Investment Strategies 03 (Jul 13 - Mar 19)

[winston]

Your Best Stocks Will Be in the Best Industries nnBy Kevin Matras

We’ve all heard the old adage that 50% of a stock’s price movement can be attributed to the group that it’s in.

In fact, studies have shown that just getting into an average stock in a strong industry, is likely to outperform a great stock in a poor industry.

Of course, this does not mean that you can just pick any stock in a top group and expect to make money. But, it does underscore the importance of sticking with the best industries.

If your last losing stock was in a poorly performing industry, the odds of success were against you the entire time.

Source: Zacks Investment Research

[winston]

Thinking Long Pays Off

by Christopher Rowe

http://www.investmentu.com/article/deta ... F_pyWcYiqY

[winston]

The Most Valuable Investment Secret of All By Porter Stansberry

Today, I'm going to show you one of the most advanced investment skills you could ever master…

But I don't want to tell you upfront what today's lesson is about. I want to see if you can figure it out yourself. So don't skip ahead.

Think of today's essay as a test. As I always say… there is no such thing as teaching, there is only learning. And there's a hugely valuable investment lesson – the most valuable secret of all – below…

Let's start with the big secret about the father of value investing, Ben Graham. (It's not that he was a notorious philanderer… Everyone knew that.) Most people know Graham literally wrote the book (or books) on how to invest: Securities Analysis and The Intelligent Investor.

Likewise, most people know he was a successful investment manager. That's all true, of course. But most people don't know how Graham got rich. Here's a big hint: It had nothing to do with his normal method of value investing. It had everything to do with insurance.

For most of his career, Graham avoided buying insurance companies and never put more than 5% of his portfolio into any individual security. But in 1948, at the age of 54, Graham decided to allocate 25% of his portfolio into insurance firm GEICO. He bought 50% of the company for $712,000.

After the purchase, the Securities and Exchange Commission (SEC) decided investment partnerships like Graham's couldn't own a controlling interest in an insurance company. To get around the rules, Graham distributed the GEICO shares among the various investors in his partnership.

Graham never sold the shares he received from the distribution. By 1972, Graham's stake in GEICO was worth $400 million. He made more than 400 times his money in 25 years. It wasn't a lifetime of careful value investing that made Graham a wealthy man… It was an investment in GEICO.

Graham made vastly more money in GEICO than he made in all of his other investments combined. About 10 years after buying GEICO, Graham had made so much money that he quit investing altogether and closed his fund.

The success Graham had with GEICO led Warren Buffett – who was Graham's student at Columbia University – to study the company intensely. In January 1951, Buffett famously visited the company's headquarters on a Saturday, knocking at the front door until a janitor let him in. After speaking with GEICO executive Lorimer Davidson for four hours, Buffett put 65% of his savings in GEICO's stock – a stake worth about $10,000.

He wrote up the stock for his clients in a report titled "The Security I Like Best." The next year, Buffett sold his position for a 50% gain or so. But the lessons Buffett learned from Davidson went on to guide Buffett's entire investing career. Buffett has said publicly many times that those four hours with Davidson changed his life.

Buffett didn't own GEICO shares again until 1976. The company stumbled badly in the early 1970s when government regulations (no-fault rules), inflation, and aggressive plaintiffs' attorneys radically transformed the risks of auto insurance.

The company lost $126 million in 1975 and looked as though it might go bankrupt. The board brought in a new CEO, Jack Byrne, who radically restructured the company. He fired 4,000 of GEICO's 7,000 employees, closed down 100 offices, and exited the Massachusetts and New Jersey markets. Byrne raised insurance rates by 40%. Incredibly, in less than a year, GEICO was back in the black. By 1977, GEICO was paying a dividend again.

In May 1976, Buffett met with Byrne. He was impressed. Buffett believed the turnaround at GEICO would be successful. It's a little ironic, because Buffett is famous for refusing to invest in turnaround situations. He says most turnarounds "don't." But in this case, he had been following the company closely for 25 years… and determined it was the best business he had ever found.

He got to know the CEO. He knew he could personally provide the financing required. That's a much different situation than you or me buying shares of a cheap stock and hoping it goes back up.

Following a dinner with Byrne, Buffett began to buy huge blocks of GEICO shares. The first order was for 500,000 shares at $2.12. He later provided a huge amount of capital to the company – $75 million – through a convertible bond. His cost basis for the stock through this instrument was $1.31 per share.

Buffett's money helped save GEICO. By 1980, he owned one-third of the company. GEICO represented 31% of Berkshire Hathaway's equity portfolio at the time. Like his mentor Ben Graham, Buffett was now poised to make tremendous profits. He had allocated a huge portion of his net worth into the best business he had ever found.

By 1985, GEICO represented 50% of Berkshire's portfolio.

By 1994, Berkshire had received $180 million in dividends from GEICO – seven times more money than Buffett spent on buying the stock. Finally, in 1995, Disney bought out ABC/Capital Cities, whose shares Berkshire held. The deal gave Buffett a huge $2 billion profit. Buffett used the cash to buy the remainder of GEICO that Berkshire didn't own for $2.3 billion. By that point, Buffett had earned 48 times his initial investment in the company.

Today, GEICO's float (the amount of insurance premiums it carries) is in excess of $16 billion – up from $3 billion in 1995. If GEICO was publicly traded, it would be worth something around $20 billion. Buffett's initial $25 million investment would now be worth at least $10 billion… 400 times his initial investment.

Now… with that in mind… let me switch gears for a minute. The chart you see below is unusual. I would wager you haven't seen a chart like this before. It's designed to show you periods of time when you should have been buying stocks. It does so in a simple way: it measures changes to the S&P 500's book value as a percentage below its 24-month high.

We have good data on the S&P 500's book-value ratio since 1978. This chart makes it clear when good opportunities to buy stocks existed. Longtime investors will surely be familiar with these years: 1981, 1987, 2002, and 2009…


During my career – from 1996 to today – I've seen several excellent buying opportunities in stocks…

The first was in August 1998 when Russia defaulted. Many high-quality emerging-market stocks were trading for less than four times earnings.

The second was the end of the tech-stock bubble in 2002. My Investment Advisory subscribers can read the October 2002 issue to see how I described conditions at the time. (On the first page, I asked, "Is it the end of the world?") During this period, many high-quality technology-related businesses were trading for less than the cash on their balance sheets.

The biggest, best-known market correction of my career was in late 2008/2009, when even the world's highest-quality businesses were trading at decade-low valuations. I recall analyzing shares of jewelry company Tiffany in February 2009 and realizing that the stock was worth $24 per share, assuming you just sold the inventory and used the proceeds to buy back all of the stock and pay off all of the debts.

The stock was trading at $22. Tiffany was trading below liquidation value, implying that you could get the brand name, the operating profits, the future growth, and all of the real estate for free. I doubt you'll ever see an investment as good as Tiffany's trading cheaper than that. (As a side note, Tiffany shares trade for around $96 today. The company has paid $6.44 per share in dividends. By simply buying shares in February 2009, you would be up more than 360%.)

Based on these experiences, I've come to expect a good opportunity to buy stocks about once every five to seven years… and a great opportunity to come around about once every decade. Lo and behold, when I asked Steve Sjuggerud's research analyst Brett Eversole to check the historical numbers for me, he found eight different 19%-plus corrections (declines) in the S&P 500 since 1976.

Again, these dates will be familiar to longtime investors: 1977, 1981, 1987, 1990, 1998, 2002, 2008, and 2011. Investors become euphoric after a period of gains. They become depressed after losses. It's human nature that's being expressed in these charts.

What's the difference between a good opportunity to buy and a great one? Studying the corrections we've seen since the 1970s, a good opportunity is a 20% or so decline in the S&P 500's price-to-book-value ratio.

The 2011 correction saw the S&P 500 fall 19.4%, but the ratio only declined 17.5%. This was the least impressive opportunity in our study, but that's largely because stocks were coming from a super-depressed bottom two years earlier.

In contrast, a great opportunity to buy is after the S&P 500's book-value ratio declines 30% or more, like it did in 1981, 1987, 2002, and 2008. The 1990s – a roaring bull market inspired by falling interest rates – was the only decade in my lifetime that didn't offer a great opportunity to buy stocks.

Keep in mind that if the book-value ratio of America's 500 largest companies has declined by 30% or more, you will be able to find dozens (if not hundreds) of high-quality businesses where book-value ratio has declined 50% or more.

So… What do you think the underlying message of today's essay is? Remember, I was trying to teach you the most advanced skill you can possess as an investor. What's that skill? What do these stories reinforce?

The most advanced skill you can develop as an investor isn't knowledge of arcane accounting rules. It's not developing real expertise in charting. It's not even becoming an expert in position-sizing and risk management.

The most advanced skill you can develop as an investor is simply the emotional discipline to be incredibly patient.

If you want to succeed in investing, you have to be other-worldly in your ability to wait until you get the rarest of opportunities – a chance to buy the businesses you've always wanted at the right price.

Buffett knew all about GEICO. He saw exactly how it enriched his mentor beyond belief. He knew it would certainly enrich him (assuming he bought it at the right price). As a young man, Buffett had foolishly advertised the opportunity and, even more foolishly, he sold the stock rather than simply continuing to buy more.

He then spent the next 34 years waiting for the right opportunity to buy the company. He waited and waited and waited and waited. Then he made 400 times his money.

Think about that the next time you're going to buy a stock. Is it a great time to be buying stocks? Is it the best time you've seen in five or 10 years to make investments in the stock market? Is the stock you're about to buy really trading at the cheapest price you've ever seen? Is it really a chance to make 400 times your money over several decades?

The more patient you become, the better your investments will be. I guarantee it. Patience is Buffett's greatest virtue. He figured out what businesses he wanted to own when he was in his 20s. Then he waited until he got the opportunity to buy them at prices he knew would make him extremely rich.

There's no reason you can't do the same – even if you're older than 50. Don't forget: Graham bought GEICO when he was 54. And Buffett's best investment ever was in Coca-Cola. He started buying the blue-chip soda brand after the 1987 collapse. He was 57 years old when he made that investment.

My advice: Keep a list near your computer or on your desk. When you come across a truly great business – a business that has enriched investors for decades – write down the name. Read its annual reports. Follow its progress. Get to know the business like you know your siblings or your spouse. See how the company responds in good times and bad times. Then… wait for the market to give you a great opportunity to buy the stock.

Source: Daily Wealth

[winston]

Three charts on the economy you might not believe

by Amber Lee Mason

Source: DailyWealth Trader

http://thecrux.com/three-charts-on-the- ... 37gMXBU%3D

[winston]

9 Tips on How to Invest Like a Pro

Forget just 'buy and hold.' Investors need to have a new, more nuanced way of attacking the markets.

By Anthony Mirhaydari

Source: InvestorPlace

http://investorplace.com/2014/11/9-ways ... Hkw09KUd1Y

[winston]

Beat 85% of Investors with These Steps By SID RIGGS

Step #1: Set Your "Sell" Plan, Before You Buy

Strategy Note: Your initial trailing stop and the amount to which you tighten your trailing stop is entirely up to you and should be based on your own risk tolerance.

Personally, one of my favorite strategies is to:
1) begin with a 25% trailing stop,
2) once my position is up 30% I like to tighten my stop up to a 19% trailing stop, which makes my stop 5% over my entry price,
3) once my position is up 40% I'll tighten my trailing stop to 15%,
4) and once my position is up 50% I'll settle in with a trailing stop of 12.5% for the remainder of the holding period – or until I get to a 100% gain, which is when I'll start scaling out of the position.

Step #2: Rebalance Your Profits

50-40-10 Model

50% of your assets: invested in what we refer to as "Base Builders," which includes assets such as sovereign debt, muni bonds, corporate debt, etc.

40% of your assets: invested in what we refer to as "Growth and Income," which are stocks with global exposure to some of the world's largest trends, solid cash flow, rock solid balance sheets, and an above average yield.

10% of your assets: invested in what we refer to as "Rocket Riders", which is where you'll find speculative positions such as small-cap stocks.

Source: Money Morning

http://moneymorning.com/2014/08/29/beat ... dium=email

[winston]

This simple skill separates the average investor from the best in the world

by Amber Lee Mason

Source: DailyWealth Trader

http://thecrux.com/this-secret-separate ... 37gMXBU%3D

[winston]

Albert Einstein’s advice can make you a much better investor by Shane Parrish

[Warren Buffett's partner] Charlie Munger once said: “We have a passion for keeping things simple.”

Einstein says, “I soon learned to scent out what was able to lead to fundamentals and to turn aside from everything else, from the multitude of things that clutter up the mind.” Most of us try to consume more information, thinking it will lead to more signal, without thinking about how we filter and how we process the information coming in.

Knowing some basic principles helps as does knowing how to combine them. As Einstein says “A theory is the more impressive the greater the simplicity of its premises, the more different kinds of things it relates, and the more extended its area of applicability.”

It wasn’t because he understood more about the complicated than other people, as John Wheeler points out in his short biographical memoir on Einstein:

Many a man in the street thinks of Einstein as a man who could only make headway in his work by dint of pages of complicated mathematics; the truth is the direct opposite.

As Hilbert put it, “Every boy in the streets of our mathematical Gottingen understands more about four-dimensional geometry than Einstein. Yet, despite that, Einstein did the work and not the mathematicians.” Time and again, in the photoelectric effect, in relativity, in gravitation, the amateur grasped the simple point that had eluded the expert.

Where did Einstein acquire this ability to sift the essential from the non-essential? For this we turn to his first job.

In the view of many, the position of clerk of the Swiss patent office was no proper job at all, but it was the best job available to anyone with (Einstein’s) unpromising university record.

He served in the Bern office for seven years, from June 23, 1902 to July 6, 1909. Every morning he faced his quote of patent applications. Those were the days when a patent application had to be accompanied by a working model.

Over and above the applications and the models was the boss, a kind man, a strict man, a wise man. He gave strict instructions: explain very briefly, if possible in a single sentence, why the device will work or why it won’t; why the application should be granted or why it should be denied.

Day after day Einstein had to distill the central lesson out of objects of the greatest variety that man has power to invent. Who knows a more marvelous way to acquire a sense of what physics is and how it works? It is no wonder that Einstein always delighted in the machinery of the physical world—from the action of a compass needle to the meandering of a river, and from the perversities of a gyroscope to the drive of Flettner’s rotor ship.

Who else but a patent clerk could have discovered the theory of relativity? “Who else,” Wheeler writes, “could have distilled this simple central point from all the clutter of electromagnetism than someone whose job it was over and over to extract simplicity out of complexity.”

Charles Munger speaks to the importance of sifting folly.

Part of that (possessing uncommon sense), I think, is being able to tune out folly, as distinguished from recognizing wisdom. You’ve got whole categories of things you just bat away so your brain isn’t cluttered with them. That way, you’re better able to pick up a few sensible things to do.

Source: Farnam Street

[winston]

If You Only Use One Tactic in 2015, Use This by Keith Fitz-Gerald

Good Investing Habit No. 1: Have a Plan and Stick to It

Good Investing Habit No. 2: Take a Measured Approach When You Buy

Good Investing Habit No. 3: Use Trailing Stops.

http://totalwealthresearch.com/2014/12/ ... /#deeplink

[winston]

If You Only Use One Investing Strategy in 2015, Use This

By KEITH FITZ-GERALD

Source: Money Map Report

http://moneymorning.com/2014/12/22/if-y ... dium=email