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.

END

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.

The Fallen Angels

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.

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

Wisdom on Value Investing: How to Profit on Fallen Angels Summary - Chapter 9

Pay Attention to the Cycle!!

·         Pay attention to the cycle – do not invest for the long term (i.e., buy and forget for 30 years).

a.       Cycles matter – Some might dismiss the significance of market cycles, calling them too simplistic to provide meaningful investment guidance. But they are a force to be reckoned with.

b.      It is essential to pay attention to market cycles, but never bet the ranch on them.

c.       We have to realize the limits of our investing horizons (i.e., relatively short compared to a full market cycle of 20 years), we need to pay attention to market cycles, because time does matter to us, and we don’t even know for sure how much we have.

·         Buying stocks is like buying anything else; there are good times and bad times to plunk your money down, determined by the most basic market regulator – the law of supply and demand.

a.       Just like groceries and cars, there is an ideal time to buy stocks – when they are about as popular as swimsuits in the winter. The worst time to buy stocks, conversely, is when they are hotter than the latest block buster film and people are lining up to buy tickets.

b.      Value investors wait patiently for stocks to go on sale, because they know that prices will rise and fall based on news events, public sentiment, business and market cycles. 

The Science of demographics

Wisdom on Value Investing: How to Profit on Fallen Angels Summary - Chapter 8

The Cycles

      The cycles:

a.       Near the peak of the wave, all the news is fantastic. Newspaper, magazines and TV pundits rave about the strength of the market and the latest and greatest investment opportunities.

b.      Unbridled optimism is an indication that the market is at a turning point. The public often become complacent and felt this state of affairs was normal.

c.       Skyscraper index is remarkably consistent in predicting major stock market crash. To me, the skyscraper index illustrates the business world’s quest for extravagance amid long periods of economic prosperity, an outlet for the hubris of financial titans who get swept up in the moment and believe the good times will roll on into the foreseeable future.

d.      Whenever the market reaches manic levels, with people clamoring to buy stocks at any price and newspaper touting how much money can be made in the market, investors should sell stocks to buy bonds.

e.       Wait for the inevitable downturn, when the news is dire and no one wants stocks.

f.       At the conclusion of every crisis in history, the U.S. and world markets were priced for Armageddon, as if the entire free enterprise model had been a failed experiment. Books forecasting the greatest depression of all time were among the best sellers.

g.      The ingredients for a market recovery are eventually put in place by the government, increasing the money supply and working to make money cheap and plentiful in the credit market.

h.      Over an investor’s career, the cycles repeat themselves numerous times.

i.        Periodic market panics and crashes are common occurrences.

j.        Although crashes do offer incredible buying opportunities, statistically, they only come around every eight years or so, meaning you can’t count on them as part of an ongoing investment strategy.

k.      Observation of the market over many years has taught me that at any given time, even during the euphoria of a bull market, bargains are available for the discriminating stock-picker.

Pay Attention to the Cycle!!

Wisdom on Value Investing: How to Profit on Fallen Angels Summary - Chapter 7

Advantages of Time arbitrage

·         Time arbitrage is the advantages from buying good companies with rising profits at discount prices, and then wait patiently for share prices to rise (i.e., time is your ally).

a.       However, if you buy a company that is eroding in value, and hope for good news to give the shares a boost so you can sell it, time is probably working against you.

b.      I like to get paid while I’m waiting. Look for value first and dividends second. Specifically, look for companies with a history of raising their dividend each year.

c.       Current payments to shareholders and the companies that pay them are a great example of the knowable. As an investor, that’s where you want to be.

·         Have a 3-years mindset:

a.       It takes patience and a willingness to hold on to great companies that may appear to be going nowhere for what may seem like a long time.

b.      Having a three-year mindset prepare you for patience in an investment world obsessed with short term excitement.

·         The three forces that create fallen angels:

a.       Business and economic cycles.

b.      Recoverable calamities (i.e., short term events that cause panic).

c.       Broader market downturn (i.e., widespread panic).

·         Watch for extreme prices – they are not likely to remain that way.

The Cycles

Wisdom on Value Investing: How to Profit on Fallen Angels Summary - Chapter 6

Do not Buy Cheap Stock!!!

·         Do not buy cheap for the sake of buying cheap.

a.       A company that is part of a dying industry such as today’s large newspaper holding companies, might be a bad deal no matter how cheap the stock’s price.

b.      Not all marked-down stocks qualify as Fallen Angels; some companies deserve to be devalued and should not be purchased even if their share prices are depressed.

·         Good investing means stick with sectors and companies that are highly predictable.

·         Take advantage of errors others make, usually because they are too short term oriented, or they over react to dramatic events, or they overestimate the impacts of events and so on.

a.       Ideally, we like to know ahead of time what we want to buy, wait patiently, buy it when it goes on sale, and then hold it to reap the benefits of compounding after-tax rates of return.

b.      Program yourself to take advantage of opportunity quickly – if you have done your homework and determined a reasonable goal, and the price meets that goal, don’t wait.

·         2 critical elements of a Fallen Angels:

a.       Price below intrinsic value.

b.      The fundamentals are likely to propel it to future revenue and earnings growth.

Advantages of Time arbitrage

Wisdom on Value Investing: How to Profit on Fallen Angels Summary - Chapter 5

Methodology to Weight the Value

·         Have a methodology to weight the value of your holdings.

a.       The best investors look at a company’s share price relative to revenue, free cash flow, earning momentum, and the rate at which shareholder equity is compounding.

b.      Stick to your methodology & have an exit strategy.

c.       As an investor, you need to find your own best call in terms of the market. Don’t concern yourself with every ball that comes across the plate.

·         Great investors don’t pull the trigger on a purchase or sale based on a spur-of-the-moment impulse (Remember: The crowd is often wrong).

·         Be properly diversified, not overly diversified. I don’t want a lot of good investments. I want a few outstanding ones.

·         Live with volatility without changing your investment strategy.

·         Recognize that volatility is not the same as risk.

·         Study history:

d.      By watching the reactions of the market to external stimuli, over time you will hone your ability to judge the most opportune times to enter or exit the stock market.

e.       It is found that the crowd is always wrong at market turning points but often right once a trend sets in – unless volatility is extremely low or high, one should think twice before betting against the crowd.

f.       History shows that the longer you hold on to a broadly diversified portfolio – the higher the odds you will experience a significant market downturn. Few of us can wait 20 or 25 years for our investments to recover from a major crash.

g.      Today’s darling is usually tomorrow’s dog.

Do not Buy Cheap Stock!!!

Wisdom on Value Investing: How to Profit on Fallen Angels Summary - Chapter 4

About Economic and Financial Predictions

·         About economic and financial predictions:

a.       When it comes to financial prediction, the more widely followed and credible the source, the more skeptical we should all be about the information.

b.      Many who try to read the economic tea leaves in the hopes of gaining an investment advantage have a miserable track record.

c.       Although we don’t want to ignore forecast, we must try to find out what we (and the market) don’t know, at least not yet, and take action before others do.

d.      Many analysts wait for a stock to go down before downgrading it and for it to go up before they issue a ‘buy’ alert. They wait for confirmation, which is too late to do investors any good. The analysts are using information that is already reflected in the stock price to make their forecasts.

e.       Analysts also tend to look at the industry outlook in which a company operates in preparation of the stock forecasts. Unfortunately, anticipated industry trends don’t always pan out, and investors who rely too heavily on such forecasts can be left holding the bag.

·         Step back from the circumstances of the moments and access the events around you with a sense of detachment – keep the reality of market and business cycles in mind, look to the future, and try to anticipate what is coming next.

Methodology to Weight the Value

Wisdom on Value Investing: How to Profit on Fallen Angels Summary - Chapter 3

 Successful investors buys bargain

·         Successful investors buys bargain:

a.       Smart investor stays calm and waits patiently for the incredible deals that are certain to come along. The superstar investors always look to buy when the market is down.

b.      The best time to buy a stock – or anything else – is when no one else wants them. And the best time to sell is when everyone is clamoring for what you have.

c.       Buy when everyone is complaining (i.e., panicking), and sell when they are celebrating (i.e., overly optimistic).

·         Consistently successful investors have:

a.       Self-discipline to resist the pushes and pulls of the market.

b.      Make decisions based on well-researched and clear-eyed reasoning.

c.       Learned to distinguish the true losers and winners.

·         Successful investing requires you to be skeptical of what everyone seems to know at that time, including investment soothsayers of all stripes.

·         To make any meaningful money in the financial markets, real estate, or a business, you need to think and do things a little differently from the crowd.

About Economic and Financial Predictions

Wisdom on Value Investing: How to Profit on Fallen Angels Summary - Chapter 2

Erosion of purchasing power

·         The biggest financial threat facing people over the last 30 years is not market volatility or temporary loss of capital. Instead, it’s the erosion of purchasing power that comes with inflation.

·         The core ingredients for investment success are:

a.       Buying quality at a discount to intrinsic value.

b.      Know that the price you pay determines the initial rate of returns on your investment (i.e., less is more).

                                                  i.      Buying at the right price is extremely important because it enables you to make above-average returns on your investment.

                                                ii.      If you find a great business and pay a fair-to-bargain price for your shares, the rest will generally take care of itself. (To help manage risk, however, some timing tools can be applied. E.g., cycle analysis, technical analysis as outlined below.)

c.       Hold the issue for a reasonable time frame of three to five years.

d.      Keep your emotions in check during the market’s emotional mood swings (the most important).

·         Wealthy investors and billionaires share many traits and tactics, among them:

a.       Uncanny ability to spot a bargain.

b.      They recognize the inherent value in a product or invention that even the seller doesn’t see.

c.       They reduce their risk by paying very little for what they buy.

d.      They usually earned their money the old-fashioned way, by wheeling and dealing in their chosen field and outsmarting the competition.

e.       They usually haven’t invented anything – i.e., copying is better than innovating.

f.       They are usually not the innovators or manufacturers of new technology; they are the adopters of technology.

g.      They pay little attention to what everyone already knows – by training themselves to question the conventional wisdom; they gain insight into coming trends and market cycles.

h.      They have a way of overcoming the social and economic forces that work against their success.

i.        They have figured out ways to build wide moats around their operations – and often, they operate behind a cloak of secrecy.

j.        Luck is for losers – they don’t bet on luck.

 Successful investors buys bargain

Wisdom on Value Investing: How to Profit on Fallen Angels Summary - Chapter 1

Wisdom on Value Investing: How to Profit on Fallen Angels

Author: Gabriel Wisdom

This book introduces the strategies on value investing. First of all, it introduces the doomed human nature in stock market as following:

The markets are moved by animal spirits and not by reason. Markets are just big groups of people competing to buy and sell items of value. And people are just big-brained animals in fancy clothes.

Animals, like humans, are driven to relieve pain and gain pleasure. They need to care and provide for their offspring, reduce or eliminate fear, and achieve a feeling of security.

It’s important to recognize that the traits of top investors run counter to the instincts of most human beings. (Your instincts will kill you in the stock market.)

The human nature want to buy what has already gone up and sell after steep declines. You are hardwired to avoid pain and seek pleasure – to sell when prices are plunging and buy when they are rising.

The herd mentality works for animals by providing protection, efficiency and even companionship. However, it pays to be a lone wolf in investing.

Human nature makes us place a premium on the familiar or on coveted items, which leads us to overpay for the hottest toy, book or collectible. Avoid too popular stock.

Emotion is overwhelmingly influential – the intellect finds logic to justify what the emotions have already decided.

For whatever reason, people don’t tend to think long term when making financial decisions. Perhaps it is human nature to want to get as much as you can as soon as possible, for immediate gratification.

You will find that the majority of market participants are focused on the present, the here and now. They are fearful and hesitant when times are bad, and complacent and overconfident during periods of prosperity.

Erosion of purchasing power

The Little Book of Big Profits from Small Stocks Summary - Chapter 12

Chapter 12: Low Prices and High Profits

1.      Over the years I found that low-priced breakout stocks to be the single best area for investors to earn explosive gains.

2.      It is difficult for investors to make money in well-known big stocks with dozens of analysts following.

3.      By getting ahead of Wall Street in lower-priced stocks we benefit from the institutional pack mentality that dominates many traditional investment managers. When they are selling and pushing stocks to low prices, we are buying. Then, when their excitement for those stocks return, we are selling to them. There simply is no better way for individual investors to outperform the market in my opinion.

4.      One of the most important takeaways I hope you have from this little book is that an optimistic approach to the markets will serve you a lot better as an investor than being overly fearful. If you focus on the fear you miss opportunities.

5.      Markets are going to have declines. There will be recessions and bear markets throughout your career. The right way to look at these occasions is as inventory creation events, not catastrophes.

6.      The best investors are well aware that every bear market has ended and every economic recession has been followed by an economic recovery. Besides, they read voraciously to keep up with the world and the markets. Read everything you can as often as you can is some of the best advice I can give you about successful investing.

7.      In the stock market, optimism pays off over time. It always has and always will.

8.      Investing in low-priced stocks demand you to do homework.

a.       Read 10Q and 10K. Pat attention to the footnotes.

b.      Check the materials on investor’s relation section.

c.       Check who is buying or selling the stock.

9.      Diversify your portfolio:

a.       You do not want to own all stock in a single industry.

b.      Try to find companies that respond differently to economic and market events.

END

The Little Book of Big Profits from Small Stocks Summary - Chapter 11

Chapter 11: Beware the Wolves of Wall Street

1.      There are some things we need to consider when dealing with low-priced stocks. Movies such as The Wolf of Wall Street illustrate some of the unethical and downright criminal behavior that occurs in low-priced stock issues.

2.      The best way to avoid getting caught up in this type of fraud is to avoid the come-ons and advertisements for companies you have never heard of, or are recommended by someone you have also never heard of.

3.      Many firms charge much higher commission rates for lower-priced issues so you need to be aware what your broker is charging you to invest.

4.      Other issues to aware include:

a.       High interest costs for margin borrowing on lower-priced stocks

b.      Potential costs due to high spreads in some low-priced issues

Chapter 12: Low Prices and High Profits

The Little Book of Big Profits from Small Stocks Summary - Chapter 10

Chapter 10: Well Bought Is Half Sold

1.      A stock bought right is half sold.

2.      A lot of our selling decisions will be made for us by the market itself.

3.      When you start investing in low-priced breakout stocks, it is necessary to monitor your portfolio on an ongoing basis.

4.      When you have a loser:

a.       When a stock moves against you, see what you missed in the original analysis. Ask yourself: Are you wrong or are you just early?

b.      You are looking for material negative changes in the company or its outlook since you originally bought the stock. If there are any, then you want to sell the stock.

c.       Watch what insiders are doing with their stock. If there is persistent large selling by officers and directors you want to challenge your original conclusions, and to sell your stock right away.

d.      Things changed so you changed your opinion, which is the smart and correct way to approach the sale of a stock that did not work.

5.      When you have a winner:

a.       Check the fundamentals and news from your winners and make sure you think they can still breakout higher and deserve a place in your portfolio.

b.      Ride the wave and let your profits grow (when the fundamentals are improving).

c.       If business starts to slow and is no longer improving, it is time to sell.

d.      As a stock climbs higher, it’s often a good idea to scale out of a stock (i.e., it’s a great idea to sell some of your position when a stock had doubled in price).

e.       My favorite reason to sell a stock is because it’s been acquired. To close the deal buyers have to pay a premium to the current market price and this means profits for you!

Chapter 11: Beware the Wolves of Wall Street

The Little Book of Big Profits from Small Stocks Summary - Chapter 9

Chapter 9: Looking For the Right Stuff

1.      Choose companies that have a debt to capitalization ratio of 50% or less.

2.      Estimate the capital requirements of a company in the near future. If capital expenditure is required, it would cause lower profits on the horizon.

3.      Check the footnotes and fine print on financial statement. If auditors issued a qualified opinion that is a huge red flag that something may be wrong with the data we use to evaluate the company. 

4.      Check with the investor relation

5.      Look at the price chart (for some of these signals: stock moving higher on increased buying activity, stock breaking out to new highs, the stock has bounced off a level of support).

6.      I never make a decision because of the chart itself but if the stock has passed the research process, charts can provide valuable information about what other investors think of the company.

7.      Check who is buying or selling the shares.

a.       An insider selling the stock may not be a serious problem – as someone could be in need of cash for some personal reasons.

b.      However, many sellers over a period of time is a huge red flag.

c.       Insider buying is an indication that they like the potential of the company.

d.      Look at what other funds or large investors are buying. I like to see that at least a few other smart investors have expressed interest in the stock.

8.      Research what the analysts are saying. There are some great research resources available to you. For example: Value Line, Standard and Poor’s and Yahoo!’s Finance.

9.      Explore your own network of contacts (i.e., experts in the various fields to understand the new technologies, products and services)!

10.  The lesson here is to get talking, get researching and get to it!

Chapter 10: Well Bought Is Half Sold