Investing Lessons: How to Invest, Trade & Achieve Financial Freedom

Showing posts with label How To Invest. Show all posts

Showing posts with label How To Invest. Show all posts

Monday, June 1, 2009

Why Buy & Hold Works?

Trust me - it works!

Because it is a zero sum game. When you buy, someone has to sell or vise versa. So one wins and the other loses. But what happens at the overall level. The market is a zero sum game. If businesses that participate in that market are making money and growing - the overall market value will appreciate otherwise it may decline. The way I look at this situation is either at the macro or the micro level. At the macro level you buy the market - US, developed, emerging, small cap ... and at the micro level you participate in an individual business by buying individual company stock. In both cases your research and confidence is paramount to making this model work. Why you pick a market or a stock, what is your time horizon, what are the growth prospects, what are the risk factors, what is your diversification strategy are some of the questions worth pondering.

Bottomline - in most cases stay away from trying to time the market or stock - either yourself of thru middlemen. Middlemen in my mind are the players who buy and sell for you to capture that elusive 'home run'. What you end up doing is shaving off potential benefits in the form of commissions, fees and bad timing. Here is an excerpt from a recent interview John Bogle did and explained why "buy & hold" still works.

"I read all the time that investors need to move beyond a buy-and-hold strategy,
but this strikes me as being a dumb idea. What is the advantage of swapping
stock with other people? The stock market system is based on the idea of pitting
the interests of one investor against another, knowing that only one will win.
People say it's a stock-pickers market but, if your stock picker is good, then
mine is bad. It's all a gimmick. Of course buy and hold is the thing to do. A
genius like Jim Cramer hasn't gone anywhere for 10-14 years and few [managed]
mutual funds have beaten the market indices during the same period. It's just
market timing, and your good market timing is my bad market timing. [We invest
within] a totally illogical system where we move money around and the
middlemen--or what Warren Buffet calls the "helpers"--are the only ones getting
wealthy."

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Saturday, May 2, 2009

Monkeys pick bottoms!

What do I do now ...

Do you live in a tree? If the answer is no – then you probably don’t spend most of your time picking bottoms. If you don’t live in a tree but still spend most of your time picking bottoms – there may be a problem.

The problem is that we cannot predict the future. It is a fashionable habit to predict but ultimately it is just talk. Talk that can lead us to make irrational or bad decisions.

Financial decisions usually merit some due diligence to get the best possible deal. But in the search for the best possible deal we can get stuck trying to time the market. When is the best time to get back in the market, should I refinance now or wait for rates to fall to below 4%, maybe if I wait another 6 months house prices will fall another 50% …

Finding a good price is always important but it should be considered within the context of the overall situation. The overall situation may merit consideration of other factors like affordability, financial status, need and long-term implications. Do you buy something just because it is on sale or do you buy something because you need it? Is the stress of waiting and evaluating worth the miniscule advantage you may derive if the price drops another percentage point? Will mortgage rates drop much further – probably not? Will mortgage rates go up – probably yes? Will the market in the short term go up – who knows? Will the market in the long term go up – probably yes but contingent of various other factors?

Do your due diligence, understand the overall situation and make price one component of the overall financial decision. When you risk everything for the sake of picking bottoms – it becomes monkey business!

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Tuesday, March 31, 2009

The Short Term And The Long Term

Plot your moves - in advance!

It is amazing how in a crisis we focus solely on the short term. The immediate is paramount because survival, continuation or existence comes into play. If you can't make it through the short term, the long term has no relevance. So focusing on the short term is necessary and prudent but ...

The but is there because the astute and smart plan out the long term before they are forced to focus solely on the short term. The winners contemplate the short term in the context of the long term, not by accident but because of planning and preparation. Here are some observations at three levels

National Interest
The current turmoil facing our economy is being dealt with unprecedented and unconventional actions by the government. The argument goes that the immediate need to mitigate "systemic risk" trumps the need to have a long term strategy or roadmap. We are in a crisis and need to act now with scant regard for future consequences. This mode of thinking is concerning. I worry about the immediate impacts of this crisis but I also worry about the long term effects of these policies. I am in this for the long haul and need to be convinced that we are pursuing a viable and sustainable strategy (hint hint - Japan and the lost decade). Did we plan for this situation - no. Should we have considered the scenario and planned for it - absolutely!

Yes - it is easy to say in hindsight that we should have but then again there are government agencies, a system of checks & balances and governance models to have prevented this from happening. Or if it happens we should have had the long-term vision to deal with such a crisis.

Organizational Maturity
Every mature business should plan for a downturn. They should anticipate and prepare for tough times which are inevitable. The ones which prepare will have charted a long-term strategy to deal with both the ups and downs of the business cycle. But when you read about the reaction of most businesses to this crisis - it is clear that many were unprepared - they are clearly reacting. Circuit City decided to trim their top performers because they made too much money, Starbucks can't figure out how to sell $4 coffee in a recession, banks can't get their arms around their balance sheets, some auto makers are clearly clueless, many businesses are hacking off their most valuable assets - their employees just to reduce cost and on and on we go.

The smart business is investing in R&D, retraining their workforce, exploring M&A opportunities and in some sense going on a shopping spree. Obviously these businesses are prepared and their short term reaction is aligned with their long term strategy. Now that is a winning formula.

Individual Focus
Do you have a long term strategy? Financial strategy, career strategy, investing strategy ... living your life strategy. If you do then you have long term focus and a strong sense of where you want to be, how you will get there and how you will manage the ups and downs of life.

When folks react to the current market turmoil by dumping their 401(K) or cashing out of the market - it suggests that they had not thought through their investment strategy. The stock market is not a regular and consistent wealth creator. The 8-11% equity returns we are told about are generated in clinical conditions over long periods of time. To make money investing in real companies requires diligence, commitment and time.

If you are uncomfortable with your financial situation today - do what lets you sleep at night but also invest in having a long term vision. A vision which is realistic, actionable and comprehensive. You cannot predict the future but being unprepared and reactive does not get you very far either.

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Saturday, March 21, 2009

Speculation Makes the World Go Around

Place your bets!

Is it a good time to buy stocks? What about distressed real estate? Blue chips are down and financials are dirt cheap - time to buy?

This is the fun world of speculation. We don't know what the future holds but are willing to place a directional bet. So what is wrong with that notion? Isn't all investing betting at some level? After all who knows what the future holds and what will pay dividends in the long term.

Yes - no one knows the future but you can reduce your risk (and increase your return) by betting on what has a high probability of success. Is the probability high that large corporations like IBM, Caterpillar and GE will still be around in five years and handsomely reward their investors? Is the probability high that you can accurately predict the price of gold five years from now?

In the first case your probability is high that you will come out ahead. Your risk is limited and your reward will be limited to reasonable returns. In the second case the probability of being right is low and thereby your chances of hitting the jackpot are also low. You get lucky and get a big payoff or lose it all.

So the question is are you comfortable with small but predictable return or high but volatile return? Both have a place in your portfolio. Some component of your portfolio may be speculative, directional and/or high risk. And some portion of your portfolio may be more boring but predictable and less risky.

Focus on an allocation that suits your risk appetite, time horizon, financial needs and market savvy. Spread your bets and stick around to play for a while!

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Friday, March 6, 2009

The Tipping Point - What Now?

This is not real!

"Irrational pessimism - a fear that stock prices are headed in only one direction -- lower and lower".

My wife got on my case last night and stated that we should have sold our investments six months ago and bought them back now. I agreed with her that would have been the smart thing to do. The only problem being - what is obvious now is in hindsight. And everyone's a genius in hindsight.

So I quizzed her - what should we do now? Should we sell now and buy back when the Dow hits 4000 or should we stay put because the market is at the bottom? Obviously her response was - I don't know!

I guess no one knows where we are headed. Citibank at $1, GE at $6, unemployment inching towards 10%, foreclosures in two digits and getting worse ... it's getting scary. Scary to the point of panic and all hope is lost. Too much CNBC, too much negative news, too much doom & gloom starts to take its toll. Ironically - now we are overshooting on the negative by seriously contemplating - can the Dow go to zero?

A global recession and bear market has shaken our trust in capitalism to the extent that we are questioning the future of society, economies and even countries. It is bad - OK it is very bad but to wonder if this is it may be a little too fatalistic.

In my view - we are facing a financial crisis, which will abate. It will take time, markets will change, players will change and maybe the rules will change but eventually we will persist. This is the time to entrench, reflect, assess and invest.

“Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so.”
Warren Buffett 2009

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Friday, February 20, 2009

The price is right!

Ready to try?

Citibank was trading at above $50 not too long ago. Goldman Saks hit a high of $235. GE was hovering above $35. After a 50% or more price reduction - the price became even more attractive - Citi at $10, GS at $120 and GE at $15. Wow - a 50-80% discount on quality blue chips (2 of which are endorsed by none other than the oracle of Omaha) - the price had to be right.

Guess what - Citi closed yesterday at $2 and change, GE is at $10 and GS is flirting with $80. So is this a good price?

If you don't know - conclusively - then pause and ponder.

The fundamental rule of buying is - matching value with price. You use this rule everyday. Most spending like food, clothes, products, services are predicated by value and price. Even how much you get paid is determined by this rule. So shouldn't you know what is the value of the business in which you are investing?

Bottomline - do your homework and figure out the value of the business, outsource this task to an expert or stay away from this investing game (at least picking individual stocks). The price on the tape is a reflection of market psychology today - it is not an assessment of business value.

If you got burned chasing cheap prices recently - remember it's all relative. What is cheap today can be marked down another 50% tomorrow. Ouch!

"Only Goldman (GS - commentary - Cramer's Take) got it right. That means you should forget about the other guys, even sell the other guys into strength and just buy Goldman Sachs up here. I don't care that it is up $13 and change; it isn't done. I believe Goldman can earn $30 and deserves a 10 multiple."
Cramer 11/07 - GS closed at $220

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Sunday, January 25, 2009

Are you going up, down or staying put?

You gotta move!

The diminishing value of 401(K) accounts is causing many of my coworkers to start to panic. Some of them are in shock, some are confused and some are reacting in irrational ways. Stopping or reducing contributions is one theme but some folks are going a step ahead and liquidating their accounts. Talk about buy high and sell low!

I understand the fear and restlessness - I am not above the market psychology but I am not reacting. Some lessons learned over the years are working for me.

Am I still buying? Absolutely and if you have a long-term time horizon you should be buying too. What should you be buying? The answer to that question is contingent on your financial IQ, risk threshold and time horizon. Once you determine your risk/reward profile and find appropriate asset classes to invest in - it is time to start investing. How much to save and how much to invest? And how to save? And how to invest ...

The bottomline folks is education, which leads to readiness and thereby risk mitigation. If the current market turmoil is a wakeup call - so be it. Use this opportunity to get smart about your financial IQ. Now is not the time to be reacting but taking deliberate actions to set your financial life in order. It takes time and effort but hey - it's your money!

"As a rock climber, the one thing you learn is that those who panic, die on the mountain. You don't just sit on the mountain. You either go up or go down, but don't just sit and wait to get clobbered. If you go down and survive, you can come back another day. You have to ask the question, What can we do not just to survive but to turn this into a defining point in history?"
Jim Collins

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Friday, October 31, 2008

Is It Time To Move Beyond the Financial Turmoil?

Looking for value!

In my real estate license classes, each and every instructor got on his or her soap box and spewed their opinion on the current financial mess. Since they are associated with the real estate industry they felt more knowledgeable about the subject or just had a captive audience and wanted to vent – suffice is to say they blamed everyone for this mess. The ignorant, the greedy, the incompetent, the incumbent, the retired, the foreigner … even Joe the Plumber came up in this rant.

Everyone had an opinion and that is no surprise. We all are eager to judge and pin blame on somebody. I guess it makes us feel better if we can identify the villain. In times of crisis – you need a head to calm the crowds down.

Sooner than later the witch hunt will begin for the culprits. We will feel closure as the guilt are tried and prosecuted for ripping off the naïve and ignorant. Remember Enron and WorldCom! Knowing that the guilt are behind bars makes the pain of losing most of your money more bearable.

But here is my question. Did we not participate in this sham? Yes – you and me. We bought real estate, we refinanced, we spend the home-equity, we upgraded to bigger houses, we marveled at our ballooning stock portfolios, we speculated on the commodities boom, we bought emerging markets, ventured into frontier markets and gloated at our financial smarts.

Bubbles are formed by collusion. And main street was an active participant in this bubble. We can debate the amount of blame to dish out to the various parties but in the end none of us is going to come out blameless.

Ranting about the mess may help you let off some steam but what puts you ahead in this game is forward thinking. Learn from what has happened but start to move forward. Consider the following advice from John Bogle

“From today's levels, it's reasonable to think that the S&P 500's profits could grow by 7% a year. Throw in the current dividend
yield of over 3%, and I believes stocks could return 10% a year for the next
decade.”

Read the rest of what Mr. Bogle and others have to say here!

(Photo courtesy - Flickr/honjooshi58)

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Sunday, September 7, 2008

Diversification - A Cornerstone of Smart Investing

Choices galore!

The last few weeks have been painful for any equity investor. The trend has been down, down and more down. Although we all knew that the market is headed towards a correction - when it happens it hurts. So how can you still make money when the market is down 20% in less than a year?

The magic word is diversification. Simply put diversification is spreading your investments across an array of products. Where we miss the point is 'array of products'. My definition of diversification used to be the S&P 500. I though diversified across 500 companies was broad enough.

But I was wrong. The US market was a component of the global market and I had no direct exposure to non-US market. I rectified that by investing in developed and emerging markets. Over the last few years my portfolio has benefited from the stupendous growth in the emerging markets.

Recently I have started exploring options to invest in non-cash assets like real estate. Commodities have been another investment class that has seen a huge run-up recently. With the plethora of choices available today via ETFs and other financial products - diversification is a matter of education and intention.

Diversify your portfolio to maximize your investment choices and minimize your risk - that is smart investing.

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Sunday, August 24, 2008

Is Wall Street Ripping You Off?

Which end of the bull ..

Cramer was venting recently about the unfairness of the Freddie/Fannie decline. His contention was the some people obviously knew something and were profiting from it while the average Joe was getting the short end of the stick. Then there are the conspiracy theories about how the Bear Sterns debacle was premeditated and engineered in favor of the powerful and well connected. As the sub-prime saga unfolds the role of rating agencies is starting to get questioned. In the pursuit to increase top line revenue did they forget what their purpose was? And might I remind you about the large scale collusion between bankers, analyst, traders, regulatory agencies and top notch executives which led to the collapse of Enron, WorldCom and Tyco.

The examples above are some instances that we know about, many others we never hear about. Systemic rip-off, exceptions to the norm, conspiracy - large or small - who knows. The more pertinent question is - what are the options?

A Bunch of Crooks
If you paint the whole financial system as rotten and run by crooks – you have no choice but to stay away. And that is a shame because there is money to be made by investing in the market – if you are financially smart and are willing to play the game.

Let’s Play the Game
You can make money in the market. People have done it and are doing it today. Average Joe’s like you and me. Reduce your risk, manage your greed and have patience. Reduce your risk by knowing what you are doing, diversifying and having a plan. Manage your greed by not falling for the get rich quick schemes. And finally have patience.

You Are My Friend
Give your money to Wall Street, your broker, your company, your brother-in-law and let them define your financial destiny. Some get lucky but most regret such blind faith. In my experience – no one cares about my money more than I do so the onus is on me to make it happen.

In the end if you learn to play the game you will make money. Stay away from the shenanigans and dubious schemes out there – because there is always something out there, which is too good to be true!

(Photo coutesy riclane/Flickr)

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Wednesday, July 23, 2008

Investing in a Bear Market!

If you only invest in bull markets the probability of making decent returns is limited. You generate greater return when you invest in a bear market. Here are a few pointers from some smart folks about investing in times like these.

"If a stock [I own] goes down 50%, I'd look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month."
Warren Buffett

"If you're serious about getting rich, now is the time. We've entered a period of mass-produced pessimism, when bad news is everywhere, and the best time to invest is when optimists become pessimists."
Robert Kiyosaki

"The answer lies in a phased, multi-quarter approach by investors that benefit from the following structural attributes: a high degree of capital permanency that steers clear of the need to finance sudden withdrawals; a willingness to take long-term views that can be sustained through wild market swings; and a process that accommodates opportunities that, in some cases, do not fit well into traditional classifications of asset classes."
Mohamed El-Erian

So what does all this wisdom mean? Don't panic, keep investing, find bargains, invest for the long term and stick to your plan. Remember you want to "buy low and sell high" and not the other way around.

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Sunday, June 29, 2008

Focusing on the Macro Trends of Tomorrow

Volatility! Makes your head spin. Till recently the concensus was - the credit crisis is behind us, earnings are good, globalization works - the bulls run. Today, we are officially in bear territory, back to where we were in 2006 and it could get worse.

Who do you trust? Who do you listen to? What do you sell or buy? What actions do you take - if any? My take on this situation - forget the noise, instead focus on the trends. And the trends to monitor are

Energy: Oil at $140 may be a fluke but there is an energy trend in the works. The billions of new consumers all want their cars, fridges and fast food. Energy needs are growing exponentially while proven supply models are unsustainable. New energy sources, alternative fuels, conservation, consumption and behavior are all prone to change dramatically in the next decade.
Globalization: BRIC, emerging economies and Chindia are regular discussion topics in newspapers, TV and online media. The world economy with its global workforce, manufacturing capabilities and increasing buying power is not a fad. How the global socio-economic factors evolve is yet to be determined? Will the US retain its economic supremacy? How will the billions of consumers in India and China impact corporate profits & growth?
Technology: The Internet revolution has just begun. Compound that with telecommunications, wireless and mobile computing and you have a potent mix of change elements, which have the power to drastically change our life styles. How we communicate, live and shop are all subject to change.
Environment: Is the planet heating up? The artic ice cap is melting, weather patterns are changing, oceans are warming up and global warming is a proven fact. Fossil fuels, human waste, destruction of rain forests and pollution caused by human activities are all changing the earth. Some effects are apparant, some will manifest themselves in the years to come.

Investing has to be a long-term and holistic discipline. You have to account for the trends and changes shaping our world. Invest prudently in companies and ideas that are evolving because therein lies the huge returns of tomorrow.

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Tuesday, May 27, 2008

College Savings Myths - Busted by Fidelity

Fidelity Investor's Weekly provided insight into some pertinent college saving myths. Bottom line - saving for college is good!

Myth 1:Saving in a 529 plan will affect my child's eligibility to receive financial aid
529 assets are associated with you and not your child. According to the federal financial aid formula, parent-owned assets are assessed at approximately 5%, compared with 20% of the child's assets.
Myth 2: I shouldn't risk investing my money in a college savings account when the market is so volatile
Think dollar cost averaging and contribute regularly.
Myth 3 : I'll lose control over the assets in a 529 plan if my child decides not to attend college
Assets can be used to fund a different childs education or your own.
Myth 4: 529 plans offer limited investment options
A wide variety of investment choices are available. Check out the options
Myth 5: I don't have enough money to open a 529 plan
Minimum requirements are $15 - $50.
Myth 6: I don't want to limit my child's college options by having to invest in my state-sponsored 529 plan
Getting into a good school is a bigger challenge - the money will follow you.
Myth 7: The contribution limits of 529 plans won't allow me to save enough for college
Contribution limits are $300K or more so this is a non-issue.
Myth 8: You can get a better return on your investments if you create your own portfolio of funds versus savings in a 529 plan
Possible but keep in mind the other benefits (like tax reduction).

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Sunday, May 11, 2008

How to get financially smart – for free!

Learning for free

Yes – it is possible to sharpen your financial acumen for free. I had to skip work to attend a ThinkorSwim seminar on option trading but it was definitely worth the time off. What I learned in the seminar will be another post but here are some thoughts on free learning.

What is free?
You may be surprised but there are enough free resources to make any one of us financially astute. Free financial seminars usually come bundled with some sales and marketing for the company products or trading platform but there is ample professional advice being imparted in these sessions to make them worth attending. If you are into options trading – I would highly recommend ThinkorSwim seminars (most are free) and CBOE sessions (which are not free but definitely worth the fee). Most financial institutions (Fidelity, Vanguard etc.) also sponsor financial/retirement planning seminars. Check them out.

The other resource to be leveraged is the public library. My mantra is read before you buy. I do buy some books (see my listing on the right) but I leverage my local library to keep up with the current financial bestsellers.

Online classes and webinars are also a great resource to get financial coaching and listen to industry gurus. Check out financial institutions, brokerage houses and trading/investing platform companies for online learning opportunities.

Who is Learning?
About 80% of the attendees in this sold out class on options trading were retirees. Most of the people I talked to expressed a strong desire to increase their income potential due to limited retirement income. It is a sad but true state of the baby boomer’s retirement dilemma. Ready to retire but not enough income to make it happen. At least this set of would-be retirees was making an effort to learn new financial techniques to augment their income.

On the flip side what could one surmise from the absence of the younger generation at this seminar. One could assume that the younger generation has either figured out their retirement strategy or they will scramble when retirement is imminent.

Can I learn?
The resources are available for anyone to become financially smart. What is needed to make it happen is motivation? The motivation to learn and improve your financial status will help create the urgency and time. You can dream of quitting your job, retiring early, retiring rich, having passive income or you can turn dreams into reality by learning and acting.

So register for a financial seminar, take an online class or listen to your favorite financial guru’s podcast/webinar. It is free and it will make you smart!

(Photo courtesy - Flickr)

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Sunday, April 27, 2008

Too Much Noise Can Make You Poor!

Trust me - everthing's fine!

There are newspapers, magazines, newsletters, blogs, RSS feeds, TV channels, news feeds, interviews and assessments - and you try to keep up! You read a few magazines, subscribe to some blogs, scan the newspaper and catch CNBC a few times a day. The question is - are you any smarter after absorbing all this information?

Vested Interest
Everyone has an vested interest in what they do - including you. You want information about the ecomony or the market so you can make better investing decisions and eventually make more money. CNBC has an interest in getting high ratings so they go for hype and sensationalism. The political figures say things that will help them get elected. The analysts tout their investment bank's offering so they can make more money. The special guest wants to plug his book and the list goes on.

Everyone is in it for something so be careful what you believe and what you act upon. What may be good for someone else may not be good for you.

What is Your Pitch
You can hear and read all you want but finally you have to come up with your own decisions. And your decision needs to be grounded in your research and analysis. You have heard others, now what do you say? If you spend most of your time immersed in the media - when are you finding time to do your own research. Don't make the mistake of labelling others work as your own. This is one area where copying someone's work may not be very prudent.

Follow the Herd
If you are not careful the noise can overwhelm you. You start to believe what the media pumps out. When you are confronted with the same message over and over again - you also start to fall for it. Obviously being comfortable in your own assessment and analysis is important but you have to learn to manage the noise.

Switch off the TV for a while. Skip the newspaper for a day. Ignore the hype and instead put your investments on long-term autopilot. Do your research, buy quality business, buy the markets, diversify and let compounding work for you.

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Sunday, April 13, 2008

Are You Ready for the Next Bubble?

Ready to pop!

Bubbles have a way of reappearing. When one pops, a new one starts to inflate. There was the dot-com bubble, then the housing bubble, somewhere in between there was an emerging market bubble and now possibly a commodity bubble. So what gives? Are we destined to jump from bubble to bubble – fervently trying to avoid the mess the eventual popping creates?

What creates a bubble? I my humble opinion it is greed. I know I was greedy when I jumped on the dot-com bandwagon. I was looking for easy and fast money. I had no idea what I was buying but the allure of easy return was compelling. The herd was sold on the concept and I did not want to be left behind. The media was pandering to what the public wanted. Wall Street as usual was busy minting money.

When that bubble fizzled, we licked our wounds for a while and then wondered how we double, triple and quadruple our money – quickly. Buying and selling property seemed to fit the bill. Driven by the promise of a quick buck – we piled in on the real estate boom. Investment property, second homes, flipping and expecting outsized leveraged profits all seemed to make sense. Once again the media and Wall Street got behind the craze.

The routine is pretty obvious. Today we are in the throes of another get rich quick scheme gone awry. There is speculation (how bad will it get), there is incredulousness (what were people thinking), there is finger pointing (don’t blame Mr. Greenspan) and there is anxiousness – where should I invest my money? The common phrases to epitomize the investment dilemma are - there is money on the sidelines or the more exotic sounding reference to excess liquidity sloshing around in the market. In other words – folks are sitting on cash waiting for the next great investment opportunity. What will that be – maybe social networking, wireless broadband, frontier markets, energy … Sooner or later there will another once in a lifetime opportunity because this time it will be different.

If you are smart enough to time the market or identify the next trend – go for it. Most people I know (including myself) cannot. My strategy is to stick with the dull and boring. Invest consistently and regularly in a diversified set of markets or businesses. Since I have time on my side – a 10% annualized return will do wonders for my portfolio in the long term. Will I miss the next big thing? Probably but I would rather go slow and steady instead of ‘double or nothing’. After all there is always the super lotto – if I feel lucky!

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Tuesday, April 8, 2008

Caution - Anaylst Predicting Bull!

It's all bull!

In my profession, if a PM cannot accurately project how his project will progress - he is sooner or later in trouble. Smart PMs do their due diligence, crunch the numbers, review historical data, discuss their estimation models with SMEs and then project timelines and cost. PMs don't have a crystal ball but good estimation practices lead to reasonable projections most of the time. When estimates go awry - PMs take corrective action by addressing the issue, replanning and restimating. It is ultimately a question of trust, competency and accountability.

Wall street analysts have similar job functions but are presumably not held to the same quality standard. Consider the following equity analyst failing reported at Bloomberg.

When Wall Street's almost 1,800 equity analysts figured U.S. earnings growth for the third quarter of 2007, they were 8.2 percentage points too high. Forecasts for the fourth quarter were wrong, too, overestimating profits by 33.5 percentage points, the biggest miss ever.
Analysts say 2008 will be the best year ever for U.S. profits, data compiled by Bloomberg show. Earnings for companies in the Standard & Poor's 500 Index will rise 10.7 percent, even after Federal Reserve Chairman Ben S. Bernanke acknowledged that the economy may fall into a recession and banks reported $232 billion of writedowns and losses, the forecasts show.
Analysts' recommendations to `buy' or `hold' U.S. shares climbed to 94.5 percent, the highest rate in more than five years.
Wall Street predictions in the second half of 2007 were too bullish even after analysts cut them. At the start of the third quarter, average estimates called for earnings to increase 5.7 percent. By the end of the quarter, analysts had cut by more than half to 2.7 percent. Companies ended up reporting a 2.5 percent drop in profits.
The forecasts were even farther from the mark in the fourth quarter. Analysts predicted 10.9 percent growth before flipping the projection to a decline of 7.9 percent. S&P 500 companies reported that profit dropped 22.6 percent.

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Monday, March 24, 2008

Do You Believe The CEO?

"The past week has been an incredibly difficult time for Bear Stearns. This transaction represents the best outcome for all of our constituencies."
ALAN SCHWARTZ, president and CEO of Bear Stearns, which, as part of a federal bailout, was acquired by rival JPMorgan Chase for $236.2 million--a meager $2 per share

I guess $2 is better than no dollars but to claim that this is the best outcome is a little far fetched. Company management is a key evaluation criterion when you consider buying shares of any company. Primarily because you want to invest in a business that is run by a competent, honest and transparent management team.

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