionary advice. Graham is nothing if not cautious, after all. The focus here is on things that even enterprising investors should avoid.
Chapter 6 - Portfolio Policy for the Enterprising Investor: Negative Approach
So, what should you avoid?
First, avoid junk bonds. If they have anything less than a stellar bond rating, don’t bother, even if they appear to return very well. Junk bonds put your principal at risk, and the point of buying bonds is to have a safe portion of your portfolio.
Second, avoid foreign bonds. Here, there are stability issues, and it’s often hard to adequately judge the risk of buying bonds from government and private entities operating under rules unfamiliar to you. Today, arguably, Graham would be okay with buying bonds within the European Union, but I would guess Graham would avoid anything outside of that.
Third, avoid preferred stocks. Preferred stocks are ones that have a higher priority in the event of a liquidation of the business, but often come at a premium price. Almost always, Graham doesn’t feel these are worth any sort of premium. Of course, in the United States, preferred stock is generally not sold directly to individual investors, only to large institutions, so it’s largely a moot point.
Finally, avoid IPOs. To put it simply, new issues do not have any track record upon which to adequately judge the company. The “hype” of an IPO is all you really have to judge the issue on. Instead, let others jump into that feeding frenzy and wait until time has shown which companies swim and which ones sink.
Those are some good rules for anyone to follow, particularly if you’re concerned about not losing the money you invest. Most of these investments have a pretty significant amount of risk and in Graham’s world, one shouldn’t put the principal at undue risk.
Commentary on Chapter 6
Zweig looks at modern examples of all four of these cases and largely comes to the same conclusions as Graham: they’re quite risky and probably not worth it for the average investor. The only caveat that Zweig makes is that there could be room for a mutual fund of junk bonds in a large and diverse portfolio, but it should be considered risky and not be considered anywhere close to a “safe” portion of the portfolio.
Zweig also covers day trading here, describing it as something for most people to avoid. Why? In a world where trading is completely free and trades could be always executed without delay, many people could make a solid income from day trading.
But that’s not the real world. Brokerage fees can eat up a lot of one’s gains, as can trading delays. This forces day traders to walk a tightrope - it becomes a high risk game, and that’s not a game for an investor with any conservative streak. Zweig almost writes it off as gambling, in fact.
So, in short, avoid junk bonds, foreign bonds, IPOs, and day trading and you’re off to a good start in Graham’s world.
Ref: The Intelligent Investor: A Negative Approach to Portfolio Policy for the Enterprising Investor
Chapter 6 - Portfolio Policy for the Enterprising Investor: Negative Approach
So, what should you avoid?
First, avoid junk bonds. If they have anything less than a stellar bond rating, don’t bother, even if they appear to return very well. Junk bonds put your principal at risk, and the point of buying bonds is to have a safe portion of your portfolio.
Second, avoid foreign bonds. Here, there are stability issues, and it’s often hard to adequately judge the risk of buying bonds from government and private entities operating under rules unfamiliar to you. Today, arguably, Graham would be okay with buying bonds within the European Union, but I would guess Graham would avoid anything outside of that.
Third, avoid preferred stocks. Preferred stocks are ones that have a higher priority in the event of a liquidation of the business, but often come at a premium price. Almost always, Graham doesn’t feel these are worth any sort of premium. Of course, in the United States, preferred stock is generally not sold directly to individual investors, only to large institutions, so it’s largely a moot point.
Finally, avoid IPOs. To put it simply, new issues do not have any track record upon which to adequately judge the company. The “hype” of an IPO is all you really have to judge the issue on. Instead, let others jump into that feeding frenzy and wait until time has shown which companies swim and which ones sink.
Those are some good rules for anyone to follow, particularly if you’re concerned about not losing the money you invest. Most of these investments have a pretty significant amount of risk and in Graham’s world, one shouldn’t put the principal at undue risk.
Commentary on Chapter 6
Zweig looks at modern examples of all four of these cases and largely comes to the same conclusions as Graham: they’re quite risky and probably not worth it for the average investor. The only caveat that Zweig makes is that there could be room for a mutual fund of junk bonds in a large and diverse portfolio, but it should be considered risky and not be considered anywhere close to a “safe” portion of the portfolio.
Zweig also covers day trading here, describing it as something for most people to avoid. Why? In a world where trading is completely free and trades could be always executed without delay, many people could make a solid income from day trading.
But that’s not the real world. Brokerage fees can eat up a lot of one’s gains, as can trading delays. This forces day traders to walk a tightrope - it becomes a high risk game, and that’s not a game for an investor with any conservative streak. Zweig almost writes it off as gambling, in fact.
So, in short, avoid junk bonds, foreign bonds, IPOs, and day trading and you’re off to a good start in Graham’s world.
Ref: The Intelligent Investor: A Negative Approach to Portfolio Policy for the Enterprising Investor
The Intelligent Investor: The Defensive Investor and Common Stocks
Chapter 5 - The Defensive Investor and Common Stocks
Graham’s advice, then, tends to focus on people who are willing to put in that extra time - and if you’re willing to do that, he has a lot of wisdom to share.
First of all, diversify. You should own at least ten different stocks, but more than thirty might be a mistake, as it becomes difficult to follow all of them carefully and also seek out new potential stock investments.
Second, invest in only large, prominent, and conservatively financed companies. Look for ones with little debt on the books and ones with a large market capitalization.
Third, invest only in companies with a long history of paying dividends. If a company rarely pays dividends, your only way to earn money from that company is if the market deems the stock to be valuable, and you shouldn’t trust that the market will do so.
Graham seems to point strongly towards the thirty stocks that make up the Dow Jones Industrial Average as a good place to start looking, as they usually match all of these criteria. I’d personally stretch that to include stocks that make up the S&P 500, but the Dow is a great place to find very large blue chip companies that are very stable and have paid dividends for a long time.
Other than that, Graham pooh-poohs many other common strategies.
Buying growth stocks? Nope.
Dollar-cost averaging? Good in theory, not great in practice.
Portfolio adjustments? Be very, very careful - and only do annual evaluations.
In short, be very, very wary and play it very, very cool.
Remember, this is Graham’s advice for the defensive, very conservative investor.
Commentary on Chapter 5
So, what does Jason Zweig have to say about all of this?
His big point is that simply “buying what you know” isn’t enough. You shouldn’t buy Starbucks’ stock simply because you drink their coffee. You need to spend the time to analyze the company’s situation, both internally and in the marketplace, and determine whether or not it’s a reasonable value. You can’t get there just by knowing the products they produce.
Zweig seems to generally feel that most people on the ground that are defensive investors are better off just buying mutual funds (preferably index funds) or seeking help from investment advisors, because the work needed to adequately study enough companies to build a good defensive portfolio is beyond what’s available to most people in their busy lives.
For me? I might tinker with individual stock buying, but I think I’d prefer to keep most of my money in index funds, simply because I, too, don’t feel like I have adequate time to really study enough stocks to build a good defensive stock portfolio.
Ref: The Intelligent Investor: The Defensive Investor and Common Stocks
Graham’s advice, then, tends to focus on people who are willing to put in that extra time - and if you’re willing to do that, he has a lot of wisdom to share.
First of all, diversify. You should own at least ten different stocks, but more than thirty might be a mistake, as it becomes difficult to follow all of them carefully and also seek out new potential stock investments.
Second, invest in only large, prominent, and conservatively financed companies. Look for ones with little debt on the books and ones with a large market capitalization.
Third, invest only in companies with a long history of paying dividends. If a company rarely pays dividends, your only way to earn money from that company is if the market deems the stock to be valuable, and you shouldn’t trust that the market will do so.
Graham seems to point strongly towards the thirty stocks that make up the Dow Jones Industrial Average as a good place to start looking, as they usually match all of these criteria. I’d personally stretch that to include stocks that make up the S&P 500, but the Dow is a great place to find very large blue chip companies that are very stable and have paid dividends for a long time.
Other than that, Graham pooh-poohs many other common strategies.
Buying growth stocks? Nope.
Dollar-cost averaging? Good in theory, not great in practice.
Portfolio adjustments? Be very, very careful - and only do annual evaluations.
In short, be very, very wary and play it very, very cool.
Remember, this is Graham’s advice for the defensive, very conservative investor.
Commentary on Chapter 5
So, what does Jason Zweig have to say about all of this?
His big point is that simply “buying what you know” isn’t enough. You shouldn’t buy Starbucks’ stock simply because you drink their coffee. You need to spend the time to analyze the company’s situation, both internally and in the marketplace, and determine whether or not it’s a reasonable value. You can’t get there just by knowing the products they produce.
Zweig seems to generally feel that most people on the ground that are defensive investors are better off just buying mutual funds (preferably index funds) or seeking help from investment advisors, because the work needed to adequately study enough companies to build a good defensive portfolio is beyond what’s available to most people in their busy lives.
For me? I might tinker with individual stock buying, but I think I’d prefer to keep most of my money in index funds, simply because I, too, don’t feel like I have adequate time to really study enough stocks to build a good defensive stock portfolio.
Ref: The Intelligent Investor: The Defensive Investor and Common Stocks
Strong, thorough research is the most important part about owning stocks.
There’s one big underlying theme to this book, Intelligent Investor. It’s the one point that I believe Graham wants people to take home from this book.
Strong, thorough research is the most important part about owning stocks.
If you can’t - or aren’t willing to - put in a lot of time studying individual stocks, identifying ones that genuinely have potential to return good value to you over time, and keep careful tabs on those individual stocks, then you shouldn’t be investing in stocks.
Over and over again, Graham makes this point, in both obvious and subtle ways. He’s a strong, strong believer in knowing the company. If you don’t have clear, concrete reasons for buying a stock, then you shouldn’t be buying that stock, period.
What if you don’t have that time? This book was written before the advent of index funds, but I tend to think that broad-based index funds can be a reasonable replacement for the stock portion of your portfolio.
Strong, thorough research is the most important part about owning stocks.
If you can’t - or aren’t willing to - put in a lot of time studying individual stocks, identifying ones that genuinely have potential to return good value to you over time, and keep careful tabs on those individual stocks, then you shouldn’t be investing in stocks.
Over and over again, Graham makes this point, in both obvious and subtle ways. He’s a strong, strong believer in knowing the company. If you don’t have clear, concrete reasons for buying a stock, then you shouldn’t be buying that stock, period.
What if you don’t have that time? This book was written before the advent of index funds, but I tend to think that broad-based index funds can be a reasonable replacement for the stock portion of your portfolio.
The Intelligent Investor: General Portfolio Policy for the Defensive Investor
Chapter 4 - General Portfolio Policy: The Defensive Investor
Graham opens the chapter defining two different kinds of investors: the “active” investor, which is the kind of investor that actively seeks new investments and invests serious time into studying investments, and the “passive” or “defensive” investor, the kind of investor that wants to invest once (or on a highly regular basis) and just let his or her portfolio run on autopilot.
Regardless of the activity that you apply to your investments, Graham sticks hard with his recommendation from the earlier chapter: 50% stocks, 50% bonds (or a close approximation thereof, with an absolute maximum of 75% in either side). It’s important to remember with a recommendation like that that Graham is very conservative in his investing, dreading the idea of an actual loss in capital. Only in the most dire of down markets (like 2008, for example) would such a portfolio actually deliver a loss to the investor.
Much of this chapter is spent talking about the various types of bonds that a person can buy:
Zweig also covers several additional options for the bond portion that didn’t exist in Graham’s day, such as bond funds, mortgage securities (no, no, no, no, NO!), and annuities. More importantly, Zweig actually looked at holding cash as an investment option in such things as high-interest online savings accounts and CDs. All of these can be a big part of the conservative half of one’s portfolio, sharing space with (or replacing) bonds.
Most interestingly, though, Zweig suggested that buying stocks solely for the dividends might be considered something that could be a part of the conservative side of a portfolio. Zweig points out that many common stocks pay out 3% or more of their value in dividends each year, so if you select a high-dividend stock from a very stable company, it could potentially serve as part of the conservative side of a defensive investor’s portfolio. I don’t know if I agree with this, given the inherent riskiness of owning individual stocks, that companies reset their dividends annually, and that even the most stable of companies can fall apart quicker than you might expect.
(Comment: In the absence of easy access to bonds for individual investors in Malaysia, the FDs and selected high-dividend stock from a very stable company are the 'equivalent' alternatives to the bond portion of the portfolio.)
Ref: The Intelligent Investor: General Portfolio Policy for the Defensive Investor
Graham opens the chapter defining two different kinds of investors: the “active” investor, which is the kind of investor that actively seeks new investments and invests serious time into studying investments, and the “passive” or “defensive” investor, the kind of investor that wants to invest once (or on a highly regular basis) and just let his or her portfolio run on autopilot.
Regardless of the activity that you apply to your investments, Graham sticks hard with his recommendation from the earlier chapter: 50% stocks, 50% bonds (or a close approximation thereof, with an absolute maximum of 75% in either side). It’s important to remember with a recommendation like that that Graham is very conservative in his investing, dreading the idea of an actual loss in capital. Only in the most dire of down markets (like 2008, for example) would such a portfolio actually deliver a loss to the investor.
Much of this chapter is spent talking about the various types of bonds that a person can buy:
- savings bonds,
- treasury notes/bills,
- municipal bonds, and
- corporate bonds
- some short term,
- some long term,
- some free from taxes,
- some not.
Commentary on Chapter 4
So, how can you tell whether you should be 75% stock and 25% bonds or 50/50 or 25/75? Or somewhere in between? Zweig argues that it mostly comes down to
- your goals,
- the stability in your life,
- your other savings, and
- your tolerance for risk.
Zweig also covers several additional options for the bond portion that didn’t exist in Graham’s day, such as bond funds, mortgage securities (no, no, no, no, NO!), and annuities. More importantly, Zweig actually looked at holding cash as an investment option in such things as high-interest online savings accounts and CDs. All of these can be a big part of the conservative half of one’s portfolio, sharing space with (or replacing) bonds.
Most interestingly, though, Zweig suggested that buying stocks solely for the dividends might be considered something that could be a part of the conservative side of a portfolio. Zweig points out that many common stocks pay out 3% or more of their value in dividends each year, so if you select a high-dividend stock from a very stable company, it could potentially serve as part of the conservative side of a defensive investor’s portfolio. I don’t know if I agree with this, given the inherent riskiness of owning individual stocks, that companies reset their dividends annually, and that even the most stable of companies can fall apart quicker than you might expect.
(Comment: In the absence of easy access to bonds for individual investors in Malaysia, the FDs and selected high-dividend stock from a very stable company are the 'equivalent' alternatives to the bond portion of the portfolio.)
Ref: The Intelligent Investor: General Portfolio Policy for the Defensive Investor
An intelligent and patient investor has a big advantage over the “gambler”-investor.
A lot of people like to argue that the rate of return you can expect from an investment is directly related to the amount of risk you take on. The more risk you have, the greater the potential return - but also the greater risk if you suddenly need to pull out your money.
I’ve always felt that this is a very limited view of things and that it ignores the effort and intelligence of the investor. An investor who can invest a lot of time studying the market and specific investments and can apply cool reasoning and behavior to his or her investments can get a better return than an investor who just wants to stick his or her money somewhere.
Take index funds, for example. Stock index funds are made up of all of the stocks that meet a certain criteria. If you buy into an index fund, it’ll essentially do as well as the average of all of those stocks. That actually also lowers your risk a fair amount because you’re not tied to the ups and downs of a specific company.
For an investor with limited time to research and understand specific investments - such as me - that’s a great way to invest. However, I know that if I had adequate time to actually study the market and played it cool, I could often (not always, but often) pick specific stocks that would beat this return.
Why don’t I do that? With the amount of money I have to invest (relatively small) and the time it would take to actually do the research and pick the investments (relatively large), it’s not a cost-effective use of my time. Give me index funds or give me death!
This is much the same logic that this chapter provides. Graham also buys into the idea that an intelligent and patient investor has a big advantage over the “gambler”-investor.
http://www.thesimpledollar.com/2008/11/07/the-intelligent-investor-general-portfolio-policy-for-the-defensive-investor/
I’ve always felt that this is a very limited view of things and that it ignores the effort and intelligence of the investor. An investor who can invest a lot of time studying the market and specific investments and can apply cool reasoning and behavior to his or her investments can get a better return than an investor who just wants to stick his or her money somewhere.
Take index funds, for example. Stock index funds are made up of all of the stocks that meet a certain criteria. If you buy into an index fund, it’ll essentially do as well as the average of all of those stocks. That actually also lowers your risk a fair amount because you’re not tied to the ups and downs of a specific company.
For an investor with limited time to research and understand specific investments - such as me - that’s a great way to invest. However, I know that if I had adequate time to actually study the market and played it cool, I could often (not always, but often) pick specific stocks that would beat this return.
Why don’t I do that? With the amount of money I have to invest (relatively small) and the time it would take to actually do the research and pick the investments (relatively large), it’s not a cost-effective use of my time. Give me index funds or give me death!
This is much the same logic that this chapter provides. Graham also buys into the idea that an intelligent and patient investor has a big advantage over the “gambler”-investor.
http://www.thesimpledollar.com/2008/11/07/the-intelligent-investor-general-portfolio-policy-for-the-defensive-investor/
The Intelligent Investor: Shareholders and Managements: Dividend Policy
Chapter 19 - Shareholders and Managements: Dividend Policy
Here, Graham seems to indicate that if a stock that otherwise appears to be a value stock isn’t paying out dividends, something is afoot. If there’s not a very clear and concrete reason for no dividends (and the overly simplistic “we’re investing in the company” isn’t satisfactory), then there’s something afoot.
This is not true for companies that would be considered “growth” investments. Quite often, the absence of a dividend (or the presence of only a small dividend) in a growth company is a sign that the company is actually doing what they claim - investing in the company with the intent of maintaining the impressive rate of growth.
The big difference is in why you invest in these different types of stocks. You invest in growth stocks to enjoy the increase in stock price - dividends aren’t really a part of the equation. You intend to ride that wave of growth until it runs out, then sell the stock somewhere near the peak (when the stock is still selling at a premium because of its “growth” status, but the growth is slowing).
However, the typical reason for owning a value stock is income. You don’t expect that the price of a value stock will jump greatly over time. Instead, you own it for that dividend - it’ll keep putting money in your pocket over the long haul. This isn’t a good enough reason for speculators to own the stock - dividend earnings are a long term thing - so good value stocks tend to be forgotten in the mad rush.
If you see a stock that’s undervalued, it should either
Here, Graham seems to indicate that if a stock that otherwise appears to be a value stock isn’t paying out dividends, something is afoot. If there’s not a very clear and concrete reason for no dividends (and the overly simplistic “we’re investing in the company” isn’t satisfactory), then there’s something afoot.
This is not true for companies that would be considered “growth” investments. Quite often, the absence of a dividend (or the presence of only a small dividend) in a growth company is a sign that the company is actually doing what they claim - investing in the company with the intent of maintaining the impressive rate of growth.
The big difference is in why you invest in these different types of stocks. You invest in growth stocks to enjoy the increase in stock price - dividends aren’t really a part of the equation. You intend to ride that wave of growth until it runs out, then sell the stock somewhere near the peak (when the stock is still selling at a premium because of its “growth” status, but the growth is slowing).
However, the typical reason for owning a value stock is income. You don’t expect that the price of a value stock will jump greatly over time. Instead, you own it for that dividend - it’ll keep putting money in your pocket over the long haul. This isn’t a good enough reason for speculators to own the stock - dividend earnings are a long term thing - so good value stocks tend to be forgotten in the mad rush.
If you see a stock that’s undervalued, it should either
- be paying out a good dividend,
- have a stellar reason for not doing so, or
- it should be avoided.
Commentary on Chapter 19
Zweig offers up one nugget that really caught my attention. From page 506:
Research by money managers Robert Arnott and Clifford Asness found that when current dividends are low, future corporate earnings also turn out to be low. And when current dividends are high, so are future earnings. Over 10-year periods, the average rate of earnings growth was 3.9 points greater when dividends were high than when they were low.
What does that mean? Good, strong companies can afford to pay out dividends. Thus, to an extent, a company paying solid dividends - particularly over a lot of years - is likely a company that’s on very solid footing and sure of their future.
Companies that pay good dividends don’t need to hoard money. They don’t need to invest in themselves. Instead, they’re able to provide direct value to their stockholders.
It’s a pretty good argument for value stocks, I must say.
To make money in the stock market, you must have discipline
When it pays to follow rules
Hemananthani Sivanandam
T3B (Track the Trend Breakthrough) system founder Keane Lee believes it pays to follow the rules — literally. This belief, held steadfastly for many years, has made him who he is today — a financially free man.
“If you want to make money in the stock market, you must have discipline. The trading plan is something you must abide by. It is your compass in the forest.”
T3B is a web-based trading system which identifies stocks and derivatives that are about to rise significantly or plunge drastically.
“As we all know, the most vital elements in trading stocks are to pick the right stocks and the right price to enter and exit the market.
“T3B is a charting system that allows people to pinpoint the exact buying and selling price of stocks in markets such as Malaysia, Hongkong, Singapore and Indonesia,” said Lee, who also conducts courses on the T3B system.
With more than 5,000 people in Singapore, Indonesia and Malaysia following the system, Lee said the system allows one to be emotionally detached, which he said is crucial in order to trade.
He said the most important factor when buying shares is the price and knowing when to sell without being influenced by emotions.
“Many people make the mistake of listening to rumours or people when it comes to buying shares. Some buy in a frenzy and some sell (shares) in a panic.
“If you know how to get into the share market but not out, then you’ll be stuck and suffer losses. The system helps you to get in but most importantly, get out and cut your losses.”
Is the system foolproof? Lee said the system is not a miraculous or magical formula as it is merely a guide to help people make the right decision.
“I can tell you that not all 5,000 of my students are completely financially free because to me, there are three types of people when it comes to trading.”
He said there are some people who embrace the system but at the same time they go back to their old habit of listening to rumours and tips about the market.
“Then there are also those who are not disciplined and focused to follow the system and give up.
“Lastly, there are people who procrastinate. The procrastinators are the ones who believe in the system but somehow find it hard to make the first move of trading and postpone it,” said Lee, who has 20 years’ experience in trading and broking.
He likened the system to someone in a forest but is equipped with infra-red goggles.
“I can give you the goggles to guide you but I cannot change what is on your path. We cannot change what will happen in the stock market but the system allows you clarity to see the movements in the market and tells you which to follow,” said Lee.
Lee said the system was initially created for his personal use but through word of mouth, it became popular.
“I taught it to some of my clients but soon others were willing to pay me to teach them about the system, so I thought, why not?”
He said apart from attaining financial freedom, it gives him satisfaction when he sees people who use the system becoming successful.
“I believe if you give the world the best, the best comes back to you.”
Lee’s investment tips
» Be financially educated.
Ignorance is expensive
» Find a trading niche which
is suitable for you
» Focus and follow through your
investment plan
» Set realistic goals
» Make money but also save to re-invest
Hemananthani Sivanandam
T3B (Track the Trend Breakthrough) system founder Keane Lee believes it pays to follow the rules — literally. This belief, held steadfastly for many years, has made him who he is today — a financially free man.
“If you want to make money in the stock market, you must have discipline. The trading plan is something you must abide by. It is your compass in the forest.”
T3B is a web-based trading system which identifies stocks and derivatives that are about to rise significantly or plunge drastically.
“As we all know, the most vital elements in trading stocks are to pick the right stocks and the right price to enter and exit the market.
“T3B is a charting system that allows people to pinpoint the exact buying and selling price of stocks in markets such as Malaysia, Hongkong, Singapore and Indonesia,” said Lee, who also conducts courses on the T3B system.
With more than 5,000 people in Singapore, Indonesia and Malaysia following the system, Lee said the system allows one to be emotionally detached, which he said is crucial in order to trade.
He said the most important factor when buying shares is the price and knowing when to sell without being influenced by emotions.
“Many people make the mistake of listening to rumours or people when it comes to buying shares. Some buy in a frenzy and some sell (shares) in a panic.
“If you know how to get into the share market but not out, then you’ll be stuck and suffer losses. The system helps you to get in but most importantly, get out and cut your losses.”
Is the system foolproof? Lee said the system is not a miraculous or magical formula as it is merely a guide to help people make the right decision.
“I can tell you that not all 5,000 of my students are completely financially free because to me, there are three types of people when it comes to trading.”
He said there are some people who embrace the system but at the same time they go back to their old habit of listening to rumours and tips about the market.
“Then there are also those who are not disciplined and focused to follow the system and give up.
“Lastly, there are people who procrastinate. The procrastinators are the ones who believe in the system but somehow find it hard to make the first move of trading and postpone it,” said Lee, who has 20 years’ experience in trading and broking.
He likened the system to someone in a forest but is equipped with infra-red goggles.
“I can give you the goggles to guide you but I cannot change what is on your path. We cannot change what will happen in the stock market but the system allows you clarity to see the movements in the market and tells you which to follow,” said Lee.
Lee said the system was initially created for his personal use but through word of mouth, it became popular.
“I taught it to some of my clients but soon others were willing to pay me to teach them about the system, so I thought, why not?”
He said apart from attaining financial freedom, it gives him satisfaction when he sees people who use the system becoming successful.
“I believe if you give the world the best, the best comes back to you.”
Lee’s investment tips
» Be financially educated.
Ignorance is expensive
» Find a trading niche which
is suitable for you
» Focus and follow through your
investment plan
» Set realistic goals
» Make money but also save to re-invest
Malaysia's Affirmative Action
JUNE 30, 2009
Malaysia Eases Race Rules
By JAMES HOOKWAY
Malaysian Prime Minister Najib Razak's move to relax race-based investment restrictions is his latest effort to roll back a decades-old affirmative action program criticized for benefiting the country's majority ethnic Malay population at the expense of the broader economy's competitiveness.
Some political analysts say the latest measures don't spell the end for Malaysia's New Economic Policy, as the affirmative action policies are known. Instead, Mr. Najib is attempting to balance the needs of Malaysia's shrinking economy with a social policy that many Malaysian politicians say they believe has helped stabilize the country's racial mix, which includes large ethnic-Chinese and Indian minorities.
"The world is changing quickly and we must be ready to change with it or risk being left behind," Mr. Najib told an investment conference Tuesday in Kuala Lumpur.
In his address, he outlined a package of measures to spur foreign investment in the Malaysian economy, which private economists say could contract as much as 5% this year amid the global downturn. Among the new policies, companies listing on the Kuala Lumpur Stock Exchange will be required to allocate just 12.5% of their equity to ethnic Malays, compared with 30% before.
Foreign investors will be able to own as much as 70% of stock-brokerage companies -- up from the current 49% cap -- while foreign fund managers will be allowed to establish 100%-foreign-owned fund-management companies in Malaysia, which has one of the largest stock markets in Southeast Asia.
Citigroup economist Kit Wei Zheng said the moves were consistent with earlier measures and would likely enhance Malaysia's competitive edge in attracting foreign investment. Earlier this year, Malaysia allowed foreign companies to enter certain service sectors without allocating 30% of their equity to ethnic Malays.
The main index at the Kuala Lumpur Stock Exchange fell 0.1% to close at 1075.24 Tuesday, but the ringgit strengthened to 3.5170 ringgit against the U.S. dollar at the close of trade compared with 3.5730 ringgit on Monday.
Mr. Najib, 55 years old, emphasized that Malaysia wasn't giving up its affirmative action policies, which were introduced in 1971 following bloody race riots, to help ethnic Malays catch up economically with ethnic Chinese Malaysians. The target of putting 30% of the economy in Malay hands, Mr. Najib said, remains intact. "But this 30% figure is now a macro target, not a micro target," he told reporters.
Significantly, the 30% Malay-ownership rules remain in force for "strategic industries" such as telecommunications, ports, energy and transport. In many cases, state investment funds have large controlling interests in these businesses.
"We will help the best and the good in business. We want to be fair to all communities," Mr. Najib said. "It is a tricky balancing act, but it is doable."
Some activists in the ethnic Malay community, which comprises 60% of Malaysia's 28 million people, have warned there could be protests if Mr. Najib moves too quickly to remove affirmative action policies. Last week, Mr. Najib took other steps to placate the country's ethnic Chinese and Indian minorities by announcing plans for merit-based university scholarships for which Malay, Chinese and Indian students can compete on an equal basis.
Some economists were surprised at the number of policy changes that Mr. Najib announced. "I didn't expect that," said Tim Condon, chief Asia economist with ING Group in Singapore. "But Mr. Najib appears to be responding to what people want and as pro-market measures go, these can only be seen as positive."
—K.P. Lee contributed to this article.
Write to James Hookway at james.hookway@wsj.com
http://online.wsj.com/article/SB124633190411371761.html
Malaysia Eases Race Rules
By JAMES HOOKWAY
Malaysian Prime Minister Najib Razak's move to relax race-based investment restrictions is his latest effort to roll back a decades-old affirmative action program criticized for benefiting the country's majority ethnic Malay population at the expense of the broader economy's competitiveness.
Some political analysts say the latest measures don't spell the end for Malaysia's New Economic Policy, as the affirmative action policies are known. Instead, Mr. Najib is attempting to balance the needs of Malaysia's shrinking economy with a social policy that many Malaysian politicians say they believe has helped stabilize the country's racial mix, which includes large ethnic-Chinese and Indian minorities.
"The world is changing quickly and we must be ready to change with it or risk being left behind," Mr. Najib told an investment conference Tuesday in Kuala Lumpur.
In his address, he outlined a package of measures to spur foreign investment in the Malaysian economy, which private economists say could contract as much as 5% this year amid the global downturn. Among the new policies, companies listing on the Kuala Lumpur Stock Exchange will be required to allocate just 12.5% of their equity to ethnic Malays, compared with 30% before.
Foreign investors will be able to own as much as 70% of stock-brokerage companies -- up from the current 49% cap -- while foreign fund managers will be allowed to establish 100%-foreign-owned fund-management companies in Malaysia, which has one of the largest stock markets in Southeast Asia.
Citigroup economist Kit Wei Zheng said the moves were consistent with earlier measures and would likely enhance Malaysia's competitive edge in attracting foreign investment. Earlier this year, Malaysia allowed foreign companies to enter certain service sectors without allocating 30% of their equity to ethnic Malays.
The main index at the Kuala Lumpur Stock Exchange fell 0.1% to close at 1075.24 Tuesday, but the ringgit strengthened to 3.5170 ringgit against the U.S. dollar at the close of trade compared with 3.5730 ringgit on Monday.
Mr. Najib, 55 years old, emphasized that Malaysia wasn't giving up its affirmative action policies, which were introduced in 1971 following bloody race riots, to help ethnic Malays catch up economically with ethnic Chinese Malaysians. The target of putting 30% of the economy in Malay hands, Mr. Najib said, remains intact. "But this 30% figure is now a macro target, not a micro target," he told reporters.
Significantly, the 30% Malay-ownership rules remain in force for "strategic industries" such as telecommunications, ports, energy and transport. In many cases, state investment funds have large controlling interests in these businesses.
"We will help the best and the good in business. We want to be fair to all communities," Mr. Najib said. "It is a tricky balancing act, but it is doable."
Some activists in the ethnic Malay community, which comprises 60% of Malaysia's 28 million people, have warned there could be protests if Mr. Najib moves too quickly to remove affirmative action policies. Last week, Mr. Najib took other steps to placate the country's ethnic Chinese and Indian minorities by announcing plans for merit-based university scholarships for which Malay, Chinese and Indian students can compete on an equal basis.
Some economists were surprised at the number of policy changes that Mr. Najib announced. "I didn't expect that," said Tim Condon, chief Asia economist with ING Group in Singapore. "But Mr. Najib appears to be responding to what people want and as pro-market measures go, these can only be seen as positive."
—K.P. Lee contributed to this article.
Write to James Hookway at james.hookway@wsj.com
http://online.wsj.com/article/SB124633190411371761.html
Affirmative action, meet economic reality.
Malaysia's Affirmative Action
By MOHAMMED HADI
Affirmative action, meet economic reality.
Facing declining interest from foreign investors and finding itself in an increasingly liberalized neighborhood, Malaysia on Tuesday unveiled some big changes in stock ownership and acquisition rules.
The boldest of these chip away at the country's nearly forty-year-old affirmative action policies -- in this case, rules over corporate ownership. Specifically, the requirement that ethnic Malays own 30% of any listed company will be watered down, effectively, to 12.5%.
Hurdles to acquisitions by foreign buyers too will be lowered, as will ownership restrictions for foreigners on fund management companies and brokerages.
Aimed at improving the lot of the country's ethnic majority Malay population, the affirmative action rules -- which govern everything from university enrollment to work force quotas -- have more recently become an anchor around the economy.
The symptoms of this -- a decline in competitiveness of non-commodity exports and foreign interest in the country -- is evident, Morgan Stanley says. Net foreign direct investment, for example, has been trending lower since the early 1990's -- contrary to the flood of inflows into the much of the region.
Malaysia trails Singapore, Thailand, and Indonesia when it comes to the volume of funds raised on its domestic stock market and value of acquisitions by foreign companies in recent years, according to Dealogic.
Tuesday's changes are unarguably a step toward fostering much needed innovation and risk-taking by Malaysian business, but relaxing rules to encourage foreign investment is surely the easy part.
Malaysia's Byzantine politics may keep any further changes -- particularly to labor laws -- off the table.
Write to Mohammed Hadi at mohammed.hadi@dowjones.com
http://online.wsj.com/article/SB124635723363472461.html?mod=googlenews_wsj
By MOHAMMED HADI
Affirmative action, meet economic reality.
Facing declining interest from foreign investors and finding itself in an increasingly liberalized neighborhood, Malaysia on Tuesday unveiled some big changes in stock ownership and acquisition rules.
The boldest of these chip away at the country's nearly forty-year-old affirmative action policies -- in this case, rules over corporate ownership. Specifically, the requirement that ethnic Malays own 30% of any listed company will be watered down, effectively, to 12.5%.
Hurdles to acquisitions by foreign buyers too will be lowered, as will ownership restrictions for foreigners on fund management companies and brokerages.
Aimed at improving the lot of the country's ethnic majority Malay population, the affirmative action rules -- which govern everything from university enrollment to work force quotas -- have more recently become an anchor around the economy.
The symptoms of this -- a decline in competitiveness of non-commodity exports and foreign interest in the country -- is evident, Morgan Stanley says. Net foreign direct investment, for example, has been trending lower since the early 1990's -- contrary to the flood of inflows into the much of the region.
Malaysia trails Singapore, Thailand, and Indonesia when it comes to the volume of funds raised on its domestic stock market and value of acquisitions by foreign companies in recent years, according to Dealogic.
Tuesday's changes are unarguably a step toward fostering much needed innovation and risk-taking by Malaysian business, but relaxing rules to encourage foreign investment is surely the easy part.
Malaysia's Byzantine politics may keep any further changes -- particularly to labor laws -- off the table.
Write to Mohammed Hadi at mohammed.hadi@dowjones.com
http://online.wsj.com/article/SB124635723363472461.html?mod=googlenews_wsj
The Intelligent Investor: A Comparison of Eight Pairs of Companies
This is really a “put the principles into practice” chapter, above all else. The premise is really simple: Graham simply picks eight pairs of companies off of a list of stocks available on the stock exchange. He simply chose ones that were adjacent to each other in name on a long list of publicly traded stocks.
So what’s the value in reading these comparisons?
The value comes in seeing what things Graham looks for when comparing two companies. If you carefully read this chapter, you can tease out a lot of interesting basic concepts that Graham seems to rely on in his analysis. Let’s dig in.
Chapter 18 - A Comparison of Eight Pairs of Companies
So, what “basic concepts” am I talking about? Here are five things that stood out to me in Graham’s comparisons.
Companies that stick to their core businesses are generally better values. Companies that dive into mergers and make big splashes into other businesses get all the attention, but if you’re looking for value, look for companies that focus in one area and do it well.
Investing on what you think will happen in the future is almost always a bad idea. No one can predict the future. If you’re investing for value, don’t bet on a company because of what they’ve done very recently. Look for a long track record.
Overvalued stocks tend to stay overvalued, while undervalued stocks tend to stay undervalued. Why? Conventional wisdom tends to rule the day. If a company is seen as “hot,” it takes a lot for that facade to go away. Similarly, if a company is seen as “boring,” it’s very hard to lose that stigma. That’s why selling short really only works well in certain specific situations where a company is clearly losing something of value, not just merely the fact that it seems overvalued.
A company in a highly competitive market is almost never a value. If a company has a lot of strong competitors, you should never view that stock as a value stock. Most good values sell products in niches where there isn’t much competition - hence the perception that such stocks are boring.
Price volatility is usually a bad sign. If a company is experiencing far greater price fluctuations than the market as a whole is seeing, particularly when it alternates between going up rapidly and going down rapidly, avoid the stock. Such events happen only in companies that are either unstable or are involved in something else going on in the market, both of which are good to avoid.
Commentary on Chapter 18
Zweig attempts to do eight similar comparisons with more modern companies, looking at them as they sat in 2002 and early 2003.
Again, most of these comparisons are really products of their times - they aren’t valid looks at the companies today. However, these comparisons do reinforce most of the principles taught in this book - nice, quiet, steady, stable companies with steady dividends and earnings growth are the ones that make for a great value.
Most importantly, it establishes that Graham’s principles are all about the long term, not the short term. If you’re interested in day trading and selling short, Ben Graham’s philosophy isn’t the right one for you.
Ref: The Intelligent Investor: Four Extremely Instructive Case Histories
So what’s the value in reading these comparisons?
The value comes in seeing what things Graham looks for when comparing two companies. If you carefully read this chapter, you can tease out a lot of interesting basic concepts that Graham seems to rely on in his analysis. Let’s dig in.
Chapter 18 - A Comparison of Eight Pairs of Companies
So, what “basic concepts” am I talking about? Here are five things that stood out to me in Graham’s comparisons.
Companies that stick to their core businesses are generally better values. Companies that dive into mergers and make big splashes into other businesses get all the attention, but if you’re looking for value, look for companies that focus in one area and do it well.
Investing on what you think will happen in the future is almost always a bad idea. No one can predict the future. If you’re investing for value, don’t bet on a company because of what they’ve done very recently. Look for a long track record.
Overvalued stocks tend to stay overvalued, while undervalued stocks tend to stay undervalued. Why? Conventional wisdom tends to rule the day. If a company is seen as “hot,” it takes a lot for that facade to go away. Similarly, if a company is seen as “boring,” it’s very hard to lose that stigma. That’s why selling short really only works well in certain specific situations where a company is clearly losing something of value, not just merely the fact that it seems overvalued.
A company in a highly competitive market is almost never a value. If a company has a lot of strong competitors, you should never view that stock as a value stock. Most good values sell products in niches where there isn’t much competition - hence the perception that such stocks are boring.
Price volatility is usually a bad sign. If a company is experiencing far greater price fluctuations than the market as a whole is seeing, particularly when it alternates between going up rapidly and going down rapidly, avoid the stock. Such events happen only in companies that are either unstable or are involved in something else going on in the market, both of which are good to avoid.
Commentary on Chapter 18
Zweig attempts to do eight similar comparisons with more modern companies, looking at them as they sat in 2002 and early 2003.
Again, most of these comparisons are really products of their times - they aren’t valid looks at the companies today. However, these comparisons do reinforce most of the principles taught in this book - nice, quiet, steady, stable companies with steady dividends and earnings growth are the ones that make for a great value.
Most importantly, it establishes that Graham’s principles are all about the long term, not the short term. If you’re interested in day trading and selling short, Ben Graham’s philosophy isn’t the right one for you.
Ref: The Intelligent Investor: Four Extremely Instructive Case Histories
The Intelligent Investor: Four Extremely Instructive Case Histories
In this chapter, Graham discusses four examples of this kind of careful study:
Penn Central (Railroad) Co., which is an example of a corporate giant that’s rotting from the inside
Ling-Temco-Vought, Inc., which is a company that builds an empire on paper, but is actually pretty fragile
NVF Corp., which is an example of corporate acquisitions gone bad
AAA Enterprises, which is an example of a “hot” stock that’s getting elevated beyond all reason
Chapter 17: Four Extremely Instructive Case Histories
Here’s how Graham sniffed out the rat in each company.
Penn Central (Railroad) Co.
A careful reading of the company’s annual reports reveals that the company had been paying virtually no income tax for a decade. That’s a huge warning sign - if they’re not paying income tax,
AAA Enterprises
If you can’t determine why exactly people are investing in a company, don’t invest. That’s basically the story here, in which a tiny company played a hype game and wound up being valued at 115 times earnings - a number that’s not realistic no matter what the company.
This was all based on potential - much like the “dot com” stocks of 1999 and 2000. Graham’s point? Avoid companies that are selling nothing more than potential. If you can’t see real assets and real business there, don’t invest.
Ref: The Intelligent Investor: Four Extremely Instructive Case Histories
Penn Central (Railroad) Co., which is an example of a corporate giant that’s rotting from the inside
Ling-Temco-Vought, Inc., which is a company that builds an empire on paper, but is actually pretty fragile
NVF Corp., which is an example of corporate acquisitions gone bad
AAA Enterprises, which is an example of a “hot” stock that’s getting elevated beyond all reason
Chapter 17: Four Extremely Instructive Case Histories
Here’s how Graham sniffed out the rat in each company.
Penn Central (Railroad) Co.
A careful reading of the company’s annual reports reveals that the company had been paying virtually no income tax for a decade. That’s a huge warning sign - if they’re not paying income tax,
- they’re either taking advantage of a ton of tax breaks (which you should be able to discover easily) or
- they’re not really earning much income at all.
How did they do it? They were reporting earnings without “charges” that were going to be taken several years down the road. These “charges,” however, were merely disguising that the company wasn’t really bringing in any income.
What can you do to avoid this? If you see a company reporting good earnings but also talking about “charges” for mysterious reasons that will be dealt with in future years, be very careful. They could be just extending the life of the company on paper when it’s actually in serious trouble.
Ling-Temco-Vought, Inc.
The warning signs? In 1966, the company stated that their assets were less than 5% of the stock value of the company. This means that if the company went bankrupt, the common stocks would pretty much be worthless - something to avoid like the plague if you’re investing for value.
Another warning sign: large investors started dumping the stock in droves. If you see big investors selling all of their stock in a company, you might want to consider doing the same. Watch out for big changes in institutional investing in the public reports on the company.
In 1969, the company reported a loss far bigger than the total profits in the history of the company. In one year, it lost more money than it ever earned - a sure sign something’s seriously wrong.
The way to avoid this is simple:
- avoid any stocks that are valued far beyond their asset value.
- Avoid any stocks that are being sold in droves by institutional investors.
- Avoid stocks that suddenly report a huge loss seemingly out of nowhere.
NVF Corp.
Here, NVF used a number of accounting gimmicks to hide the fact that they were acquiring companies with a huge amount of debt and unsteady business.
How did they do that? The most flagrant sign was that the company claimed an “asset” called “deferred debt expense” that was actually larger than the entire equity of the company. If you started digging into the annual report and figuring out what the items are, you soon realized that the company was actually claiming some debts as assets - and when you got that all straightened out, it became clear that the company was worthless.
You can avoid this by avoiding any company that has unexplainable items on their annual report. If you can’t get a rational explanation of what an element of a company’s annual report is, avoid that company.
AAA Enterprises
If you can’t determine why exactly people are investing in a company, don’t invest. That’s basically the story here, in which a tiny company played a hype game and wound up being valued at 115 times earnings - a number that’s not realistic no matter what the company.
This was all based on potential - much like the “dot com” stocks of 1999 and 2000. Graham’s point? Avoid companies that are selling nothing more than potential. If you can’t see real assets and real business there, don’t invest.
Commentary on Chapter 17
Zweig spends his commentary making modern analogies for each of these disasters.
Zweig compared Penn Central (Railroad) Co. to Lucent. Both companies were among the largest in America, but once you started digging into the books, it became clear that the large company was rotting from the inside, with apparent earnings that weren’t actually based in reality.
He compared Ling-Temco-Vought, Inc. to Tyco, both of which built a big paper empire that wasn’t really based on real-world assets, but instead based on mergers and shuffling.
He compared NVF Corp. to AOL-Time Warner, the best modern example of a merger that completely made no sense in which the minnow swallowed the whale.
Finally, the easy one: AAA Enterprises could have been compared to a lot of dot-com companies (my favorite disaster was Boo.com), but Zweig analogized it to eToys, another classic dot-com disaster.
What’s the lesson? These same tactics keep getting used and keep fooling investors. Be careful.
Ref: The Intelligent Investor: Four Extremely Instructive Case Histories
The real question in value investing
The real question in value investing is how do you identify the lemons that are mixed in with the ‘values’?
Obviously, when you’re digging into “value” companies, you’re seeking out companies that are currently undervalued by the stock market. This can happen for a lot of reasons:
http://www.thesimpledollar.com/2009/02/06/the-intelligent-investor-four-extremely-instructive-case-histories/
Obviously, when you’re digging into “value” companies, you’re seeking out companies that are currently undervalued by the stock market. This can happen for a lot of reasons:
- these companies are boring,
- these companies are not experiencing rapid growth, or,
- more ominously, something nasty is afoot with this business.
The problem with teasing out companies that are up to shenanigans is that there’s no ready made recipe for identifying them. This is where homework comes into play. You need to study the individual companies you invest in. Careful study of a company will often identify fundamental problems in their business plan - and if you see those things, you can stay away.
http://www.thesimpledollar.com/2009/02/06/the-intelligent-investor-four-extremely-instructive-case-histories/
The Intelligent Investor: The Investor and Market Fluctuations
Chapter 8 - The Investor and Market Fluctuations
Right off the bat, Graham argues that attempting to play market timing games is a fool’s game. One can never predict true market bottoms or peaks in advance - they can only be seen through hindsight. Graham also points out that some of the “markers” of a bottoming-out market won’t necessarily hold true for the next bottom, and that same effect holds true for peaks as well. In a nutshell, don’t bother trying to time things based on what you think the overall stock market is going to do.
However, for individual stocks, Graham thinks that timing can actually work well. In this case, though, Graham is referring to detailed study of a company: knowing that the company is sound, knowing how it compares to the competition, and knowing what a reasonable value of the stock should be. Once you’ve identified a good, quality company, then you should keep your eye out for the right price on that stock - when it goes below a certain number without any change in the nature of the company itself, then you buy.
This, in essence, is the key of the “buy low, sell high” idea. You don’t try to time the market at all. Instead, you merely seek out bargains in the things that you know, and you wait for them patiently.
What about selling? For the most part, Graham encourages people not to sell into fluctuations, either, and instead hold onto those steady, dividend-paying stocks. The only time Graham seems to encourage selling based on market conditions is if the prices you would get today are significantly out of whack with the long term history of the stock. For example, if the stock has pretty consistently held near a 12 P/E ratio, but is suddenly selling for 20, it’s probably a good time to sell it.
What’s the end result of all of this? A person who diligently follows Graham’s advice is going to almost always be doing the opposite of what everyone else is doing. When the bull market is roaring and everyone is buying, you’re likely to be holding or selling stocks. When the bear market is afoot and everyone is selling, you’re likely to buy up those value stocks.
What about bonds? Graham generally advocates buying bonds when there are no values to be had in the stock market. In other words, if you have money to invest and the stock market is roaring like a freight train, Graham suggests increasing the portion of bonds in your portfolio. Similarly, when the market is down, one may want to decrease the portion of their portfolio that is in bonds if there are appropriate value stocks out there for purchase. Again, it’s the opposite of what seems to be the convention on Wall Street.
Commentary on Chapter 8
Zweig spends most of the commentary ruminating on Graham’s “Mr. Market.” For those unfamiliar, Graham often liked to imagine the stock market as a person he called Mr. Market. This individual was essentially a manic depressive - when the stock market was rocketing, he’d offer to buy or sell you stocks at a price way beyond what the company was worth, but when the stock market was down, he’d only buy or sell at prices far below what the company should fetch. Graham argued that the way to deal with Mr. Market was patience - wait until he quoted you prices you liked.
Zweig uses several modern examples of irrational exuberance to show this “Mr. Market” phenomenon at work - and the dot-com boom certainly gave us a lot of examples. Zweig discusses Inktomi, which went from a peak well over $200 in 2000 to being worth a quarter a share in 2002, even though the fundamentals of the business actually improved over that time frame. In 2002, it was a bargain, and eventually Yahoo bought the company lock, stock, and barrel for roughly seven times that much.
So how can you avoid situations like Inktomi? Know what you’re buying, be patient, and only buy when the getting is good. Not only does this ensure that you get actual bargains, it also reduces the brokerage fees that a more frenetic buyer and seller would accumulate.
Zweig picks out a great quote from Graham that I think bears repeating here.
The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage.
That, right there, is most of the lesson of this chapter in one sentence.
Ref: The Intelligent Investor: The Investor and Market Fluctuations
Right off the bat, Graham argues that attempting to play market timing games is a fool’s game. One can never predict true market bottoms or peaks in advance - they can only be seen through hindsight. Graham also points out that some of the “markers” of a bottoming-out market won’t necessarily hold true for the next bottom, and that same effect holds true for peaks as well. In a nutshell, don’t bother trying to time things based on what you think the overall stock market is going to do.
However, for individual stocks, Graham thinks that timing can actually work well. In this case, though, Graham is referring to detailed study of a company: knowing that the company is sound, knowing how it compares to the competition, and knowing what a reasonable value of the stock should be. Once you’ve identified a good, quality company, then you should keep your eye out for the right price on that stock - when it goes below a certain number without any change in the nature of the company itself, then you buy.
This, in essence, is the key of the “buy low, sell high” idea. You don’t try to time the market at all. Instead, you merely seek out bargains in the things that you know, and you wait for them patiently.
What about selling? For the most part, Graham encourages people not to sell into fluctuations, either, and instead hold onto those steady, dividend-paying stocks. The only time Graham seems to encourage selling based on market conditions is if the prices you would get today are significantly out of whack with the long term history of the stock. For example, if the stock has pretty consistently held near a 12 P/E ratio, but is suddenly selling for 20, it’s probably a good time to sell it.
What’s the end result of all of this? A person who diligently follows Graham’s advice is going to almost always be doing the opposite of what everyone else is doing. When the bull market is roaring and everyone is buying, you’re likely to be holding or selling stocks. When the bear market is afoot and everyone is selling, you’re likely to buy up those value stocks.
What about bonds? Graham generally advocates buying bonds when there are no values to be had in the stock market. In other words, if you have money to invest and the stock market is roaring like a freight train, Graham suggests increasing the portion of bonds in your portfolio. Similarly, when the market is down, one may want to decrease the portion of their portfolio that is in bonds if there are appropriate value stocks out there for purchase. Again, it’s the opposite of what seems to be the convention on Wall Street.
Commentary on Chapter 8
Zweig spends most of the commentary ruminating on Graham’s “Mr. Market.” For those unfamiliar, Graham often liked to imagine the stock market as a person he called Mr. Market. This individual was essentially a manic depressive - when the stock market was rocketing, he’d offer to buy or sell you stocks at a price way beyond what the company was worth, but when the stock market was down, he’d only buy or sell at prices far below what the company should fetch. Graham argued that the way to deal with Mr. Market was patience - wait until he quoted you prices you liked.
Zweig uses several modern examples of irrational exuberance to show this “Mr. Market” phenomenon at work - and the dot-com boom certainly gave us a lot of examples. Zweig discusses Inktomi, which went from a peak well over $200 in 2000 to being worth a quarter a share in 2002, even though the fundamentals of the business actually improved over that time frame. In 2002, it was a bargain, and eventually Yahoo bought the company lock, stock, and barrel for roughly seven times that much.
So how can you avoid situations like Inktomi? Know what you’re buying, be patient, and only buy when the getting is good. Not only does this ensure that you get actual bargains, it also reduces the brokerage fees that a more frenetic buyer and seller would accumulate.
Zweig picks out a great quote from Graham that I think bears repeating here.
The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage.
That, right there, is most of the lesson of this chapter in one sentence.
Ref: The Intelligent Investor: The Investor and Market Fluctuations
Security Analysis for the Lay Investor: General Approach
Chapter 11 - Security Analysis for the Lay Investor: General Approach
How exactly can an individual estimate what a reasonable value of a given stock should be? Graham identifies five key factors that basically define the value of a stock.
The company’s “general long-term prospects”
Ignore what the talking heads are saying and look at the books. Is the company growing steadily? Is this growth actually in line with the stock price, or is the stock price jumping up and down seemingly out of touch with the actual business of the company? If the books are steady, the company is steady, and the prices jumping up and down is the result of talking heads. Be sure to look at a lot of data, though - at least five years, and ten is better.
The quality of the management
It’s hard to judge this. One way to effectively judge it is to watch the annual reports of the company over a long period and see if the management actually does what they say they’re going to do as well as frankly discuss the moves they’ve made. If the management commentary seems not well related to the business of the company, that’s a big red flag.
Its financial strength and capital structure
The less debt, the better, but a little bit of debt isn’t a big scary red flag. Again, look at the long term and see how the company has handled debt over the long term - it should always be low (or steadily going down).
Its dividend record
Graham believes that a company should be paying a pretty steady investment for at least twenty years. If the company you’re investing in doesn’t have this kind of history, that’s something of a negative.
Its current dividend rate
Since Graham wrote this book, companies have gradually shrunk their dividend payments, making the current dividend rate much less of a factor. When Graham was writing, companies typically paid around 60% of earnings out as dividends - today, 25-30% is fairly typical.
One important thing to note about Graham’s five factors is that he’s looking at these stocks as a long term investment that he hopes will return a healthy pile of dividends over that time. He’s not necessarily looking for a big ramp-up in stock price over that period - his “value” comes primarily from the dividends. That’s quite a bit different than how CNBC often talks about about stocks.
Commentary on Chapter 11
Zweig spends the commentary basically taking Graham’s five key factors and putting them in a modern context. For example, for evaluating a company’s long term prospects, Zweig encourages people to visit EDGAR (at sec.gov) and download at least five years’ worth of annual reports. That’s not exactly something that could be done in Graham’s day.
In fact, most of Zweig’s recommendations point people towards using EDGAR, which is an incredible tool for getting straightforward factual information about the status of companies you’re investing in. Zweig points out lots of things you should look for in all that data, but here’s three that stood out to me:
Form 4, which shows what a firm’s senior management has been doing in terms of buying and selling stock. If they’re buying, they believe in what they’re doing. If they’re all selling quite a bit, something’s amiss.
Statement of cash flows, which shows where the money is coming from. If you see a lot of “cash from financing activities,” that means they’re borrowing Peter to pay Paul - not a healthy long term solution.
Revenue and earnings each year for as many years as you can, which can show whether the earnings growth is smooth (good) or very bumpy (bad). No company is perfectly smooth, but if you see a 120% jump in growth followed by a 4% growth followed by a 19% growth followed by 2% shrinkage, consider that a red flag.
Ref: The Intelligent Investor: A General Approach to Security Analysis for the Lay Investor
How exactly can an individual estimate what a reasonable value of a given stock should be? Graham identifies five key factors that basically define the value of a stock.
The company’s “general long-term prospects”
Ignore what the talking heads are saying and look at the books. Is the company growing steadily? Is this growth actually in line with the stock price, or is the stock price jumping up and down seemingly out of touch with the actual business of the company? If the books are steady, the company is steady, and the prices jumping up and down is the result of talking heads. Be sure to look at a lot of data, though - at least five years, and ten is better.
The quality of the management
It’s hard to judge this. One way to effectively judge it is to watch the annual reports of the company over a long period and see if the management actually does what they say they’re going to do as well as frankly discuss the moves they’ve made. If the management commentary seems not well related to the business of the company, that’s a big red flag.
Its financial strength and capital structure
The less debt, the better, but a little bit of debt isn’t a big scary red flag. Again, look at the long term and see how the company has handled debt over the long term - it should always be low (or steadily going down).
Its dividend record
Graham believes that a company should be paying a pretty steady investment for at least twenty years. If the company you’re investing in doesn’t have this kind of history, that’s something of a negative.
Its current dividend rate
Since Graham wrote this book, companies have gradually shrunk their dividend payments, making the current dividend rate much less of a factor. When Graham was writing, companies typically paid around 60% of earnings out as dividends - today, 25-30% is fairly typical.
One important thing to note about Graham’s five factors is that he’s looking at these stocks as a long term investment that he hopes will return a healthy pile of dividends over that time. He’s not necessarily looking for a big ramp-up in stock price over that period - his “value” comes primarily from the dividends. That’s quite a bit different than how CNBC often talks about about stocks.
Commentary on Chapter 11
Zweig spends the commentary basically taking Graham’s five key factors and putting them in a modern context. For example, for evaluating a company’s long term prospects, Zweig encourages people to visit EDGAR (at sec.gov) and download at least five years’ worth of annual reports. That’s not exactly something that could be done in Graham’s day.
In fact, most of Zweig’s recommendations point people towards using EDGAR, which is an incredible tool for getting straightforward factual information about the status of companies you’re investing in. Zweig points out lots of things you should look for in all that data, but here’s three that stood out to me:
Form 4, which shows what a firm’s senior management has been doing in terms of buying and selling stock. If they’re buying, they believe in what they’re doing. If they’re all selling quite a bit, something’s amiss.
Statement of cash flows, which shows where the money is coming from. If you see a lot of “cash from financing activities,” that means they’re borrowing Peter to pay Paul - not a healthy long term solution.
Revenue and earnings each year for as many years as you can, which can show whether the earnings growth is smooth (good) or very bumpy (bad). No company is perfectly smooth, but if you see a 120% jump in growth followed by a 4% growth followed by a 19% growth followed by 2% shrinkage, consider that a red flag.
Ref: The Intelligent Investor: A General Approach to Security Analysis for the Lay Investor
The Intelligent Investor: “Margin of Safety” as the Central Concept of Investment
Chapter 20 - “Margin of Safety” as the Central Concept of Investment
A single quote by Graham on page 516 struck me:
Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.
Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.
This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?
Graham takes this point a step further, arguing that diversification is strongly correlated with margin of safety. In effect, Graham states that you introduce some additional margin of safety into your portfolio when you own a widely diverse array of value stocks that each have significant margin of safety.
Graham’s final note is pretty simple: investors get in trouble when they abandon their basic principles in the heat of the moment. One must approach investing with a set of fundamental principles and not abandon them in the heat of the moment.
Commentary on Chapter 20
Zweig closes out this final chapter by arguing that psychology is a major part of investing, one that many people overlook in the rush to find the big bargain. He goes so far as to argue that people are the primary risk in their own investing - poor decision making and abandonment of principles results in far more loss than an investment gone wrong.
Zweig actually ties this to Pascal’s wager, a famous suggestion by the French philosopher Blaise Pascal in which he argues that, since God’s existence cannot be determined through reason, one should behave as though God does exist, since living in that way (as opposed to living as though God does not exist) provides much more gain than loss. Similarly, since one cannot prove what will happen in the future with investments, we’re better off living by our investing principles than playing it by ear.
http://www.thesimpledollar.com/2009/02/27/the-intelligent-investor-margin-of-safety-as-the-central-concept-of-investment/
A single quote by Graham on page 516 struck me:
Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.
Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.
This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?
Graham takes this point a step further, arguing that diversification is strongly correlated with margin of safety. In effect, Graham states that you introduce some additional margin of safety into your portfolio when you own a widely diverse array of value stocks that each have significant margin of safety.
Graham’s final note is pretty simple: investors get in trouble when they abandon their basic principles in the heat of the moment. One must approach investing with a set of fundamental principles and not abandon them in the heat of the moment.
Commentary on Chapter 20
Zweig closes out this final chapter by arguing that psychology is a major part of investing, one that many people overlook in the rush to find the big bargain. He goes so far as to argue that people are the primary risk in their own investing - poor decision making and abandonment of principles results in far more loss than an investment gone wrong.
Zweig actually ties this to Pascal’s wager, a famous suggestion by the French philosopher Blaise Pascal in which he argues that, since God’s existence cannot be determined through reason, one should behave as though God does exist, since living in that way (as opposed to living as though God does not exist) provides much more gain than loss. Similarly, since one cannot prove what will happen in the future with investments, we’re better off living by our investing principles than playing it by ear.
http://www.thesimpledollar.com/2009/02/27/the-intelligent-investor-margin-of-safety-as-the-central-concept-of-investment/
The Intelligent Investor: Investing in Investment Funds
Chapter 9 - Investing in Investment Funds
Graham basically says that there are three questions you need to answer before investing in any fund.
1. Is there any way by which the investor can assure himself better than average results by choosing the right funds? [...]
2. If not, how can he avoid choosing funds that will give him worse than average results?
3. Can he make intelligent choices between different types of funds - e.g., balanced versus all-stock, open-end versus closed-end, load versus no-load?
Graham states that in general, individuals who invest in balanced funds tend to do better than individuals who invest in individual common stocks. The reason is simple: a person who is not an expert at picking individual stocks and balancing a portfolio is usually better off in the hands of a professional money manager even after the costs.
However (and this is big), Graham largely seems to suggest that the fees in a typical mutual fund are far too high and the time invested in finding a bargain fund (one with good results with limited costs) is well worth the time. He also believes that you should not expect to ever radically beat the market with a fund, and that funds who have astounding short term gains are usually not playing a healthy long-term gain - something that’s been shown over and over again over the history of investing.
Commentary on Chapter 9
Zweig has the advantage of knowledge of three more decades of investing history and he definitely uses it here. For the most part, Zweig applies Graham’s three big questions to modern mutual funds - and the results aren’t pretty.
Zweig seems to conclude that managed mutual funds are not a good investment for the typical investor. Over a long period, very few funds even manage to match the market, let alone beat the market. Why is this? Assuming there were no fees or costs, a truly average fund would match the market and (in theory) half of all funds would do that well or better. However, once you add in fees and costs, this sinks many of those market-beaters to a rate of return worse than the overall market.
Given that, though, Zweig is a big fan of index funds, as they overcome several of the problems with managed funds. They’re designed merely to match the market with an extremely low cost, which means that a typical index fund should beat a solid majority of mutual funds covering the same area.
Of course, Zweig advises that even if you’re using an index fund strategy, you still need to pay attention to diversification and should not have all of your eggs in one basket. Just because you’re invested with index funds doesn’t mean you shouldn’t balance your portfolio between stocks, bonds, and cash.
Ref: The Intelligent Investor: Investing in Investment Funds
Graham basically says that there are three questions you need to answer before investing in any fund.
1. Is there any way by which the investor can assure himself better than average results by choosing the right funds? [...]
2. If not, how can he avoid choosing funds that will give him worse than average results?
3. Can he make intelligent choices between different types of funds - e.g., balanced versus all-stock, open-end versus closed-end, load versus no-load?
Graham states that in general, individuals who invest in balanced funds tend to do better than individuals who invest in individual common stocks. The reason is simple: a person who is not an expert at picking individual stocks and balancing a portfolio is usually better off in the hands of a professional money manager even after the costs.
However (and this is big), Graham largely seems to suggest that the fees in a typical mutual fund are far too high and the time invested in finding a bargain fund (one with good results with limited costs) is well worth the time. He also believes that you should not expect to ever radically beat the market with a fund, and that funds who have astounding short term gains are usually not playing a healthy long-term gain - something that’s been shown over and over again over the history of investing.
Commentary on Chapter 9
Zweig has the advantage of knowledge of three more decades of investing history and he definitely uses it here. For the most part, Zweig applies Graham’s three big questions to modern mutual funds - and the results aren’t pretty.
Zweig seems to conclude that managed mutual funds are not a good investment for the typical investor. Over a long period, very few funds even manage to match the market, let alone beat the market. Why is this? Assuming there were no fees or costs, a truly average fund would match the market and (in theory) half of all funds would do that well or better. However, once you add in fees and costs, this sinks many of those market-beaters to a rate of return worse than the overall market.
Given that, though, Zweig is a big fan of index funds, as they overcome several of the problems with managed funds. They’re designed merely to match the market with an extremely low cost, which means that a typical index fund should beat a solid majority of mutual funds covering the same area.
Of course, Zweig advises that even if you’re using an index fund strategy, you still need to pay attention to diversification and should not have all of your eggs in one basket. Just because you’re invested with index funds doesn’t mean you shouldn’t balance your portfolio between stocks, bonds, and cash.
Ref: The Intelligent Investor: Investing in Investment Funds
Wednesday 1 July 2009
Intelligent Investor Notes
This book will teach you three powerful lessons:
+ how you can minimize the odds of suffering irreversible losses;
+ how you can maximize the chances of achieving sustainable games;
+ how you can control the self-defeating behavior that keeps most investors from reaching their full potential.
And Graham’s ticket to that is value investing.
The Intelligent Investor: Introduction
The Intelligent Investor: Investment Versus Speculation
The Intelligent Investor: The Investor and Inflation
The Intelligent Investor: A Century of Stock Market History
The Intelligent Investor: General Portfolio Policy for the Defensive Investor
The Intelligent Investor: The Defensive Investor and Common Stocks
The Intelligent Investor: A Negative Approach to Portfolio Policy for the Enterprising Investor
The Intelligent Investor: The Positive Side to Portfolio Policy for the Enterprising Investor
The Intelligent Investor: The Investor and Market Fluctuations
The Intelligent Investor: Investing in Investment Funds
The Intelligent Investor: The Investor and His Advisers
The Intelligent Investor: A General Approach to Security Analysis for the Lay Investor
The Intelligent Investor: Investment Versus Speculation
The Intelligent Investor: The Investor and Inflation
The Intelligent Investor: A Century of Stock Market History
The Intelligent Investor: General Portfolio Policy for the Defensive Investor
The Intelligent Investor: The Defensive Investor and Common Stocks
The Intelligent Investor: A Negative Approach to Portfolio Policy for the Enterprising Investor
The Intelligent Investor: The Positive Side to Portfolio Policy for the Enterprising Investor
The Intelligent Investor: The Investor and Market Fluctuations
The Intelligent Investor: Investing in Investment Funds
The Intelligent Investor: The Investor and His Advisers
The Intelligent Investor: A General Approach to Security Analysis for the Lay Investor
The Intelligent Investor: Things to Consider About Per-Share Earnings
The Intelligent Investor: A Comparison of Four Listed Companies
The Intelligent Investor: A Comparison of Four Listed Companies
These are notes from:
The Simple Dollar
How I Deal With My Financial Fears
How I Deal With My Financial Fears
August 14, 2008 @ 8:00 am - Written by Trent
Even though I write a lot about personal finance on here and elsewhere, I still have a lot of my own hang-ups about personal finance. One of the big reasons I started The Simple Dollar was to learn how to deal with those fears, and once I dealt with that new batch, a fresh batch came along. Right now, my biggest fears revolve around taxes, the possibility of a third child, identity theft, and future career directions.
I think this is actually a pretty normal thing for most people. We all have areas where we’re less than confident and we all have areas that concern us about the future.
It’s very easy to push these fears aside and just not worry about them, especially if they’re not vital to our day to day life. We’ll tell ourselves, “I’ll think about that later,” and then when it comes up again, tell ourselves the same thing again, until it’s sat around for years, untouched.
This can really be dangerous. Take, for example, my fear of taxes. I’m making myself face this fear this year and that means I’m digging into an uncomfortable subject, saving for the taxes, and paying them when they’re due. If I had taken the “typical” route and worried about it later, I would be suffering dearly when tax time came around.
What can a person do to step up to the plate and tackle our financial fears? The obvious “just do it!” tactic is nice, but it doesn’t really work here - if it were that simple, we’d already have faced the fear and moved on with life, wouldn’t we? Here are six alternate tactics to try.
Make a list of what exactly makes you nervous
Quite often, a fear of a financial move is actually just related to some small aspect of the move. Spend a bit of time figuring out exactly what it is that makes you afraid. I find that doing this with a pen in hand and a piece of paper in front of me makes it easy for me to jot down thoughts, which I can start working through.
Sometimes what you’ll find out is that you’re actually stressed out about something else entirely or you’re only stressed out by a very small part of the equation. For example, I know one person who was avoiding dealing with his retirement situation because he intensely disliked the retirement specialist at his workplace. It wasn’t a fear of retirement, it was a fear of interaction with someone.
Do some research
One big fear is fear of the unknown. Quite often, a lack of knowledge will make someone afraid of something else - we can all think of examples of this in life, where ignorance makes people afraid.
Don’t succumb to it. If you’re afraid of something because you don’t know about it, investigate it. Hit the library or visit Wikipedia and find out more. Dig in, a piece at a time, until you understand the topic - and the fear of it is lifted.
Talk to someone about it
If something makes you uncomfortable, put forth the effort to talk to others about it. Find someone you trust deeply, preferably someone with some experience in the area in question, and just ask questions.
This might mean contacting a financial advisor. If it does, seek out a fee-only financial advisor, as they won’t be engaged in selling you products and are most interested in just providing information to you. If a fee-only advisor isn’t available to you, you can use another, but be very hesitant to invest or put money in specific places based on their advice - instead, just take their information with you and follow up yourself with your own research.
Write out the pros and cons of your decision
One alternative to having a conversation, especially if the fear is related to an important decision, is to simply write out all of the pros and cons related to that decision.
For example, I kept putting off my decision to switch to a full time writing career. One of the big steps that helped push me towards writing was simply making a giant list of the pros and a list of the cons of making the leap. This really helped put things in perspective, as it became clear I was letting the “cons” guide my way of thinking, even though the “pros” were a much more powerful list.
Spend some time each day thinking about the fear
Don’t let yourself lay the fear on the table, because once you start ignoring it, it’s easy to just let something very important slide by until it’s too late. Instead, add consideration of the fear to your daily to-do list and actually spend a bit of time thinking about the fear seriously.
This is often good to do if you’ve gathered the information but are still hesitant about what to do. Steady and informed consideration of a fear is a great way to make that fear go away. I like to think of my two year old son who fears sharks in his room. After giving him a flashlight to investigate the room and some talk about how sharks need water to swim in and there’s no water in his room, he thinks about this information, overcomes the fear a little, and goes to sleep. Over time, his fear of sharks has become less and less intense.
Take a baby step
Once you’ve made up your mind that you’re going to do this, get started with a first little baby step. Take a little action that moves you in the right direction, and feel the relief that comes with wiping away your fear.
Then, take another little step, and another. Soon, you’ll be well on your way to completely eliminating the challenge that brought you so much fear to begin with. And it will feel really good.
What are your financial fears? Feel free to share them in the comments, and good luck on trying to conquer them.
http://www.thesimpledollar.com/2008/08/14/how-i-deal-with-my-financial-fears/
August 14, 2008 @ 8:00 am - Written by Trent
Even though I write a lot about personal finance on here and elsewhere, I still have a lot of my own hang-ups about personal finance. One of the big reasons I started The Simple Dollar was to learn how to deal with those fears, and once I dealt with that new batch, a fresh batch came along. Right now, my biggest fears revolve around taxes, the possibility of a third child, identity theft, and future career directions.
I think this is actually a pretty normal thing for most people. We all have areas where we’re less than confident and we all have areas that concern us about the future.
It’s very easy to push these fears aside and just not worry about them, especially if they’re not vital to our day to day life. We’ll tell ourselves, “I’ll think about that later,” and then when it comes up again, tell ourselves the same thing again, until it’s sat around for years, untouched.
This can really be dangerous. Take, for example, my fear of taxes. I’m making myself face this fear this year and that means I’m digging into an uncomfortable subject, saving for the taxes, and paying them when they’re due. If I had taken the “typical” route and worried about it later, I would be suffering dearly when tax time came around.
What can a person do to step up to the plate and tackle our financial fears? The obvious “just do it!” tactic is nice, but it doesn’t really work here - if it were that simple, we’d already have faced the fear and moved on with life, wouldn’t we? Here are six alternate tactics to try.
Make a list of what exactly makes you nervous
Quite often, a fear of a financial move is actually just related to some small aspect of the move. Spend a bit of time figuring out exactly what it is that makes you afraid. I find that doing this with a pen in hand and a piece of paper in front of me makes it easy for me to jot down thoughts, which I can start working through.
Sometimes what you’ll find out is that you’re actually stressed out about something else entirely or you’re only stressed out by a very small part of the equation. For example, I know one person who was avoiding dealing with his retirement situation because he intensely disliked the retirement specialist at his workplace. It wasn’t a fear of retirement, it was a fear of interaction with someone.
Do some research
One big fear is fear of the unknown. Quite often, a lack of knowledge will make someone afraid of something else - we can all think of examples of this in life, where ignorance makes people afraid.
Don’t succumb to it. If you’re afraid of something because you don’t know about it, investigate it. Hit the library or visit Wikipedia and find out more. Dig in, a piece at a time, until you understand the topic - and the fear of it is lifted.
Talk to someone about it
If something makes you uncomfortable, put forth the effort to talk to others about it. Find someone you trust deeply, preferably someone with some experience in the area in question, and just ask questions.
This might mean contacting a financial advisor. If it does, seek out a fee-only financial advisor, as they won’t be engaged in selling you products and are most interested in just providing information to you. If a fee-only advisor isn’t available to you, you can use another, but be very hesitant to invest or put money in specific places based on their advice - instead, just take their information with you and follow up yourself with your own research.
Write out the pros and cons of your decision
One alternative to having a conversation, especially if the fear is related to an important decision, is to simply write out all of the pros and cons related to that decision.
For example, I kept putting off my decision to switch to a full time writing career. One of the big steps that helped push me towards writing was simply making a giant list of the pros and a list of the cons of making the leap. This really helped put things in perspective, as it became clear I was letting the “cons” guide my way of thinking, even though the “pros” were a much more powerful list.
Spend some time each day thinking about the fear
Don’t let yourself lay the fear on the table, because once you start ignoring it, it’s easy to just let something very important slide by until it’s too late. Instead, add consideration of the fear to your daily to-do list and actually spend a bit of time thinking about the fear seriously.
This is often good to do if you’ve gathered the information but are still hesitant about what to do. Steady and informed consideration of a fear is a great way to make that fear go away. I like to think of my two year old son who fears sharks in his room. After giving him a flashlight to investigate the room and some talk about how sharks need water to swim in and there’s no water in his room, he thinks about this information, overcomes the fear a little, and goes to sleep. Over time, his fear of sharks has become less and less intense.
Take a baby step
Once you’ve made up your mind that you’re going to do this, get started with a first little baby step. Take a little action that moves you in the right direction, and feel the relief that comes with wiping away your fear.
Then, take another little step, and another. Soon, you’ll be well on your way to completely eliminating the challenge that brought you so much fear to begin with. And it will feel really good.
What are your financial fears? Feel free to share them in the comments, and good luck on trying to conquer them.
http://www.thesimpledollar.com/2008/08/14/how-i-deal-with-my-financial-fears/
The Only Thing We Have to Fear Is Fear Itself
The Only Thing We Have to Fear Is Fear Itself
Fear is the best salesman, after all.
October 2, 2008 @ 8:00 am - Written by Trent
Over the last several days, many readers have asked for my take on the economic crisis. I’m not an economist - my opinion is just that of an average person who has read a number of economics books and talked to a lot of people from all walks of life. Here’s my humble take on the situation.
From Franklin Roosevelt’s first inaugural address, March 4, 1933 (please, listen in):
I am certain that my fellow Americans expect that on my induction into the Presidency I will address them with a candor and a decision which the present situation of our Nation impels. This is preeminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today. This great Nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory. I am convinced that you will again give that support to leadership in these critical days.
Over the last two weeks, I’ve read countless articles and heard countless podcasts talking about financial apocalypse, spreading fear around like mayonnaise on a turkey sandwich. Most of the suggestions are maddening - I’ve heard previously rational people talking about pulling all of their money out of FDIC-insured bank accounts and putting them under their mattresses.
All of this is based on fear, not fact. Over the last few months, several financial institutions have failed, but in each case, the resources of those institutions were immediately absorbed by other companies or, in a few cases, by governmental buyouts. No one has lost a dime in a bank account. No one has lost a single cent of insurance coverage. Many large banks - like Bank of America - have already taken their losses from the subprime mortgages and rolled right through them, and they’re strong enough that they see this as a buying opportunity.
We all know the general storyline by now - these failures were the result of investing too much in bad mortgages. The truth is that no one knows how serious the actual problem is. No one. The ludicrous plan that Paulson proposed last week served one purpose alone - it gave him tons of cash to make sure that the banks run by his cronies wouldn’t outright fail. The truth is that he doesn’t know how bad it actually is. Neither does Bernanke. Neither do you, and neither do I.
The panicked talk, the whispered statements about apocalypse - they’re fear. Nothing more, nothing less.
I don’t claim to know what the “best” plan for resolving the situation is. My level of information about the true nature of the economic situation is extremely limited - and so is yours.
I’ll tell you what I do see, though.
I look out my window here in Iowa and I see the ongoing harvest of one of the largest soybean and corn crops ever - not the cropless Dust Bowl of the 1930s.
I don’t see a single person with a bank account that has lost their deposits, like my grandfather’s family did circa 1932.
I see people going to work, working hard and producing value for their wage, coming home, and buying the things that they need to keep their family going, which puts money directly into the economy.
I see unemployment barely over six percent, not the 25% rate at the time of FDR’s address.
I see industrial production still rising - in 1932, it had fallen by more than half in just three years.
I see a dollar that’s actually strengthening, not weakening, while the price of oil is down sharply from its highs earlier this year.
In short, I see a lot of things that make me optimistic about our ecnomic situation, a pretty stark contrast from the fear being peddled by some. I’m actually much more reminded of 1987, when banks were failing thanks to the Savings and Loan crisis and Black Monday, when the Dow dropped 22% of its value in a single day. We haven’t yet seen anything as worrisome as that, in my opinion - and that was just a drop in the bucket compared to the 1930s.
To put it simply, I’m still not worried a bit, and when I see the fear being bandied about, I’m reminded of FDR’s words.
So what have I been doing with my money as of late?
First, I haven’t taken a dime out of any bank. I haven’t seen any FDIC-insured bank account fail, and none have in the history of the FDIC.
Second, I actually maxed out my Roth IRA contributions earlier this month. Almost all of that money went into broad based index funds - namely, Vanguard’s Target Retirement 2045 fund.
Third, I haven’t made a single change in any plans I’ve had for investing other than the early Roth IRA buy. I’m still following my own game plan.
Now, ask yourself this. If you make any irrational moves, like pulling all of your money out of stocks, does someone profit from it? Of course they do. Your brokerage will make a fee from the sale, and a happy buyer out there will be glad to buy that stock from you at a nice discount. Fear is the best salesman, after all.
My sole piece of advice to you is this: don’t panic. Don’t make any hasty decisions. Sit back and get informed - and don’t just rely on one source for information, either. Get a bunch of different angles on what’s happening, from liberals and conservatives and moderates alike. If you’re worried about your money, do your own research and find out reasonable things to do with it. Take a serious look at what people who really know what they’re doing are doing with their money - in the last two weeks, Warren Buffett has invested $3 billion in General Electric stock and $5 billion in Goldman Sachs stock (an investment bank … weren’t we supposed to be afraid of those?) - he sees this current situation as an opportunity to buy, not sell.
And one more thing. Even in the darkest heart of the Great Depression, 75% of Americans had a steady job with a steady paycheck, which they steadily used to buy the things they needed. Those years also produced the Greatest Generation and an economic steamroller that ran through the last half of the Twentieth Century like a tidal wave.
It was true 75 years ago. It’s true now.
The only thing we have to fear is fear itself.
http://www.thesimpledollar.com/2008/10/02/the-only-thing-we-have-to-fear-is-fear-itself/
Fear is the best salesman, after all.
October 2, 2008 @ 8:00 am - Written by Trent
Over the last several days, many readers have asked for my take on the economic crisis. I’m not an economist - my opinion is just that of an average person who has read a number of economics books and talked to a lot of people from all walks of life. Here’s my humble take on the situation.
From Franklin Roosevelt’s first inaugural address, March 4, 1933 (please, listen in):
I am certain that my fellow Americans expect that on my induction into the Presidency I will address them with a candor and a decision which the present situation of our Nation impels. This is preeminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today. This great Nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory. I am convinced that you will again give that support to leadership in these critical days.
Over the last two weeks, I’ve read countless articles and heard countless podcasts talking about financial apocalypse, spreading fear around like mayonnaise on a turkey sandwich. Most of the suggestions are maddening - I’ve heard previously rational people talking about pulling all of their money out of FDIC-insured bank accounts and putting them under their mattresses.
All of this is based on fear, not fact. Over the last few months, several financial institutions have failed, but in each case, the resources of those institutions were immediately absorbed by other companies or, in a few cases, by governmental buyouts. No one has lost a dime in a bank account. No one has lost a single cent of insurance coverage. Many large banks - like Bank of America - have already taken their losses from the subprime mortgages and rolled right through them, and they’re strong enough that they see this as a buying opportunity.
We all know the general storyline by now - these failures were the result of investing too much in bad mortgages. The truth is that no one knows how serious the actual problem is. No one. The ludicrous plan that Paulson proposed last week served one purpose alone - it gave him tons of cash to make sure that the banks run by his cronies wouldn’t outright fail. The truth is that he doesn’t know how bad it actually is. Neither does Bernanke. Neither do you, and neither do I.
The panicked talk, the whispered statements about apocalypse - they’re fear. Nothing more, nothing less.
I don’t claim to know what the “best” plan for resolving the situation is. My level of information about the true nature of the economic situation is extremely limited - and so is yours.
I’ll tell you what I do see, though.
I look out my window here in Iowa and I see the ongoing harvest of one of the largest soybean and corn crops ever - not the cropless Dust Bowl of the 1930s.
I don’t see a single person with a bank account that has lost their deposits, like my grandfather’s family did circa 1932.
I see people going to work, working hard and producing value for their wage, coming home, and buying the things that they need to keep their family going, which puts money directly into the economy.
I see unemployment barely over six percent, not the 25% rate at the time of FDR’s address.
I see industrial production still rising - in 1932, it had fallen by more than half in just three years.
I see a dollar that’s actually strengthening, not weakening, while the price of oil is down sharply from its highs earlier this year.
In short, I see a lot of things that make me optimistic about our ecnomic situation, a pretty stark contrast from the fear being peddled by some. I’m actually much more reminded of 1987, when banks were failing thanks to the Savings and Loan crisis and Black Monday, when the Dow dropped 22% of its value in a single day. We haven’t yet seen anything as worrisome as that, in my opinion - and that was just a drop in the bucket compared to the 1930s.
To put it simply, I’m still not worried a bit, and when I see the fear being bandied about, I’m reminded of FDR’s words.
So what have I been doing with my money as of late?
First, I haven’t taken a dime out of any bank. I haven’t seen any FDIC-insured bank account fail, and none have in the history of the FDIC.
Second, I actually maxed out my Roth IRA contributions earlier this month. Almost all of that money went into broad based index funds - namely, Vanguard’s Target Retirement 2045 fund.
Third, I haven’t made a single change in any plans I’ve had for investing other than the early Roth IRA buy. I’m still following my own game plan.
Now, ask yourself this. If you make any irrational moves, like pulling all of your money out of stocks, does someone profit from it? Of course they do. Your brokerage will make a fee from the sale, and a happy buyer out there will be glad to buy that stock from you at a nice discount. Fear is the best salesman, after all.
My sole piece of advice to you is this: don’t panic. Don’t make any hasty decisions. Sit back and get informed - and don’t just rely on one source for information, either. Get a bunch of different angles on what’s happening, from liberals and conservatives and moderates alike. If you’re worried about your money, do your own research and find out reasonable things to do with it. Take a serious look at what people who really know what they’re doing are doing with their money - in the last two weeks, Warren Buffett has invested $3 billion in General Electric stock and $5 billion in Goldman Sachs stock (an investment bank … weren’t we supposed to be afraid of those?) - he sees this current situation as an opportunity to buy, not sell.
And one more thing. Even in the darkest heart of the Great Depression, 75% of Americans had a steady job with a steady paycheck, which they steadily used to buy the things they needed. Those years also produced the Greatest Generation and an economic steamroller that ran through the last half of the Twentieth Century like a tidal wave.
It was true 75 years ago. It’s true now.
The only thing we have to fear is fear itself.
http://www.thesimpledollar.com/2008/10/02/the-only-thing-we-have-to-fear-is-fear-itself/
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