An investment in timber is a long-term, steady investment and an interesting option available at the moment. Investing in this type of commodity helps protect investors during these economically difficult times, while also providing investors with returns that many commodity sectors have been unable to match over the last forty years.
Teak is one of the highest yielding species of tree in the timber sector. Teak is a small but sought after niche within the timber industry. This small segmented niche is normally managed by small companies that are privately owned, in contrast to being offered by larger institutional operators. This is due to natural teak forests being protected in most producing countries.
There are many different ways that an investor can invest in this form of timber, with reputable companies. How you choose to invest your funds and the company that you decide to go with will have a major effect on the amount of returns you can expect from your timber investment. The best managers of Teak plantations will invest heavily in the quality, strength and the well-being of the teak trees.
While researching the returns and opportunities that exist with teak investments, you will quickly discover that companies utilise a lot of techniques to calculate the returns on these types of investments. Unfortunately, as with many forms of Timber, there are few Internationally used measurements for pricing Teak. In proceeding to calculate and predict the returns on your investment, it is imperative that you utilise the same standards on every investment opportunity that you're involved in. What is required is Due Diligence.
There are a lot of ideas surrounding what the net worth of teak is going to be in the next twenty-five years. There are also a lot of prediction on the amounts of teak trees being available in the future, and the condition they will be in prior to harvesting.
The most obvious way to carry out an investment comparison is to consider the amount of assets that you are going to be receiving for the capital that you will invest. Instead of trying to determine what your cash will be worth in the future. In layman's terms, you should determine how much of your invested cash is actually going towards the product offered by the company and their cost. Or in even simpler terms, how many trees are you buying and how much will it cost to look after them.
When determining the return that you can expect to receive on a Teak investment, it is vital that you understand the type of annual percentage price increase that the company is using for projections. Furthermore, you need to pay close attention to how the company is using their data. Some of the data that companies may decide to use are price per unit or growth rate information.
Teak is commonly used and sold as a commercial wood product. The price per unit of teak is usually fixed at source, but will reflect quality and the way that it is processed. Plantations that harvest the tree are normally well managed locations that have fairly comparable growth rates. Teak is a type of tree that has been cultivated on plantations for hundreds of years. This is driven by quality and demand, especially in Asia, as a highly usable and sought after hardwood.
The minimum rotation times for teak are twenty to twenty-five years. With the prices for teak and the growth rates for the tree being fairly comparable, the return on investment for the commodity is based largely on the cost of the purchase. Ultimately, returns will be driven by supply and demand but if applying this concept to teak investments, as a long-term investor you should receive a healthy return on investment (ROI).
Tuesday, 3 July 2012
Seven Key Principles for Investing
Whether you are starting out as a beginner investor or an experienced investor, one thing is for sure. You need to think as an investor. Investing is not for everyone, simply because an investor need to own a certain package of temperament. In other words, it is the way an investor think that makes him a true investor, instead of a gambler. Here in this article, you will find seven key principles for investing which I have personally consolidated for sharing with my readers, in hope of educating the less-informed and challenging my understanding. What better way to sharpen one's thought in learning than by teaching, right?
As a quick summary of what I am about to expound on, these are the seven key points for you to take away:
1. Circle of Competence
2. Independent Thinking
3. Delayed Gratification
4. Intrinsic Value
5. Margin of Safety
6. Secret of Compounding
7. Relative Thinking
While it could be argued that these principles are non-exhaustive and I might be over-simplifying things, I wish to reiterate that this article is meant for the less informed to accelerate their financial education. They are derived from my learning experience. Sometimes, less is more.
1. Circle of Competence
Simply put, what I do not understand, I do not do. If I were to be interested in something I lack understanding in, I should go and learn about it before diving into doing the activity. You see, risk comes from the lack of control, and the lack of control comes from the lack of knowledge. As described by Warren Buffett, one of the world's greatest value investors, says "Diversification is protection against ignorance." To avoid ignorance, get knowledge.
2. Independent Thinking
Charlie Munger, a multi-billionaire and business partner of Warren Buffett always emphasizes the importance of inverse thinking. He quoted, "Tell me where I would die so I would not go there" as a way of covering as many possibilities in any investing opportunity. Nobody can predict the future. Insight into the future is not as hard to acquire as foresight into the future. Basically, as investors, we need to think for ourselves because ultimately, we are individually responsible over the stewardship of the money in our own pockets. To think independently, avoid herd mentality. Stop guessing or assuming; start finding out facts instead of dwelling in opinions.
3. Delayed Gratification
This is often one of the most misunderstood concepts, so I will spend a little bit more effort to elaborate on this. The key word here is patience. Let me repeat myself, the ke word here is patience. One more time. Patience.
Let me be up-front here. Most people will have a difficult time to absorb what I am about to say. Please bear with me and later on, you will realize how counter-culture this principle is. This is why for the few who truly apply this principle alone, they are the rich, and for the remaining majority, they are the poor.
Emotional Quotient (EQ) is more important than Intelligence Quotient (IQ) in this case. Let me remind us that it is your individual temperament that separates you from being an investor or not. The rich and the poor have a certain pattern of behavior when it comes to money. For one, the rich alway apply the "Pay Yourself First" principle. They treat savings as an expense. Every time they earn, they first save, then they spend. The poor, however, tend to earn, spend, and then save the remaining.
The other habit that sets the poor from the rich is the ability to invest more than they spend. An investor understands that money used for investing should also be treated as an expense. That is, they are ready to lose the money they've put into investments. Hence, they only invest when they are sure they will have an unfair advantage of winning. And when they do invest, they always look out for opportunities to make their money work for them.
4. Intrinsic Value
Investors are less of a speculators, and more of an analyst. For all investment opportunities, there is a need to discover the true value you believe it to be. The more ascertain you are of the real value, the more accurate you will be able to judge if it is a worthwhile investment. You see, no matter how financially rich you are, there is always a limit to your capital. You have to make do with what you have to get the most out of the moment of opportunity.
The question to ask is: what is the worth of this opportunity?
A quick tip is to know that it is better to be roughly right than to be deadly wrong in determining the intrinsic value. Avoid being penny-wise, but pound-foolish.
5. Margin of Safety (MoS)
This point is best illustrated with an example. Say, for example, you found a public listed company with durable competitive advantage. You like the stock because it has a strong business model and a powerful management team with integrity. The have a track record of success, but the price on the stock exchange is overvalued at the moment. Would you buy the shares? A savvy investor would adhere to the famous Rule Number One of Warren Buffett:
Do not lose money.
Recalling that what you invest is what you're ready to lose, you won't want to throw away your money foolishly. Since you know how to measure the intrinsic value, you know that you can afford to wait till the price is undervalued before putting in the money. This is to factor in any misjudgment you made in determining the intrinsic value. An example is to purchase something that is worth the value of $1 at the price of 60 cents. Look out for such a kind of deals.
By the way, there is a Rule Number Two, and it goes, "Remember Rule Number One."
6. Secret of Compounding
The rich knows the secret to being rich is to save AND invest. They also know that with control, you can harness the power of compounding. Compounding is a friend to the rich, but a foe to the poor. It makes the rich richer and the poor poorer. It exists in inflation and in the return of interest (ROI).
A $100 saved today with an annual inflation rate of 5% would become around $60 of today's value 10 years down the road. On the other hand, a $100 invested with an annual return of the same 5% will become around $160 in 10 years' time.
Try calculating it yourself. Think about the time value of money.
7. Relative Thinking
A true investor is shrewd. You think in terms of percentage, and not just the absolute. You'll be more concerned over the return of investment more than the return of interest. Because the percentage holds more weight than the absolute figures, you have the special ability to see what is a more worthwhile investment. If you're starting out to invest and you have little capital, this is especially useful. Let's say we have two investment opportunities, such as those below:
Project A: $100 investment with $10 return per period
Project B: $10,000 investment with $100 return per period
At first glance, one might feel that Project B has a higher ROI and seem more attractive than Project A. However, at a deeper analysis, you'd have realized that Project A returns 10% but Project B returns only a measly 1%. If you want to make your money work for you, wouldn't you look for more investment opportunities such as Project A?
So there you have it. These are seven guiding principles to help you to become a better investor. Investing is simple, but not easy. It takes discipline. It is knowledge-intensive and capital-intensive. I wish you all the best in your investing journey. And when you do make money, remember to give back. This world needs more rich people, people who thinks like the rich.
Peter Low is a writer/blogger who specializes on down-to-earth ideas for growing money. You can check out his website at Low Han Yew Peter where he provides unreserved education on improving personal financial IQ, including topics such as Think Relative Over Absolute Numbers, Farming and Investing, and Asset and Liability.
As a quick summary of what I am about to expound on, these are the seven key points for you to take away:
1. Circle of Competence
2. Independent Thinking
3. Delayed Gratification
4. Intrinsic Value
5. Margin of Safety
6. Secret of Compounding
7. Relative Thinking
While it could be argued that these principles are non-exhaustive and I might be over-simplifying things, I wish to reiterate that this article is meant for the less informed to accelerate their financial education. They are derived from my learning experience. Sometimes, less is more.
1. Circle of Competence
Simply put, what I do not understand, I do not do. If I were to be interested in something I lack understanding in, I should go and learn about it before diving into doing the activity. You see, risk comes from the lack of control, and the lack of control comes from the lack of knowledge. As described by Warren Buffett, one of the world's greatest value investors, says "Diversification is protection against ignorance." To avoid ignorance, get knowledge.
2. Independent Thinking
Charlie Munger, a multi-billionaire and business partner of Warren Buffett always emphasizes the importance of inverse thinking. He quoted, "Tell me where I would die so I would not go there" as a way of covering as many possibilities in any investing opportunity. Nobody can predict the future. Insight into the future is not as hard to acquire as foresight into the future. Basically, as investors, we need to think for ourselves because ultimately, we are individually responsible over the stewardship of the money in our own pockets. To think independently, avoid herd mentality. Stop guessing or assuming; start finding out facts instead of dwelling in opinions.
3. Delayed Gratification
This is often one of the most misunderstood concepts, so I will spend a little bit more effort to elaborate on this. The key word here is patience. Let me repeat myself, the ke word here is patience. One more time. Patience.
Let me be up-front here. Most people will have a difficult time to absorb what I am about to say. Please bear with me and later on, you will realize how counter-culture this principle is. This is why for the few who truly apply this principle alone, they are the rich, and for the remaining majority, they are the poor.
Emotional Quotient (EQ) is more important than Intelligence Quotient (IQ) in this case. Let me remind us that it is your individual temperament that separates you from being an investor or not. The rich and the poor have a certain pattern of behavior when it comes to money. For one, the rich alway apply the "Pay Yourself First" principle. They treat savings as an expense. Every time they earn, they first save, then they spend. The poor, however, tend to earn, spend, and then save the remaining.
The other habit that sets the poor from the rich is the ability to invest more than they spend. An investor understands that money used for investing should also be treated as an expense. That is, they are ready to lose the money they've put into investments. Hence, they only invest when they are sure they will have an unfair advantage of winning. And when they do invest, they always look out for opportunities to make their money work for them.
4. Intrinsic Value
Investors are less of a speculators, and more of an analyst. For all investment opportunities, there is a need to discover the true value you believe it to be. The more ascertain you are of the real value, the more accurate you will be able to judge if it is a worthwhile investment. You see, no matter how financially rich you are, there is always a limit to your capital. You have to make do with what you have to get the most out of the moment of opportunity.
The question to ask is: what is the worth of this opportunity?
A quick tip is to know that it is better to be roughly right than to be deadly wrong in determining the intrinsic value. Avoid being penny-wise, but pound-foolish.
5. Margin of Safety (MoS)
This point is best illustrated with an example. Say, for example, you found a public listed company with durable competitive advantage. You like the stock because it has a strong business model and a powerful management team with integrity. The have a track record of success, but the price on the stock exchange is overvalued at the moment. Would you buy the shares? A savvy investor would adhere to the famous Rule Number One of Warren Buffett:
Do not lose money.
Recalling that what you invest is what you're ready to lose, you won't want to throw away your money foolishly. Since you know how to measure the intrinsic value, you know that you can afford to wait till the price is undervalued before putting in the money. This is to factor in any misjudgment you made in determining the intrinsic value. An example is to purchase something that is worth the value of $1 at the price of 60 cents. Look out for such a kind of deals.
By the way, there is a Rule Number Two, and it goes, "Remember Rule Number One."
6. Secret of Compounding
The rich knows the secret to being rich is to save AND invest. They also know that with control, you can harness the power of compounding. Compounding is a friend to the rich, but a foe to the poor. It makes the rich richer and the poor poorer. It exists in inflation and in the return of interest (ROI).
A $100 saved today with an annual inflation rate of 5% would become around $60 of today's value 10 years down the road. On the other hand, a $100 invested with an annual return of the same 5% will become around $160 in 10 years' time.
Try calculating it yourself. Think about the time value of money.
7. Relative Thinking
A true investor is shrewd. You think in terms of percentage, and not just the absolute. You'll be more concerned over the return of investment more than the return of interest. Because the percentage holds more weight than the absolute figures, you have the special ability to see what is a more worthwhile investment. If you're starting out to invest and you have little capital, this is especially useful. Let's say we have two investment opportunities, such as those below:
Project A: $100 investment with $10 return per period
Project B: $10,000 investment with $100 return per period
At first glance, one might feel that Project B has a higher ROI and seem more attractive than Project A. However, at a deeper analysis, you'd have realized that Project A returns 10% but Project B returns only a measly 1%. If you want to make your money work for you, wouldn't you look for more investment opportunities such as Project A?
So there you have it. These are seven guiding principles to help you to become a better investor. Investing is simple, but not easy. It takes discipline. It is knowledge-intensive and capital-intensive. I wish you all the best in your investing journey. And when you do make money, remember to give back. This world needs more rich people, people who thinks like the rich.
Peter Low is a writer/blogger who specializes on down-to-earth ideas for growing money. You can check out his website at Low Han Yew Peter where he provides unreserved education on improving personal financial IQ, including topics such as Think Relative Over Absolute Numbers, Farming and Investing, and Asset and Liability.
Introduction to Investment Trusts - 'Gearing' Explained
What+is+gearing%3F%0D%0A%0D%0AGearing+is+the+process+whereby+an+Investment+Trust+%28IT%29+borrows+money+in+order+to+reinvest+it.+The+money+that+is+borrowed+is+invested+in+shares+and+other+securities+in+an+attempt+to+maximise+the+gains+made+by+the+Investment+Trust.+Unit+trusts+cannot+do+this.%0D%0A%0D%0AInvestment+trusts+also+have+the+ability+to+use+derivatives+to+increase+exposure+to+stocks+and+effectively+gear+the+portfolio.+Derivatives+are+used+as+a+way+of+gaining+exposure+to+the+price+movements+of+shares+without+buying+the+underlying+shares+directly.%0D%0A%0D%0AWhen+the+stock+market+is+healthy+and+rising+Gearing+can+be+very+effective+as+the+gains+made+by+the+IT+will+be+maximised.+When+stock+markets+are+falling%2C+Gearing+will+accentuate+losses+of+the+IT+due+to+the+increased+exposure.%0D%0A%0D%0AA+trust+with+a+high+level+of+gearing+-+i.e.+a+trust+which+has+borrowed+a+larger+amount+of+money+or+has+increased+its+exposure+to+stocks+via+derivatives+-+would+potentially+fall+further+when+markets+are+performing+badly+than+trusts+with+low+gearing%2C+to+the+detriment+of+investors.+However+when+markets+are+performing+well%2C+a+highly+geared+trust+has+the+potential+to+make+higher+returns.+Please+do+remember+that+the+value+of+investments+can+go+down+as+well+as+up+and+you+may+get+back+less+than+you+invested.%0D%0A%0D%0AWhat+are+the+benefits%3F%0D%0%C2%A325m+invested.+If+the+underlying+investments+rise+by+20%25%2C+the+fund+would+be+valued+at+%C2%A330m.+%C2%A35m+is+still+owed%2C+giving+a+net+value+of+%C2%A325m%2C+an+increase+of+25%25.+If+instead+the+underlying+investments+had+decreased+by+20%25%2C+the+net+value+would+have+been+%C2%A315m+-+a+loss+of+25%25.+The+figures+presented+above+are+hypothetical+and+the+important+point+to+consider+is+that+gearing+makes+the+Investment+Trust+potentially+more+profitable+but+also+increases+the+exposure+to+the+risk+of+making+losses.%0D%0A%0D%0AManaging+the+risk+of+Gearing%3A%0D%0A%0D%0AWell+managed+ITs+ca+take+steps+to+manage+the+risks+of+gearing+and+to+help+conserve+capital.%0D%0A%0D%0AThe+money+that+is+borrowed+to+bolster+the+Investment+Trust+does+not+have+to+be+invested+in+equities.+If+the+equity+market+has+a+negative+forecast+then+the+borrowed+money+can+be+held+either+as+bonds+or+in+cash.+Alternatively+they+can+be+invested+in+other+asset+types+such+as+property.+This+will+serve+to+%22hold+the+cash%22+until+the+market+outlook+improves.%0D%0A%0D%0AIf+the+outlook+of+the+market+deteriorates+further+Investment+Trust+managers+can+even+embark+upon+the+process+of+de-gearing+whereby+a+greater+amount+of+equities+than+the+amount+borrowed+are+sold+and+the+proceeds+held+as+cash.%0D%0A%0D%0AConclusion%3A%0D%0A%0D%0AIt+can+be+seen+that+Gearing+can+have+a+substantial+effect+upon+the+performance+of+an+Investment+Trust.+When+markets+are+positive+it+has+the+potential+to+significantly+increase+the+level+of+return+seen+by+a+particular+Trust.%0D%0A%0D%0AThe+successful+management+of+borrowings+and+the+subsequent+gearing+is+vital+in+order+to+achieve+greater+returns+in+a+way+not+available+to+open-ended+funds+for+example.+However%2C+it+is+prudent+to+remember+that+when+markets+are+falling+gearing+creates+greater+levels+of+risks+and+the+Investment+Trust+can+experience+significant+losses.+This+means+that+investment+trusts+are+potentially+more+volatile+than+the+equivalent+unit+trust.%0D%0A%0D%0ANot+all+ITs+engage+in+gearing+and+details+of+a+specific+trust%27s+gearing+can+be+obtained+from+the+Association+of+Investment+Companies+%28AIC%29+to+ensure+that+the+level+of+risk+is+acceptable+to+the+individual+investor.
6 Essential Functions Of Financial Analysis Tools
Do you sell or hold a stock that has had a big drop? Is it too late to sell? Whether your stock has had a big loss or small loss should not make a difference. Judging a loss by its magnitude is an arbitrary approach to risk control. For example, it would be a more rational way to control risk to base decisions on abnormal stock behavior, an inability of a moving average, trendline, or other line of support to keep a stock from falling below that support, or on a change in trend. Sometimes a switch to another stock makes much more sense than to continue to hold a declining stock.
Let's say you paid $100 per share for 100 shares of a stock that subsequently falls to $80. Traders would never permit a big loss like that, but people who have not learned how to control risk might. To simplify these comments, assume that you have only one stock. Thus, your portfolio has dropped in value from $10,000 to $8,000. If this stock is still declining, to continue to hold would be to invite further loss. You have a choice. You can hold the stock, determined not to sell unless you have a profit, or you can switch to another stock that is already moving up in value. People who keep holding a declining stock after a 20% drop are apparently overlooking the fact that it is possible for a stock to decline to less than a dollar and remain there for several years before it recovers, if it ever does recover (even great companies sometimes go out of business).
Some people say, "I'll just wait until the stock gets back to where I bought it." However, the stock does not "know" what you paid, nor does it care. For practical purposes, it only "knows" where supports and resistances are (regions of demand and supply in the market for that stock). Your personal gain or loss is of absolutely no consequence to the stock. Though you may suffer some loss by selling a declining stock that is below your purchase price, you actually improve your portfolio by moving to a stock that is currently in a rising trend rather than declining. Even moving out of the stock and into cash would be an improvement, because the cash is not losing value.
We do not want to sell stocks in reaction to normal day-to-day fluctuations. However, if a stock declines with enough energy that it breaks through its underlying support, or if the stock's trend changes direction, continuing to hold the stock can be disastrous. A person who lets his stocks fall more than 20% really does not have a risk-control system. In fact, he may not even have a sell strategy. That is asking for financial pain and suffering. Many investors use moving averages to get a clear picture of a stock's trend. It may be okay under some circumstances to ignore changes in the very short-term trend of a stock, but ignoring a change in the long-term trend is foolish. If you are a beginner with no sell discipline at all, there is a simple strategy that can save your financial neck when you are unsure of how to respond intelligently to market turmoil.
For long-term investors, we suggest averaging the price of a stock for about 30 weeks (150 market days) and plotting this average on a daily basis. When this trend starts to turn down, it is a warning that the average performance of the stock for the most recent 150 days (ending today) is evidencing significant deterioration relative to the 150-day performance of the stock. This means that the deterioration in performance being witnessed goes beyond the mere day-to-day fluctuations experienced by every stock. Why is that? When we average price activity over 30 weeks or 150 days, the normal day-to-day fluctuations of the stock (which wave theorists refer to as "noise" because they obscure the more significant underlying waveforms) are reduced to insignificance (they are effectively factored out). This enables a person to see more clearly the underlying pattern of a stock's price movement.
There is another reason for using the 150-day moving average. One expert trader has tested all single moving averages from the 3-day moving average to the 200-day moving average as the basis for a trading discipline. Tests were performed covering many years and thousands of stocks. Results for all stocks were combined for each moving average system. While the 200-day moving average does offer more support for a declining stock, trading with the 150-day moving average was the most profitable. It simply gave a greater amount of total profit (accumulating profits and losses from all stocks over many years) when we based buy and sell signals on this moving average. There are, of course, variations on other moving averages, combinations of moving averages and completely different systems that produce better results. However, all things being equal and considering only single moving averages (simple and exponential), the 150-day simple moving average was the most profitable in our tests.
What is the strategy? Buy when the stock is closing above the 150-day moving average and the 150-day moving average first turns up. Sell when the stock is closing below the 150-day moving average and the 150-day moving average first turns down. Instead of using the closing price relative to the 150-day moving average, you could use a 10-day moving average in order to reduce the number of false signals. Thus, you could buy when the 10-day moving average crosses above the 150-day moving average and the 150-day moving average begins to rise. You could sell when the 10-day moving average crosses below the 150-day average and the 150-day moving average begins to decline.
Market strategists know that it is wise to avoid investing in a stock against its prevailing trend because trends tend to persist. When the trend turns down on a $50 stock, it may not turn up again until after the stock falls below $25. Why wait to see how far it will drop? Why not simply improve the position while you still have most of your money? Selling at a 20% loss and immediately moving on to a better situation may involve a little pain, but it is preferable to holding on to a declining stock that eventually loses 50% (and then to continue holding on to it for an additional two years while it recovers). Using the former approach, we could break even in six months or less. Using the latter approach, we might break even in two or three years (assuming that the stock indeed recovers). Therefore, we are suggesting for those who are not traders and who have no defined sell strategy, that they consider using a sell strategy based on the 150-day moving average and to use 20% as the maximum loss. If the system based on the 150-day moving average gets you out before a decline of 20% occurs, so much the better. If it does not get you out before the decline reaches 20%, then perhaps it is time to pull the plug anyway.
The 20% maximum loss is based on the assumption that the investor has at least 10 positions in his portfolio. That way, a 20% drop in any individual stock will cost the portfolio no more than 2%. Of course, you may decide to modify both the moving average system and the maximum allowable decline so that they better suit your own investment objectives and tolerance for risk. However, our own position is that risk is reduced when losses are kept small, because it is much easier to recover from a small loss than from a large one.
By using a strategy like the one outlined here, you have an answer to the original question. You will have a sell discipline that will get you out of a position most of the time before the loss becomes too great. However, if it does not, you will have a backup sell discipline that takes over. The market is sometimes quite confusing. The strategy outlined here will help you do what is necessary under the prevailing conditions. You may learn after the fact that the action you took was the wrong one. However, no system exists that is always right. Investors have to learn to accept the fact that wrong decisions are made by even the best traders. There is, however, one thing the best traders agree on and have in common. They all have a well-defined discipline, and they do not second-guess it.
Let's say you paid $100 per share for 100 shares of a stock that subsequently falls to $80. Traders would never permit a big loss like that, but people who have not learned how to control risk might. To simplify these comments, assume that you have only one stock. Thus, your portfolio has dropped in value from $10,000 to $8,000. If this stock is still declining, to continue to hold would be to invite further loss. You have a choice. You can hold the stock, determined not to sell unless you have a profit, or you can switch to another stock that is already moving up in value. People who keep holding a declining stock after a 20% drop are apparently overlooking the fact that it is possible for a stock to decline to less than a dollar and remain there for several years before it recovers, if it ever does recover (even great companies sometimes go out of business).
Some people say, "I'll just wait until the stock gets back to where I bought it." However, the stock does not "know" what you paid, nor does it care. For practical purposes, it only "knows" where supports and resistances are (regions of demand and supply in the market for that stock). Your personal gain or loss is of absolutely no consequence to the stock. Though you may suffer some loss by selling a declining stock that is below your purchase price, you actually improve your portfolio by moving to a stock that is currently in a rising trend rather than declining. Even moving out of the stock and into cash would be an improvement, because the cash is not losing value.
We do not want to sell stocks in reaction to normal day-to-day fluctuations. However, if a stock declines with enough energy that it breaks through its underlying support, or if the stock's trend changes direction, continuing to hold the stock can be disastrous. A person who lets his stocks fall more than 20% really does not have a risk-control system. In fact, he may not even have a sell strategy. That is asking for financial pain and suffering. Many investors use moving averages to get a clear picture of a stock's trend. It may be okay under some circumstances to ignore changes in the very short-term trend of a stock, but ignoring a change in the long-term trend is foolish. If you are a beginner with no sell discipline at all, there is a simple strategy that can save your financial neck when you are unsure of how to respond intelligently to market turmoil.
For long-term investors, we suggest averaging the price of a stock for about 30 weeks (150 market days) and plotting this average on a daily basis. When this trend starts to turn down, it is a warning that the average performance of the stock for the most recent 150 days (ending today) is evidencing significant deterioration relative to the 150-day performance of the stock. This means that the deterioration in performance being witnessed goes beyond the mere day-to-day fluctuations experienced by every stock. Why is that? When we average price activity over 30 weeks or 150 days, the normal day-to-day fluctuations of the stock (which wave theorists refer to as "noise" because they obscure the more significant underlying waveforms) are reduced to insignificance (they are effectively factored out). This enables a person to see more clearly the underlying pattern of a stock's price movement.
There is another reason for using the 150-day moving average. One expert trader has tested all single moving averages from the 3-day moving average to the 200-day moving average as the basis for a trading discipline. Tests were performed covering many years and thousands of stocks. Results for all stocks were combined for each moving average system. While the 200-day moving average does offer more support for a declining stock, trading with the 150-day moving average was the most profitable. It simply gave a greater amount of total profit (accumulating profits and losses from all stocks over many years) when we based buy and sell signals on this moving average. There are, of course, variations on other moving averages, combinations of moving averages and completely different systems that produce better results. However, all things being equal and considering only single moving averages (simple and exponential), the 150-day simple moving average was the most profitable in our tests.
What is the strategy? Buy when the stock is closing above the 150-day moving average and the 150-day moving average first turns up. Sell when the stock is closing below the 150-day moving average and the 150-day moving average first turns down. Instead of using the closing price relative to the 150-day moving average, you could use a 10-day moving average in order to reduce the number of false signals. Thus, you could buy when the 10-day moving average crosses above the 150-day moving average and the 150-day moving average begins to rise. You could sell when the 10-day moving average crosses below the 150-day average and the 150-day moving average begins to decline.
Market strategists know that it is wise to avoid investing in a stock against its prevailing trend because trends tend to persist. When the trend turns down on a $50 stock, it may not turn up again until after the stock falls below $25. Why wait to see how far it will drop? Why not simply improve the position while you still have most of your money? Selling at a 20% loss and immediately moving on to a better situation may involve a little pain, but it is preferable to holding on to a declining stock that eventually loses 50% (and then to continue holding on to it for an additional two years while it recovers). Using the former approach, we could break even in six months or less. Using the latter approach, we might break even in two or three years (assuming that the stock indeed recovers). Therefore, we are suggesting for those who are not traders and who have no defined sell strategy, that they consider using a sell strategy based on the 150-day moving average and to use 20% as the maximum loss. If the system based on the 150-day moving average gets you out before a decline of 20% occurs, so much the better. If it does not get you out before the decline reaches 20%, then perhaps it is time to pull the plug anyway.
The 20% maximum loss is based on the assumption that the investor has at least 10 positions in his portfolio. That way, a 20% drop in any individual stock will cost the portfolio no more than 2%. Of course, you may decide to modify both the moving average system and the maximum allowable decline so that they better suit your own investment objectives and tolerance for risk. However, our own position is that risk is reduced when losses are kept small, because it is much easier to recover from a small loss than from a large one.
By using a strategy like the one outlined here, you have an answer to the original question. You will have a sell discipline that will get you out of a position most of the time before the loss becomes too great. However, if it does not, you will have a backup sell discipline that takes over. The market is sometimes quite confusing. The strategy outlined here will help you do what is necessary under the prevailing conditions. You may learn after the fact that the action you took was the wrong one. However, no system exists that is always right. Investors have to learn to accept the fact that wrong decisions are made by even the best traders. There is, however, one thing the best traders agree on and have in common. They all have a well-defined discipline, and they do not second-guess it.
Two Of the Best Investments for Income in 2012?
In the current investing climate, Investors and Financial Planners are seeking out alternative investments capable of replacing traditional income streams as low interest rates and volatility in traditional financial assets continues to ravage the performance of investment portfolios. These negative variables, in conjunction with above-target inflation can ultimately cause a 'real' (adjusted for inflation) loss for a basic rate taxpayer needs earning less than 4%, and higher rate taxpayers require at least 6%. So where are investors allocating capital in their efforts to bolster investment performance without dramatically altering the risk profile of their overall portfolio?
One particular area of interest for many investors has been the property markets, as distressed sellers seek to liquidate their assets in order to pay down debt or free up balance sheets, well-located real estate can deliver yield of up to 15 per cent per annum. Property assets have been considered as useful income tools for years, yet faith in traditional listed vehicles such as real estate investment trusts and property funds is waning, due in part to the fact that such investments are publicly traded and invariably trade at a discount to net asset values. In fact it is true to say that any securitised investments will display a markedly different cash flow dynamic to that of a direct investment in strategic real estate assets.
The most obvious market targeted by investors in the US housing market, as banks seek to shed vast swathes of foreclosed real estate assets, and a proliferation of agents have sprung up offering investors the opportunity to acquire tenanted properties generating a monthly income equating to an annual yield of between 8% and 18%, although there are a number of mid and long-term risks associated with this investment strategy, including on-going tax liabilities, tenet management issues and of course there is a direct correlation with the on-going economic recovery in the united States which allows for tenants to afford such rental payments.
With such offers it is almost always the case that the selling agent has acquired the property and renovated for a much lower price than the sale price to the end investor, indicating that the real opportunity lies in just such an approach (buy/sell) rather than acquiring a property for the long term. Indeed, taking a more opportunistic approach allows the Investor to remain relatively liquid - rolling original capital over into further acquisitions once one property is sold. This also means that the investor gains a regular profit margin for up to 50% per transaction which making this an interesting take on investments for income, wve the purpose of reducing exposure to financial markets, as well as bolstering performance and offering a high degree of capital security simply because in both cases, capital is secured against real estate with a much higher capital value than committed capital.
One particular area of interest for many investors has been the property markets, as distressed sellers seek to liquidate their assets in order to pay down debt or free up balance sheets, well-located real estate can deliver yield of up to 15 per cent per annum. Property assets have been considered as useful income tools for years, yet faith in traditional listed vehicles such as real estate investment trusts and property funds is waning, due in part to the fact that such investments are publicly traded and invariably trade at a discount to net asset values. In fact it is true to say that any securitised investments will display a markedly different cash flow dynamic to that of a direct investment in strategic real estate assets.
The most obvious market targeted by investors in the US housing market, as banks seek to shed vast swathes of foreclosed real estate assets, and a proliferation of agents have sprung up offering investors the opportunity to acquire tenanted properties generating a monthly income equating to an annual yield of between 8% and 18%, although there are a number of mid and long-term risks associated with this investment strategy, including on-going tax liabilities, tenet management issues and of course there is a direct correlation with the on-going economic recovery in the united States which allows for tenants to afford such rental payments.
With such offers it is almost always the case that the selling agent has acquired the property and renovated for a much lower price than the sale price to the end investor, indicating that the real opportunity lies in just such an approach (buy/sell) rather than acquiring a property for the long term. Indeed, taking a more opportunistic approach allows the Investor to remain relatively liquid - rolling original capital over into further acquisitions once one property is sold. This also means that the investor gains a regular profit margin for up to 50% per transaction which making this an interesting take on investments for income, wve the purpose of reducing exposure to financial markets, as well as bolstering performance and offering a high degree of capital security simply because in both cases, capital is secured against real estate with a much higher capital value than committed capital.
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