Predicting the future networth of these individuals.
Andrew: Risky to Predict
Linda: Less Risky to Predict
Just because a business has volatile numbers doesn't mean it won't make a lot of money in the future.
It's just more difficult to predict and value = RISK.
Buffett Rule: A Stock must be stable and understandable.
Sunday 23 December 2012
Best Video Explanation of the Yield Curve and how this can help your investing
What is a Yield Curve?
What are the 3 financial risks in an investment?
What causes financial risks in an investment?
1. Excessive debt
"Only when the tide goes out do you discover who's been swimming naked." - Warren Buffett.
Companies incur debts because they want to speed up time. They can own assets now instead of waiting for them later. Why is speeding up time a bad thing?
These are often the companies and people with a lot of debts when the market collapses.
2. Overpaying for an investment.
Price is what you pay. Value is what you get. - Warren Buffett
The asset quality has not changed. The market conditions has not changed. The poor investment was based on the initial price paid, not the quality of the asset. The investor overpaid to own the asset or stock.
3. Not knowing what you're doing.
"Risk comes from not knowing what you're doing." - Warren Buffett.
Why do people value the ownership of a house but not value the ownership of a company?
People understand how to value a house. Many people do not understand how to value a company or stock. They definitely do not understand the value of the company when they are broken down into many shares. So, that is the true risk here and if you are the type of person who buys company shares and never look at what they are worth and buying on the basis that "well I like this company", you are probably setting up yourself up for buying too high above the true value of the share.
1. Excessive debt
"Only when the tide goes out do you discover who's been swimming naked." - Warren Buffett.
Companies incur debts because they want to speed up time. They can own assets now instead of waiting for them later. Why is speeding up time a bad thing?
These are often the companies and people with a lot of debts when the market collapses.
2. Overpaying for an investment.
Price is what you pay. Value is what you get. - Warren Buffett
The asset quality has not changed. The market conditions has not changed. The poor investment was based on the initial price paid, not the quality of the asset. The investor overpaid to own the asset or stock.
3. Not knowing what you're doing.
"Risk comes from not knowing what you're doing." - Warren Buffett.
Why do people value the ownership of a house but not value the ownership of a company?
People understand how to value a house. Many people do not understand how to value a company or stock. They definitely do not understand the value of the company when they are broken down into many shares. So, that is the true risk here and if you are the type of person who buys company shares and never look at what they are worth and buying on the basis that "well I like this company", you are probably setting up yourself up for buying too high above the true value of the share.
Greed and Fear. Who do you think is ultimately determining the market price in the long run?
What are instincts?
Any behaviour is instinctive if it is performed without being based upon prior experience or knowledge.
Since most investors base their investing on emotions and instinct, they follow the mindset of Mr. Market. (Instinct = without knowledge).
Solution .. become knowledgeable. Base your decisions on facts opposed to emotions.
Greed Cycle
People are chasing prices ... not value.
Mindset: A quick buck is about to be made.
Fear Cycle
People are scared they'll lose everything.
Mindset: I don't k now the value of these stocks, so I'm outa' here.
How do we know how much the stock is worth? This is a tough question.
The knowledge of a stock's value allows an investor to determine if Mr. Market is Greedy or Fearful. (That's why we are here. :-) )
The key is to be greedy when others are fearful and fearful when others are greedy. - Warren Buffett.
The name of the game really is between Accumulating Shares versus Trading Shares. You want to be the person who is accumulating shares.
The stock market behaves like a voting machine, but in the long term it acts like a weighing machine. - Benjamin Graham.
Short Term: Anyone can price the stock.
Long Term: The Value becomes absolute.
Who do you think is ultimately determining the market price in the long run?
Any behaviour is instinctive if it is performed without being based upon prior experience or knowledge.
Since most investors base their investing on emotions and instinct, they follow the mindset of Mr. Market. (Instinct = without knowledge).
Solution .. become knowledgeable. Base your decisions on facts opposed to emotions.
Greed Cycle
People are chasing prices ... not value.
Mindset: A quick buck is about to be made.
Fear Cycle
People are scared they'll lose everything.
Mindset: I don't k now the value of these stocks, so I'm outa' here.
How do we know how much the stock is worth? This is a tough question.
The knowledge of a stock's value allows an investor to determine if Mr. Market is Greedy or Fearful. (That's why we are here. :-) )
The key is to be greedy when others are fearful and fearful when others are greedy. - Warren Buffett.
The name of the game really is between Accumulating Shares versus Trading Shares. You want to be the person who is accumulating shares.
The stock market behaves like a voting machine, but in the long term it acts like a weighing machine. - Benjamin Graham.
Short Term: Anyone can price the stock.
Long Term: The Value becomes absolute.
Who do you think is ultimately determining the market price in the long run?
Benjamin Graham's Mr. Market, a stubborn business partner who sometimes offer great deals or very expensive prices.
As buyers and sellers move the market price of a stock, the market will offer great deals or very expensive prices. This idea is represented by Benjamin Graham's Mr. Market. Graham used the idea of Mr. Market to represent a stubborn business partner that sometimes offers great deals or horrible prices. Your job as an intelligent investor is to determine which deals are of great value.
Benjamin Graham's Mr. Market
Mr. Market is your emotionally disturbed business partner.
You can't change his behaviour ... but you can react to it!
Mr. Market is your servant, not your guide.
Mr. Market: "Hey Guys!!! Buy some stocks ... everyone's make money ... you can too. I am making a lot of money, so are my friends."
Mr. Market: "Watch out, I'll take your money. The outlook for tomorrow is even worse, so don't ask! If you think you can make money in the stock market, you are just kidding yourself."
Never follow Mr. Market's changing emotions.
Instead, remain calm and competent, and take advantage of the opportunities Mr. Market presents.
Mr. Market is your servant, not your guide. - Warren Buffett
Benjamin Graham's Mr. Market
Mr. Market is your emotionally disturbed business partner.
You can't change his behaviour ... but you can react to it!
Mr. Market is your servant, not your guide.
Mr. Market: "Hey Guys!!! Buy some stocks ... everyone's make money ... you can too. I am making a lot of money, so are my friends."
Mr. Market: "Watch out, I'll take your money. The outlook for tomorrow is even worse, so don't ask! If you think you can make money in the stock market, you are just kidding yourself."
Never follow Mr. Market's changing emotions.
Instead, remain calm and competent, and take advantage of the opportunities Mr. Market presents.
Mr. Market is your servant, not your guide. - Warren Buffett
The Reasons for Selling and for Buying a Stock
For every single trade, there is always a buyer and a seller.
The Reasons for Selling
Seller: "This stock stinks. I can make more money somewhere else."
Seller: "I need money for my new car."
The Reasons for Buying
Buyer: "This company is going to make me some money."
Buyer: "This company is going to make me some money."
There are a few reasons for selling a stock, but there is usually only one reason for buying a stock. :-)
The seller thinks the stock stinks, whereas the buyer thinks the company is great.
The seller thinks the stock is still good but he needs the money, and the buyer bought because he thinks the company is great.
Thousands of orders a day cause the market price of a company to move up and down. However, the market price of a stock is determined only by a small number of players and not by all of the people.
The Reasons for Selling
Seller: "This stock stinks. I can make more money somewhere else."
Seller: "I need money for my new car."
The Reasons for Buying
Buyer: "This company is going to make me some money."
Buyer: "This company is going to make me some money."
There are a few reasons for selling a stock, but there is usually only one reason for buying a stock. :-)
The seller thinks the stock stinks, whereas the buyer thinks the company is great.
The seller thinks the stock is still good but he needs the money, and the buyer bought because he thinks the company is great.
Thousands of orders a day cause the market price of a company to move up and down. However, the market price of a stock is determined only by a small number of players and not by all of the people.
How does the Stock Market work for the Value Investor?
Amy the Seller put a stop order to sell a company share at $65 per share.
Linda the Buyer put a market order to buy.
The transaction was matched.
The market price of the stock is now displayed on the board at $65 per share.
Does this mean the company IS worth $65 a share?
or
Did a couple of people trade it for $65 a share?
As a value investor, the answer is the latter. The $65 is the trading price. Just because a couple of people traded the share for $65 a share, this doesn't mean that the company is actually worth $65 a share.
Value investing is all about determining what the value of that share is worth and looking at what the price people are willing to buy it for or sell it for, and capitalize on these.
Linda the Buyer put a market order to buy.
The transaction was matched.
The market price of the stock is now displayed on the board at $65 per share.
Does this mean the company IS worth $65 a share?
or
Did a couple of people trade it for $65 a share?
As a value investor, the answer is the latter. The $65 is the trading price. Just because a couple of people traded the share for $65 a share, this doesn't mean that the company is actually worth $65 a share.
Value investing is all about determining what the value of that share is worth and looking at what the price people are willing to buy it for or sell it for, and capitalize on these.
Saturday 22 December 2012
Why is stock investing so lucrative?
Emotion trading offers really cheap prices and really expensive prices.
Your job is to always calculate the intrinsic value of the business regardless of the size, then compare the value to the price it trades for.
Your job is to always calculate the intrinsic value of the business regardless of the size, then compare the value to the price it trades for.
P/E Ratio
P/E Ratio
This ratio is a comparison between the price you would pay to buy a stock and how much profit you may see from 1 share in 1 year.
How Warren Buffett hedges himself against Inflation
17 minutes into the video: Warren Buffett talks about investing and inflation.
Good businesses are the cheapest investment to acquire by far.
Buffett: "I love owning businesses."
Calculating a College Degree's True Value
How much is a college diploma actually worth? The perennial question asked by every former English, philosophy, and art history major now has an answer in some states. For University of Virginia students, it pays to major in engineering—$60,300, on average, 18 months after graduation—rather than sociology ($33,154), or worse, biology ($27,209). In Tennessee, a graduate of Dyersburg State Community College with an associate’s degree in health earns an average $5,000 more than someone who majored in health and picked up a bachelor’s at the University of Tennessee at Knoxville, the state’s flagship school.
With tuition and student debt skyrocketing and dim job prospects awaiting many graduates, states are trying to show residents what kind of return they can realistically expect for investing in a degree from a public college or university. That’s why Virginia, Tennessee, and Arkansas are collecting salary data on their graduates and posting it online at CollegeMeasures.org, a website run by a former education official in the Bush administration. The database, which doesn’t reveal any names or other identifying information, shows students how much money they can expect to earn based on the major and school they choose. Colorado, Nevada, and Texas will also begin using it in early 2013.
“What we want is for students to make informed decisions,” says Tod Massa, director of policy research and data warehousing at Virginia’s State Council of Higher Education. Massa, who’d been pushing for such a database for years, had little success until 2011, when the Virginia legislature passed a law mandating that the state publish salary data for graduates of all colleges and universities, public and private. Schools “need to coordinate their level of student borrowing with [students’] likely ability to repay,” Massa says. Virginia shares its information with CollegeMeasures and operates its own website, publishing data for graduates up to five years out of school.
http://www.businessweek.com/articles/2012-12-20/calculating-a-college-degrees-true-value#r=nav-r-story
Chinese Stocks Lose Their Luster
The average price-earnings ratio of Chinese stocks sank 76 percent over the past decade as growth cooled and investors soured on the lumbering state-owned enterprises that dominate the country’s main equity index.
In a World Full of Risk, Why Are Investors So Calm?
Leuthold’s monthly Risk Aversion Index, which bakes together various credit and swap spreads, commodity and currency prices, and relative asset returns to offer a broad gauge of skittishness, is at a record low going back to 1980. That span includes the Crash of ’87, the rolling emerging-market contagions of the 1990s, and the multiple human and financial calamities of the past decade.
How does this overwhelming calm jibe with the prevailing uncertainty of our times?
“The so-called Bernanke put—or, more accurately, global central bank put—is suppressing most of the risk and fear gauges,” says Leuthold’s Chun Wang. “And just about all asset classes, risky or risk-free, have been bid up.” Wang finds that low-fear backdrops like this historically last much longer than high-fear ones, and that increasing signs that housing and China are on the mend only add to the general chill-out.
It’s been a paradoxical climate for investors, who have seen the rather unique confluence of low economic growth with double-digit global equity returns—something that normally doesn’t happen in the absence of post-recession relief rallies and/or significant interest-rate declines.
Some are already conflating all this calm with complacency, warning that danger lies ahead.
http://www.businessweek.com/articles/2012-12-19/in-a-world-full-of-risk-why-are-investors-so-calm#r=rss
How to select the better company to invest in? Comparing Companies.
If the companies you wish to compare are in different industries, you should use the industry as another subjective criterion. You can compare investments in different industries if you're interested in the best investment opportunity. Some criteria; e.g., profit margins, differ from industry to industry so you will want to overlook those items. You may find one industry to be more appealing to you than another and should allow that criterion to help with your decision.
The criteria you should use for comparison are not limited to the "value" and "quality" criteria. The most important criteria are those that address "quality." Beyond that, the price-sensitive "value" criteria will address the potential rewards and risk. However, such items as the industry or company size may have a bearing on your decision as well, although they are less critical than some of the others.
For comparison, you should select no more than 5 companies. More than five companies becomes a "screening" exercise and becomes unwieldy. While companies may be in a variety of industries, some comparison criteria such as profit margins may be valid only when comparing companies in the same industry.
You should circle a value if it's better than most of the others. Circle the values that are better than most for each criterion. It may be more than one - or all - if they are close enough not to be obviously ruled out. All you can hope to accomplish by circling the criteria is to sharpen your judgement and separate the chaff from the wheat.
Pick a winner on the basis of your overall subjective assessment. Base your decision on your overall subjective assessment, using the number of circles as a guide and the more subjective items such as the industry the company is in, the size of the company, etc. as tie breakers. The number of circles is important only as a starting place and guide; and should be tempered with your assessment and "gut feeling" about the company when the numbers are close.
The criteria you should use for comparison are not limited to the "value" and "quality" criteria. The most important criteria are those that address "quality." Beyond that, the price-sensitive "value" criteria will address the potential rewards and risk. However, such items as the industry or company size may have a bearing on your decision as well, although they are less critical than some of the others.
For comparison, you should select no more than 5 companies. More than five companies becomes a "screening" exercise and becomes unwieldy. While companies may be in a variety of industries, some comparison criteria such as profit margins may be valid only when comparing companies in the same industry.
You should circle a value if it's better than most of the others. Circle the values that are better than most for each criterion. It may be more than one - or all - if they are close enough not to be obviously ruled out. All you can hope to accomplish by circling the criteria is to sharpen your judgement and separate the chaff from the wheat.
Pick a winner on the basis of your overall subjective assessment. Base your decision on your overall subjective assessment, using the number of circles as a guide and the more subjective items such as the industry the company is in, the size of the company, etc. as tie breakers. The number of circles is important only as a starting place and guide; and should be tempered with your assessment and "gut feeling" about the company when the numbers are close.
Good quality company but trading at high price - Add this to your "watch list."
If the price is too high, you should add the company to your "watch list." You have found the company to be a good quality company but the price is too high. If it's much too high, put it on your "watch list" and wait for it to come down.
In rare circumstances, you may wish to put in a market order; but you will not want to do this in every case.
The "buy price" is the price at which both your risk and reward criteria are met. This is the highest price you can pay and realize both a Total Return that will double your money every five years and where the risk of loss is less than one third of the potential gain.
The reward should be at least three times the risk. Even though you may sometimes accept a total return of less than 15% because of the contribution that the stock can make to your portfolio's stability, you don't want to accept a Risk index of much above 25%.
If the Risk index is zero or negative, you should question your assumptions about the quality issues. You will want to question why the price of the stock is so low. What do others know about the company that you don't know? If you're a new investor, you should move on to another candidate. If you can satisfy yourself that the price is depressed for no good reason, then you can be a contrarian and buy the stock.
Additional note:
A market order is also sometimes referred to as an "unrestricted order."
Read more: http://www.investopedia.com/terms/m/marketorder.asp#ixzz2FjYO8xoI
Calculating the Risk Index
Risk Index
= (Current Price - Potential Low Price) / (Potential High Price - Potential Low Price)
The result is the risk index, the percentage of the deal that is risk.
We look for a risk index of 25 percent or less, meaning that only a quarter of the proposition or less is risk.
We would then have at least 75 percent to gain versus at most 25 percent to lose; so the reward is at least three times the risk.
In rare circumstances, you may wish to put in a market order; but you will not want to do this in every case.
The "buy price" is the price at which both your risk and reward criteria are met. This is the highest price you can pay and realize both a Total Return that will double your money every five years and where the risk of loss is less than one third of the potential gain.
The reward should be at least three times the risk. Even though you may sometimes accept a total return of less than 15% because of the contribution that the stock can make to your portfolio's stability, you don't want to accept a Risk index of much above 25%.
If the Risk index is zero or negative, you should question your assumptions about the quality issues. You will want to question why the price of the stock is so low. What do others know about the company that you don't know? If you're a new investor, you should move on to another candidate. If you can satisfy yourself that the price is depressed for no good reason, then you can be a contrarian and buy the stock.
Additional note:
Definition of 'Market Order'
An order that an investor makes through a broker or brokerage service to buy or sell an investment immediately at the best available current price. A market order is the default option and is likely to be executed because it does not contain restrictions on the buy/sell price or the timeframe in which the order can be executed.A market order is also sometimes referred to as an "unrestricted order."
Investopedia explains 'Market Order'
A market order guarantees execution, and it often has low commissions due to the minimal work brokers need to do. Be wary of using market orders on stocks with a low average daily volume: in such market conditions the ask price can be a lot higher than the current market price (resulting in a large spread). In other words, you may end up paying a whole lot more than you originally anticipated! It is much safer to use a market order on high-volume stocks.
Read more: http://www.investopedia.com/terms/m/marketorder.asp#ixzz2FjYO8xoI
Calculating the Risk Index
Risk Index
= (Current Price - Potential Low Price) / (Potential High Price - Potential Low Price)
The result is the risk index, the percentage of the deal that is risk.
We look for a risk index of 25 percent or less, meaning that only a quarter of the proposition or less is risk.
We would then have at least 75 percent to gain versus at most 25 percent to lose; so the reward is at least three times the risk.
Be conservative in your estimates for future growth.
Never estimate future earnings growth:
Be conservative in your estimates for future growth. It's always better to underestimate than to overestimate.
- to exceed the growth of sales
- to exceed 20 percent
- to exceed its historical growth rate
- to exceed the analysts' estimates.
Be conservative in your estimates for future growth. It's always better to underestimate than to overestimate.
Beware that the worse a company performs, the better value its stock will appear to be.
The worse a company performs, the better value its stock will appear to be.
Because declining fundamentals will prompt a company's shareholders to sell, the price will decline. This will cause all the value indicators to show that the price has become a bargain. It's not.
Because declining fundamentals will prompt a company's shareholders to sell, the price will decline. This will cause all the value indicators to show that the price has become a bargain. It's not.
Friday 21 December 2012
Confine your study to companies with good sales or earnings growth.
Don't bother to continue with a stock study if sales or earnings growth is inadequate.
Sales growth is inadequate if it is below the guidelines for the size of the company you are studying (ranging from around 7 percent for a large company to 12 percent for a smaller one).
Earnings growth should be around 15 percent or better; but you can accept slower growth from companies whose dividends contribute substantially to the total return.
Sales growth is inadequate if it is below the guidelines for the size of the company you are studying (ranging from around 7 percent for a large company to 12 percent for a smaller one).
Earnings growth should be around 15 percent or better; but you can accept slower growth from companies whose dividends contribute substantially to the total return.
Why you shouldn't invest in companies whose business you don't understand?
You shouldn't invest in companies whose business you don't understand because you won't be able to judge their future potential and vulnerabilities.
While intimacy with a company's business is not essential to making a decision to buy the stock, later "hold" or "sell" decisions may be clearer if you understand its competitive position in the marketplace, the value of its products or services, and the character of its industry's problems. These are common-sense issues for which a simple understanding of the business will suffice.
While intimacy with a company's business is not essential to making a decision to buy the stock, later "hold" or "sell" decisions may be clearer if you understand its competitive position in the marketplace, the value of its products or services, and the character of its industry's problems. These are common-sense issues for which a simple understanding of the business will suffice.
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