School of Hard Knocks 02 (Jan 10 - Jan 13)

[winston]

31 Years of Investing Wisdom in 5 Minutes
Author: Zacks Investment Research

Let’s flash back 31 years ago to a brokerage office in Merrillville, Indiana.

There you will find a young Steve Reitmeister doing a summer job for his father. Sure I was trying to earn extra spending money. But, more importantly, I was a budding young capitalist eager to learn about investing in stocks. So who better to learn from than my father, a seasoned Certified Financial Planner?

So dad pulls out the (seemingly 50 pound) hard copy Value Line Investment Survey binder. He reviews the basics with me. Such as understanding that owning stocks is about taking an ownership stake in the company.

And the healthier the company and the more earnings it generates, the higher the stock price will go. He then leaves me for a while to do some research on my own.

I was immediately drawn to the valuation section for each stock. In my mind it made no sense to buy a stock that they only expected to go up 30-50% when some had the potential to go up 100, 200 even 300%.

My dad tried to explain to me that quite often they are discounted for a reason. Many of them were troubled companies producing poor earnings results and suffering from declining stock prices. This made them risky investments and perhaps should be avoided.

No matter how hard he tried I could not be swayed. I wanted the chance at the higher potential return. Right then and there, it was clear I was a value investor.

The story since then is one of some glorious successes (buying Amazon at $8.65 and Priceline at $14.62 after the Internet bubble burst). But also a story of some shocking failures (watching shares of @Home and CMGI go from bad to non-existent).

So the purpose of this article is to share 3 key lessons learned over these 31 years with other investors who enjoy the thrill of profiting from great value stocks.

[winston]

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Lesson 1: Why Pursue Value Stocks?

There are many ways to invest successfully. Yet the appeal of value stocks is broad based. That's because no one will pat you on the back for buying an obviously good company like McDonalds at $80 and selling it for $100.

The joy of the value story is that it's often a discarded or unknown stock that no one else wants to touch. And when it goes up you get great satisfaction in the 'I told you so' moment when you share the story with others (Many of whom didn't take your advice in the first place. Shame on them

But more importantly, there is great satisfaction in the outsized returns that occur when you guess right on a previously neglected stock. And that is the best reason of all to actively seek out these value candidates.

More...

[winston]

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Lesson 2: Wait for the Proof

The one thing that all my value stock failures have in common is that I got in too early. Meaning I was buying in on the way down, hoping and praying that a turnaround would take place.

Too often that turnaround did not materialize and my hard earned money was washed down the drain.

So the key is to have the patience for the company to show you undeniable proof that an upturn in business performance is occurring.

The clearest form of proof is when the company delivers a big positive earnings surprise that Wall Street analysts fawn over with greatly increased earnings estimates for the future.

Yes it's true that the stock will jump on that news and you will not grab the stock 'exactly' at the bottom. However, your entry point will be plenty low in the grand scheme of things.

Plus you have now GREATLY increased your odds of being in a winning and timely trade.

[winston]

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Lesson 3: Growth Stocks Can Be Value Stocks Too

You are bound to discover that value stocks exist in every industry with companies big and small. So your choices are abundant.

However, the best returns will come from buying the stocks that have the highest growth rates.

That is because once the turnaround takes place the PE will start to rise from abnormally low levels.

The higher the growth rate of the firm the more the multiple will expand and the greater your final return.

My two previous success stories of Priceline and Amazon prove out my point. These stocks are up 48X and 21X, respectively, since I bought them eleven years ago. That's because they are still experiencing the phenomenal growth associated with being Internet ecommerce leaders.

However, we all know I would not have fared as well if I invested in more pedestrian stocks like a phone company or bug exterminator.

Long story short...focus on growth stocks for the best value investing profits.


http://finance.yahoo.com/news/31-years- ... 39935.html

[winston]

Warren Sapp: Don’t Be a “Sapp” With Your Finances by Alexander Green

It’s hard to feel sorry for Warren Sapp…

As a defensive tackle at the University of Miami, he was a consensus All-American who won multiple awards. He was an NFL first-round draft pick in 1995. And during his professional career, he earned seven trips to the Pro Bowl and a Super Bowl ring in 2002.

These accomplishments brought financial rewards, as well. Sapp reportedly grossed $60 million playing football. And today he earns nearly $116,000 a month as a sports broadcaster for the NFL network. That’s why some were taken aback at his recent bankruptcy filing.

Yet bankruptcy documents show Sapp had a propensity to make poor investments – including an 18,000-square-foot Florida mansion – and spend liberally, including more than 240 pairs of athletic shoes (still in the boxes).

His situation is hardly unique, of course. Baltimore Colts quarterback Johnny Unitas filed for bankruptcy protection in 1991. In more recent years, so did NFL veteran quarterback Mark Brunell and New Orleans Saints running back Deuce McAllister.

Football players are hardly alone. Other celebrity bankruptcies include Willie Nelson, Mike Tyson, MC Hammer, Toni Braxton, Cyndi Lauper, Tom Petty, Kim Basinger, and Ed McMahon.

How could all these famous people – with all those millions – find themselves financially upside down, owing more than they own? The two culprits are almost always the same: overspending and poor investments. They can strike anyone, regardless of net worth… unless you take these basic precautions.

Let’s cover overspending first. Most people imagine that if they just had more money they could save a lot. But expenses have a strong propensity to rise to meet the income available. Today you’re probably earning much more than you did 10 or 20 years ago. But your expenses have probably risen faster than inflation and perhaps faster than your income.

Thomas Stanley, author of The Millionaire Next Door, has studied this phenomenon intensively. He found that the overwhelming majority of successful, high-net-worth individuals follow the same basic formula. They maximize their income, minimize their outgo, and religiously save and invest the difference.

No matter how high your income, it’s still possible – as Warren Sapp and others discovered – to overspend. If you can avoid their overconfidence or lack of self-control, you have won the primary battle.

Still, one major hurdle remains: managing your investments sensibly. This is a topic we discuss five days a week here at Investment U.

But I can boil the fundamentals down to just three basic rules:
1. Diversify – Not just to reduce your risk but to maximize your chance of holding big winners.
2. Stick to quality – Buy high-quality stocks and bonds and forget about penny stocks, options and futures.
3. Gird yourself to take the long-term view – To avoid abandoning your strategy when the market gets bumpy, as it always does from time to time.

Can it really be this simple? Yes and no. You’ll notice that successful dieting is equally straightforward. Every day of your life, you either take in more calories than you burn or burn more calories than you take in. (Glance in the direction of your belt buckle to see your running total.)

Investing and dieting are not rocket science. But sticking to core principles – at the dinner table or in the market – is not always easy.

However, the rewards are great if you do. Because no one wants to be a “Sapp.”

http://www.investmentu.com/2012/April/w ... uptcy.html

[winston]

TOL:-

It's probably acceptable if you lose money due to a Market Risk.

However, it's not acceptable if you lose money due to your Ignorance.

[winston]

WhoTF Is Giving Howard Stern Financial Advice?
Author: Barry Ritholtz

Howard Stern may have more dough than you, but his rant is instructive in what most individuals — not just HNW, but anyone — needs to learn to protect themselves from the wolves of Wall Street.

1. Societies, Economies and Markets Move in Long Cycles: Investors have to understand long cycles — and that half of them are not good:

Think about the post WW2 era — GI Bill sent millions of returning soldiers to school, the building out of suburbia, rise of the car culture, construction interstate highway system, civilian air service, broad electronics development — its no coincidence that 1946-66 was a long term secular bull market (good) for stocks.

This investors paradise was followed by an ugly period: 1966-82 had VietNam, Watergate, Oil Embargo, Inflation, etc. In 1966 the Dow was 1000 and in 1982 it was still 1000 — 16 years, no gains (not good).

The next good run was the 1982-2000 period that saw the rise of the PC, chips, software, internet, mobile, networks, storage etc. Another golden era for investing. (good). Do I need to explain 2000-2012 and counting? (not good).

If you don’t understand these cycles, you will not be a successful investor.


2. Long term doesn’t matter if you are in the middle of a bear market: Like we are today. I cannot tell you when it will end, but history suggests sometime before the next 5 years are over.

During these secular bear markets, your job is to reduce risk, carry more cash and bonds, and wait for better times.

Tactical adjustments are what get you through these periods — not sitting fully invested in equities and getting shellacked. (See number 1 above)


3. Ignore pretty charts in Marketing Materials: Whatever you are shown in glossy brochures is nonsense sales bullshit.

Never make any decision based on the old couple walking down the path, or a picture of boats. Its junk advertising — and amazingly, it is an effective way to capture the suckers.

Howard called it “bullshit” in the audio — and it still ensnared him. That’s how effective it is.


5. Buy & Hold is for Secular Bull, Not Bear Markets. Buy & Hold is folly during secular bear markets like 1966-82 or 2000-to-today. Simply stated, it is against human nature and therefor will not work.

People get tired, annoyed and angry. Human nature is such that no one wants to lose money for 15 years. This ultimately leads to frustration and bad decision making.

Secular bear markets like the one we are in right now is not when you want to work with a buy & hold advisor (like Howard’s).


6. Caution When Too Much Wealth is Tied Up in One Stock: You would think that this lesson would have been learned after Worldcom, Enron, Lucent, Lehman Brothers and soon Facebook, but apparently not.

Anyone with a substantial amount of their personal net worth tied up in a single company needs to diversify that holding as soon as possible.

We can argue if 40% or 75% is too much, but the short answer is if you are even debating it, you need to diversify your risk away from that one holding. PERIOD.


7. Build a Bond Ladder 7-15 Years Out: Ladders are bond portfolios of differing maturities (rungs) designed to capitalize on falling or rising yields. Higher yields means you build a longer ladder (15-20 years); low rates like today means you keep it shorter duration.


8. Rising Bond Prices = Lock in Yield: This has been a 30 year bull market for bonds. Anyone who is HNW should have been advised to ladder a portfolio decades ago, up to as recently as 2005-06.


http://www.ritholtz.com/blog/2012/06/wh ... ard-stern/

[winston]

The root of our investment mistakes is often extrapolation and in disregarding the possibility that events might have changed, are different than suggested by the markets or have already been discounted in the marketplace.

[winston]

TOL:-

Do u have the feeling that no matter how much u read, no matter how much time u spend on the market, it's just not enough ?

New stuff are spinging up every day and there's no way that u would be able to anticipate those things ...

[winston]

"Learn from others who are also learning. This gives you exponential learning results."

- Alwyn Cosgrove