Popular Features. New Releases. Description The best-selling index investing "bible" offers new information and is updated to reflect the latest market data The Little Book of Common Sense Investing is the classic guide to getting smart about the market. Legendary mutual fund veteran John C. Bogle reveals his key to getting more out of investing: low-cost index funds. Such an index portfolio is the only investment that guarantees your fair share of stock market returns. This strategy is favored by Warren Buffett, who has endorsed this best selling 10th Anniversary Edition. The book shows you how to make index investing work for you and help you achieve your financial goals, cut through the hype to see what's really in your best interest, and analyze the metrics that truly matter.
You'll gain candid insight from some of the world's best financial minds: not only Warren Buffett, but Benjamin Graham, Paul Samuelson, Burton Malkiel, and others. Updated with current data and laced with two new chapters on asset allocation and retirement investing, the new Little Book of Common Sense Investing gives you a solid strategy for building your financial future.
Learn how to harness the magic of compounding returns while avoiding the tyranny of compounding costs. Bogle describes his simple method for developing rational expectations for future market returns, and what he sees coming over the next decade. Other books in this series. Add to basket. Flap copy "Rather than listen to the siren songs from investment managers, investors--large and small--should instead read Jack Bogle's The Little Book of Common Sense Investing. Legendary mutual fund pioneer John C. While the stock market has tumbled and then soared since the first edition of The Little Book of Common Sense Investing was published in April , Bogle's investment principles have endured and served investors well.
This tenth anniversary edition includes updated data and new information but maintains the same long-term perspective as its predecessor. Bogle has also added two new chapters designed to provide further guidance to investors: one on asset allocation, the other on retirement investing. A portfolio focused on index funds is the only investment that effectively guarantees your fair share of stock market returns. This strategy is favored by Warren Buffett, who said this about Bogle: "If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle.
For decades, Jack has urged investors to invest in ultra-low-cost index funds. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me. This new edition of The Little Book of Common Sense Investing offers you the same solid strategy as its predecessor for building your financial future. Build a broadly diversified, low-cost portfolio without the risks of individual stocks, manager selection, or sector rotation. Forget the fads and marketing hype, and focus on what works in the real world.
Understand that stock returns are generated by three sources dividend yield, earnings growth, and change in market valuation in order to establish rational expectations for stock returns over the coming decade. Recognize that in the long run, business reality trumps market expectations. While index investing allows you to sit back and let the market do the work for you, too many investors trade frantically, turning a winner's game into a loser's game. His conception and development of index funds transformed the investment world for individuals and institutions alike. Countless millions of investors have purchased index funds because of Jack.
But, simply being an indexer is insufficient. Successful investors embrace the principles undergirding the rationale for index funds and understand the pitfalls hindering the effective execution of an investment plan. No wonder it is easier for investors to ignore all this and concentrate on individual companies! Unfortunately, this "provincial" approach is also far less profitable and such investors are often bemused when an apparently "good quality" share fails to perform as ex.
The secret to a forming a macro view is to read widely with the idea of building a "good general business knowledge". Although it is often difficult to make time to read everything thoroughly, we suggest that you start small with careful reading of the daily Business Day newspaper. Try to develop an eye for articles which have significance for your "macro" world view and focus on these, quickly passing over other, less important material.
You could then gradually expand your horizon to include Internet websites such as Reuters and Bloomberg. The problem with subscribing to many other publications is two-fold — time and money. One solution to this problem is to work with a group of other investors, like in an investment club, where each member then takes on one publication, or focuses on one specific market.
When an article of significance is found it should then be photocopied or the website link sent via email for the others in the group. This approach also helps to reduce expenses. Important articles should be filed away for later reference, especially articles which contain useful factual information. It is important to plan the time that you spend on share market analysis carefully so that it is as effective as possible. This planning must take place within a sound overall investment strategy. Creating a watch list was discussed in the second tutorial at the start of this investment training course, but it is important to revisit the idea as it is very important.
Study the diagram below. The outer circle shows the universe of JSE-listed shares available. Once you have created your watch list, you should then look at the share prices and volume traded of each share every day. Better still, you will notice which shares have the most activity and moving higher by looking for shares that are "green" or trading positive compared to the previous day's trade. Valuable company research is automatically linked to the shares in your watch list, which is a big time-saver. Familiarise yourself with the fundamentals of each company, i. The more you know a.
Out of this watch list you will select those shares which you are actually going to buy and hold in your trading or investment portfolio. In general, a balanced portfolio should have no more than 12 shares and no fewer than 8 shares. Obviously, this is idealistic, but more than 12 shares will tend to spread your time too thinly, while fewer than 8 shares will expose you unduly to market risk. When you are just beginning in the market, you only buy one share and spend no more than R on the outside, even if you have far more money than that, because the lessons that can be learned with R are the same as the lessons that can be learned with R50 , but there is just less pain!
This means that the shares that you hold should be about the top two- to -three percent of opportunities on the market. If you do not think that the share you are considering fits into this category then scrap it and look elsewhere. Your watch list should be comprised of shares which you feel have the potential to be in the top performers on the JSE.
Do not waste your precious time with mediocre shares. Part of your whole investment strategy should be a process of having shares moving in and out of your watch list and into and out of your portfolio. In general, you should try not to buy a share that has not been on your watch list for at least one month. In creating a watch list, the process of prospecting for shares should be fine-tuned with knowledge and experience. We have borrowed the word "prospecting" from the mining profession and it simply refers to the fact that you should be continuously looking for interesting shares that may have the potential to be a winner.
There are four different prospecting methods Refer to "Getting Started - Choosing your first shares" , which include:. These prospecting activities should result in a continuous stream of "prospects", which you should then subject to a series of fundamental and technical sifting criteria. Some of your selections will be right and some will be wrong. As you get better at evaluating companies, your "hit-rate" will improve.
A mistake is defined as any trade where you are forced to sell out at your stop loss level. From this you can see your "in-the-money" mistakes and "out-of-the-money" mistakes. Obviously, it is the "out-of-the-money" mistakes that really matter, because they show you that there is something wrong with the share selection process. In the next few pages, we will review the share selection process from a fundamental point of view because a good company with good prospects, over the long-term will give you good results.
In evaluating a business, your goal is to get to know the company very well inside and out. Evaluating a business and not evaluating a share is written intentionally like that because too many people think of their investments merely as shares. They pay too much attention to the share price and too little to the underlying business. Each share is more than an intangible price that goes up and down each day. Each share represents for its owner a claim on a small percentage of an actual business.
If you own one share of PicknPay, you, along with members of founder Raymond Ackerman's family, own the company. True, they own a lot more of the company than you do but your share still counts. When important decisions are to be made like approving members of the board of directors, the company will send you a ballot and solicit your vote. And every time a shopper buys groceries, a set of towels or even a television, a tiny fraction of the profit from that sale generated is yours. The fate of each share is tied inextricably with the fortune of its underlying business.
Successful investors need to get and stay familiar with the companies they own. As you have learnt in this investment training course about how to study various companies, you will have run across many different measures and tools that investors use in their share evaluation. At first, you will probably keep them all in your mind. You will do well to try and sort them into two categories, namely: quality and price. Here is why:. There are two main questions you need to answer before you decide whether to invest in a company:. If you do not make a point of addressing both of these questions, you might end up buying grossly overvalued shares of a wonderful company or you might snap up shares of a hapless, doomed business at what seems like a bargain price.
Quality - There are a number of ways that you can zero in on a company's quality. Price - When evaluating a company's share price, investors typically take a number of measures and relate them back to the company's earnings. Discounted Cash Flow DCF is another way to evaluate a share price to estimate the company's earnings for the years ahead and then discount them back to their present value. Remember, a company's share price is essentially a reflection of all its expected future earnings, in today's money. If your calculations suggest that the total discounted earnings will amount to R50 per share and the share is currently trading at R30 per share, you are probably looking at a real bargain.
If this sounds a little complicated, it is. But it still is not rocket science. And anyone who likes playing with numbers and solving puzzles may actually find it fun! A share's price is meaningful only when you compare it to earnings and other measures like that. It is pretty much meaningless, though, when examined in a vacuum.
People often mistakenly think that a R10 share is more attractive than a R share. The R10 share may be overvalued, while the R share might be a great bargain. Another common misconception is that penny shares, those trading for less than c per share, are great buys. People think that a c share is likely to double quickly. Well, penny shares are usually trading that low for a reason. They are more likely to drop to zero than to double. Do not think that just because you can afford to buy 10 shares, that you are bound to make a bundle. People often think that they have to buy shares in "round lots" of shares.
Not true. You can buy as many shares as you want. If the company that you are interested in trades for R75 per share and you only have R2 , you can buy 27 shares i. Just be aware that you must still make allowance for brokerage costs. Brokerage costs as a percentage of the transaction will be much higher and therefore you will have to make a much bigger profit in percentage terms just to break even.
For example a minimum brokerage fee of R98 would translate into 4. Value - Once you have a better understanding of the company's quality and its share price, you can make a judgement on whether it is offers good value. Before we go any further, you must know that there are many different investing styles. Some investors focus primarily on finding undervalued companies, paying close attention to a share's price. Other investors do consider price, but they focus more on the quality of the business.
Both of these are wise approaches. What is foolish is simply to look for rapidly growing companies, regardless of price or quality. Or only to use technical analysis and examine charts of a share's price movements and its volume in trading.
Guide to Intelligent Stock Market Investing - Goodreturns
Imagine that you are in an investment club and you are explaining to your fellow members why the club should invest in a particular company. Here are some steps and questions that you could take that would help in the process. Sure, you can follow all the above research steps and questions and be more prepared to invest in today's hurly-burly markets than 9 out of 10 people. But how can you become better able to handle the twists and turns of individual shares than 99 out of investors? To really take advantage of your relationship with us and this course, you need to discover our extensive online offerings by visiting our Internet websites.
There you will find dozens of additional educational features, and much, much more. The PSG Securities Ltd website is designed to be a place for investors to turn to when it comes to any aspect of investor education and investing on the share market, respectively. Online you will have everything you need at your fingertips.
Do you have clear investment strategy? For instance, do you know when to sell, or do you rely on a wait-and-see approach?
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A better approach would be to make sure you are invested right in the first place. If you have done all the above, then a depressing bear market will be much easier to live through. If you do not … well, those are the steps you can take to get through a mess. It is much easier to think long term when your financial matters are in order.
In the book, "How to Make Money in Stocks", author William J O'Neil argues that the share market is really no different from any other business, and should, therefore, be operated just like a business. You have bought and stocked dresses in three colours - yellow, green and red.
How much money do you need to invest in stocks?
The red dresses are quickly sold out, the green ones are half sold, and the yellow ones have not sold at all. What do you do? Do you say: The red dresses are sold out. There is no demand for the yellow ones, but I still think they are good and besides, yellow is my favourite colour, so let us buy some more? A professional merchandiser would look at the situation objectively and say: 'We sure made a mistake. We'd better eliminate the yellow dresses. Then buy more of the red dresses.
You do not have to be correct on all your investment decisions to make a profit. Any time a commitment in a share is made, define the potential profit and the possible loss. But how do you know that is not the case when you buy a share if you do not attempt to define these factors and operate according to well-thought-out selling rules? Investment strategy refers to the choice of shares in one's portfolio, timing of purchases and sales and one's overall investment stance e.
As far as the choice of shares in a portfolio is concerned, one basic approach is the "top-down" approach as mentioned in the TFS Learner Guide at the beginning of this training course. As a quick reminder, the process starts where one gets an overview of industries to identify those with good potential and then try to find those companies within these industries which offer the best prospects of earnings growth. It is important to assess how sound a company is, what its track record of earnings and dividend growth are, and its prospects.
Stockbroker research reports can be very useful in this regard as they generally provide an analysis of particular shares and an assessment of likely future earnings growth. One should be alert of special opportunities, e. When a company becomes a target for a takeover, its share price generally rises.
Once one has decided on the basis of fundamental analysis that a share is a good investment, the next question is when to buy i. In this regard, one must clearly be alert to what range the share price has been moving in and also have a general idea of what is happening to the share market. Where possible, one should try and buy shares after the market has taken a dip i. Technical analysis is widely used to improve one's timing decisions and the various techniques discussed in lessons 7, 8 and 9 of this training course can all be applied to the timing of one's purchases or sales.
One's overall investment stance is clearly dictated by how one reads the market. What is the outlook for gold, interest rates or share prices? If the market has been in a downward phase for some time, has this ended and is it worthwhile investing again? Obviously, one has to watch world markets closely, particularly Wall Street. If things go wrong there, then markets around the world react. By the same token, any sign of a recovery in the South African economy will be positively interpreted by investors on the JSE.
Once you have gained sufficient knowledge and experience through 'playing' on the Trading Simulator, one of your main objectives is to search for better solutions through successful investment strategies on the real market. We encourage you to develop your own personal preferred strategy or style of investing. Here are two investment strategies that you may consider, namely the aggressive and conservative strategies. Some companies succeed by breaking all the rules.
Here we are talking about the small capitalisation and penny stock companies that provide investors with the most dynamically high returns achievable on the share market. They provide inspiration and guidance to all business people; be they managers, planners, or executors. These companies are capitalism's special sauce, its tastiest and most necessary condiment. Small capitalisation or penny stock companies are only for the more experienced, aggressive, brash and daring of investors.
Those who invest in these small cap companies consciously take on lots of risk, believing that for the experienced and wiser investor, high risk will lead to high reward. Small cap shares should make up only a part of any portfolio and investors are warned that they should be prepared to lose the money they invest in these companies. Not too encouraging, is it? Here are some useful tips on how to find these outperforming small cap companies and their characteristics:.
Whether or not you decide to look for emerging companies the "Aggressive Investment Strategy' way, you should give serious consideration to including a number of small-cap companies in your portfolio. The beauty of investing in small-cap companies is that they sometimes give the individual investor a chance to beat the unit trust fund managers to the punch. Due to the size of most unit trust funds and financial regulations and legislation, as well as the way they are set up, fund managers often have a hard time establishing any kind of meaningful position in small-caps.
In fact, fund managers are frequently restricted from doing this by their own guidelines or mandate. The fact that the unit trust fund managers cannot buy these small-cap companies is a great advantage to the individual investor who has the ability to spot promising companies and get in before the institutions do.
That is because when institutions, like unit trust and pension funds, get in, they will do so in a big way, buying many shares and pushing up the share price with their demand. Also, many of these small-cap companies are "closely-held", that is, the management owns a sizable percentage of the company. Since most of their potential for wealth is tied to the share price, you can bet that they will be working very hard to get the share price to move up.
The final and probably the best reason to buy these small-cap growth companies is because they grow, sometimes rather quickly. Small companies are in a much better position than their larger counterparts to expand their businesses, and rapidly multiplying earnings often translate into quick growth in the share price. If you are thinking of buying small capitalisation or penny stock companies for your portfolio, we recommend that you only make it a small part of your overall investment strategy.
A better approach might be the 'balanced' approach, which includes a few blue chip or large capitalisation companies, a bunch of green chip i. Investing in small-cap companies is not for everyone, though. You should know your way around a set of financial statements, and a few laps around the investing block does not hurt, either. Novice investors should steer clear for a while. You would not go up in the Space Shuttle without prior training, nor would you try investing in small-cap companies until you have cut your teeth on some large- and mid-cap issues.
The lack of time is another dissuading factor as finding good small-cap companies is a lot of work, and it takes even more attention after you have made your purchase. If you do not have the available time, energy, or inclination to keep up with the news on your portfolio, you are better off using the "Conservative i. The last reason to stay away from investing in small-cap growth companies is if you have a natural aversion to risk. Small-caps are more volatile than large-caps.
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Everyone has his or her own risk tolerance, and there is no reason why you should make any investment that makes you feel uncomfortable. If you have got some experience under your belt and are not averse to volatility, then investing in small-cap growth companies will make a nice addition to your portfolio. Some small-cap companies grow up to become dominant in their industry, able to call the shots and generate great value for shareholders. These companies serve most investors well. This particular investment strategy suggests buying companies that are stalwarts i.
They are generally big large-cap companies. Not all big companies will meet the criteria listed below, though, and many non-blue chip companies will be worthy of your consideration. This investment strategy relies only on simple numeric calculations, common-sense logic, and your patience. This investment strategy is as convenient as a unit trust fund, but which offers above-average performance and lower expense. The time horizon with this investment strategy is meant to be a long-term one. The idea is that once you identify and invest in these powerful companies, you should, for the most part, be able to leave your money invested for a decade or longer.
There is more involved in identifying and investing in these types of companies, and we suggest that you develop more of your own criteria but these are some of the core principles. They will help you to zero in on companies worth a closer look. Whether you have blue chip companies or other companies in your share portfolio, you will do well to make sure that you have got a few heavyweights in it.
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That is because large companies are generally more stable than smaller ones. Value investing is an investment model that derives from the ideas on investment and speculation that two professors at Columbia Business School called Benjamin Graham and David Dodd began teaching in and subsequently developed in their text "Security Analysis.
Graham always took the position that value investment was the only real form of investment; anything else was speculation. In terms of picking shares, it was recommended defensive investment in shares trading below their Tangible Net Asset Value TNAV , as a safeguard to adverse future developments often encountered in the stock market.
Intangible assets such as patents, software, brands, or goodwill are difficult to quantify, and may not survive the break-up of a company. When an industry is going through fast technological advancements, the value of its assets is not easily estimated.
Sometimes, the production power of an asset can be significantly reduced due to competitive disruptive innovation and therefore its value can suffer permanent impairment. One good example of decreasing asset value is a personal computer. An example of where book value does not mean much is the service and retail sectors. One modern model of calculating value is the discounted cash flow model DCF. The value of an asset is the sum of its future cash flows, discounted back to the present. Value investing is the strategy of selecting shares that trade for less than their intrinsic values.
Value investors actively seek shares of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.
The big problem for value investing is determining a share's intrinsic value. Remember, there is no "correct" intrinsic value. Two investors can be given the exact same information and place a different value on a company. For this reason, another central concept to value investing is that of "margin of safety". This just means that you buy at a big enough discount to allow some room for error in your estimation of value. Also keep in mind that the very definition of value investing is subjective.
Other value investors base strategies completely around the estimation of future growth and cash flows. Despite the different methodologies, it all comes back to trying to buy something for less than it is worth. High profile proponents of value investing, including Warren Buffett, have argued that the essence of value investing is buying shares at less than their intrinsic value.
The discount of the market price to the intrinsic value is what Benjamin Graham called the "margin of safety", which called for a cautious approach to investing. The intrinsic value is the discounted value of all future distributions. However, the future distributions and the appropriate discount rate can only be assumptions. Warren Buffett has taken the value investing concept even further as his thinking has evolved to where for the last 25 years or so his focus has been on "finding an outstanding company at a sensible price" rather than generic companies at a bargain price. Value investing has proven to be a successful investment strategy.
There are several ways to evaluate its success. One way is to examine the performance of simple value strategies, such as buying low PE ratio shares, low price-to-cash-flow ratio shares, or low Price-to-Net Asset Value ratio shares. Numerous academics have published studies investigating the effects of buying value stocks.
These studies have consistently found that value shares outperform growth shares and the market as a whole in the long run. Intrinsic value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value.
Value investors use a variety of analytical techniques in order to estimate the intrinsic value of a company in the hope of finding investments where the true value of the investment exceeds its current market value. For example, value investors that follow fundamental analysis look at both qualitative business model, governance, target market factors etc.
Below are ten principles which will provide you with the essential information you will need when deciding which shares to invest in. Companies which stand out after applying these rules, should depending on the timing, produce above average returns. In addition, by sticking to this maxim the probability of not losing any money when investing, rises considerably.
Not only has he become one of the leading investment authorities, his performance record, which goes back more than forty years, is unmatched. Warren Buffet is truly an amazing man in that he still drives his own car and does his own taxes. He is very intelligent, quick and intuitive, whilst also being a man of warmth and genuine charm. While investment markets appear more confusing than rational, it is no surprise that investors all over the world have become keenly interested in Mr. Buffet's investment approach and ideas. The buy-and-hold investment strategy that is the core of Mr.
Buffet's investment approach appeals intuitively to people. Buffet does not practice portfolio management, at least not in the traditional sense. Modern-day portfolio managers are mindful of the share weightings, industry diversification, and performance relative to a major index. Buffet approaches portfolio management differently. If he were restricted to selecting only companies that were based in his home town of Omaha, he would first ascertain the long-term prospects of the various businesses.
He would then judge the quality of management and finally, he would purchase a few of the very best businesses at reasonable prices. He says that he would not be interested in purchasing shares in each business in town i. Now, since the universe of companies that he can select from extends much further than Omaha, why should he behave any differently? However, the idea of buying a good business and holding this investment for several years, thus achieving returns matching with the financial matters of the business, is simple and straightforward.
Investors can easily understand and appreciate the workings of this approach. Warren Buffet's method is attractive to people for two reasons:. Look at "owner earnings" - This is the net income, plus depreciation, depletion and amortisation, less capital expenditure CAPEX and any additional working capital required.
This figure gives the true reflection of any business in whose shares you are considering investing. Earnings as normally reported is only useful to your analysis if they approximate the expected cash flow of the company. But even cash flow is not a perfect tool for measuring value, as it ignores CAPEX, which is critically important on an ongoing basis for manufacturing companies.
Look for high profit margins — These figures reflect not only a strong business, but also the company management's tenacious spirit for controlling costs. Buffet says: "Managers of high cost operations tend to find ways to continually add to overhead costs, whereas managers of low-cost operations are always finding ways to cut expenses. Look at retained earnings - For every Rand retained out of earnings and ploughed back into the company, there should be an equivalent improvement in the market value.
Combine both the 'value' and 'growth' approaches to investing - Mr. Buffet says that the debate between the two ways of selecting shares, the 'value' or the 'growth' approaches, is nonsense as they are "joined at the hip. The share price increase should at least match the growth of retained earnings over time. Buffet says: "Value is the discounted present value of an investment's future cash flow; growth is simply a calculation used to determine value. Irrespective of whether a business grows or does not, displays volatility or smoothness in earnings, or carries a high price or low in relation to its current earnings and book value, the investment shown by the discounted cash flow calculation to be the cheapest is the one the investor should purchase.
Focus on four-or five-year averages — When studying the figures, do not take yearly results too seriously. Only invest in a business when its share price is significantly below its true value. Buffet believes in buying stakes in great businesses when they are having a temporary problem, or when the share market declines and creates bargain prices for outstanding businesses.
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Stick with the simple and stable — To avoid mistakes in valuation arising out of wrongly estimating future cash flow, stick with businesses that are simple and stable, and insist on a substantial margin of safety between the share price and your determined value. Ignore the stock market trends - This is one of Mr. Buffett's most controversial principles. Buffet has gained the reputation as a savvy investor because of his ability to buy a good business when most of Wall Street either hates or is indifferent to that business.
He does not care what the market has done recently or is expected to do in future because he buys shares that offer value. Buffet also does not care if a share has already risen greatly. He bought Coca-Cola after it had already risen fivefold in six years and then made four times his initial investment over the next three years. Buffett's main investment share portfolio. Making a few correct decisions is what matters most - Mr. Buffett says that in his year career, it is just 12 investment decisions that have made all the difference.
With every investment decision his card is punched, and he has one fewer available for the rest of his life. Do not buy a share unless all the facts are in its favour — Buffet puts no confidence in the prospects of market timing i. Buffet suggests that an investor should ignore the environment and focus on the company. He says, "Study the facts and the financial condition, value the company's future outlook, and purchase when everything is in your favour. Have cash ready to snap up bargains - Mr.
Buffett's company Berkshire Hathaway has not declared a cash dividend since Shareholders get their reward through the rising value of their shares. The money that would otherwise be paid out to shareholders in the form of dividends is retained in the company to make it grow faster and make the price of its shares grow faster. Buffet says that it is even OK to borrow money to snap up a bargain on one of those rare occasions when one comes on offer. But more usually, you should have a pile of cash waiting in the bank to use when you need it. Private investors can do as well as professionals - Buffet does not believe that individual investors are at a disadvantage relative to professional fund managers.
The Mr. Buffett way to share market success does not require computer programs, complex mathematics or expert knowledge of a company or its industry. It boils down to valuing a business according to particular principles, then buying a piece of it when the shares are seriously undervalued.
However, you have to do your own thinking and be prepared to ignore what the share market is doing. Before you think about buying shares, you ought to have made some basic decisions about the share market, about whether you need to invest in shares and what you expect to get out of them, and about whether you are a short-term trader or a long-term investor.
More importantly, you need to decide beforehand how you will react to sudden, unexpected, and severe drops in price. It is best to define your objectives and clarify your attitudes beforehand, because if you are undecided and lack conviction, then you are a potential market victim, who abandons all hope and reason at the worst moment and sells out at a loss. It is personal preparation, as much as knowledge and research, that will distinguish the successful share picker from the chronic loser. Ultimately it is neither the share market nor even the companies themselves that will determine an investor's fate.
It is the investor. Buffet does not like mining or farm-related shares. He would rather own the output i. Eventually the consumers have gotten the metal and the company is left with a hole. You may show a book-keeping profit, pay taxes on it, and end up with receivables i. For the thirteen years, from May to May , he was the portfolio manager of Fidelity's Magellan Fund. This fund rose fold per share for the best performing fund in the world. Peter Lynch knows how to make money. Here are some of Peter Lynch's other ideas for identifying superior companies.
He believes that in the end, superior companies will succeed and mediocre companies will fail, and investors in each will be rewarded accordingly. However a share has grabbed your attention, whether via the office, the shopping mall, something you bought, something you ate, or something you heard from your stock broker, your mother-in-law, the discovery is not a buy signal or that you own the share. Not yet. What you have got so far is simply a lead to a story that still has to be developed.
Treat this initial information as if it were an anonymous and intriguing tip. Developing the story is really not difficult; at most it will take a couple of hours of research. How big is this company in which you have taken an interest? Specific products aside, big companies do not have big price moves. You do not buy shares in Anglo American expecting to quadruple your money in two years. If you buy Anglos at the right price, you may expect to triple your money in six years, but you are not going to hit the jackpot in two years.
Lynch adds, "In certain markets, these companies perform well, but you will get your biggest moves in smaller companies. Slow growing companies are usually the large and aging companies that are expected to grow slightly faster than the gross national product GNP or between two and four percent growth in earnings. Slow growers did not start out that way. They started out as fast growers and eventually tired out, either because they had gone as far as they could, or else they got too tired to make the most of their chances.
When an industry at large slows down, most companies within that industry lose momentum as well. You can usually spot a slow grower by looking at technical charts, where you will notice that they are not very cyclical and bounce along slowly. Another sure sign of a slow grower is that it pays a generous and regular dividend. This is usually because the company cannot dream up new ways to expand the business. This does not mean that the management is doing anything wrong and in many cases it may be the best use to which the company's earnings can be put.
If the company is not going anywhere fast, neither will the price of the share. If growth in earnings is what enriches a company, then what is the sense of wasting time on these slow-moving companies? There is plenty of risk in fast growers, especially in the younger companies that tend to be overzealous and underfinanced. When an underfinanced company has headaches, it usually ends up bankrupt. Also, the market does not look too kindly on fast growers that run out of steam and turn into slow growers, and when that happens, the shares are beaten down accordingly. But as long as the management can keep it up, fast growers are the big winners on the share market.
Lynch looks for companies that have good balance sheets, and are making substantial profits. The trick is figuring out when these companies will stop growing, and how much to pay for the growth. The disadvantage with cyclical companies is when the economy is not flourishing and going into recession i. Cyclical companies are the most misunderstood of all the types of shares. It is here that the unwary stock picker is most easily parted from his money, and in shares that he considers safe.
Because the major cyclical companies are large and well-known companies, they are naturally lumped together with the trusty stalwarts. Timing is everything with cyclical companies, and you have to be able to detect early signs that business is falling off or picking up. If you work in some profession that is connected to steel, aluminium, automobiles, etc. Turnaround companies can make up lost ground very quickly and the best thing about investing in successful turnarounds is that of all the categories of shares, their ups and downs are least related to the general market. Peter Lynch talks about there being several different types of turnaround companies.
For example:. Restructuring is a company's way of ridding itself of certain unprofitable subsidiaries it should never have acquired in the first place. The earlier buying of these ill-fated companies is called diversification. Peter Lynch calls this "deworsification".
Asset opportunities are everywhere. Although they require a working knowledge of the company that owns the asset and once again, if you work in some profession that is connected, you have an edge. But once you understand what is happening in the company, all you need then is patience. You never find the perfect company, but if you could imagine it, you will know how to recognise favourable attributes.
Like Warren Buffet, Peter Lynch also believes that getting the story on a company is a lot easier if you understand the basic business. He would rather invest in a panty hose company than in communication satellites, or in motel chains than in fibre optics. The simpler the business, the better he likes it because it is easier to follow. The perfect share would be attached to the perfect company, and the perfect company has to be engaged in a perfectly simple business, and the perfectly simple business ought to have a perfectly boring name.
The more boring it is the better. Few things are easier to ignore than trading or investment advice. Many of the most significant investment rules have been so widely circulated that they have lost their ability to provoke any thought in the new investor. The most followed investment guru is probably Warren Buffet. He has added to his phenomenal lifetime investment performance by becoming a sought after speaker, commentator and writer. But there are many other commentators, bloggers and analysts who have interesting insights to add to the body of general knowledge. If you Google 'investment tips' you will be presented with thousands of possible links to explore further.
You will note that some of the advice may even be contradictory! We have put together a list of 12 tips that come from a range of sources, including Warren Buffet, Vikesh Jain and Steve Sjuggerand. Links for these sources are at the end of this section. The first ten tips are from Warren Buffet, the next four are from Steve Sjuggerand and the last twelve are from Vikesh Jain.
Readers will note that the tips include advice on life style and spending habits as well as investing. Rule 1: Live a very modest life, always avoid lavish spending - In other words save as much money as possible to enable you to invest majority of your earnings. Though Warren Buffett is among the richest men in the world but he still lives in a very modest house and still drives his own car. He believes that majority of his earnings shall be used for share investing to build as much asset as possible. Warren Buffet. Rule 2: Avoid being a compulsive buyer and seller of shares - It is not always important to keep on buying and selling stocks.
Buffett's believes that investors shall show patience and should be ready to wait indefinitely for that right time to invest their savings. The right time as per Buffett is during stock market collapse where great companies stocks becomes undervalued and are worth buying. Rule 3: Do not buy shares what everyone else is buying - It is best to buy that share which has not drawn attention of others. When everyone starts buying a particular share its market price is bound to go up above reasonable price levels making it overvalued.
Or in other words buy those stocks which are considered as bad purchase by majority of investors. Of course it is important to check the fundamental of the company before buying one. Rule 4: Buy shares of companies which have simple products and services - Buy shares of company whose product or services are understandable to you. Understanding the business process is important before buying its shares.
Rule 5: Use your own method to evaluate value of shares - The basic of any share investing strategy is to learn the process of fundamental evaluation of a company. It is also important to learn the trick evaluating the value of shares. Fundamental analysis and share valuation are two preconditions of value investing. Rule 6: Always buy undervalued shares - Warren Buffett calculates an intrinsic value of a share.
If the market price of share is trading below its intrinsic value then it can be termed as an undervalued share. Warren Buffett first checks the fundamental strength of company and then calculates its intrinsic value to judge its status of being overvalued or undervalued. Warren Buffett calls purchase of undervalued shares as buying shares by maintaining "margin of safety'. The trick Warren Buffett uses to calculate the intrinsic value of share is the heart of his share investing wisdom.
Intrinsic value is nothing but present value of all future cash flows linked with a particular shares. In calculating the intrinsic value Buffett pays more attention to a return on equity ROE , b operating margin, c and on reasonable or no debt at all. Warren Buffett does not do analysis of shares on basis of only one year figures; instead he works on figures for at least last five years.
Rule 7: Buy shares of companies doing monopoly business - Such companies are becoming less and less in today's world, but still there are companies you can find who can manipulate their selling price at will without effecting their sales a lot. It may be difficult to locate too many of Microsoft's today but careful study will make it evident that there are companies that enjoy major competitive advantage than others.
Warren Buffett will buy such companies over others. Rule 8: Only confused people diversify their investments - If you will ask Warren Buffett about investment diversification he will give you a glare eyes. He believes that all investors shall be ready to wait indefinitely till share prices of fundamentally strong companies become undervalued. Till such time all investors shall save all of their earnings, so that when the time comes they shall not fall short of money for shares investing.
Rule 9: Buy shares to hold them for life - This does not mean that one shall go on holding a share even if the business has gone sick. Warren Buffett says that periodic evaluation of portfolio is very important. If the company us losing its competitive edge or its fundamental superiority then it is better to quit it than holding it forever. But what Buffett means when he says that 'hold it forever' is that before you buy share you should evaluate the share such that you are going to hold it forever as for your kids. Rule Do not invest to make money. Instead invest your money with the objective of generating more and more assets - There are people who enter the share market for making a quick buck.
Warren Buffet will call such people fools. Share investing is not for making quick bucks, but instead it is a longer-term money making machine. The term is so long term that investors even loose the interest of making money. Then what is the motivation for such long term investors?