Category: Investment Strategies

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Investment Strategy


 

So what is an investment strategy? It’s not an action plan, it’s not a mission statement, and it’s not a set of objectives.

Actually, these concepts are organized as follows: You start with a vision, then a mission to reach that vision, then a set of objectives to guide you through your movement towards the vision. Then comes the strategy, which defines “how” you’re going to achieve the objectives, how you’re going to carry out the mission, and how you’re going to reach the vision. Finally, an action plan is the actual set of steps you take to implement all the above within the framework of your intentions. In other words, the action plan is the manifestation of your intentions.

Let’s start with the vision.

A vision is what you see in the future. In the context of investing, it’s what you see yourself achieve, say 10 years from now.

Your vision is tightly related to your self concept. If having a million freaks you out, because you don’t know what to do with it, or because you worry about protecting it, then don’t worry. You won’t reach that amount! Wealth or poverty, both lie within, not without. Do you want a proof? More than 90% of those who hit the jackpot lose all the money within a year. Why? They are poor on the inside. They can’t handle prosperity, it’s too much for them.

On the other hand, truly wealthy people, stay wealthy, even if their bank accounts are clean and shiny :-). How? They have what it takes, on the inside, to create physical wealth again and again, all because they are full of non-physical wealth. Their minds and hearts are rich.

You always need to start with a vision. You actually do start with one even if you don’t notice consciously. “Everything is created twice” (to quote Stephen Covey): First in our minds, then on the ground. The better the first creation, the more robust and successful the second. So instead of delving into a life-changing experience like investing subconsciously, without being fully aware of your final target, I’m inviting you to sit down, grab a pen and paper, and chart some course.

Now along the path, you’ll face challenges and difficulties, or even unexpected success! Have you heard of the “fear of success”? You need to be prepared. And that where objectives come into play. They guide your march towards your vision.

Success is not only achieving “what” you set for to achieve, it’s also “how” you intend to achieve it.

In summary,  an investment strategy is your approach to investing. It’s your vehicle to reaching your vision.

In a following post, I may give some practical examples of the embodiment of a good investment strategy.

Till then, stay healthy, wealthy, and wise…

The Wealth Maker

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How to Invest?


Investment is based on rules and guidelines, as well as inclinations and gut feelings. If you could find a wounderfel business at an attractive price, following the strategies we’ve talked about in the previous posts, do not ignore your feeling towards the company!

If, for any reason, you didn’t like what the company produced, or you wouldn’t feel proud had you have to own the whole business for the next 20 years or so, do not buy. As simple as that. There’re thousands of businesses out there to choose from.

On the other hand, don’t ever let your love for the business stand between you and selling your shares (or part of them) once the business stops being wonderful, or once you realize it’s time to cash in your profits.

Investment in stocks is only one kind of growing your capital. There are other investment instruments, but you need to choose something that suits your risk tolerance and the length of time you afford to leave your capital in an investment (assuming you can’t withdraw any proceeds during the investment term).

I’ve talked about HYIP investment, and given several warnings in case you would like to “try your luck” at such investment instrument. Since that post, I’ve found two or three sites that could be safer than the majority of HYIP’s. The main reasons are they have been around for a long time, and they have been paying their members on time. But that does not eliminate the risk entirely.

Now let’s delve into our main topic. In order to invest in any market, you will need a broker to carry on the actual buy and sell activities on the  “floor”. The floor is a term used by brokers to refer to the operation space of a stock exchange. Examples of stock exchanges are: New Your Stock Exchange (NYSE), Toronto Stock Exchange (TSX), NASDAQ, and many others. Almost every major city in the world has its own stock exchange. A stock exchange (SE) is where brokers “change hands”, in other words: Buy and Sell on behalf of their clients.

In the old days, people had to interact directly with their stock brokers in order to “place orders”. Placing an order is another term that means asking the broker to execute a Buy or Sell transaction in the SE, on your behalf. So if you wanted to buy 100 shares of IBM back in the fifty’s or sixties, you would first call the broker, identify yourself, ask for the operation you wanted, and then wait for him or her to call you back (usually after few days), to let you know if your order had been “filled” or not. A filled order is a successfully executed order. In our example it means: Your request to buy 100 IBM shares had been fulfilled. Then the broker would send you a certificate that proved your ownership of those 100 IBM shares.

It’s different nowadays. The whole scenario described above has been minimized to a few mouse clicks, and sometimes, to a few seconds (if the market is open).

In the following post, I’ll exaplain the deatals of today’s stock investment steps (I’m assuming here that you’ve already done your homework and picked the right business, based on the criteria explained at length in the previous posts). Now since we’ve picked a wonderful business at an attractive price, we need to know how to buy shares in that business, and how to sell those shares (or part of them), if need be.

Till the next post, stay safe, and happy investing!

Yaman

The Wealth Maker

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High Yield Investment Programs (HYIP’s)


Looking for quick and easy riches has become a fertile soil for fraud. Today I’ll talk about a trend that has been gaining momentum due to the current financial atmosphere around the globe.

HYIP’s have been popping up out of nowhere every day. They play on the novice investor’s emotions, and to some extent, greed.

The promise is very tempting: Put down as low as $1, and start earning an hour later. If you kept re-investing, you could convert that one buck into $200 easily within 48 hours.

Now try to withdraw all or some of your earnings. To make things look professional, and to get you deeper into the greed hole, the program may actually process your first, and probably second, withdrawal requests. By doing so, it gains your trust, and makes you either leave your profits in the program, or even worse, deposit more cash, lured by the promise of fast accumulation of wealth.

Usually, not all investors ask to withdraw their profits at the same time. This gives the program admin enough maneuvering room to circulate the money among the members, till that admin runs out of spending cash. Now here is the critical point in the life cycle of an HYIP: The organizers wouldn’t distribute all the cash. They keep the bulk for themselves. Absent any real investment activity, such as trading, or real estate investing, the only available cash is the sum of the members’ deposits!

Once they run out of “spending” cash, the modern thieves shut down the site abruptly, disappear, and take with them most of the invested money.

Are there any legitimate HYIP’s out there? If there were, they would be very hard to find. And the only way to test their legitimacy is trial and error.

The web is full of HYIP “monitors”. They invest in a certain program and watch it for a number of days. After that, they give it their blessings as “Paying”. Big deal! Yes, they do pay for some time, but no one knows when they will disappear.

This phenomenon is not new. The proliferation of such programs has increased exponentially because of the web. It’s so easy to find a web host who accepts your site as anonymous, which gives you the freedom to close shop anytime you want!

This is hard to regulate. The only cure, in my opinion, is knowledge. Investing, like any other trade, requires proper training. No respectful training house would encourage you to invest in such programs

Today they call themselves HYIP’s. Who knows what the acronym would be tomorrow? Lucrative Profits Made Easy (LPME), or something else!

I invite the readers of this post to comment, share their experiences, and suggest ways to limit such harmful behaviours from distorting the image of a worthwhile industry like investing.

Till the next post, stay safe and away from suspicious investment vehicles!

The Wealth Maker

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When to Sell?


This is a critical decision, which you will face sooner or later. The ideal answer is: Never! But realistically speaking, there are situations where you find selling a business (or part of it) is the best action to take.

What makes selling a business feasible? Remember the attributes we focused upon when picking a winning stock: A wonderful business at an attractive price.

Businesses change, like everything else in life, to the better or, sometimes, to the worse. In other words, if one of your businesses has stopped to be wonderful, it’s time to jump off the wagon! We do not fall in love with shares. We check emotions out at the door. No matter how much you like the business, if its financial performance starts getting out of shape for few quarters in a raw, and there’s no clear sign of improvement, you should leave.

Now, here’s another dilemma: Do you sell no matter what? Do you short the stock and incur a loss? Of course not! As an Intelligent Investor, you sniff such changes early on, so that you sell before the share price goes into a free fall. For you, the worst case scenario should be to retrieve your initial investment fully, and come out even.

This requires continuous monitoring of your portfolio, and being on top of major market movements. You don’t have to spend hours every day following financial news though. That would defeat the purpose of being an Intelligent Investor! All you need is a sense of the market pulse, and a good overall knowledge of the businesses that make up your portfolio.

There is another reason to sell a business: Maturity. But how would you know if a business has reached its peak? No one can answer that question for sure. What we can do is to consult our financial plan and strategy. You don’t have to reap the maximum possible profit of each and every business you engage in! That is almost impossible. You must draw a line at some point and sell when your business reaches maturity based upon your educated opinion at that stage. Getting out with, say, 75% profit is much better than waiting too long, and having to short the stock at a loss.

And if you decide to wait for every business to reach its peak (which you don’t know when for sure), you definitely run the risk of losing money when the wind blows against your ship. So being somewhat on the defensive side is better here, considering the bigger scope of your long-term financial strategy. Remember Rule Number One: Never Lose Money. To adhere to that rule, it’s OK to pass on some extra profits, as long as you end each financial year up in the black…

There are exceptions of course. If your monitoring tells you that a business is destined for 300% net profit, you may want to wait and sell then. But check your risk tolerance first 🙂

After all, no matter how much monitoring, planning, and calculations you make, leave some space for your own common sense, gut feeling and inner wisdom. Yes, ask for higher guidance, when human tools fail to help you make a decision. I guess you know what I’m trying to say here.

Finally, as long as your money is locked in shares, it’s paper money. Eventually, you need to sell and convert that paper money into real money. But don’t go and sell your whole portfolio all together! Only sell those businesses that either stop to be wonderful, or those that reach maturity based on your best possible logical judgment and heart-driven, spiritually guided inner wisdom.

Till the next post, happy and prosperous investing. Don’t forget to have fun along the way, eh…

The Wealth Maker

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How to Weather Mr. Market’s Moods


By now, you probably have created a portfolio of carefully picked stocks. Each has a wide Margin Of Safety (MOS). We did talk about how to achieve that in a previous post. Simply put: Never pay the price tag. Not only that; but go to the extent of paying 50 cents for each dollar. You may wonder: But how? If I found a beautiful business, and fell in love with it, how could I wait till its price fell to those levels?

The answer is the following: Since Mr. Market is moody, its movements are not always logical. Often times it does punish a good, or even a great, business, and yank its share price way down. If you did your homework of investigating good businesses and placing them on your radar screen, you would capture that opportunity and buy as many shares as you could. This also requires having cash put aside for such instances.

So back to the title of this post, in order to withstand price fluctuations, especially in times of uncertainty, or even recessions, you need a portfolio that has been built based on the principles we’ve been talking about; that’s number one. Number two, you need the emotional stamina to stay put! Yes, do nothing till the storm passes. In the middle of the hurricane, you can remain stable, because you know your businesses are good, and you know you had bought them at attractive prices, so they will bounce back for sure.

Any action you take, you will most probably regret later when the sun rises the next morning! Sometimes inaction is the best of actions. It’s helpful here to have a longer view of your investment, part of your investment strategy (which I will talk about in a future post) is to decide a time span of your portfolio. This could be three, five, or even 10 years. Having that in mind, helps you ignore monthly fluctuations and weather the storm!

Till the next post, happy investing 🙂

The Wealth Maker

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Day Trading


The reason I’m writing about day trading, although it contradicts the basics of what we’ve been covering so far, is to give the reader an idea about something that’s out there. An investment instrument that has been around for quite some time. It sheds more clarity on the original topic when you talk about its opposite.

So what is day trading?

A day-trader, as the name implies, starts and finishes his or her trades within one market day. An NYSE market day, for example, starts with the market bell at 9:30 AM EST, and closes at 4:00 PM EST.

A day-trader relies on the minor changes in stock prices throughout the trading day. In other words, he/she rides the fluctuation waves of share prices.

Let’s take an example. Suppose the day-trader got information that RIM is going to fluctuate a lot today. The expected scope of fluctuation is $2. So RIM’s share price will hover, say around 58-60 (remember, this is still a pure speculation, the price might take a different course altogether).

If the trader wants to ride the wave downward, he/she speculates that the price will go down from the time he/she buys the share. If the trader wants to ride the wave upward, he/she speculates that the price will go up from the time he/she buys the share.

Let’s, for the sake of explanation, say that RIM’s share price was 58.5 at 10:00 AM. The trader “expects” the price to go up, so he/she buys a 1000 shares based on that expectation. If the stock makes it up, and reaches, say, 58.7, the trader can sell the 1000 shares and make $200 profit. If, on the other hand, Mr. Market was in a bad mood that day, and wanted to punish RIM for some reason, and slams the price down to 56.87, oops, the day-trader has just lost $1,630 in less than an hour! Of course if he/she was nervous enough to sell.

Here comes the difference between a day-trader, and a value trader. For the latter, that drop in price is only a reflection of Mr. Market’s mood changes, and it means nothing next year, or even next month. The fundamentals upon which the value trader had made the decision to buy RIM (if he did) should still hold.

In conclusion: Even if a day-trader beats the market in a few trades, most of the time, at the end of the trading day, the house wins. This kind of business takes patience, discipline and a long-range view. Fighting Mr. Market on a daily basis, expecting big profits by riding price waves, reflects a micro-view, and ends in a lot of wounds..

I should also mention that day-trading is not restricted to the stock market. It could be done in a variety of markets like energy, metals, commodities, etc. Usually it’s referred to as future trading.

Till the next article, never lose money 🙂

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Why Do You Invest?


Have you ever asked yourself this question?

Some people invest because they don’t know what to do with their money! Some to imitate their friends or family.

The reason we invest is two-fold: One is to grow our savings, and the other is to contribute to our society by supporting wonderful businesses.

As a value investor, you should not invest in businesses that harm the society, even if they pass the criteria for a wonderful business at an attractive price. There are hundreds, if not thousands of businesses that qualify without imposing any harm to the society.

Are there other reasons to invest? To put your money on the line? To allow others to make decisions, concerning your money, on your behalf, without consulting with you, most of the time?

Investment, when practised mindfully and full heartedly, gives you the opportunity to sharpen your intellectual faculties: You study, analyze, compare, make decisions, and so on.

You also get to have a broader view of the market and the forces that influence it, regardless of its moodiness!

You realize after a while, that there are businesses out there, you haven’t heard of before, especially if you had been a professional in a specific industry. Here, you almost know them all, but you don’t have to be an expert in any one of them. As a matter of fact, you shouldn’t, to avoid any potential bias.

In my opinion, if you reach that level of neutrality, you can call yourself: a businessman.

You no longer fall in love with technology, retail, energy, manufacturing, or whatever. Your main focus is on the business as a business: A vehicle to produce value to the society, the employees, the shareholders, and of course, to you!

And that value is not only money. It is also a contribution to productivity, to a stronger economy, and to the well-being of all involved.

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Value-based Investment: Wonderful Businesses


 

This is the heart of our value-investing discussion. If you haven’t already, I suggest you go back and read the previous articles in this series.

A Wonderful business is one that delivers value to its customers, shareholders, and employees. The role of the management of such business is to balance those interests, yet satisfy them to a reasonable degree.

This leads us to a key element in spotting a wonderful business: Its management. Who is calling the shots? How does the management maintain a positive balance sheet? What are their pay packages? Are those in line with the financial temperature of the business? We could spend hours asking such questions. The bottom line is to investigate the managing team, meet some of them if possible, ask the tough questions. You should be satisfied with their management style and their track record, before you give them your hard-earned money.

Next, or parallel to that, you need to roll up your sleeves for few hours, or maybe days, to research the financial health of the company. The first station your research train will stop at is the annual report. Reading and understanding annual reports gives you a tremendous edge, yet it’s not easy at all. Studying the financial history of the company gives you a good idea concerning its future. The most important annual report to dig through is the last one. But you should have a look at the annual reports of at least the last five years.

Questions you may want to ask, and find solid answers to, are:

  • Have the earnings been growing quarter over quarter, during the last five years?
  • Has the compensation of employees, especially the executives, been in line with the growth of the business?
  • What is the market capitalization? Is it a small cap or a large cap, or something in between?
  • Does the business pay dividends to the shareholders? What’s the dividend percentage of the share price? Look for something above 2%
  • Are their strategies in place to reduce the cost of production without affecting the quality?
  • How much debt does the company carry from quarter to quarter?
  • What is the net Earning/share (EPS) for the last four quarters, the last five years, and maybe 10 years?
  • Has the EPS been growing or declining?
  • What is the current Price / Earning (P/E) ratio? You need that to be as low as possible. Be careful of any P/E above 20
  • Are there any legal issues facing the business?
  • How does the business compare to its competitors in terms of market share?
  • How much does the business spend on research and development? A retail chain must have a different figure here than a pharmaceutical company, provided everything else is the same
  • Simplicity is another factor. Although it’s not very easy to find out, but it’s worth the research. The more complex the business is, the more prone it is to problems down the road. The reward of simplicity is a low-maintenance business. As an intelligent Investor, you should not fall in love with the business. Even if you love technology, for example, this is not enough reason to buy technology shares, unless they prove to be wonderful businesses!

What you’re looking for is a stable business, which has been growing nicely for quite some time, and which has good, honest, and capable management. A management team that has been successful in making that business a vehicle to delivering real value.

The key words here are: Stability, sustainable growth, ethics, value, and it won’t harm to have some fun along the way!

To be continued…

The Wealth Maker

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Value-based Investment: The Rules


 

The rules here are simple. They follow common, yet clear, sense.

Warren Buffett [1], the great investor of all times says: Rule number One: Never lose money! And rule number Two: Never forget Rule number One.

Sounds easy? Not always. But keeping those tow rules in mind helps you say no to a bad investment, while cheering a big yes to a wonderful investment. The first opportunity has the potential to make you lose money. The second has the potential to make you profit.

The intelligent investor buys wonderful businesses at attractive prices, that’s how he/she adheres to the two rules above.

After the IV discussion few days ago, we can guess what an attractive price is. It’s buying a dollar worth of the stock IV for 50 cents! weird? difficult? Not really.

Everyday, stock markets all over the world, list businesses selling at such discounts. Remember, Mr. Market is not logical, it doesn’t care what the IV is. It follows its fluctuating mood. A wonderful business may go down to an attractive price. But we need to be patient and ready. We must be sure that this is the business we want to add to our portfolios.

So, what we do is the following:

  1. Make a list of businesses you like. By that I mean, you’d love to own. You’re interested in their products or services. You know the management, or the owners, and you want to be part of the game. Something in every entry on that list has attracted your attention
  2. One by one, find out the IV of each business
  3. Divide that IV by 2. That is your attractive price. You keep the stock on your radar screen till it hits that price. Why do we discount the price that much? first, it’s very possible that the business would fall to that price. Second, we all like to sleep well at night, don’t we? In order to sleep well, not worrying about your stock picks, Ben Graham introduced another term he referred to as Margin Of Safety (MOS). When you divide the intrinsic value of a stock by two, you introduce the right MOS into the process. Even if Mr. Market becomes so angry at that business and yanks its price way down, you’re still much better off than someone who bought at the IV or even higher!
  4. Decide whether the business is a wonderful business or not. Is it going to grow your money, or is it going to send you to the cleaners? You shouldn’t buy such a loser even at 10% of the IV.

But how would you know that the businesses on your list deserve your money (provided their share prices have already fallen down to 50% of the IV)?

That’s our topic for the next episode…

To be Continued…

 

The Wealth Maker

 

[1] Warren Buffett was one of Ben Graham’s devoted students. He had followed Ben’s methodology for a long time, then introduced some of his own modifications. However, the theme and style of Buffett’s investment approach still resembles that of Graham’s to a great extent. Together, they have had changed the business of value investing for good, and for the better…