Posts Tagged ‘Investment’
Reduce Stock Investment Risks
Posted by admin in Common Stock on January 17th, 2010
Investors, Drive Down Wall Street with Care!
With all the hullabaloo about speculation, an amateur investor may naturally assume that Wall Street is strictly for gamblers. This is a great pity, because probably a long-term investor can get better results in the stock market than elsewhere, provided he follows a few fairly simple rules. Also, it would help in the public understanding of how free enterprise, and especially big business, is owned, if more of our non-gambling citizens participated in owning corporate stocks.
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Let us compare stockholders with motor-vehicle drivers. Every year automobiles, trucks, and their drivers cause a fantastic number of deaths and personal injuries, not to mention property damage. The great majority of drivers are careful at least nearly all of the time! Most accidents are caused by a comparatively small number of careless and reckless drivers. A cautious citizen, knowing that he or his family may be the victims of the next accident, could conceivably protect himself by refusing to use motor highways. But the trouble is that motor vehicles save us so much time and energy, and give us so much pleasure when used sanely, that we know their good qualities far outweigh the bad. So we continue to drive, and to hope that the wild drivers will behave, while in our vicinity! In Wall Street, the speculators, in spite of the commotion they raise, are only part of the community, the same as the reckless drivers on the highways. And in contrast to the highway problem, a cautious amateur can invest in such a manner that he runs low risk of having his finances wrecked by the gambler mindset.
Traditionally, being an equity owner of business involves serious risk, sometimes complete failure. An investor, knowing the instances of bad results in small business ventures, may assume that in buying corporate stock he must expect to run somewhat comparable risks, and so he makes no attempt to learn how to reduce the danger. Apparently a great many shareholders have attitudes more or less like this. They may not want to gamble, but they don’t bother even to inquire how Wall Street investment risks could be lowered. A serious market investor, wanting to avoid gambling in stock investments, must do some serious investing thoughts. The 8 main ideas for reducing the risks are mentioned below:
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1. Avoid Investment Egotism. Realizing that there are several million stockholders in this country, admit to yourself that probably quite a lot of these people are just as smart as you are. Be satisfied with results a little better than average. Don’t let your ego runs for 50% if the market average is performing 25%.
2. Avoid Prophets, especially the positive ones. The stock market reflects events and rumors from all over the world, and no man or any group of men can be sure of what is going to happen, or when. Some prophets are paid to write for some companies. They do not always deliver genuine opinion. I would refer to their comments and analysis, but rely on your judgment of market sentiment and stock fundamentals for investing decision.
3. Don’t Borrow on Stock. Market price might drop and wipe you out. You do not want excessive interests to incur, and in the worst case, you do not want a lender’s call back that affects your key assets like home or business ownerships. Maintenance of your personal and family’s stability is a priority over stock investment.
4. Diversify your Stock Portfolio. Don’t put all of your capital into one investment, or into just one type. Put part of your savings into common stock, the other part into fixed-price items cashable at any time, to preserve the dollar value. Own stocks in a good number of companies. The larger the number, the better the chance of getting average results. And for real diversification, the companies should be in several different industries. For instance, pick a steel manufacturer, an oil refiner, an electric-power company, an electronics manufacturer, an IT firm, a department-store chain, and so on.
5. Check stock Marketability. Before you buy, make sure that you can sell or redeem it easily and promptly. Stocks of big blue-chip corporations like Microsoft, GE, Google are more liquid and hence easier to be transacted in the market.
6. Choose Skilled Management team. Find out how to pick a stock with great management level of proven competence. Warren Buffett investigates into a company’s leadership, credibility in its past performance delivery and the management’s capability to propel further growth.
7. Time your Buying and Selling. Adopt rules on timing of your buying and selling stock. The time of action is a major risk in owning stock. After you buy, maybe the price drops; and after you sell, perhaps the price rises. Maintain a standard ratio between the current market value of your stock and your reserve. Also, buy and sell stock only in small installments, never moving a large portion of your capital within a short time. By spreading installments over many months, you obtain a fair average price per share. Patience has a big factor in success of stock investments. If you could sit and wait for the correction times to buy quality stocks, you are on your way to success!
8. Review periodically. Don’t put stock away and forget it. At regular intervals, as for example after the close of each week, check back to see how well your stock has performed during the past few weeks or months in comparison to other stocks you might buy.
Can you afford Investment Risks? Drive Carefully! A reader’s reaction to these ways of reducing risk may be: “Those are nice ideas, provided a man has considerable capital, but they are impractical with only small savings. A broker’s charge is a high percentage on a small transaction, so a little investor cannot afford to make a large number of small purchases and sales. Also, the fee for first-class advice is too high for an ordinary investor to pay.” This reader’s complaint is valid, provided he insists on owning stock in the customary old way-that is, being a direct owner of stock in corporations engaged in manufacturing, mining, transportation, retailing, and so on. But the mutual funds, the open-end type of investment companies, make it quite practical for a man with only small savings to use every one of the ideas listed above for lowering the risk of owning stock. An investor learns and matures through time. I urge you to take the above 8 ideas, study deeper into them for applications. Risk avoiding tips given here need to be internalized before positive results could happen. I wish you well in your stock investment venture!
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Picking Stocks – Stock Investment
Posted by admin in Common Stock on January 13th, 2010
Stock Forecasting?
If forecasting in the stock market is dangerous, how can an investor time his buying and selling of stock? The simplest answer is to ignore the price level, to buy stock whenever he has savings to invest, and not to sell unless he must. And he must also own fixed-dollar deposits because it opens an opportunity to buy stock at lower-than-average prices and to sell at higher than average, without forecasting.
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The Investment Ratio.
Momentarily ignoring the question of timing of stock purchases, let us suppose A has $1,000 of new savings to invest on the first day of each month. With half of this he buys common stock, and the other half he puts it into a savings deposit. His savings are always divided equally between stock and cash reserve. During the first year he deposits $6,000 in the savings bank and pays $6,000 for stock, buying 120 shares, an average of 10 shares a month, at an average price of $50 a share. (For simple illustration the expense of buying and selling stock, also the income on investments, are excluded here.)
Now let us look at A’s market or redemption values. On January 1st of the second year the current value of his savings deposit, disregarding interest, is the same as his cost. But the market value per share of his stock has dropped to $40, giving his 120 shares a value of $4,800, or $1,200 less than his savings deposit. With this drop in price, his usual $500 monthly purchase would pay for 12 shares, as compared to his previous average of 10 shares a month.
At this point A decides he wants the market value of his stock to equal his savings deposit, and that he should adjust his buying to accomplish this. So on January first he makes no savings deposit but puts all of his $1,000 monthly saving into stock, thus raising the total stock value to $5,800, as compared to $6,000 in the savings deposit. With the $1,000 he buys 25 shares, 2.5 times as many as his former monthly average. Later on, when a rise in price causes his stock value to exceed his savings deposit, he offsets this by putting all or most of his new savings into the savings deposit.
Action Plan.
Now let us expand A’s action into a plan. First, an investor selects a standard ratio that he will maintain between the market value of his common stock and his cash deposit. The idea can be applied to any ratio an investor prefers.
To maintain a stable lifestyle for the family, some additional reserve says $5,000 would be needed for personal emergencies outside the investing portfolio. On starting to save $1,000 a month, he might adopt a standard ratio of $800 stock to $200 fixed-dollar deposit, but not counting $5,000 in his emergency reserve. For the first 5 months all his savings go into this special reserve, thus completing his goal for emergencies. In the sixth month, observing his standard ratio, he puts $200 into cash deposit and $800 into stock.
Having chosen a standard ratio, he must not allow current stock-market conditions to persuade him to change the ratio. If he adopts one ratio when stock prices are dropping, and changes to another ratio when prices are rising, he is slipping into forecasting. A standard ratio has no chance of success unless, after an investor adopts it, he parks his emotions outside.
Buying under a standard ratio goes this way: When an investor has new savings available, before placing them he finds out what the current values are of his total stock and his total bank deposit, not counting the emergencies reserve. Then he puts his new savings into whichever one is low in value compared to his standard ratio, as A did with his $1,000 monthly savings.
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No New Saving Situation.
When an investor has little or no new savings, he can gain the benefit of the standard-ratio plan by applying the same ratio to both selling and buying stock. Suppose B’s annual spending is exactly equal to his income, so that he has no new savings, nor is he spending any capital. His standard ratio is 1 to 1, and the current value of his capital agrees with this; 2,000 shares of stock at $10 a share total $20,000, and $20,000 in a savings deposit.
Then the value of a share drops to $8, making his total stock value $16,000. To restore his values to agreement with his standard ratio, he withdraws $2,000 from savings deposit and buys 250 shares of stock. This cuts his reserve to $18,000, and also raises his current stock value to $18,000.
Next, the value per share rises to $10, the same as the original figure, and his 2,250 shares have a current value of $22,500. Again acting to restore his values to his standard ratio, he sells 225 shares of stock for $2,250, and adds this to his savings deposit. This leaves him with 2,025 shares of stock, valued at $20,250, and $20,250 in bank deposit, his total capital being $500 larger than at the start. (For accuracy, the expense of buying and selling should be subtracted from this gain.)
Stock Value Movement and Value Gap.
A switch of old capital between stock and bank deposit should not take place until stock value has moved far enough away from the standard ratio to justify the expense and trouble of changing. In the above example, B bought stock when his stock value was 20 per cent below his reserve value. And he did not sell stock until his stock value was 25 per cent above his bank deposit value. The desired gap can be provided automatically by setting up a standard ratio for selling stock that is different from the buying ratio.
Ratio System Requires Discipline.
It helps you decide when the share price moves down, how many shares to buy into your stock, drawing from your available bank deposit. It also prompts you during the stock soaring months, how many shares to sell in order to keep to your initially set ratio.
This Standard Ratio Investing System has to be followed with discipline in order to achieve winning goals. The buy low and sell high obviously comes into fruition here as you see your combined stock and bank deposit value grows over time.
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How to Find Good Stock Investment Ideas
Posted by admin in Common Stock on January 8th, 2010
We all know that opportunity does not come knocking every day. The phrase ‘lightning never strike twice on the same place’ illustrates the point. Investors are successful because they can identify opportunity as well as the courage to act on it. This article is written to identify what constitutes a good turnaround stock investment. Here are several steps necessary in finding your next stock investment.
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Scour the 52 week-low list – This is a useful preliminary screening where you identify stocks that has fallen. While stocks that fall have their own specific problems, it is generally better to buy low rather than high.
Calculate Its Net Cash. The next step would be to gauge the strength of the company’s balance sheet. This is done by calculating the company’s net cash. Net cash is calculated by adding cash equivalents, short term investments and long-term investments in the asset column and subtract it with long-term debt. If possible, you need to find stocks that has a positive net cash valued at 10% of its market capitalization or more. All the companies in our stock portfolio has positive net cash.
Calculate Earning Per Share Going Forward. This step is critical in determining the fair value of the common stock. It is also the hardest part to master in stock investing. Generally, you predict earning per share by constructing your own pro-forma income statements where all its components are based on your prediction of the company. At the bottom of the income statement is the profit/loss figure in which you can convert to earning per share.
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Calculate Fair Value. When you obtain your earning per share figure, you can then calculate the fair value of the common stock. Fair Value differs for various investors depending on their investment objective. With current interest rate environment, I set the fair value when the company can give me a return on investment (ROI) of roughly 7.5% year after year. To give you an idea, an ROI of 1 % means that for every $ 100 you invest, you will get $ 1 back annually. For common stocks, this means that for every $ 13.4 of investment, common stock holders will get $ 1 in profit. As you may know, this translates into a fair Price Earning Ratio of 13.4.
Determine Your Entry Point. You have found the fair value of your stock. It is now the time to decide where and what price you want to buy your investment. Investors’ job is to make money. Therefore, we should not buy a stock at its fair value. We should sell at fair value or if heaven permits, at overvalued level. But, we should buy at below fair value. This depends again on your investment philosophy. If taking 10% return is fine with you, then you can buy a stock that is trading at 10% below fair value. I personally think that investors should buy a stock that is at least 30% below its fair value. This is because of the uncertainty in the earning per share figure of a common stock. As you may remember, we need to predict this earning per share at step # 3. We compensate our inability to forecast earning per share by buying our stocks 30% below fair value.
Other investors might have different ways of picking for their stock investment. But the basic idea is still the same. They want to buy lower than their expected sale price. In our case, our selling price is when a stock reaches its fair value. A lot of investors mistook fair value as the buying point. Hopefully, reading this will change your perception about that.
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Penny Stocks – an Unknown Investment Game
Posted by admin in Common Stock on January 1st, 2010
In the U.S., a penny stock is a common stock that trades for less than $5 a share and are traded over the counter (OTC) through quotation services such as the OTCBB or the Pink Sheets. Although a penny stock is said to be “thinly traded,” share volumes traded daily can be in the hundreds of millions for a sub-penny stock, thank you Wikipedia.
Investing in Penny Stocks is of course, like any stock investment, risky. Especially so for the Penny Stocks because you won’t have as much information on the company as you do with the major stocks. But with risk, can come reward. Penny Stocks are one of the few stocks that double in price overnight. And it happens alot compared to a normal stock.
Trying to Invest in Penny Stocks is a lot like playing the Lottery, unless you can find someone or something that trades in ONLY PENNY STOCKS. The world’s first Stock Picking Robot, which they have named MARL, does just that. And Marl is very good at what he has been created to do, as all robots should be.
Marl has the uncanny ability to pick stocks that will double or triple in price overnight. That my friend is a real talent that I wish that I had. But if I did, you wouldn’t be reading this now because I would be on my Island relaxing from the long day on the beach. Anyway, Marl studies thousands of stocks continuously and looks for patterns and has been programmed to know what to look for and when to look for it and he announces what to pick and when to get out at a profit.
I know this sounds unbelievable but Marl has real data to back him up and he has real MILLIONAIRE friends to vouch for his ability. Lucky for you you can lease a Marl for yourself for the low low price of only $28,000.00. Whats that you say? I know. Me neither. So that would be the end of our little story if not for the kindness and generosity of the two Geeks. You see, Geeks aren’t usually greedy. Once they get all of their high-tech toys and latest game systems and fast cars they don’t really see the point in not sharing the wealth.
Now it really is Lucky for You. They will let you subscribe to their newsletter that announces to you which stocks are going to double or more. This newsletter has been so successful it has been featured in Business Week and the Wall Street Journal. The only caveat is Marl wants you to report back to him if you really do invest in the stock so that he can continue to improve his algorithms. Not bad. The more you tell him the smarter he gets.
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Ten Common Investment Errors: Stocks, Bonds, & Management
Posted by admin in Preferred Stock on December 10th, 2009
Investment mistakes happen for a multitude of reasons, including the fact that decisions are made under conditions of uncertainty that are irresponsibly downplayed by market gurus and institutional spokespersons. Losing money on an investment may not be the result of a mistake, and not all mistakes result in monetary losses. But errors occur when judgment is unduly influenced by emotions, when the basic principles of investing are misunderstood, and when misconceptions exist about how securities react to varying economic, political, and hysterical circumstances. Avoid these ten common errors to improve your performance:
Investment decisions should be made within a clearly defined Investment Plan. Investing is a goal-orientated activity that should include considerations of time, risk-tolerance, and future income… think about where you are going before you start moving in what may be the wrong direction. A well thought out plan will not need frequent adjustments. A well-managed plan will not be susceptible to the addition of trendy, speculations.
The distinction between Asset Allocation and Diversification is often clouded. Asset Allocation is the planned division of the portfolio between Equity and Income securities. Diversification is a risk minimization strategy used to assure that the size of individual portfolio positions does not become excessive in terms of various measurements. Neither are “hedges” against anything or Market Timing devices. Neither can be done with Mutual Funds or within a single Mutual Fund. Both are handled most easily using Cost Basis analysis as defined in the Working Capital Model.
Investors become bored with their Plan too quickly, change direction too frequently, and make drastic rather than gradual adjustments. Although investing is always referred to as “long term”, it is rarely dealt with as such by investors who would be hard pressed to explain simple peak-to-peak analysis. Short-term Market Value movements are routinely compared with various un-portfolio related indices and averages to evaluate performance. There is no index that compares with your portfolio, and calendar divisions have no relationship whatever to market or interest rate cycles.
Investors tend to fall in love with securities that rise in price and forget to take profits, particularly when the company was once their employer. It’s alarming how often accounting and other professionals refuse to fix these single-issue portfolios. Aside from the love issue, this becomes an unwilling-to-pay-the-taxes problem that often brings the unrealized gain to the Schedule D as a realized loss. Diversification rules, like Mother Nature, must not be messed with.
Investors often overdose on information, causing a constant state of “analysis paralysis”. Such investors are likely to be confused and tend to become hindsightful and indecisive. Neither portends well for the portfolio. Compounding this issue is the inability to distinguish between research and sales materials… quite often the same document. A somewhat narrow focus on information that supports a logical and well-documented investment strategy will be more productive in the long run. But do avoid future predictors.
Investors are constantly in search of a short cut or gimmick that will provide instant success with minimum effort. Consequently, they initiate a feeding frenzy for every new, product and service that the Institutions produce. Their portfolios become a hodgepodge of Mutual Funds, iShares, Index Funds, Partnerships, Penny Stocks, Hedge Funds, Funds of Funds, Commodities, Options, etc. This obsession with Product underlines how Wall Street has made it impossible for financial professionals to survive without them. Remember: Consumers buy products; Investors select securities.
Investors just don’t understand the nature of Interest Rate Sensitive Securities and can’t deal appropriately with changes in Market Value… in either direction. Operationally, the income portion of a portfolio must be looked at separately from the growth portion. A simple assessment of bottom line Market Value for structural and/or directional decision-making is one of the most far-reaching errors that investors make. Fixed Income must not connote Fixed Value and most investors rarely experience the full benefit of this portion of their portfolio.
Many investors either ignore or discount the cyclical nature of the investment markets and wind up buying the most popular securities/sectors/funds at their highest ever prices. Illogically, they interpret a current trend in such areas as a new dynamic and tend to overdo their involvement. At the same time, they quickly abandon whatever their previous hot spot happened to be, not realizing that they are creating a Buy High, Sell Low cycle all their own.
Many investment errors will involve some form of unrealistic time horizon, or Apples to Oranges form of performance comparison. Somehow, somewhere, the get rich slowly path to investment success has become overgrown and abandoned. Successful portfolio development is rarely a straight up arrow and comparisons with dissimilar products, commodities, or strategies simply produce detours that speed progress away from original portfolio goals.
The “cheaper is better” mentality weakens decision making capabilities and leads investors to dangerous assumptions and short cuts that only appear to be effective. Do discount brokers seek “best execution”? Can new issue preferred stocks be purchased without cost? Is a no load fund a freebie? Is a WRAP Account individually managed? When cheap is an investor’s primary concern, what he gets will generally be worth the price.
Compounding the problems that investors have managing their investment portfolios is the sideshowesque sensationalism that the media brings to the process. Investing has become a competitive event for service providers and investors alike. This development alone will lead many of you to the self-destructive decision making errors that are described above. Investing is a personal project where individual/family goals and objectives must dictate portfolio structure, management strategy, and performance evaluation techniques. Is it difficult to manage a portfolio in an environment that encourages instant gratification, supports all forms of “uncaveated” speculation, and that rewards short term and shortsighted reports, reactions, and achievements?
Yup, it sure is.
Ten Common Investment Errors: Stocks, Bonds, & Management
Posted by admin in Preferred Stock on December 9th, 2009
Investment mistakes happen for a multitude of reasons, including the fact that decisions are made under conditions of uncertainty that are irresponsibly downplayed by market gurus and institutional spokespersons. Losing money on an investment may not be the result of a mistake, and not all mistakes result in monetary losses. But errors occur when judgment is unduly influenced by emotions, when the basic principles of investing are misunderstood, and when misconceptions exist about how securities react to varying economic, political, and hysterical circumstances. Avoid these ten common errors to improve your performance:
Investment decisions should be made within a clearly defined Investment Plan. Investing is a goal-orientated activity that should include considerations of time, risk-tolerance, and future income… think about where you are going before you start moving in what may be the wrong direction. A well thought out plan will not need frequent adjustments. A well-managed plan will not be susceptible to the addition of trendy, speculations.
The distinction between Asset Allocation and Diversification is often clouded. Asset Allocation is the planned division of the portfolio between Equity and Income securities. Diversification is a risk minimization strategy used to assure that the size of individual portfolio positions does not become excessive in terms of various measurements. Neither are “hedges” against anything or Market Timing devices. Neither can be done with Mutual Funds or within a single Mutual Fund. Both are handled most easily using Cost Basis analysis as defined in the Working Capital Model.
Investors become bored with their Plan too quickly, change direction too frequently, and make drastic rather than gradual adjustments. Although investing is always referred to as “long term”, it is rarely dealt with as such by investors who would be hard pressed to explain simple peak-to-peak analysis. Short-term Market Value movements are routinely compared with various un-portfolio related indices and averages to evaluate performance. There is no index that compares with your portfolio, and calendar divisions have no relationship whatever to market or interest rate cycles.
Investors tend to fall in love with securities that rise in price and forget to take profits, particularly when the company was once their employer. It’s alarming how often accounting and other professionals refuse to fix these single-issue portfolios. Aside from the love issue, this becomes an unwilling-to-pay-the-taxes problem that often brings the unrealized gain to the Schedule D as a realized loss. Diversification rules, like Mother Nature, must not be messed with.
Investors often overdose on information, causing a constant state of “analysis paralysis”. Such investors are likely to be confused and tend to become hindsightful and indecisive. Neither portends well for the portfolio. Compounding this issue is the inability to distinguish between research and sales materials… quite often the same document. A somewhat narrow focus on information that supports a logical and well-documented investment strategy will be more productive in the long run. But do avoid future predictors.
Investors are constantly in search of a short cut or gimmick that will provide instant success with minimum effort. Consequently, they initiate a feeding frenzy for every new, product and service that the Institutions produce. Their portfolios become a hodgepodge of Mutual Funds, iShares, Index Funds, Partnerships, Penny Stocks, Hedge Funds, Funds of Funds, Commodities, Options, etc. This obsession with Product underlines how Wall Street has made it impossible for financial professionals to survive without them. Remember: Consumers buy products; Investors select securities.
Investors just don’t understand the nature of Interest Rate Sensitive Securities and can’t deal appropriately with changes in Market Value… in either direction. Operationally, the income portion of a portfolio must be looked at separately from the growth portion. A simple assessment of bottom line Market Value for structural and/or directional decision-making is one of the most far-reaching errors that investors make. Fixed Income must not connote Fixed Value and most investors rarely experience the full benefit of this portion of their portfolio.
Many investors either ignore or discount the cyclical nature of the investment markets and wind up buying the most popular securities/sectors/funds at their highest ever prices. Illogically, they interpret a current trend in such areas as a new dynamic and tend to overdo their involvement. At the same time, they quickly abandon whatever their previous hot spot happened to be, not realizing that they are creating a Buy High, Sell Low cycle all their own.
Many investment errors will involve some form of unrealistic time horizon, or Apples to Oranges form of performance comparison. Somehow, somewhere, the get rich slowly path to investment success has become overgrown and abandoned. Successful portfolio development is rarely a straight up arrow and comparisons with dissimilar products, commodities, or strategies simply produce detours that speed progress away from original portfolio goals.
The “cheaper is better” mentality weakens decision making capabilities and leads investors to dangerous assumptions and short cuts that only appear to be effective. Do discount brokers seek “best execution”? Can new issue preferred stocks be purchased without cost? Is a no load fund a freebie? Is a WRAP Account individually managed? When cheap is an investor’s primary concern, what he gets will generally be worth the price.
Compounding the problems that investors have managing their investment portfolios is the sideshowesque sensationalism that the media brings to the process. Investing has become a competitive event for service providers and investors alike. This development alone will lead many of you to the self-destructive decision making errors that are described above. Investing is a personal project where individual/family goals and objectives must dictate portfolio structure, management strategy, and performance evaluation techniques. Is it difficult to manage a portfolio in an environment that encourages instant gratification, supports all forms of “uncaveated” speculation, and that rewards short term and shortsighted reports, reactions, and achievements?
Yup, it sure is.
Stock and Bond Trading as a Conservative Investment Strategy
Posted by admin in Preferred Stock on December 3rd, 2009
It’s likely that either curiosity or skepticism led you to this article, and I would agree that, for most individual investors, trading is approached in a totally speculative manner. Stock trading, in its more popular forms (Day Trading, Swing Trading, Penny Stock Speculating, etc.) includes none of the elements that a conservative investment strategy would have at its very core: Little if any attention is given to the fundamental Quality of the equities selected. Any Diversification that exists in the portfolio is determined by chance alone and is, at best, a transient result of the selection guesswork. No attempt whatever is made to develop an increasing and dependable stream of Income. But stock trading by individual investors doesn’t deserve quite as bad a “rep” as it has earned. After all, its very foundation is Profit Taking, probably the most important (and possibly the most often neglected) of the activities required for successful investment portfolio management. Unfortunately for most non-professional equity traders, loss taking is a more common occurrence.
Bond, (and other Income Security) trading is generally avoided by most non-professional traders. Obviously, it takes more investment capital to establish positions in Corporate and Municipal Bonds, Real Estate, or Government Securities than it does in Equities, and the volatility that traders thrive upon is just not a standard feature of the mundane world of debt securities. Surprisingly, most investment advisors and stock brokers have not discovered that there is a more exciting approach to Income Investing that is actually safer for investors and less inflexible in the face of changing interest rate expectation scenarios. Certainly, Wall Street financial institutions pressure their representatives to push individual new issues and/or investment products, but I think that the Market Value fixation that stretches from Wall Street to Main Street is the real culprit. Income securities need to be “valued” for long-term income growth and traded with great pleasure… albeit much less frequently.
Consequently, most trading is done in an Equity only environment that, by its very nature, is too speculative for most mature (in whatever sense you choose) investors. But this is not the way it needs to be. Since stock prices are likely to remain volatile in the short run and cyclical in the long run, there will always be opportunities for profit taking. [Note that it is the combination of volatility, market accessibility, universal equity ownership, and confiscatory taxation that have made "Buy 'n Hold" a tar pit Investment strategy.] Similarly, there are no rules against taking advantage of the cyclical nature of interest rate sensitive security prices. Trading is the world’s oldest form of commercial activity, and it is unfortunate that it is treated with such disrespect by our dysfunctional tax code. It is even more unfortunate that it is looked at askance by client attorneys and brokerage firm compliance officers… masters of hindsight that they are.
Trading does not have to be done quickly to be productive, and it doesn’t have to focus on higher risk securities to be profitable. And perhaps most importantly, it doesn’t have to avoid the interest rate sensitive income securities that are so important to the long-term success of any true investment portfolio. No matter how beaten up a speculative day trader becomes, whatever profit taking experience there has been is invaluable. Once a trader/speculator is weaned off the gambling mentality that brought him to the “shock market” in the first place, he can apply his trading skills to investing and to portfolio management. The transition from trader/speculator to trader/investor requires some education… education that cannot be obtained from product salespersons.
Step One is to gain an appreciation of the power of Asset Allocation using the principles of The Working Capital Model. Asset Allocation is the process of dividing the portfolio into two conceptual “buckets”. The first of these will contain Equity Securities, whose primary purpose is to produce growth in the form of Realized Capital Gains. The other bucket will contain various securities whose primary purpose is to produce some form of regular income… dividends, interest, rents, royalties, etc. The percentage allocated to each is a function of a short list of personal facts, concerns, goals, and objectives. The cost basis of the securities, absolutely not their constantly changing Market Values, must be used in all Asset Allocation calculations. Asset Allocation is a critical portfolio planning exercise that is: based on the purpose of the securities to be purchased, long term in nature, and never “rebalanced’ or altered due either to current market circumstances, hedging, or some form of market timing (which, of course, is impossible).
Market Values are used in the selection process that identifies trading candidates that will fill the buckets… cash from all income sources, by the way, is always “destined” for one bucket or the other, and may be held unused if no proper candidates exist. Selecting potential Equities must first be “fundamental”, then “technical”… i.e. based on the Quality of the security first, and the price second. My experience is that higher quality companies purchased at a 20% or more discount from the 52-week high, with a profit target of approximately 10% (realized as quickly as possible) is a very manageable approach. The proceeds find their way back into the “smart cash” pot for Asset Allocation according to formula. There will be times when “smart cash” grows quickly while the list of new trading candidates shrinks, but when trading candidates are all over the place, “smart cash” is replenished with a portion of every income dollar produced by both fully invested buckets! Thus, insistence upon some form of income from all securities owned makes enormous sense!
But what about trading the Income Bucket securities? Enter the Closed End Income Fund, in the form of a common stock, and in a surprising variety of income producing specialties ranging from Preferred Stocks to Oil Royalties, Treasury Securities to Municipal Bonds, and REITs to Mortgage Income. No more worries about liquidity and hidden markups. No more cash flow positioning or laddering of maturities. And best of all, no more calls of your highest yielding paper when interest rates fall. Instead, you are taking capital gains, compounding your yield, and paying your dues to the Equity Bucket. And when interest rates move back up… you’ll have the luxury of reducing your cost basis by adding additional shares. Of course its magic… that’s what we do here on Wall Street!
Stock Market Investment
Posted by admin in Preferred Stock on December 1st, 2009
Buying and selling of shares happen in Stock market. A share of stock is the smallest unit of ownership in a company. If you own a share of a company’s stock, you are a part owner of the company.
If the company loses a lawsuit and must pay a huge judgment, the worse that can happen is your stock becomes worthless. The creditors can’t come after your personal assets.
There are two types of stock: Common stock , Preferred stock . Most of the stock held by individuals is common stock . NYSE, NSE, BSE etc..are few places where trading of stock happens.
Why Investing In Stock Market?
Investing is the proactive use of your money to make more money or, to say it another way, it is your money working for you. Investing is different from saving.
Saving is a passive activity, even though it uses the same principle of compounding. Saving is more focused on safety of principal (the amount you start out with) and less concerned with return.
Investing in stocks means you are partial owner of a business. Whenever management distributes profit as dividend you will get it. This is called dividend income – a best strategy for passive income. This is best suited for retirement income planning.
As per history, if you compare Return of Investment of stock market to that of high yield bond investment i.e. “junk” in every decade for last 100 years, investing in stock market outperforms others 8 out of 10 times by a fair margin. If your investment horizon is 20 years, statistically return of your stock portfolio will at least beat inflation.
How you Should Invest in Share Market?
Budgeting eats your time. Instead of following complex and boring expense tracking, you simply follow the financial strategies of pay your self first. You should investment at least 30% of your savings in blue chip companies and 20% to high dividend yielding stocks. On Line Investing in stock market is the best way to invest.
How to do Portfolio Management in stock Market?
You should carefully look around your daily life. You will notice what you use daily and what other people are using. This observation will give you fair amount knowledge to those products and companies. Try to understand business model of those companies. Gather more knowledge on those companies.
Understand company’s balance sheet & Profit- loss statement. Look for Profitability in business, cash in hand, auditor’s report, director report of the company. Try to understand the business model of the company and management team. Check return on asset. price/earning, return on equity and credit management of the company for last 5 years. Check analyst report on forward p/e.
If all these are satisfactory, invest in the company. Like these you need to find 6 to 9 companies from 5 sectors like Energy, Oil and Gas, FMCG, Service Sector, Biotech. Pharmaceutical, Bank, entertainment, IT industry and Insurance.
Your investment philosophy is to own a small part of the company for 20 years. This ownership mentality will really give you money in the long run.
In the high bull market do partial profit book regularly. If market sentiment is strong bull, buy option. If market sentiment is strong bear buy put option. Use 5% of your money in option trading. Option trading basically used to hedge your asset and also make some speculative gain.
In strong bear market, your blue chip companies can generate good income if you use covered call option regularly. It’s not difficult to get 40% p.a. ROI by writing Covered Call Option.
Money Management tricks for you to ride Bear – Bull of Stock Market
1. Never investment more than 50% of your savings in stock market
2. It is necessary to invest in speculative investment for big money but never invest more than 10% of your portfolio.
3. Get out of loss making investment. It will protect you from bigger loss and the loss you can offset against your profit in your tax return.
4. Do not make buy decision out of greed.
5. Do not take sell decision under panic
6. Understand the market and where you investment with clear objective why you are investing.