Can price changes in common stocks be ignored?
Does the investor become richer or poorer as his stocks advance and decline in the market?
1. NO
The bona fide investor who bought for income plus an incidental long-term increase in value, was supposed to be immune to the stock ticker and the market reports.
The nature of investment-grade common stocks before the First World War was their dividends were well maintained even in depression years and their prices did not soar to absurd heights in bull markets and consequently they did not fall into the abyss even in panic times.
Thus, it was possible for the "permanent holder" of these stocks to ignore their price fluctuations as irrelevant to his own purposes and philosophy.
2. YES
Nowadays the situation is different. No one believes seriously that the common-stock investor can remain indifferent to price fluctuations.
The reason for this about-face is found in a change in the stock market itself. Before the First World War common stocks could be divided into a small number of investment issues and a much larger number of speculative issues.
The price movements of the investment issues were relatively narrow, even when the market as a whole was fluctuating widely. Thus the holder of these quality stocks was under no real psychological pressure to pay attention to the market.
Beginning with the bull market of the 1920's this condition has changed. Because the high-grade issues have risen to excessive heights in period sof speculative enthusiasm, they have tended to swing far downward in the ensuing bear markets.
Confronted with price variations of the kind experienced since 1929, it is impossible for the modern investor to ignore these phenomena. Clearly the success of his investment program in common stocks must depend in great part on what happens ultimately to their prices.
$$$$$$$
But how far must he commit himself to concern with the market's conduct?
By what market tests should he consider that he has been successful or not?
Certainly not by short-term or minor fluctuations, for this attitude would make him indistinguishable from the stock trader.
Thursday 15 January 2015
Practical suggestions on switching stocks
Let us summarize our practical suggestions in the matter of security switches as follows:
The investor who begins with a list of standard, first-grade common stocks can expect some of them to lose quality through the years.
His aim should be to replace these, with a minimum sacrifice of dividend return and with a fair chance of recouping any loss of principal value resulting from their sale.
The best means of accomplishing this is by seeking out attractive issues in the secondary group. A competent security analyst is usually in a position to recommend a number of such issues which by objective tests appear to be worth substantially above their selling price.
The fundamental principle of every security replacement should be the following:
Each dollar paid for the issue bought should appear to obtain more intrinsic value than was represented by a dollar's worth of the issue sold.
We believe, in sum, that quality may be approached soundly by way of value. If the value is abundant, the quality may be deemed sufficient.
Benjamin Graham
The investor who begins with a list of standard, first-grade common stocks can expect some of them to lose quality through the years.
His aim should be to replace these, with a minimum sacrifice of dividend return and with a fair chance of recouping any loss of principal value resulting from their sale.
The best means of accomplishing this is by seeking out attractive issues in the secondary group. A competent security analyst is usually in a position to recommend a number of such issues which by objective tests appear to be worth substantially above their selling price.
The fundamental principle of every security replacement should be the following:
Each dollar paid for the issue bought should appear to obtain more intrinsic value than was represented by a dollar's worth of the issue sold.
We believe, in sum, that quality may be approached soundly by way of value. If the value is abundant, the quality may be deemed sufficient.
Benjamin Graham
Behaviour of Growth Stocks
A growth stock is identified as such because it has an especially satisfactory past record coupled with the expectation that this will continue.
It is the inherent nature of corporate growth eventually to taper off or to cease entirely.
Thus, if the stock market possessed the penetrating qualities popularly accorded to it, many growth stocks would begin to lose their high price level some time BEFORE any decline in their earning power had become apparent.
What seems to happen, rather, is that the price remains high UNTIL the earnings ACTUALLY show a definite falling off - which invariably seems to take the followers of the issue by surprise.
Then we have the market decline usually associated with a disappointing development - a decline perhaps intensified by the fact that the price level of the growth stock had been dangerously high.
Sometimes, either because of a certain stubbornness or a real insight into the long term future on the part of the investors, the price of such a deteriorated growth stock remains higher than its current performance would justify.
The growth stock principle of investment carries with it a real danger of miscalculations. The average investor is likely to be most enthusiastic about such companies at the wrong time.
Past trends are generally an unsound basis for investment decision.
Benjamin Graham
It is the inherent nature of corporate growth eventually to taper off or to cease entirely.
Thus, if the stock market possessed the penetrating qualities popularly accorded to it, many growth stocks would begin to lose their high price level some time BEFORE any decline in their earning power had become apparent.
What seems to happen, rather, is that the price remains high UNTIL the earnings ACTUALLY show a definite falling off - which invariably seems to take the followers of the issue by surprise.
Then we have the market decline usually associated with a disappointing development - a decline perhaps intensified by the fact that the price level of the growth stock had been dangerously high.
Sometimes, either because of a certain stubbornness or a real insight into the long term future on the part of the investors, the price of such a deteriorated growth stock remains higher than its current performance would justify.
The growth stock principle of investment carries with it a real danger of miscalculations. The average investor is likely to be most enthusiastic about such companies at the wrong time.
Past trends are generally an unsound basis for investment decision.
Benjamin Graham
Extreme vicissitudes
Undoubtedly, the largest theoretical gains in the stock market are to be made not out of the continuously prosperous companies but out of those which experience wide vicissitudes - by buying their stocks at their depths and selling at their heights.
Profits of such amplitude are realized only in the paper calculations of hindsight. Yet these examples have practical significance for the intelligent investor.
They should confirm his conviction that outstanding characteristic of stock market is its tendency to react EXCESSIVELY to favourable and unfavorable influences.
The word "excessive" applied to the stock market's reactions indicates that they create many sound counter-opportunities for the investor with sense and courage.
Benjamin Graham
Profits of such amplitude are realized only in the paper calculations of hindsight. Yet these examples have practical significance for the intelligent investor.
They should confirm his conviction that outstanding characteristic of stock market is its tendency to react EXCESSIVELY to favourable and unfavorable influences.
The word "excessive" applied to the stock market's reactions indicates that they create many sound counter-opportunities for the investor with sense and courage.
Benjamin Graham
Price Changes of common stocks with highly stable earnings.
The stability of annual earnings per share of a selected common stock is extraordinary.
Record of earnings and dividends of S.H. Kress for 1924 - 45 and the more extreme price variations during that period.
It may properly be concluded that this record at no point showed any definite indications of permanent change for either the better or the worse in the company's affairs or prospects.
Hence the variation in market price must have been entirely psychological in their origin. They offer a fairly accurate measurement of the breadth of price change a scribble to the mere vagaries of the stock market - while the "article valued" changed its character not at all.
Under the circumstances, the range of price changes must be considered extraordinary.
It's price rose from 12 to 62, a fall to 9, a rise to 48, a fall to 20, and a rise to 49. For the 5 years 1933 - 37 the earnings varied between $2.11 and $2.31 per share, whereas the price ranged from 13 1/2 to 47 1/2. In the 6 years 1939- 45 the earnings varied between $1.93 and $2.25, but the price ranged from 19 1/2 to 40 1/2.
Reference
The Intelligent Investor, by Benjamin Graham
Record of earnings and dividends of S.H. Kress for 1924 - 45 and the more extreme price variations during that period.
In 16 out of 22 years, the earnings per share varied only between $1.93 and $2.32. In the other 6, including the boom and deepest depression years, the range widened only to $1.38 - $2.88.
It may properly be concluded that this record at no point showed any definite indications of permanent change for either the better or the worse in the company's affairs or prospects.
Hence the variation in market price must have been entirely psychological in their origin. They offer a fairly accurate measurement of the breadth of price change a scribble to the mere vagaries of the stock market - while the "article valued" changed its character not at all.
Under the circumstances, the range of price changes must be considered extraordinary.
It's price rose from 12 to 62, a fall to 9, a rise to 48, a fall to 20, and a rise to 49. For the 5 years 1933 - 37 the earnings varied between $2.11 and $2.31 per share, whereas the price ranged from 13 1/2 to 47 1/2. In the 6 years 1939- 45 the earnings varied between $1.93 and $2.25, but the price ranged from 19 1/2 to 40 1/2.
Reference
The Intelligent Investor, by Benjamin Graham
Sunday 4 January 2015
Either you ignore market fluctuations or you buy and sell based on value.
It is people generally who make high and low markets, because they are optimistic (and greedy) in high markets and pessimistic (and disgusted) in low markets.
How can you - a member representing the public at large - be expected to act otherwise than the public acts?
Does not this mean that you are doomed, by some law of logic, to buy when you should be selling and to sell when you should be buying?
This point is vital. The investor cannot enter the arena of the stock market with any real hope of success unless he is armed with mental weapons that distinguish him in kind - not in a fancied superior degree - from the trading public.
(1) One possible weapon is indifference to market fluctuations; such an investor buys carefully when he has money to place and then lets prices take care of themselves.
(2) But, if the investor intends to buy and sell recurrently, his weapons must be a frame of mind and a principle of action which are basically different from those of the trader and speculator. He must deal in values, not in price movements. He must be relatively immune to optimism or pessimism and impervious to business or stock-market forecasts.
In a word, he must be psychologically prepared to be a true investor and not a speculator masquerading as an investor. If he can meet this test, he will be a member not of the public at large but of a specialized and self-disciplined group.
Returning to the matter of the market's cyclical swings,we must point out that the duration or frequency of these swings has changed considerably since 1921. This is an added obstacle to the pleasing project of investing regularly in low markets and selling out in high ones. Between 1899 and 1921 the industrial average made five well defined highs and five definite lows, an average cycle of about four years. Since then there have been only two clean-cut swings and the intervals between low points have been eleven years and ten years, respectively.
An investor nowadays is likely to grow uneasy and impatient while waiting for his cyclical buying opportunity to reappear. In the meantime, also, his funds will bring him no interest in the bank and only a negligible rate if placed in short-term securities. Thus he can lose more in dividends foregone than he can ever gain from buying at eventual low levels.
Summary
Either buy carefully and then ignore the market fluctuations or if you intends to buy and sell recurrently, deal in values.
Should you patiently wait for your cyclical buying opportunity to reappear? The low-points of the market maybe 10 or 11 years apart. While waiting for these hoping to buy at eventual low levels, you can lose more in dividends foregone; earning little income from your cash holdings.
How can you - a member representing the public at large - be expected to act otherwise than the public acts?
Does not this mean that you are doomed, by some law of logic, to buy when you should be selling and to sell when you should be buying?
This point is vital. The investor cannot enter the arena of the stock market with any real hope of success unless he is armed with mental weapons that distinguish him in kind - not in a fancied superior degree - from the trading public.
(1) One possible weapon is indifference to market fluctuations; such an investor buys carefully when he has money to place and then lets prices take care of themselves.
(2) But, if the investor intends to buy and sell recurrently, his weapons must be a frame of mind and a principle of action which are basically different from those of the trader and speculator. He must deal in values, not in price movements. He must be relatively immune to optimism or pessimism and impervious to business or stock-market forecasts.
In a word, he must be psychologically prepared to be a true investor and not a speculator masquerading as an investor. If he can meet this test, he will be a member not of the public at large but of a specialized and self-disciplined group.
Returning to the matter of the market's cyclical swings,we must point out that the duration or frequency of these swings has changed considerably since 1921. This is an added obstacle to the pleasing project of investing regularly in low markets and selling out in high ones. Between 1899 and 1921 the industrial average made five well defined highs and five definite lows, an average cycle of about four years. Since then there have been only two clean-cut swings and the intervals between low points have been eleven years and ten years, respectively.
An investor nowadays is likely to grow uneasy and impatient while waiting for his cyclical buying opportunity to reappear. In the meantime, also, his funds will bring him no interest in the bank and only a negligible rate if placed in short-term securities. Thus he can lose more in dividends foregone than he can ever gain from buying at eventual low levels.
Summary
Either buy carefully and then ignore the market fluctuations or if you intends to buy and sell recurrently, deal in values.
Should you patiently wait for your cyclical buying opportunity to reappear? The low-points of the market maybe 10 or 11 years apart. While waiting for these hoping to buy at eventual low levels, you can lose more in dividends foregone; earning little income from your cash holdings.
The case of the market declines and unsuccessful stock investments.
There is a vital difference here between temporary and permanent influences.
A price decline is of no real importance to the bona fide investor unless it is either very substantial - say, more than a third from cost - or unless it reflects a known deterioration of consequence in the company's position.
In a well defined bear market many sound common stocks sell temporarily at extraordinarily low prices.
A significant price decline is of importance to the investor.
A price decline is of no real importance to the bona fide investor unless it is either very substantial - say, more than a third from cost - or unless it reflects a known deterioration of consequence in the company's position.
In a well defined bear market many sound common stocks sell temporarily at extraordinarily low prices.
- It is possible that the investor may then have a paper loss of fully 50 per cent on some of his holdings, without any convincing indication that the underlying values have been permanently affected.
A significant price decline is of importance to the investor.
- He would have been well advised to scrutinize the picture with some care, to see whether he had made any miscalculations.
- But if the results of his study were reassuring - as they should have been - he was entitled then to disregard the market decline as a temporary vagary of finance, unless he had the funds and the courage to take advantage of it by buying more on the bargain basis offered.
Price Changes as Measuring Investment Results
When the general market declines or advances substantially ....
.... nearly all investors will have somewhat similar changes in their portfolio values.
Benjamin Graham, in his book Intelligent Investor, wrote that the investor should not pay serious attention to such price developments unless they fit into a previously established program of buying at low levels and selling at high levels.
The investor is neither a smart investor nor a richer one when he buys in an advancing market and the market continues to rise.
That is true even when the investor cashes in a goodly profit, unless either
(a) he is definitely through with buying stocks - an unlikely story - or
(b) he is determined to reinvest only at considerably lower levels.
In a continuous program no market profit is fully realized until the later reinvestment has actually taken place, and the true measure of the trading profit is the difference between the previous selling level and the new buying level.
The INVESTMENT SUCCESS of the investor may be judged by a long-term or secular rise in market price, without the necessity of sale.
The proof of that achievement lies in the price advances made between successive points of equality in the general market level.
In most cases this favourable price performance will be accompanied by a well-defined improvement in the average earnings, in the dividend, and the balance-sheet position.
Thus in the long run the market test and the ordinary business test of a successful equity commitment tend to be largely identical.
SUMMARY
Most of us are invested for the long run.
Even if you manage to sell your investment for a profit from your previous buying price, no market profit is fully realized until you have reinvested this amount back into the market.
Your trading profit is the difference between the previous selling level and the new buying level.
.... nearly all investors will have somewhat similar changes in their portfolio values.
Benjamin Graham, in his book Intelligent Investor, wrote that the investor should not pay serious attention to such price developments unless they fit into a previously established program of buying at low levels and selling at high levels.
The investor is neither a smart investor nor a richer one when he buys in an advancing market and the market continues to rise.
That is true even when the investor cashes in a goodly profit, unless either
(a) he is definitely through with buying stocks - an unlikely story - or
(b) he is determined to reinvest only at considerably lower levels.
In a continuous program no market profit is fully realized until the later reinvestment has actually taken place, and the true measure of the trading profit is the difference between the previous selling level and the new buying level.
The INVESTMENT SUCCESS of the investor may be judged by a long-term or secular rise in market price, without the necessity of sale.
The proof of that achievement lies in the price advances made between successive points of equality in the general market level.
In most cases this favourable price performance will be accompanied by a well-defined improvement in the average earnings, in the dividend, and the balance-sheet position.
Thus in the long run the market test and the ordinary business test of a successful equity commitment tend to be largely identical.
SUMMARY
Most of us are invested for the long run.
Even if you manage to sell your investment for a profit from your previous buying price, no market profit is fully realized until you have reinvested this amount back into the market.
Your trading profit is the difference between the previous selling level and the new buying level.
My investing philosophy revisited
Happy New Year 2015.
I thought it would be nice to recall how my investing philosophy comes about.
Being a non-financial chap, it was difficult to understand investing in my early years. Tried as I did, I found the acquisition of this knowledge to be challenging. I started with various books and often find them useful but still lacking. Many were written for financial planning, understanding businesses, economics and accounts.
My early years in investing were much guided by my friend. A kind chap indeed who is obviously very knowledgeable was willing to share his recommendations and I bought his recommendations. That was in 1993 and the shares that he recommended remain in my portfolio till today and have done extremely well, despite the volatility and turmoil associated with the Asian Financial Crisis, the Sars crisis and the 2008/2009 US subprime global financial crisis. Yes, buy and hold for the long term works beautifully for selected stocks.
Of course, my pursuit of financial and investing knowledge continues till today. Post 2000, value investing became fashionable again. Books on value investing started to appear in our local bookshops. The internet was a great help. One could read numerous articles on value investing, on the gurus the like of Benjamin Graham, Warren Buffett, Philip Fisher, Peter Lynch, John Templeton and many others. Synopsis and articles on the classical books were readily available in the internet allowing one to continue to build up this financial and investing knowledge. The classic must read books would include Intelligent Investor and Security Analysis by Benjamin Graham, Common Stocks and Uncommon Profits by Philip Fisher, One Up on Wall Street by Peter Lynch, Five Rules for Successful Investing by Pat Dorsey and many others. All these readings, carefully and critically sorted, allow one to formulate a philosophy to suit your own investing objectives, your own investing risk tolerance, investing time horizon and your investing financial capacity.
Guided by a sound philosophy, how can I put this into practice? How can I approach investing without taking too much effort or time, and yet be productive in my investing? Here lies the next challenge. Again, being not so good in computing, I had to learn simple computing and microsoft excel to aid my analysis of stocks. I searched for various programs that are available online and adopted these to my own self designed program. Over time, through a bit of effort, some semblance of a simple program to guide and help my investing is realised. This helps to cut a lot of laborious analysis of past historical data and allow one to see the big picture of the company that you wish to analyse for your investing.
Yes, essentially, you should choose your own investing philosophy. I have recently met up with my good friend. He has invested into index funds in his country. That is intelligent investing too, as I realised he did not have the time nor the initiative to analyse stocks on his own. He wished to be relatively free from doing all these for his investing; more importantly he wouldn't know how. Yet, he was wise enough to invest in an index linked fund, knowing over the long term, his investment will be safe and with promise of a reasonable return after taking into consideration the low cost. That is intelligent investing of the defensive type according to Benjamin Graham.
For those who are more enterprising, well, investing can be fun and exciting. Embarking on my journey in investing has shown this to be true. It is easy to get market return, but trying to better the market return can be more challenging than it seems. But sometimes you are "lucky". But luck should really not be a big element in your investing should you choose to invest on your own in an enterprising manner. Learning from Benjamin Graham's Intelligent Investor will put you on the right track, allowing you to formulate a sound investing policy for the long term.
Best wishes and may your investing be productive always.
http://myinvestingnotes.blogspot.com/2008/08/strategies-for-buying-and-selling-kiss.html
http://myinvestingnotes.blogspot.com/p/philosophy.html
I thought it would be nice to recall how my investing philosophy comes about.
Being a non-financial chap, it was difficult to understand investing in my early years. Tried as I did, I found the acquisition of this knowledge to be challenging. I started with various books and often find them useful but still lacking. Many were written for financial planning, understanding businesses, economics and accounts.
My early years in investing were much guided by my friend. A kind chap indeed who is obviously very knowledgeable was willing to share his recommendations and I bought his recommendations. That was in 1993 and the shares that he recommended remain in my portfolio till today and have done extremely well, despite the volatility and turmoil associated with the Asian Financial Crisis, the Sars crisis and the 2008/2009 US subprime global financial crisis. Yes, buy and hold for the long term works beautifully for selected stocks.
Of course, my pursuit of financial and investing knowledge continues till today. Post 2000, value investing became fashionable again. Books on value investing started to appear in our local bookshops. The internet was a great help. One could read numerous articles on value investing, on the gurus the like of Benjamin Graham, Warren Buffett, Philip Fisher, Peter Lynch, John Templeton and many others. Synopsis and articles on the classical books were readily available in the internet allowing one to continue to build up this financial and investing knowledge. The classic must read books would include Intelligent Investor and Security Analysis by Benjamin Graham, Common Stocks and Uncommon Profits by Philip Fisher, One Up on Wall Street by Peter Lynch, Five Rules for Successful Investing by Pat Dorsey and many others. All these readings, carefully and critically sorted, allow one to formulate a philosophy to suit your own investing objectives, your own investing risk tolerance, investing time horizon and your investing financial capacity.
Guided by a sound philosophy, how can I put this into practice? How can I approach investing without taking too much effort or time, and yet be productive in my investing? Here lies the next challenge. Again, being not so good in computing, I had to learn simple computing and microsoft excel to aid my analysis of stocks. I searched for various programs that are available online and adopted these to my own self designed program. Over time, through a bit of effort, some semblance of a simple program to guide and help my investing is realised. This helps to cut a lot of laborious analysis of past historical data and allow one to see the big picture of the company that you wish to analyse for your investing.
Yes, essentially, you should choose your own investing philosophy. I have recently met up with my good friend. He has invested into index funds in his country. That is intelligent investing too, as I realised he did not have the time nor the initiative to analyse stocks on his own. He wished to be relatively free from doing all these for his investing; more importantly he wouldn't know how. Yet, he was wise enough to invest in an index linked fund, knowing over the long term, his investment will be safe and with promise of a reasonable return after taking into consideration the low cost. That is intelligent investing of the defensive type according to Benjamin Graham.
For those who are more enterprising, well, investing can be fun and exciting. Embarking on my journey in investing has shown this to be true. It is easy to get market return, but trying to better the market return can be more challenging than it seems. But sometimes you are "lucky". But luck should really not be a big element in your investing should you choose to invest on your own in an enterprising manner. Learning from Benjamin Graham's Intelligent Investor will put you on the right track, allowing you to formulate a sound investing policy for the long term.
Best wishes and may your investing be productive always.
http://myinvestingnotes.blogspot.com/2008/08/strategies-for-buying-and-selling-kiss.html
http://myinvestingnotes.blogspot.com/p/philosophy.html
Thursday 18 December 2014
Bear markets have three stages - "sharp down, reflexive rebound, and a drawn-out fundamental downtrend."
In this market, investors will need the margin of safety that a low price brings.
The crash was just the end of the beginning. Now comes what could be many months of head-fakes and hopeful rallies that wind up in dead ends. You'll be Charlie Brown charging the football with head held high, only to land flat on your back.
Bear markets have three stages - "sharp down, reflexive rebound, and a drawn-out fundamental downtrend."
Where it stops, nobody knows, but a portfolio with strong defensive stocks stands a fighting chance.
http://myinvestingnotes.blogspot.com/2008/12/five-tips-for-buying-stocks-in-bad.html
The crash was just the end of the beginning. Now comes what could be many months of head-fakes and hopeful rallies that wind up in dead ends. You'll be Charlie Brown charging the football with head held high, only to land flat on your back.
Bear markets have three stages - "sharp down, reflexive rebound, and a drawn-out fundamental downtrend."
Where it stops, nobody knows, but a portfolio with strong defensive stocks stands a fighting chance.
http://myinvestingnotes.blogspot.com/2008/12/five-tips-for-buying-stocks-in-bad.html
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