Thursday, 15 January 2015

Wisdom on Value Investing: How to Profit on Fallen Angels Summary - Chapter 12

The Fallen Angels

·         The Fallen Angels:
a.       The common traits of fallen angels are that they had been very popular with investors and traded at overpriced levels at their peaks – they have predictable future revenue streams. Further, there was a high likelihood that all these companies would continue to grow, a key indicator for investors.
b.      To be considered as Fallen Angel status, a company must have demonstrated consistent revenue growth for at least the past 5 years. This gives us a comfort level that company management knows what it is doing, and is likely to continue growing revenue in the future.

·         Some words about Warren Buffett:
a.       In my opinion, no one can actually invest like Warren Buffett – because of his financial size and massive influence he negotiates deals unavailable to the average individual.
b.      Many people may not know that the bulk of Warren Buffett’s profits have come not from speculating in the stock market, but from behind-the-scenes operations of companies he has purchased.
c.       He may be the world’s greatest investor, but he reached that lofty position by getting personally involved in the companies in which he invests – something few ordinary investors are able to do.

·         Markets are anything but efficient, and current prices rarely reflect the actual pro-rata value of a company’s stock. Why? Because professional investors and hedge fund managers are under pressure from their clients every quarter to produce profits within a ridiculously short period of time.
a.       They have to cater for a short-sighted public.
b.      Studies show that ‘rational participants’ tend to pull large sums from mutual funds after steep market downturns, while adding large sums after market upswings.

·         You can have an edge over the large institutions – due to their size, when they buy or sell, it sends a message to the market. Individual has better chance of being nimble and quick than someone investing billions of dollars.

·         I’d suggest keeping a mind open to everything and anything that may move markets – learn to read a balance sheet and charts and to understand technical analysis.

·         My most important lessons have come from experience.


Wisdom on Value Investing: How to Profit on Fallen Angels Summary - Chapter 11

The System that help you to keep your head when market is losing its mind

·         A system will help you to keep your head when the market is losing its mind.
a.       All an investor needed was discipline and a system of buying when others were selling, the ability to recognize stocks that possess future growth potential, and the patience to wait for the inevitable turnaround.
b.      Look at the market and the world with a sense of detachment and most importantly, stick with proven investment principles when times are tough. That’s when a systematic approach will help you the most.
c.       Have a checklist: Go over the checklist on an annual basis for every company you own, to make sure they still meet the highest investing standards.
d.      Markets often reflect serious problems long before the issue generate headlines – pay careful attention to the market’s attitudes towards specific stocks can tip off investors. Learn some chart reading skills.
e.       When fundamentals are deteriorating – revenue declining, ROE decreasing – it may be time to sell, no matter whether you have met your targeted price.
f.       Becoming a ‘true believer’ is one of the major traps an investor can fall into, whether the belief involves a precious metal, a commodity (e.g., oil), or any other stocks.

·         When is the time to buy?
a.       Find stocks priced below their intrinsic value and well below their old highs, in the beginning stages of a recovery. Rather than buying a stock that may still have some falling to do, why not wait until it has shown signs of life so you can catch the elevator on the way up?
a.       Do company executives and directors have a strong ownership interest in the stock, and have they bought it within the past six months?
b.      Look at moving averages – stocks trading above their 50- and 200-day moving averages are generally in an uptrend.
a.       If the stock is well extended from these lines, we prefer to buy when the stock has ‘pulled back’ to the 50-day line.
b.      Follow stocks that are trading below their long term moving averages lines.
c.       If in a bear market: Wait for shares to consolidate in a fairly narrow price range for a period of time.

·         Rapid acceleration of stock prices:
a.       Rapid success can make you far too optimistic about the future; when this happens, and it will, sell. At the minimum, sell half.

b.      After a rapid period of appreciation, the only thing that has really changed is public sentiment, and we know how quickly that can change in the market. If the crowd is competing to buy your shares at almost any price, it’s your job to sell to them.

Wisdom on Value Investing: How to Profit on Fallen Angels Summary - Chapter 10

The Science of demographics

·         Take a glimpse into the future by studying the science of demographics:
a.       Human beings do predictable things as they age.
b.      If you look at the history of stock market or real estate bubbles, they have frequently coincided with demographic shifts.
c.       As people age, their spending habits change. People in their 20s have different priorities, and differing spending patterns, than people in their 30s, 40s, 50s, and 60s and beyond.
d.      When people reach and surpass their peak spending years, the economy slows down, because older people are not generally interested in buying more stuff or in putting their capital at risk.
e.       The peak spending years is around age 48.
f.       If demographic theories hold true – and they have in the past – the U.S. economy may be in for a prolonged period of slowing as the baby boomers age and pass their peak spending years.
g.      Income-oriented (i.e., dividend paying) securities could be at the very beginning of a 20-year-long bull market due to the aging trend.
h.      Although the population of the U.S. is steadily aging, we may escape the devastating deflationary spiral that has plagued Japan thanks to immigration.

·         It’s virtually impossible for even the most knowledgeable and disciplined investor to avoid all risk. What you can do though is manage risk by avoiding permanent loses; there is where timeliness comes in.