Investment Partnership™


The world of investing is full of variables, risks, challenges, surprises, and of course, rewards.

Most people delve into that ocean, preoccupied by the lure of quick riches, overnight fortunes. They turn a blind eye to the other side of the coin; the risks, the great potential of losing one’s money, or part of it.

That’s why, the first rule in mindful investing is: Never Lose Money (Ben Graham). In other words: Preserve your capital, take reasonable, calculated risks.

One way to tackle this paradox is to work with an expert. That won’t be a money or fund manager. It’s a partner, who would go with you into that ocean, and help you reach the island of safety, and prosperity.

An “Investment Partnership™” is not a very common phenomenon. Actually, it’s rather rare, if not unique in the investment world. That’s why I consider it a new and innovative concept. The way it’s presented here is covered by the copyright provisions of this blog.

You and the expert set some terms and conditions. But the key idea is this: The client provides the investing money (principal), and the expert provides the time, the work, and the expertise. They are partners in both profit and loss on a 50/50 basis.

If they made profits, it got divided between them. On the other hand, if they lost, the client would lose his/her money (or part of it), and the expert would lose his time and effort. Most often, they would make profits, since the investment activity is based on careful strategies that take into account the potential risks, and provide safeguards to minimize them as much as possible. Preserving the client’s capital is the highest priority of the partnership.

The big and clear advantage to the client would be peace of mind, and freedom from the complexity and details of the investing process. Additionally, he or she would enjoy high profits without spending any time or effort.

The expert, on the other hand, who brings his expertise, time, and energy into the activity, doesn’t work as an employee. Rather, he is a partner. He only gets paid if he makes a profit. This gives him the right motivation and inspiration to choose the best possible investments. That’s how he generates his income, and at the same time, maintains and improves his credibility as a trustworthy and reliable investment professional.

Happy Investing to All…

The Wealth Maker

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

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…