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