June 2007

xin_2601021910406872500851.jpgWhen you buy a company’s stock, you are investing in the future growth of the company. Yet, the stock’s price may float up or down based on some broad market or economic factors that may only indirectly effect the company.

For example, the possibility (not certainty) of increased inflation will send the overall market into a slump, especially if the Federal Reserve Board expresses its concern. That concern is seen as translating into higher interest rates to head off any rise in inflation before it gets started. Increased interest rates are bad news for most businesses.

Likewise, pronouncements that the economy is expected to grow at a robust rate is usually a bad sign for the market because it means they will probably be less inclined to cut interest rates – to avoid overheating the economy and fueling inflation.

The trick for investors is understanding which market-moving factors may also directly affect the company and its stock.

Major demographic changes may have a much more permanent effect on a company than temporary fluctuations in interest rates, for example. Aging baby boomers will create opportunities for some companies and problems for others. Knowing the difference will mean investment mistakes avoided.

How do you know what is a major problem or opportunity for a company you own or are considering buying?The answer is to do your homework Study the company, its products and markets. The company Web site (if it doesn’t have a Web site, there’s a big problem) and annual report.

While you won’t find proprietary marketing data in these public forums, you can get a sense of whether the management has a sense of what is important to the future growth of the company.

And it is the future growth of the company that will generate the earnings to benefit shareholders.

freedomloan.jpgMost working people dream of this thing called financial freedom. It certainly sounds like something we’d all want. But have you ever stopped to really think about what it means? It can mean different things to different people, so before you spend time looking for it, maybe it’s worthwhile to examine what the concept really means to you. After all, it’s hard to find something if you don’t know exactly what it is!

Time and money are inversely related. This means that in most cases, one can be traded for the other. And if you think of how that applies both to your everyday life and to the way business is conducted, it’s true. For example, you can spend your own time cleaning your house or mowing your lawn, or pay someone to do it for you, and free up the time for yourself. You can spend time researching on your own, or you can pay some money for someone else’s specialized knowledge in that same field.

With that idea in mind, financial freedom may be defined broadly as reaching the point where you no longer have to trade your time for money in order to provide for what you want in life. There are two key phrases in that idea – “no longer have to trade” and “what you want”. These are what you have to define for yourself, in order to determine what financial freedom means to you.

To many, financial freedom means just not having to work for a living. They dream of stepping off the treadmill of going to work everyday to pay the bills. Some may want to escape the stresses of the job itself, unpleasant working conditions, commuting, boredom, and so on. Others may just value more time to be with their families and pursue their own interests. For most people, it’s some combination of those.

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inf017.jpgHere’s an old story that some of us have heard when we were children. A group of blind men want to know what an elephant is like and are taken to an elephant to figure its shape out for themselves. Each one touches a different part and thus gets a completely different idea of what the elephant is like. One touches its side and thinks the elephant is like a wall. Another one touches the trunk and thinks it to be like a snake. The one who touches the tail thinks that the elephant to be like a rope and the ears were like a fan and the tusks like spears and the legs like tree trunks and so on and so forth. The moral of the story is obvious. In some versions of this story the blind men become violent over their differences and beat each other up. The story is used to indicate that reality may be viewed differently depending upon one’s perspective. The problem, of course, is not the blind men are all wrong but they are all correct, but only partially so.

When the stock markets have fall sharply, losing about 5 per cent over five trading days. Newspapers and on TV channels, there are any number of blind men offering opinions about the elephant in the stock markets. Here are some of the more popular reasons. Worried about inflation and under pressure, the government will reduce duties on X and/or forbid the exports of Y and/or ban futures trading in Z and/or increase capital gains tax (either short-term or long-term) and/or an increase in the Securities Trading Tax and lots more.

All of it sounds like reasonable fears and any one could come true. In recent months, generally when I talked to big investors they seemed to be hunting for reasons to justify the rise in stocks. Now, they are desperately hunting for reasons to prove that stocks are going to fall. At the end of the day, the fact remains that after years of booming stock prices, everyone is nervous and knows that there will some kind of a correction and would like it be over and done with as quickly as possible.
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01317-0med.jpgEvery investor has several components that combine to make them successful. The degree of success depends on how well you can implement the components and how well your strategy works.

The method investors have for selecting shares that they want in their portfolio is arguably one of the most important areas of being a successful investor.

The next vital component is the trading plan. This doesn’t need to be overly complex you just need to know what you will do if the share price goes up, down or sideways. If you can cover these three things then you have a contingency for anything the share price can throw at you. And more importantly you will prevent yourself from reacting to market fluctuations.

The trading plan should also incorporate an overall strategy for the share that you have selected and explain the reasoning behind why you’re doing what you’re doing ie why you decided to place your order level at this particular point.

You will need a risk management strategy and to be successful in the long term you will need to implement the strategy. The number of times I’ve seen people unwilling to sell when the share reaches a risk price is a little bit scary.

The above three things are great to have in place but don’t forget that you must be disciplined in implementing them otherwise you’re setting yourself up for failure.

After identifying these strategic factors you should consider how much you are willing to outlay on each share. It is important to try and spend the same amount on each share ie $5000 across a portfolio of 10 shares in order to maintain a balanced portfolio. In other words don’t put all your eggs in one basket.

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whatgoes_budget_filter21.gifA young couple came to me several years ago. At the time, they had a good combined annual income of over $100,000 yet owed $20,000 to credit cards, and they were adding debt at the rate of almost $2,000 per month. Despite their high income, they were spending considerably more than they were earning.

When we reviewed their situation, I discovered that a lawn service visited their home four times a month, at $85 per visit. I told them to cancel the service, and he replied, “But our lawn will look terrible if we do that! We must keep this expense.”

I also noticed that they subscribed to cable TV, including every premium channel — a monthly cost of $97! I told them to cancel cable. Monica gasped. “There will be nothing for us to watch! We can’t cancel cable!”

I’m sure you’ll agree with me that a lawn service and cable TV are optional, yet neither understood this. Both these expenses are optional, just as — pardon me for shocking you — almost your expenses are optional.

Health club membership? Optional. Entertainment? Optional. Telephone? Optional. Clothes? Most of it — or more accurately, the total money you spend on it — is optional.
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hsc1928l1.jpgGreed can be defined as an excessive desire to acquire or possess more than what one needs or deserves, especially with respect to material wealth. Yes, that sounds just about right, certainly relates to stock market investing now doesn’t it?

Keeping Greed out of Your Investing

We all have our own investment strategies, I’m not here to tell you what works best and what sucks wind, but one thing I do know, if your investing strategy involves greed you will probably ‘lose’ more often than you ‘win’. It’s certainly not always an easy thing, to keep greed out of your investments, especially when you’re in a stock that’s on a nice uphill ride. Any prudent investment approach should contain some form of an exit strategy, simply put how you plan on getting out of the stock you hold.

This would be one way to avoid greed, have a set price at which you intend on selling the stock, walk away with the money in your pocket and move on to the next investment. Not always as easy as it sounds though is it? Prior to buying into a stock you should have some sort of idea at what price you would like to sell it, hopefully you don’t have to hold it for 10 years in order for it to reach that price. Sometimes you buy into it and if you timed it just right, you start to see the price go up sooner rather than later. When you start counting the dollars you are making seems to be when the exit strategy flies out the window and greed comes creeping in. I mean, gee, who knew when you bought it that the stock was going to rise so high, so fast, why sell now when you could make so much more money? It would be downright silly to get out now when you could clearly make much more cash if you held on to it. Somewhere deep within your being, there should be something rejecting this argument, and reminding you of your exit strategy and how you’ve gone past the price you told yourself you were going to be out of that stock and onto the next one.

Take your profits when you can
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stock_trading_250×251.jpgIt is time to sell a stock when the points in your buy case have turned negative, but beware of false signals that can trick you into selling at the wrong time.

This written case is your reason for owning the stock. The only reason for selling the stock is if something changes the buy case. Here are some events that can fool you into selling, but may not mean your buy case has been compromised:

Falling stock price – A drop in stock price is not necessarily a reason to sell (it may, in fact be a signal to buy). Remember that you are investing in a company and its stock may not always reflect its true value.

Re-check the company’s fundamentals and if they haven’t changed, the stock is probably reacting to market conditions that are affecting all stocks or all stocks in the same sector.

If the company remains a strong buy, it may be time to add more to your portfolio.

Stock price rises – Oddly enough, investors sometimes can’t stand a good thing and sell after the stock has gone up. Stocks prices don’t necessarily operate by the laws of gravity. Just because they have gone up doesn’t mean they are doomed to come down. Some stocks keep going up for long periods, which is the idea.

Bad news and rumors – Bad news about a stock/company can send a stock down. It might be a story about the company missing earnings or something more serious like a government investigation.

Before an emotional “Oh my gosh” reaction, get facts, not rumors to assess the full impact of the news. Is this a bump in the road or a major wreck? Unless it is a serious problem, most bad news goes away quickly unless it involves criminal proceedings or a fundamental change in the company’s core business. Hang over bumps. If it’s truly a wreck, it is probably time to cut your losses as quickly as possible.

Knowing when not to sell is as important as knowing when to sell.

Don’t Abandon your Buy Case without a Good Reason.

parachute1.jpgSome days back I got an email from a young man who recently inherited a good amount of money, it is certainly enough for this teenager to finance as good an education that he wants for himself. He wanted to talk to me to get investment advice on how best to invest and preserve the neat little nest egg.

The conversation I had with him reinforced my feeling that the cult of the expert – the firm belief in an outsider who knows everything – is distorting how people (specially intelligent people) approach investment. There’s a strong idea around that there are some universally good investments, and that there are experts who know what these investments are, and all one has to do is to ask an expert and he or she will tell you and that is that.

This would be very convenient but it’s unfortunately not true. The question whose answer we all need is not, Which is a good investment but Which is a good investment for me. This seems like a trivial and self-evident point but is somehow only paid lip service to. There are no universally good investments. The most important part of that question is ‘for me’.

But what is it about you that decide which investment is good and which is not? Conventionally, the big role is played by something called your risk tolerance and based on that, a financial planner can work out what kind of investments you need. Most people’s risk tolerance is actually zero, and the more inexperienced you are as an investor, the more likely that any kind of loss will make you run. The reason is that what the conventional financial planning measures is your financial risk tolerance whereas what actually matters is your psychological risk tolerance. You could be financially very stable and yet be completely unable to tolerate the idea of any investment losing you money.

The solution is to adopt what we called time-based asset allocation and continuous re balancing. The idea is that you should try and divide up your investments into portfolios that are meant for different time-periods and put them in investments with different levels of risk based on how much time is it before you need the invested money. Moreover, this allocation must be rebalanced at least once a year. This way, you will end up booking profits and buying investments at low prices automatically.

One habit which leads most of us into panic is the habit of considering our investments on an individual basis rather than as a portfolio. There’s a little point in investing some money in equity and some in debt if you keep expecting both to always make money independently. It’s a portfolio, and the debt part is there to provide some stability when the equity is tanking.

By the way, while there may not be any universally good investments, the reverse is not true. There are universally bad investments. If you ask me for a list of investments that no one should ever make, I could come up with a fairly long one without much of a problem.

I wonder if there’s a lesson in that.

ist2_2490683_finding_success_compass_points_the_way.jpgThere are risks involved in all investing. The skill of investing is knowing which risks are worth taking, and which should be avoided. Finding and knowing which risks to take is the essence of good investing and the whole reason that investments can pay such a high reward. It cannot be done without careful research and analysis. You must give yourself every chance to make the right decision. Investing without carrying out sufficient research is like playing roulette. You are giving yourself virtually no chance of covering your investments and avoiding disaster.

There are certain steps you will have to take in order to give yourself a fighting chance of being a successful investor. If you are considering investing in company shares on the stock market, then you should be aware that all publicly traded companies must provide investors and potential investors with access to company financial data. This data is generally available from the company so if you are considering buying into a company, then get access to this information and satisfy yourself that the company is in a good financial state before parting with any money.

If you do research a company, and are taking a look at its financial position, then you should look back two to three years into the past. You probably don’t need to go back further than this but if you go back less, there may be important trends in the finances that you will miss. Take special note of the quarterly statements and the revenue and earnings per share.

You should be trying to identify trends in certain figures. While these are no guarantee of what might happen in the future it is undeniable that an upward trend in revenue and profits will be a positive sign to look out for.

Once you have satisfied yourself with the basic financials of the company and that the prospects of making good profits into the future are favorable you will be in a position to consider putting money into the share.

There is an ongoing debate over whether it’s preferable to buy shares that will increase in value or shares that pay good dividends and the answer to this question must always lie with the individual investor.

What must be remembered however is that there is little point in chasing dividends? This refers to the practice of buying a share just before a dividend is expected to be announced. The price of the share will already have taken the dividend into account so you will be paying for it in any case.

trading.jpgAre you thinking of entering the fast-paced world of day trading? Arm yourselves with the information from this fact sheet on day trading.

What is day trading? Day trading is an investment tactic that does online daily stock trading with a relatively short investment. Those who do day trading usually buy and sell securities during the same market day and, as a general rule, do not hold stocks overnight. Many day traders make dozens of trades every market day hoping to capture profits that arise from small intraday price fluctuations.

How is day trading different from swing trading? Day trading relatively holds the stock for only the day. After the stock market closes, a day trader has no stock in his hands. Swing trading holds a stock for at least a few days, waiting out for the best price before dumping it back to the market. Day trading is much more stressful and requires guts and a keen business sense. Once you get good at day trading, you can earn up to $50,000 from your initial investment.

How much capital would you need for day trading? You need an investment equivalent to buy 1000 stocks. That is roughly around $20,000. Because the chances are small that you will find a marketable stock with a price of under $20, this is enough to get your day trading underway. However, you must remember that this is a 100% risk capital so do not worry too much if you lose this amount very early.

What are the general rules for day trading?
– Always trade with the trend.
– Cut losses short
– Never get emotionally involved in your trades.

What are the most suitable stocks to trade for day trading? It is advisable to trade high volume stocks. Go with the trend with the popular stocks available. It’ll be easier for you to sell those stocks at the end of the day trading.

How does a usual day trading transaction occur? For example, at 10:00 AM a day trader might buy 1000 shares of stock XYZ just as the price begins to rise on good news, then sell it at 10:04 AM when it’s up by 1/2 ($0.50). The day trader makes $500, minus commission. With today’s cheap commissions of $29.95 or less per trade, that’s a quick $440.10 or better, excluding taxes.

Most people who deal with day trading spend all of their time in front of the computer, watching the slightest change in the stock price. As the prices go up and down, the day trader must be alert as to when to sell his stock or wait for the moment to hold on it. This can be a very stressful lifestyle as a mere second could mean an increase of half the stock price and missing that moment for any person engaging in day trading could mean a loss on his investment.

Day trading is not a get rich scheme. It is serious business where you could lose everything within minutes because of wrong information. Before jumping into day trading, remember to do your homework first. Go to seminars on day trading, use simulations if possible and practice reading market indicators. To be a successful day trader, you don’t just need luck. Knowledge and experience counts. Welcome to the world of stock markets and investments!

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