Use Stock Volume to Your Benefit

So how can you use volume to your advantage?

1.  Remind yourself that traders only determine the short term price not the value.

2.  Use the volume to help predict the right time to buy more assets or change into a better position.

Large volume (relatively speaking) means the price is at a peak or valley.  You are either at the top or the bottom of the chart, you need to determine this.



What is Stock Volume?

Summary
In this lesson, we learned the importance of stock volume. Although volume won’t help intelligent investors learn the intrinsic value of a company, it can be used as a tool to help predict market behaviour.

Many times investors can be fooled into believing that the market price of a stock is determined by all the shareholders. This idea is false.

When we look at the volume of a company on an given day, we can quickly get a sense of how many traders are actually determining the price of a stock when we compare this number to the shares outstanding. This ratio, volume/shares outstanding, provides a good idea how many traders are moving away from the company and how many are coming into the company.

• When the company trades at a very low volume, we can generally say that the shareholder agree with the market price. 
• Likewise, if the volume is very high, we can generally say that shareholders disagree with the market price.

We demonstrated this principal with Wells Fargo (WFC). When we looked at the historical market price for WFC, we learned that on the day where the volume was the highest in ten years, the market price was at an all time low. This idea of shareholders disagreeing with the market price when volume is relatively high is an important point that stock traders can use to their advantage. 

Always remember, volume can mean that the stock is over priced or underpriced. The peak or valley is for you to discern.



http://www.buffettsbooks.com/security-analysis/what-is-stock-volume.html

When to Sell Stock like Warren Buffett

1.  When a higher return is expected by trading to another asset (to include the loss incurred by capital gains tax).

2.  When the company changes its fundamentals.



When to Sell Stock like Warren Buffett

Summary

In this lesson, we learned the importance of always understanding the consequences of our actions. Buying and selling stock can have an enormous impact on our success as an investor. The most important thing to learn from this lesson is the emotional decisions when selling stock can often lead to very poor results.

We learned that there are two major rules for knowing when to sell stock:

1. We sell stock when we can trade the capital into an investment that will produce a larger return after accounting for the capital gains tax paid (state and federal). In addition, you’ll want to ensure the risk assumed is comparable for the return received.

2. We sell stock when the business changes its fundamentals. This could mean the way they manage debt. The future outlook for earnings is decreasing…etc


http://www.buffettsbooks.com/security-analysis/when-to-sell-shares.html

How to use a cash flow statement to identify strong versus risky companies

What is a Cash Flow Statement

This important document is used to help determine how money flows through a business. Prior to 1987, investors could only examine the health of a company from the income statement and balance sheet. Due to stricter regulations, publicly traded companies are now required to also disclose the cash flow statement.

The cash flow statement is broken down into three categories. 

1. Operating Activities: This is probably the most important section of the statement because it shows the money that's flowing into the business from the product or service that the company produces. Positive revenues listed on the cash flow statement from other activities are not sustainable in the long term, so that's why this section is so important. 

2. Investing Activities: A negative number listed in this section would mean that the company is investing money. A positive number in this section would mean that the company sold an asset in order to generate money. Obviously its better to see a negative number show-up under this section because it implies that the company is continuing to invest the revenues that it produces. 

3. Financing Activities: In this section, an investor can identify whether the business is try to raise money or pay off debts. A positive number in this section means the company is incurring debt or dilute the value of their shares. A negative number means the company is paying off debt or increasing the value of their shares (through a share buy back). Generally speaking its good to see a negative number under this section because it means the company is removing their leverage and creating a stronger position for their shareholders.

The Cash flow is a great document to help look at trends and how money flows through a business. Although the balance sheet and income statement are very useful documents for determining the intrinsic value of a stable company, the cash flow statement gives potential investors a glimpse into the current conditions of the company and how they manage their resources.

http://www.buffettsbooks.com/intelligent-investor/cash-flow-statement/what-is-cash-flow-statement.html



How to read the cash flow statement
http://www.buffettsbooks.com/intelligent-investor/cash-flow-statement/how-to-read-cash-flow-statement.html

Income Investing: How do you plan to pay for your retirement?

Imagine that you're 65 years old and you're looking to retire.

If you have $500,000 in savings, how long will that money last?

If you spend $50,000 a year and your saving grows at 7% a year, you'll be broke by age 80.

The savings and investments can only support you for 15 years from the age of 65!!!


What is Income Investing?

Income investing is purchasing stable stocks and bonds that pay dividends and coupons.  If enough stocks and bonds are acquired, the dividends and coupons will provide income for the owner during retirement.

If the income is enough to meet spending requirements, then the equity and par value of the investments will remain or grow with time as income payments continue to grow as well.

How can you invest in companies that will provide benefits now and into retirement?  

Invest in stable companies with low debt/equity ratio that pay dividends.

Always purchase assets that will increase your cash flow next month.  Income investing has a compounding effect in increasing your cash flow.  Using this approach will provide increasing liquidity (dividends) each month, so you can invest in the most undervalued security (either stocks, bonds, or preferred shares).

Conclusion

Income investing provides quarterly payments during retirement.

Income investing provides a constant stream of cash so you can continually take advantage of changing market conditions.

As a rule of thumb, I like to find companies that pay 1/3 of their earnings through a dividend and the other 2/3 into the book value growth of the business (this is growth I don't pay taxes on).


Earnings 
----->  Option 1  ----->  Retained or Pay down debts ---->  Increase in Book Value or Equity
----->  Option 2 ------>  Dividends

Most companies retain some earnings (e.g. 2/3)  and also distribute some as dividends  (e.g. 1/3).



How can I employ Income Investing Techniques

Summary of this lesson

By employing the techniques of income investing, one can prepare themselves properly for retirement. Since income investing is the process of picking stable stocks and bonds that pay decent dividends and coupons, the investor can benefit from the cash flow that’s produced by these securities.

The first way income investing provides benefits to the investor is through liquidity. Since the investor will continually receive dividends or coupons, they then have the opportunity to reinvest that cash flow into the most undervalued asset each month. This compounding cash flow is truly the essence of investing like Warren Buffett. With an ever increasing cash flow, investors can take advantage of market conditions during spikes and valleys.

The second way income investing provides benefits to the investor is during retirement. Since most retirees may need to sell their investments in order to pay their monthly lifestyle expenses, income investing offers an alternative approach. Since the retiree will receive quarterly and semi annual payments from these types of investments, they will continue to have a steady cash flow to meet their lifestyle expenses. Although some retirees may need to pull from the principal, income investing will minimize that withdrawal.

In the end, Income Investing creates more cash flow for the individual employing the technique. It’s Warren Buffett’s opinion that purchasing dividend paying stocks is a very wise decision because of the continued and consistent cash flow that provides liquidity to reinvest your earnings.

Warren Buffett Intrinsic Value Calculator - Determine if Stock is Undervalued or Not.

Warren Buffett's 4 Rules:
1.  Vigilant Leaders
2.  Long Term Prospects
3.  Stock Stability
4.  Undervalued

Non-Predictable Company (Andrew :-) )

1. Lots of Debt
2. No Long Term Prospects
3. Not Stable
4. Price ? - Can't be determined due to stability

Predictable Company (Linda :-) )

1. Manageable Debt
2. Long-term Prospects
3. Stable 
4. Market Price = $44.33  Intrinsic Value = ?

Lesson Objective 1: How do we calculate the intrinsic value of a stock

Lesson Objective 2: How do we use the BuffettsBooks.com intrinsic value calculator

Summary of this lesson

In this lesson, students learned that the intrinsic value can be defined as the discounted value of the cash that can be taken out of a business during it's remaining life. For us, we've defined the life as the next ten years. This way, we can discount that cash by the 10 year federal note. The Cash that we are taking out of the business is simply the dividends and the book value growth during the next 10 years. Since these numbers need to be estimated, it's very important to ensure that Warren Buffett's third rule (a stock must be stable and understandable) is met.

When a company doesn't have a history of linear growth, estimating the cash that they will produce for the next ten years becomes more speculative. When we look at the root of the intrinsic value calculator, it operates off of the same principals as a bond calculator. Instead of using coupons, we substitute dividends. And instead of using par value (or value at maturity) we estimate the book value of the business in 10 years. The value that we use to discount the summation of the cash is simply the 10 year federal note.

Although the previous paragraph might sound confusing to some, it's application is fairly straight forward. The reason Buffett says, "Two people looking at the same set of facts, will almost inevitably come up with at least slightly different intrinsic value figures," is due to a difference in opinion of the future cash flows. Since some investors are more conservative than others, their estimates of book value growth or dividend payments may be lower. This will immediately change the intrinsic value. Your job as an intelligent investor is to determine your own tolerance for risk and conservative estimates on how much money you will receive while owning the stock for a 10 year period.

Intrinsic Value Calculator

Source of Quotes: http://www.berkshirehathaway.com/owners.html

"Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life." - Warren Buffett

Therefore, the sum of cash that can be taken out of the business over the next ten years is going to be the dividends plus the equity growth. The discounted value is the current value of the 10 year federal note. To start, we'll determine how much a company's book value is growing.

"In other words, the percentage change in book value in any given year is likely to be reasonably close to that year's change in intrinsic value."- Warren Buffett

Click here for the Intrinsic Value Calculator:  

http://www.buffettsbooks.com/intelligent-investor/stocks/intrinsic-value-calculator.html

Related:

Would you rather be with Andrew or Linda? Businesses manage their finances just like individual people. :-)

Would you rather be with Andrew or Linda? Businesses manage their finances just like individual people. :-)

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.

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.

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?

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

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.

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.

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.

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.

Learn How to Invest like Warren Buffett

http://www.buffettsbooks.com/index.html

http://www.youtube.com/user/BuffettsBooks/videos (38 videos)

Course 1

Introductory Lessons to Value Investing

Course 1 Lesson Plan

Course 2

Intermediate Lessons to become an Intelligent Investor

Course 2 Lesson Plan

Course 3

Advanced Lessons to Security Analysis

Course 3 Lesson Plan

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.