Investing X-Factors

Another great article by Emil Lee on fool.com.  I love these guys…..

It's easy to get carried away with anecdotal "evidence" -- like the widely held notion that Internet usage has doubled every three months. Nonetheless, anecdotal and qualitative information can be a huge investment edge for intelligent Fools.

Investors often shun or ignore non-numeric pieces of information. After all, you can't just plug that data into a discounted cash flow model. Observations like "management uses secondhand furniture, so it seems like a good steward of capital" don't readily mesh with spreadsheets and statistics. However, I often think that these pieces of information -- investing X-factors, as I call them -- can make or break your rationale for investing in a particular company. Here are a few of my favorite X-factors.

The "I'm sorry" factor
If love means never having to say you're sorry, then love has no place in the investment world. Investors should read through five or more years of a chairman's annual letters, or look at conference call transcripts, with an eye toward the firm's toughest years. When the company does not meet its targets, its executives' response to that failure should be the telltale sign of whether management holds itself accountable.

Some managers simply own up to such failures, explaining exactly what went wrong and taking the blame. The Q2 2006 earnings call for Chico's FAS (NYSE: CHS) provides a great example. CEO Scott Edmond didn't mince words when he called the company's August performance "a disappointment to us all." Instead of blaming the weather or gas prices, Edmond then listed a series of operational problems that needed to be fixed.

Although Chico's is currently in a rough patch, the company enjoys one of retail's highest sales-per-square-foot metrics, between $900 and $1,000. I think that speaks well of its management's accountability.

The "How many managers does it take to screw in a lightbulb?" factor
I once studied a restaurant company that employed a CFO, a director of investor relations, and a vice president of investor communications -- despite sporting a market cap of less than $500 million. I have no idea why such a small company would need so many layers of management. Unsurprisingly, shares of this wasteful company have lagged for more than five years.

Conversely, I become very interested whenever I spot ultra-lean management structures. One obvious example would be Inside Value selection Berkshire Hathaway (NYSE: BRK-A), which runs the $180 billion behemoth with only 19 employees at its "world headquarters." Buffett himself provides the best reason for lean management: "Because everyone has a great deal to do, a very great deal gets done."

Other efficiently managed companies include Contango Oil & Gas (AMEX: MCF), which runs a $600 million market cap company with six employees, and Redwood Trust (NYSE: RWT), a mortgage lender with about $12 billion in earning assets and only 90 employees.

The "eye on the ball" factor
Wasteful companies will inevitably find even more ways to erode shareholder values. For example, at the laggard restaurant company I mentioned above, I noticed that the company spent years doing million-dollar consulting studies about how satisfied guests spend more than unsatisfied guests.

Call me naive, but I don't think you should have to pay big bucks to a team of consultants to figure out that satisfaction leads to better sales. Furthermore, I was distressed that the same managers who spent lavishly on detailed studies never seemed to understand why their profits stayed so stagnant.

In contrast, I think the management team at CKE Restaurants (NYSE: CKR) did a great job keeping their collective eye on the ball. They've simplified their brand offerings, introduced tasty products via splashy advertising, and improved their restaurants' speed of service. All of these contributed directly to the bottom line, helping shares roughly quadruple since 2003.

Foolish final thoughts
Remember, Fools -- numbers aren't the only useful facts available when gauging a company's merits. They may be subjective, but I believe that X-factors like these can give Foolish investors a serious edge in the stock market.

Ramakanth Reddy.
http://www.ramidi.com
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Things To Look For In An Investment

This is an article I found on one of the bloggers site http://sebastianangus.tiltblog.se/2007/09/23/things-to-look-for-in-an-investment/…  Hope it helps you. 

By Joseph Kenny Investment involves staking capital in an enterprise, with the expectation of profit. It is nothing but the use of liquid funds to gain income or increase capital. In order for money to grow, investors need to invest judiciously. There are certain guidelines to be followed to avoid major mistakes. Price of the Company: An investor needs to research on the Market Capitalization of the company he is planning to invest in. Market Capitalization or Market Cap is the total cost of acquiring the entire company. It refers to the price of all outstanding shares of a company multiplied by the quoted price per share, at any given point of time. It is important to gauge the relative cost of a stock, before making any investments in the company. This can be done by learning the P/E Ratio. P/E ratio refers to the Price is to Earnings Ratio. It is the ratio of a companys current share price to its earnings per share. P/E Ratio = Market Value per Share Earnings per Share (EPS) Example: If a company is trading at $50 per share and earnings per share over the last 1 year were $ 2 per share, then, P/E ratio for this companys stocks would be $50/$2, that is, $25. High P/E value indicates that the company has high growth prospects in the future. P/E ratio can be used to make important investment decisions, by comparing P/E values of various companies. Is The Company Buying Back Shares: It is very important for investors to observe the per-share growth of a company. A company may not show considerable growth in sales, profit and revenue for a few consecutive years, but could generate large returns for investors by dropping the total number of outstanding shares. Investment Policy of the Investor: An investor needs to have valid reasons for investing in a particular enterprise. Investment decisions should be solely based on the authenticity of a company. Authenticity, here involves the reputation of the company, its management, profits earned, market cap and other such fundamentals, related to economics and finance. Long Term Goals of the Investor: Investment involves risk but intelligent planning of long-term goals makes investing safe. An investor needs to select a good company that requires him to pay the minimum possible amount initially. He should consider the Dollar-cost Averaging Program. Dollar Cost Averaging Program: This involves investing a particular amount in the same investment, periodically. Investors need not invest a lump sum amount in a stock all at once. They can invest a little every month in the same stock. Since an investor puts in the same amount of money, he can purchase more shares when the prices are lower. This basically lowers an investors average cost per share in comparison to the average market price per share, in the same time period. Dollar cost averaging builds the habit of setting aside money for investment. Reinvesting the dividends, to grow over a long period of time, often proves highly profitable. An investor should look for all valid essentials of an investment before investing. Joe Kenny writes for the Credit Card Guide, offering the latest 0% credit cards, visit today for introductory 0% balance transfers and start clearing credit card debt today.

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You must invest regularly to see profits

This is a great suggestion by Vivek kaul on Sify.com

Much as the so-called market experts may tell you otherwise, the trick of successful investing is not so much about timing your entry and exit right, as much as the time spent in the market. Indeed, timing the market is very difficult and even professional investors have a tough time doing it. Experts would tell you that the time to buy is when the markets are falling. But when prices are falling, it’s psychologically difficult to buy. Vice versa, a lot of investors enter the market when it is peaking and it is difficult to keep away from going with the herd. The result of all this is that you buy when the market is peaking and sell out when it is going down. How on earth does one predict if the market would dip tomorrow or thereon? What option do you have, then? Well, turn to your grandfather. The old man was so right when he advised you to keep investing regularly. And how does regular investing help? The simplest answer seems to be that an investor can keep investing even if he does not have a large amount of money to invest. Also with regular investment, money earmarked for investment does not go towards spending. What’s more, regular investing brings into play something called ‘cost averaging’. Say you invest Rs 5,000 to buy 100 shares of A Ltd at Rs 50 per share. Some time later, the price drops to Rs 25 and you invest Rs 5,000 again. You now have 300 shares of A Ltd at an average price per share of Rs 33.33. You stand to make a profit when the scrip price becomes greater than Rs 33.33. Had you bought as many shares when the price was at Rs 50, you would have made a profit on your investment only when the price went over Rs 50. The beauty of regular investing lies in the fact that an investor buys more when the price is less and vice versa, then be it individual stocks or mutual funds. As Benjamin Graham points out in his all time classic The Intelligent Investor, “The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into his basic disadvantage.”

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Are You a Better Investor?

As every one of you, I am also interested in getting better at investing.  Here is an article I found on CNN money.  Hope you will like it.

 

Over the past 35 years, investing has become simple, cheap and convenient. Now it's a snap to build your wealth - or destroy it.

 

By Jason Zweig, Money Magazine senior writer/columnist

September 18 2007: 8:31 AM EDT

NEW YORK (Money Magazine) -- It is Oct. 26, 1972. You turn on your transistor radio and the newscaster reads the closing-bell report from the New York Stock Exchange: The Dow Jones industrial average - led by stocks like Bethlehem Steel, International Harvester, Johns-Manville and Union Carbide - closed at 950.56 on an extremely heavy volume of 20.8 million shares.

The next morning you drive over to see George, your stockbroker. He recommends the Fidelity Trend Fund, which charges a sales commission, or load, of only 8.5 percent; most of the 400 or so load funds in existence charge 8.75 percent. Whenever you buy and sell a stock, George's commission will average about 1.3 percent of the transaction. But so would any other broker's. In 1972 "the investing world was much easier to comprehend," says Joel Seligman, a financial historian and president of the University of Rochester. You knew your broker, and he sold stocks, not funds of hedge funds. Your bank took deposits, not mutual-fund commissions. Your insurance agent didn't come at you swinging a variable annuity like a meat ax. During a typical week in 1972, the total of all trades on the New York Stock Exchange was less than the trading volume of Microsoft (Charts, Fortune 500) shares on a typical day in 2007.

Road map to a rich life

But the investing world of 1972 was also low in choice, high in cost and short on convenience and information. Nasdaq and money-market funds were less than a year old. There was no such thing as a discount broker, an index fund or a municipal bond fund, not to mention an IRA or a 401(k).

If you wanted a no-load fund, "first you had to find it," recalls fund expert Michael Lipper of Lipper Advisory Services. That meant watching for an ad, making a toll call, waiting for the prospectus, then mailing in the check - a process that could take weeks.

And 7 percent of all stock trades in 1972 "failed to deliver," meaning that the paper certificates for the shares did not change hands within five days, potentially voiding the transaction. To check on your investments, you waited for tomorrow's newspaper, or next week's - or the maiden issue of Money Magazine that October, which many charter subscribers signed up for as the only convenient way to track their mutual funds.

2007: A simpler time

Fast-forward to 2007. Your stockbroker and your banker are a swirl of electrons. Adjusted for inflation, the average commission on a retail stock trade comes to about 3 percent of what it cost in 1972. You can choose from among more than 8,000 mutual funds and over 500 exchange-traded funds, or ETFs. You can buy a stock without getting out of your pajamas, and you've never had a trade fail to deliver. And you can watch the prices of your stocks change in real time from your office computer or your iPhone.

Less cost, more choice and greater convenience: Investing has never been simpler. The birth of the index fund in 1976 enabled anybody with a couple thousand dollars to own every major U.S. stock for less than 0.2 percent in annual expenses. Critics scoffed when Vanguard rolled out the first index fund - "The name of the game is to be the best," said Fidelity chairman Ned Johnson, "and I can't conceive of investment managers not even trying to do better than average" - but year in and year out, indexing has beaten roughly three-quarters of all funds. The investor who minimizes costs maximizes returns. Period.

More recently, indexing has spread to other markets - bonds, foreign stocks, real estate - so you can minimize your costs and maximize your opportunities for profit by covering every base. Meanwhile, the electronic ease of dollar-cost averaging (automatically routing a fixed amount from your bank to your index funds once a month, every month) means you can be a committed investor without ever lifting a finger, second-guessing yourself or timing the market.

Combine the two strategies of indexing and dollar-cost averaging and you can hold the entire planet in a single portfolio on permanent autopilot. Nothing could be simpler.

One thing, however, hasn't changed over the past 35 years: human nature. In 1972, Benjamin Graham was finishing the revise of his seminal work, "The Intelligent Investor," in which he reminded readers that "the investor's chief obstacle - indeed, his worst enemy - is likely to be himself."

Then, as now, investors got in trouble by acting on impulse: either getting carried away by greed or being paralyzed by fear. And solutions like indexing have always seemed a little unsatisfying. You want investing to be more complex so you can feel special when you figure it out. And Wall Street wants it to be more complex so it can make more money off your attempts to figure it out.

Thus in the first seven months of 2007, more than 130 ETFs were created to invest in commodities, foreign currencies and single-industry sectors. You can bet on the Swedish krona, buy a basket of carbon-emissions trading credits or attempt to gain twice as much as mid-size stocks lose when they go down. There's now a fund for every conceivable need - and for plenty of inconceivable needs too.

Three rules to invest by

So how do you put all the innovations of the past 35 years to the best use for you, not Wall Street? Follow these rules:

• If there's a cheap way and an expensive way to solve an investing problem, stick with the cheap one. The typical hedge fund gouges clients but produces mediocre returns. As for mutual funds, a recent study found that each 1 percent increase in annual expenses reduces performance by 1.6 percent; managers may be taking on more risk to overcome the drag of higher costs.

• High returns and low risks don't come in the same package. As Milton Friedman said, "There's no such thing as a free lunch." Just this summer, bank-loan and long-short funds became the latest "low risk, high return" products to flame out.

• If you are presented with too many choices, you'll end up afraid to choose at all. Psychologists have shown that having to pick among dozens of options not only makes it much harder for us to make up our minds, but it also fills us with regret. No matter what we choose, we worry that another choice must have been better. So don't bother scouring among thousands of mutual funds and packing your 401(k) and other accounts with 78 of them. Instead, own a handful of low-cost, diversified index funds, add to them every month and do nothing else.

The bottom line

Despite Wall Street's unrelenting efforts to complicate it, investing can be simple. But it isn't easy. In 2007 as in 1972, building wealth is very much like losing weight. Eat less, exercise more: That's simple! But it's not easy, because the world is teeming with chocolate cake and Cheetos. Likewise, buy a diversified basket of index funds and do nothing: That's simple! But it's not easy because the world is full of TV touts, cold-calling brokers and (temporarily) hot funds.

Realize that what's good about the difference between 1972 and 2007 is also what's bad. Lower cost is great if you trade rarely and wisely, but not if it tempts you into buying and selling constantly. More choice is great if you add a few selected good things to your portfolio in moderation, but not if you end up with an unplanned jumble of investments. More convenience is great if you use it to make your life easier, but not if you take time away from family and friends to update your stock portfolio.

Lower cost, more choice and greater convenience are not means to an end, they are the end. Use them to achieve some other result, and you will fritter away the advantages the past 35 years have brought. You might as well be back in 1972, wearing plaid bell-bottoms and driving a Dodge Dart.

Jason Zweig is the author of the new book "Your Money and Your Brain." E-mail him at investor@moneymail.com. 

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The Fengshui of Stocks

Can you believe??    Using Fengshui for stocks?  Hmmmmmmm doesn’t sound like a good investing idea, but who knows it might work if you believe in it.  I wouldn’t suggest though.   Here is the article from one of the bloggers.

Chinese investors are finding a new application of the country’s ancient philosophies. I Ching, Ying Yang and the Eight Diagrams - classics and concepts from more than two thousand years ago - are now directing the buying and selling of stocks in the 21st century’s hottest stock market.

Zhao Zhe is one such investor. He said he could predict the trend of the Shanghai stock market by the Eight Diagrams of Chou Yi, Securities Daily reported. He explains how it works: Buyers are Yang and sellers are Ying. The interaction of the two opposing forces caused the ups and downs of the market. An extreme of Ying would unavoidably turn to Yang, and vise versa. To predict the details of the market, Zhao uses the Eight Diagrams and calculate future moves by the method of Xiang, Shu, Li and Yi.

It is difficult to find out how many Chinese investors are using such method, but beneath the surface is a language system that is indicative of Chinese investors’ mentality.

A stock is called a Pan, literally meaning a dish. A must-know word is Cao Pan Shou, or hands that manipulate the dish. Zhao is a successful “hand” and has made 18 million Yuan in trading stocks. These “hands” are usually institutional investors with large capital in a stock, and are thought to profit from manipulating stock price.

The strategy for individual investors, therefore, is to follow the moves of the “hands.” Naturally, guessing the manipulator’s next step becomes essential. The game has bred a new circle of bloggers and has drawn quiet a following. The blog posts call institutional investors “dealers” or “wolves.” Individual investors are encouraged to “dance with the wolves” or “lick blood on the blade.”

Trading stocks is called “frying” stocks or “operating” stocks. One can hold a stock in short, medium or long lines. A short line is to hold stocks for a few hours up to a couple of days. A medium line is up to several weeks, and a long line could mean months or years.

This is the popular language used by China’s investing communities – a world away from the intrinsic value model of Warren Buffett or Benjamin Graham. These words hopefully offer a glimpse of the way Chinese investor’s reason. So, don’t be surprised to hear Fengshui applied to stocks next time.

You can add comments to his site directly (http://xiangjixiangjinina.wordpress.com/2007/09/15/the-fengshui-of-stocks/) or mine…

 

Why These Stocks Didn't Burn Me

By Rex Moore Source: Fool.com  -- Found this and thought you might be interested.

In "These Stocks Will Burn You," I cautioned against getting too excited about the potential for making millions in small-cap stocks. Not because the chance for huge gains isn't there with small companies; I could give you any number of examples similar to NVIDIA's (Nasdaq: NVDA) 2,028% gain since it went public in 1999, or Valero Energy's (NYSE: VLO) 1,586% run-up over that same period. A modest $5,000 investment in each of those would have returned you more than $185,000.

No, my warning was simply to let you know that with such high potential reward comes high risk. It's one of the laws of investing, and one we teach about constantly in our Motley Fool Hidden Gems small-cap investing service. You need to do all you can to avoid having a stock or two inflict years' worth of damage on your portfolio.

So how can we Fools reduce the risk involved while still keeping the potential reward high enough? Two things. First, pay attention to the balance sheet, and stay away from companies that are overleveraged with debt and burning through lots of cash. In my original article, I recommended sticking with profitable companies with cash-to-debt ratios of at least 1.5. Second, buy two, three, or even more of these small fries with the same amount of cash you'd normally allocate to one position. If $6,000 is all you're comfortable allocating to a "normal" stock purchase, try buying three small caps you like at $2,000 apiece. That way, if one crashes to earth and loses half its value, your portfolio won't be overly harmed by it.

For example
A good example comes from the small caps I've bought in the past several months from Tom Gardner's recommendations in Hidden Gems. I bought Buffalo Wild Wings (Nasdaq: BWLD), Cutter & Buck, and Ctrip.com (Nasdaq: CTRP). Cutter & Buck, a "Tiny Gems" micro-cap recommendation, was down 25% for me before it was bought out by a Swedish firm. However, I'm also sitting on current gains of 107% in Buffalo Wild Wings and 171% in Ctrip. If we assume (for simplicity's sake) a $2,000 investment in each, my $6,000 would have turned into $11,060: a nice 84% gain, despite Cutter & Buck's "quarter haircut."

Of course, larger companies can be volatile and burn you as well: Supposed "sure things" like JDSU (Nasdaq: JDSU), Gateway (NYSE: GTW), and RF Micro Devices (Nasdaq: RFMD) all lost more than 90% in the great Tech Wreck of 2000. Each of these still has recovered a mere fraction of their value. But you must be especially on your guard with small caps.

How to get small
Despite the risks, the promise is there -- and we actively encourage you to make small caps a part of your portfolio, especially if you have a few years to go before retirement. If you need help separating the wheat from the chaff, and want to find out which five small companies Tom Gardner and Bill Mann suggest you buy now, consider a trial run with Hidden Gems. After four years, their recommendations are beating the S&P 500 by an average of 55% to 21%. If you're interested, here's more information on a no-risk, free trial.

Rex Moore and son Patrick recently ran in the Marine Corps Marathon in Washington, D.C. Rex owns shares of Buffalo Wild Wings, Cutter & Buck, and Ctrip.com. NVIDIA is a Stock Advisor recommendation. This information is brought to you by the Fool's disclosure policy.

personal finance for dummy - How To Invest And Breathe Simultaneously

I found this article by David Campbell, you might like it.

Well, you say you’re ready to being investing, on your own. No stockbrokers, no financial advisers, just you and the open market. What a thrilling prospect. Wait, are you seriously considering this proposition?Please allow me to give some advice: Don’t do it. I speak with some experience, having lost my fair share in the “open market” as a do-it-yourself investor. The odds of success in this kind of investing are comparable to the odds of wining the lottery. It’s a crap shoot. Unless you are willing to take the time to investigate, investigate, and then do some investigation. Successful investing is not a privilege of the stock broker and the financial analyst, alone. It is an area open to voluntary participation from any walk to life. The catch here is that you must be knowledgeable, or you will lose.Take the time to understand all the components of the investing arena, before you risk losing your nice little nest egg in ten minutes or less. What you have spent a lifetime saving can be gone in as little as ten minutes. Now, that should be a scary thought for any sane, rational, investor.If you still intend to invest alone, here are a few tips and guidelines to help ensure your success. If you are going to invest, at least hire some form of investment professional to give you advice. It’s not necessary to let them do the investing, but use common sense, here. They know things you do not,

and have not had time to learn.Another piece of advice: if it sounds too good to be true, it is. Hands down, dream investments do not exist. If you know someone who acted on a friend’s great tip, you can bet that someone worked hard for that information, and it probably isn’t going to produce the mega return promised.You must be patient when investing. Investing is like saving, it takes time to accumulate real returns. Don’t panic, take the time to step back and look objectively at your investment and the market indicators. Panic will cost you money. Hand in hand with the patience, there must be some read education about the investing process on your part. If you’re going to invest, take the time to learn the process, learn how to read a prospectus, how to calculate and distinguish a healthy business from one that is about to fold. Your knowledge will be your ticket to successful investing with a show of real returns.It can be done, it is done everyday, by people just like you and I. You just need to understand the enormity of the commitment necessary to become a successful investor.About The Author: David Campbell is a financial advisor who specializes in
document.write(" personal finance");

personal finance and investments. Vist his Successful Investing Strategies Blog at http://successful-investing-strategies.com/ for more investing information.

How You Perform in Bear Markets is what counts

Source: Gurufocus.com by Sham Gad

By definition, a true value investor is primarily focused on the weathering the bear market storms and coming out relatively unscathed. In times of market advance, a lot of people get mistaken for investment geniuses when in fact it's the rising tide that's moving them up in the world.

Bear markets on the other hand, expose the intelligent investor from the fly by night speculator. My approach and the ultimate purpose of value investing is outperforming bear markets.

In his 1961 letter to partners, a thirty-one year old investor in Omaha named Warren Buffett told his partners that they should be judging his investment performance during times of turmoil and not times of prosperity.

Buffett told his partners

"I would consider a year in which we declined 15% and the [Dow Jones Industrial] Average 30%, to be much superior to a year when both we and the Average advanced 20%."

Related gurus' buys/sells:

 

Ticker Date* Price* buy/sell Picked By BNI 2007-08-28 $79.98 Add Warren Buffett BNI 2007-08-27 $77.73 Add Warren Buffett BNI 2007-08-16 $79.88 Add Warren Buffett DJ 2007-06-30 $49.9 Buy Warren Buffett AMP 2007-06-30 $61.9 Reduce Warren Buffett

*The price and date might not be the actual time and price at which the transactions were made. In the case of institutional owners, the date is stated as the last day of their fiscal quarter. The prices are estimates if no accurate information available.

Very early on in his career, Buffett was aware that performing well during market turmoil was the key to long-term success as an investor. During the 13 years that Buffett ran his partnership from 1956 to 1969, not only did he destroy the Dow Jones Average during both bull and bear markets, Buffett never had a down year. So while other investors have come along and produced records that better Buffett's, its Buffett's preservation of capital that has allowed him to compound money at such a staggering rate .

A simple illustration makes my point.

Consider two investors starting at the same point in time with the same initial capital. Over a two year period (assumed for simplicity) the investing climate is exposed to both a bear and bull market year. In year one, investor A suffers a 30% loss and investor B suffers a 10%. In year two, investor A enjoys a 50% and investor B enjoys a 30% return. After two years, investor A's total capital has appreciated 5% and B has about a 17% overall return. Clearly the preservation of capital during the down market enables the enterprising investor to outperform over a satisfactory period of time.


There is a story that says when he was a 21 year old student at Columbia, Warren Buffett was in a classroom one day when he told his classmates to shut door so he could tell them how to get rich investing in the stock market. When he had their attention Buffett remarked,

"The key is to be greedy when others are fearful and fearful when others are greedy."

If you think about it, what Buffett said is one of the most valuable pieces of advice in investing. The most difficult part is really putting it to use.


Back in the 1960's Buffett bet big on American Express during the company's involvement in the salad oil scandal. While everyone was running for the exits with fear, Buffett was being greedy and put 30% of his partnerships assets into that one stock. Similarly in 1971, Buffett began buying the Washington Post during a time when everyone fell out of love with media stocks. As the Post continued to decline, Buffett continued buy, investing close to $11 million. That stake is worth over $1 billion today.


The current market environment is shaping up to be rife with excellent companies at very attractive valuations. As always, the first goal is approach any potential investment very carefully in order to avoid mistaking a value trap for a bargain. But during these times of turmoil, making significant investments during times of maximum pessimism is one way value investors beat the crowd.

_____________
Sham Gad is Managing Partner of the Gad Partners Fund, a  newly launched value-centric private investment partnership modeled after the 1950's Buffett Partnerships. He can be reached by visiting www.gadcapital.com or at sham@gadcapital.com. Here at Gad Capital, it is what I do each and every day for my partners - patiently waiting for Mr. Market to serve up wonderful businesses at significant discounts to intrinsic value.

All Intelligent Investing Is Value Investing

By Sham Gad Source: FOOL.COM

This article's headline, a direct quote from Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) Vice Chairman Charlie Munger, cuts right to the heart of the matter: If you are not investing based on fundamental valuation principles, you are not investing. You may think you are, but Ben Graham had another term for it: speculation.

Intelligent investing defined
As Graham stated in the book Security Analysis: "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative." Graham's definition implies that a true investment is made only when you have the right data and reasoning, followed by a suitable price that ensures a margin of safety. Putting capital to work any other way is, by its nature, speculative.

Value investors focus not on their performance in a bull market, but on their perseverance during a bear market. In his 1961 partnership letter, Warren Buffett expressed this crucial point when he told his partners, "I would consider a year in which we decline 15% and the [Dow Jones] average 30% to be much superior to a year when both we and the average advanced 20%." Most investors don't fully grasp this investing approach, and the result is inferior long-term performance relative to the benchmarks.

Speaking of bear markets, in the 1960s, Buffett invested more than 30% of his assets in one company, American Express (NYSE: AXP), during that company's worst scandal. While everyone else was running, Buffett stood still, because he was confident in his data and reasoning.

Always remember that price is what you pay and value is what you get. A fantastic business like Google (Nasdaq: GOOG) is undervalued at one price, fairly valued at another, and overvalued at yet another. At the current price, investors in Google are sacrificing a margin of safety and betting on the continuance of very high growth rates, which we know simply cannot go on forever. It's one thing for a company like Google to double profits from $2 billion to $4 billion, but it's much more difficult to go from $20 billion to $40 billion.

When you bet, bet big
Few words have influenced me more than these:

Truly outstanding investment opportunities occur only occasionally. In general, the better they are, the rarer they are. Such opportunities are normally long-term in their maturation and by careful study can be foreseen long before they come to the attention of most investors. ... The very highest profit potentials occur whenever there is a convergence of two or more primary causes.

These sound like homespun words of wisdom from Graham or Buffett, but they aren't. They come from silver analyst Jerome Smith in his book Silver Profits in the Seventies, more than 30 years ago. Smith was referring to silver, but his words also characterize the qualities of superior investments that true value investors seek to exploit.

Smith is right: Really good investment ideas are rare. So when you find one, bet big. If your thorough analysis is correct and the price is right, you should have no hesitation in investing heavily. One need look no further today than Mohnish Pabrai and the Pabrai Investment Funds. Pabrai currently manages about $600 million or so, up from $1 million in 1999. About 80% of that total is parked in just eight to 10 of Pabrai's best investment ideas, including Pinnacle Airlines (Nasdaq: PNCL) and IPSCO (NYSE: IPS). The result is a 29% net annualized return since inception, meaning that a $100,000 investment back in 1999 is worth almost $800,000 today.

Simply put, if your convictions won't allow you to put 10% of your assets in one investment, you probably don't need to have even 1% of your assets invested. But that's why such obvious investments are so rare, and when your data and reasoning are correct, be sure to take advantage of the opportunity.

Buying good businesses at bargain prices allows the investor to ride out a storm relatively unscathed. But sound investing is not easy. The key is to train yourself to be unemotional about the market and maintain an unwavering level of discipline. History has shown that there will always be periods of prosperity followed by periods of economic contraction. That will never change. If you invest with the aim of keeping your capital, the upside will take care of itself.

For great stock ideas based on value-investing principles, take a free trial of our Motley Fool Inside Value service.

Berkshire Hathaway is both an Inside Value and a Stock Advisor selection.

Fool contributor Sham Gad is the managing partner of the Gad Partners Fund, a value-rooted investment partnership operating similar to the 1950s Buffett Partnerships. He has a position in Berkshire Hathaway. Reach him at shammf@gmail.com. The Fool has an intelligent disclosure policy

The Intelligent Investor The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)

Great book, I suggest you read it. You can get it from Amazon.

Product Description

The best book on investing ever written, this classic work offers sound and safe principles for investing – principles that have worked for more than the half century since the first edition was published. This revised edition features a new introduction, appendix and chapter updates.

Since its original publication in 1949, Benjamin Graham's book has remained the most respected guide to investing, due to his timeless philosophy of 'value investing', which helps protect investors against areas of possible substantial error and teaches them to develop long–term strategies with which they will be comfortable down the road.

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Product Details

• Amazon Sales Rank: #302 in Books
• Published on: 2003-07-01
• Released on: 2003-07-08
• Number of items: 1
• Binding: Paperback
• 640 pages

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Editorial Reviews

Amazon.com
Among the library of investment books promising no-fail strategies for riches, Benjamin Graham's classic, The Intelligent Investor, offers no guarantees or gimmicks but overflows with the wisdom at the core of all good portfolio management.

The hallmark of Graham's philosophy is not profit maximization but loss minimization. In this respect, The Intelligent Investor is a book for true investors, not speculators or day traders. He provides, "in a form suitable for the laymen, guidance in adoption and execution of an investment policy" (1). This policy is inherently for the longer term and requires a commitment of effort. Where the speculator follows market trends, the investor uses discipline, research, and his analytical ability to make unpopular but sound investments in bargains relative to current asset value. Graham coaches the investor to develop a rational plan for buying stocks and bonds, and he argues that this plan must be a bulwark against emotional behavior that will always be tempting during abrupt bull and bear markets.

Since it was first published in 1949, Graham's investment guide has sold over a million copies and has been praised by such luminaries as Warren E. Buffet as "the best book on investing ever written." These accolades are well deserved. In its new form--with commentary on each chapter and extensive footnotes prepared by senior Money editor, Jason Zweig--the classic is now updated in light of changes in investment vehicles and market activities since 1972. What remains is a better book. Graham's sage advice, analytical guides, and cautionary tales are still valid for the contemporary investor, and Zweig's commentaries demonstrate the relevance of Graham's principles in light of 1990s and early twenty-first century market trends. --Patrick O'Kelley

Barron's
"The wider Mr. Graham's gospel spreads, the more fairly the market will deal with its public."

About the Author
Benjamin Graham (1894-1976), the father of value investing, has been an inspiration for many of today's most successful businesspeople. He is also the author of Securities Analysis and The Interpretation of Financial Statements.

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Customer Reviews

Ben Gragam's philosophy
I found that both Ben Graham's philosophy and Warren Buffett's philosophy are very similar to Taoism. If you are interested in this subject, you can read Warren Buffett and Tao Te Ching: A Modern Investor and an Age-Old Philosophy.

Invest in this book, invest in yourself.
With more than one million copies sold and an endorsement on the cover by Warren Buffet, you know there has to be something to this book- and I think I know why. Simply because it is the first book ever to describe the emotional framework and analytical tools necessary for financial success for individual investors.

Probably the single best book on investing written for the lay-public and the stock market bible since its first appearance in 1949, it's a great resource, although it's quite a thick book and filled with detail- and probably not for anybody but the serious stock market investor. And if getting motivated to start investing is your problem, suggest The Sixty-Second Motivator. Good luck!

Buy the orignal, not the Zweig version
As the title of this review indicates, do yourself a favour and buy the original Ben Graham version not this one with Zweig.

Let me start by saying that Warren Buffett had nothing to do with this book, the preface and appendix are extracts from the Financial Analysts Journal and transcripts of a 1984 talk at Columbia University.

The orignal Ben Graham material is mostly intact in each chapter. It is not full of calculations, so it is not difficult to read, but it is a slow and deliberate building of an argument on investing. As such people who are interested in the book for its investment advice will find it logical and sensible. Zwieg however has decided that his own footnotes are far more valuable than Graham's so he has moved Graham's footnotes to the appendix and put his notes under the original text - which is why I say that the chapters are "mostly intact", but not completely.

After each of Graham's chapters, Zweig has included a commentary chapter of his own. These chapters and his footnotes will give you the feeling that "a high school science student was commenting on the PhD work of a professor". The commentary is a weak summary, mostly devoid of any insight and sometimes making statements about what Graham "would have said", which is nothing short of egregious.

Overall, I give Graham's original chapters five stars and Zweig's additions one star, resulting in an average of 3 stars.

This book is a clear example of someone jumping on the bandwagon and trying to associate himself with prominent people like Graham and Buffett. So do yourself a favour and buy the original Graham version, that way you won't feel like Zweig suckered you into buying his book, using Graham's name.

Invest in What You Know - Timeless Insights from Warren Buffett - contd

Your Circle of Investing Competence

Investment must be rational; If you don’t understand it, don’t do it. - Warren Buffett

Some Investors will laud strong earnings from Apple’s iPod sales, yet most lack the competence to fully understand how Apple operates, makes money, and manages its business. It’s nothing to feel ashamed of, either. We all carry different levels of expertise; Some know technology, while others know aerospace.

Uniqueness is what makes this planet interesting, but foolishness causes investors to lose their shirts when buying stocks in companies they do not understand.

Your personal circle of competence differs from everyone else because each of us choose a vast range of activities to occupy our time. Since humans naturally are attracted to pleasureful environments & situations, simply identifying how you spend free time will help pinpoint your personal strengths.

For example, I spend my free time:

• Surfing the Internet
• Reading
• Writing
• Programming
• Managing Assets & Business Systems
• Socializing w/ Family & Friends
• Catching ZZZZss

My free time activities translate into knowledge within the following investment sectors & industries: retail, software, internet, media, publishing, ecommerce, finance etc.

By analyzing your own personal activities, you can highlight your strengths & work on developing an investment portfolio that addresses your strong points.

Jobs & Educational Backgrounds Bring Out Untapped Expertise

Did you ever work a job that seemed pointless to you? Perhaps you previously worked as a McDonald’s employee, yet decided your expertise as a restaurant employee would serve no future purpose.

Don’t sell yourself short! A McDonald’s employee would be much more familiar with the restaurant industry than your Average Joe. Why not put your acquired knowledge to good use and invest within the restaurant industry?

Your job & your expertise are two separate entities. Jobs will come and go, but acquired knowledge within an industry can make you very rich in the long run if you invest wisely and wait patiently.

Why Broad Diversification is the Antithesis of Sound Investing

Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing. - Warren Buffett

Now that you discovered a few of your personal strengths, you can understand why broad, mindless asset diversification makes little sense to the intelligent investor.

In the past, I invested in trucking companies, clothing retailers, and electronic device makers for the sake of diversification.

While my intentions of wide diversification across various industries would please many personal financial advisors, it did not make me richer or satisfy my investment needs. So you guessed it; I sold off my holdings at a loss because these investments were outside of my circle of competence.

Preservation of Capital is Different from Investing

When I hear financial advisors recommend over 18 different investment classes to their clients, I cringe and run the other way.

What are the chances of my understanding 18 different investments? One who carries many investments advocates intense preservation of capital, which is fine, but most people would benefit far more by understanding each investment rather than buying into investments for the sake of diversification.

Of your stocks, bonds, REITS, commodity, and cash investments, it’s a good idea to understand each and every investment and watch them constantly. Trusting your money to your financial advisor doesn’t cut it anymore. Why? Because your advisor will invest in what he or she knows, and if he or she knows very little, your capital is in big trouble.

The Moral: Invest in What You Know

Some readers will vote against my belief in investing in what you know because they believe broad diversification is the best defender against risk. If all you need is broad diversification to sleep well at night, then sell all your stocks and buy index funds. You are guaranteed to make money in the long run, and you won’t lay an egg over everyday stock market events.

For those who continue to own stocks, view your stock portfolio and ask yourself this question: Do I understand every business I own? If you answer maybe or no to any of your stocks, sell off that position and reinvest the money into a business you understand.

Years later, you will appreciate your portfolio and call yourself a genius. And all you did was invest in a sure thing: your personal knowledge & expertise.

 

Invest in What You Know - Timeless Insights from Warren Buffett

We always think or have been told, a lot of times that diversification is the best strategy in financial planning, See how the intelligent investors see it.  Source: Investortrip.com by

If you have read the book “The Tao of Warren Buffett,” a collection of quotations and aphorisms on investing and business spoken by Warren Buffett himself. It’s an extremely quick read because many of Buffett’s quotes are short and easily digestable.

Another great feature is that one single quotation can provide true understanding of how the general investment world operates, and why you should stick to investing in what you know. If you invest in what you know, you vote against broad diversification of assets.

Contd….

 

Best Regards,
Ramakanth Reddy.
http://www.ramidi.com
http://www.ramidi.org

 

Value Investors Only Care About Bear Markets

Source vinvesting.com Published Fri, 08/31/2007 - 13:43

A value-oriented investment approach in the style of Graham and Buffett does not focus on bull market performance. In fact, by definition, true value investing always focuses on weathering the bear market storms and coming out relatively unscathed. During bull markets, a lot of people are mistaken for investment geniuses when in fact it's the rising tide that's moving them up in the world. Bear markets, on the other hand, distinguish the intelligent investor from the fly-by-night speculator.

In his 1961 letter to partners, a 31-year-old investor in Omaha named Warren Buffett told his partners that they should be judging him during times of turmoil and not times of jubilance. "I would consider a year in which we declined 15% and the [Dow Jones Industrial] Average 30%, to be much superior to a year when both we and the Average advanced 20%." Very early on in his career, Buffett was aware that performing well during market turmoil was the key to long-term success as an investor. During the 13 years that Buffett ran his partnership, not only did he destroy the Dow Jones Average during both bull and bear markets, but he also never had a down year. So while other investors have come along and produced records that outshine Buffett's, its Buffett's preservation of capital that has allowed him to compound money at such a staggering rate.

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