The long term value investor seems to get a bad name attached to it in a lot of investment books and web sites these days. There are plenty of ways to make money in the stock market and buying and selling stocks as short term investments works for some investors. I even do it some myself with a few stocks I own. I would venture to guess the average investor, who doesn't have time to research stocks every day, is better off in a long term strategy when it comes to buying stocks. This doesn't mean you are buying and holding until death do us part as some of these investment books and sites would have you believe. It simply means that nobody can pick tops and bottoms so you are better off staying in the game the whole time rather than jumping in and out every other week.
I know there are several factors to consider when deciding what kind of strategy you want to use when investing. For example, risk tolerance, years to retirement, quality of life after retirement and many others, but as a general rule long term value investing is the easiest way to a good return. It might be a little old school and not as sexy as trying to grab the next hot IPO, but you also won't be gambling on a long shot with your hard earned money.
Now I'm not saying you shouldn't buy some growth stocks, in fact, I think it serves you well to have value mixed in with growth. You have to be on top of those growth stocks though because the shelf life is shorter and more volatile than a value stock. Eventually the growth rate and PE have to come down so just be on your toes before the shoe drops.
A long term value investors still needs to watch his or her portfolio carefully and try and stay diversified. You want to make sure you lighten your load in sectors and industries that are not working and redistribute to areas that are performing better. You still will want to stay diversified, but there is no need to be overweight in underperforming industries. A lot of web sites and books seem to suggest that when a value stock is purchased it is held for life and this simply is not true. You can move in and out of value stocks when you think they have run their course. All I know is Warren Buffett has made boat loads of money while investing in value stocks.
A value stock might not get you one of those rare 900% or higher returns on your money in a couple years. It also might not be the hot topic at the next cocktail party, but it does give you a better chance of beating the indexes if you do your homework. It's much easier to pick a good quality stock based off steady increasing earnings than to guess what a new high flying company will do with no previous history to gauge off.
Sometimes it might not be the most glamorous route to the finish line, but the chances of you finishing the race the way you want too are pretty good with a long term value stock strategy.
Friday, February 22, 2008
Links Between Mutual Funds And Stock Market
The Idea:
In my everyday perusal of the stock market I sometimes come across a stock whose current market value appears low and I of course wonder, "What is wrong with this stock?" A little research sometimes shows an obvious reason, but often it does not. A little more research and I can determine how secure this stock is as an investment, and if all looks good I make a purchase. Some of my best gains have come in this way.
The Problem:
The problem, if there is a problem, with investing in this manner is that it is often difficult to find these "bargains". With thousands of stock to choose from I don't have time to go through them all. So, question: How to make a quick determination on any given day as to what stocks may be undervalued? A method I have found to be quite useful is to compare the stock to the others in it's index.
A Solution:
The theory is that if ABC company makes widgets and the index comprised of all the widget making companies is doing well (i.e. people are buying widgets), then ABC should also be reaping the rewards. Low and behold after months of tracking this type of data it appears this theory is sound.
My best, unsubstantiated, guess for this behavior is due to what I would call "lag" time in the market. What appears to be happening is if ABCs clones or ABC itself hasn't yet noticed or reported the improvement, or, and this does happen, the market hasn't noticed that it has, you get lag.
The Result:
This lag period can last from days to a month, but when the market finally figures it out, and it almost always does (assuming I have done my research and can find no other factors keeping it down) my investment quickly pays off. My best analogy of this behavior is the old adage I learned in science class "Nature abhors a vacuum".
Uses:
# A very useful artifact of this calculation is that the short-term correction is often quite predictable. If an index is doing well but a given stock in the index is down say 5% for the past week, I can usually expect a 5 to 6% gain to be upcoming.
# It also is useful to determine a relative low in the price of a stock. Lets say I have been following ABC for some time and I believe it prudent to invest in some of its shares. I want to buy when the price is low, but when does this occur. No one can tell you exactly, but when it starts to appear as undervalued in it's own index you can be fairly certain it's not going to stay down much longer.
This strategy is of course highly speculative (notice the number of time I said 'often' or 'usually' in this article) and in no way replaces the necessary research (i.e. infrastructure, financial standing, industry, the market as a whole, various trends currently affecting the market, etc.). Performing this calculation does not render a "Pick". However, as a tool, to narrow down the universe that comprises the stock market into a short, manageable list, it is quite useful.
Conclusion:
Assuming this approach interests you then you may ask, how does an individual investor accomplish this task? Most investors already have a sector or index they follow closely and thus know how it has been performing. It is fairly simple to determine the overall trend of an index (try http://biz.yahoo.com/ic to follow indexes) and then see how each individual stock is performing. I have found it even more helpful, and much faster, to break down the individual indexes and stocks by different time ranges (ex. Index over the past 6 months and the stock over the past week) and then list these stocks on a day-by-day basis. With this daily list I can quickly pick out the potential "bargains" and get to work deciding which will be the most productive buy.
In my everyday perusal of the stock market I sometimes come across a stock whose current market value appears low and I of course wonder, "What is wrong with this stock?" A little research sometimes shows an obvious reason, but often it does not. A little more research and I can determine how secure this stock is as an investment, and if all looks good I make a purchase. Some of my best gains have come in this way.
The Problem:
The problem, if there is a problem, with investing in this manner is that it is often difficult to find these "bargains". With thousands of stock to choose from I don't have time to go through them all. So, question: How to make a quick determination on any given day as to what stocks may be undervalued? A method I have found to be quite useful is to compare the stock to the others in it's index.
A Solution:
The theory is that if ABC company makes widgets and the index comprised of all the widget making companies is doing well (i.e. people are buying widgets), then ABC should also be reaping the rewards. Low and behold after months of tracking this type of data it appears this theory is sound.
My best, unsubstantiated, guess for this behavior is due to what I would call "lag" time in the market. What appears to be happening is if ABCs clones or ABC itself hasn't yet noticed or reported the improvement, or, and this does happen, the market hasn't noticed that it has, you get lag.
The Result:
This lag period can last from days to a month, but when the market finally figures it out, and it almost always does (assuming I have done my research and can find no other factors keeping it down) my investment quickly pays off. My best analogy of this behavior is the old adage I learned in science class "Nature abhors a vacuum".
Uses:
# A very useful artifact of this calculation is that the short-term correction is often quite predictable. If an index is doing well but a given stock in the index is down say 5% for the past week, I can usually expect a 5 to 6% gain to be upcoming.
# It also is useful to determine a relative low in the price of a stock. Lets say I have been following ABC for some time and I believe it prudent to invest in some of its shares. I want to buy when the price is low, but when does this occur. No one can tell you exactly, but when it starts to appear as undervalued in it's own index you can be fairly certain it's not going to stay down much longer.
This strategy is of course highly speculative (notice the number of time I said 'often' or 'usually' in this article) and in no way replaces the necessary research (i.e. infrastructure, financial standing, industry, the market as a whole, various trends currently affecting the market, etc.). Performing this calculation does not render a "Pick". However, as a tool, to narrow down the universe that comprises the stock market into a short, manageable list, it is quite useful.
Conclusion:
Assuming this approach interests you then you may ask, how does an individual investor accomplish this task? Most investors already have a sector or index they follow closely and thus know how it has been performing. It is fairly simple to determine the overall trend of an index (try http://biz.yahoo.com/ic to follow indexes) and then see how each individual stock is performing. I have found it even more helpful, and much faster, to break down the individual indexes and stocks by different time ranges (ex. Index over the past 6 months and the stock over the past week) and then list these stocks on a day-by-day basis. With this daily list I can quickly pick out the potential "bargains" and get to work deciding which will be the most productive buy.
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