Stock Market Investing

 Setting clear goals:

- Have clear goals

- Design plans that will get you around them (when you have a good plan, it is easier to execute it).

The solution remains always the same; invest in good businesses that will do well and deliver good business returns no matter what happens and also, whatever happens, the businesses will be still in business. Focus on risk and leave the upside to the positive tailwind humanity creates.

A crash is not what we should fear, fearing a crash is irrational because it increases your long-term investing returns. Actually, a crash is something that should be welcomed.

Get rich slowly is the key. 

After all, whether a stock is a small-cap, large-cap, medium cap, Russian, Brazilian, American, or German, mining copper, selling tires, software, or having an online platform, it doesn’t really matter from an investing perspective. What matters is the quality of the business, its moat, the margin of safety, cash flow generation, scalability, the management, the environment, and all the other things that make great investments. 

Currently, stocks offer an earnings yield of 4%, which is better than what cash or bonds offer and one reason why to own assets in comparison to cash, but stocks are much more volatile in comparison to other asset classes.

The stock market is a system that lets companies sell partial ownership in themselves to people in exchange for cash. Investors get a way to earn a return on cash they want to invest by owning a piece of a company and companies get cash for investors to help grow their business more.

The companies often borrow money by selling bonds to investors. Stocks and bonds are alternatives for investors. One is an ownership stake in the firm, while the other is a loan to the firm. But either way, the investor earns a return. Together, we call the stock market, and the bond market the capital markets. 

If you need the cash in the next few years, then it is very risky to invest it in something other than short term bonds or just hold it within your savings account because every asset class will crash at some point in time

The answer is again diversification, and you have to see what best fits your requirements. 

The main message is simple, see what is your opportunity cost when owning cash and compare it to other opportunities out there. When you find an investment that will likely lead you towards your investment goals and also offers you the protection you need, then you buy that.

One piece of advice would be heavily invested with 86.79% in stocks and the rest in cash waiting for opportunities.

Index funds investing 3 strategy key factors to follow

1) Short term goals–long - term investing mindset

Apart from investing for the long-term and allowing the businesses you own to compound their returns, the second part of the best index fund investing strategy is to invest constantly over time. Most of us are net contributors to our portfolio and therefore we should rejoice in lower stock prices rather than higher.

2) A stock market crash is amazing news – discipline and patience

The message of the story is that lower stock prices allow you to accumulate businesses much cheaper and that even if stocks crash 50% tomorrow, once stocks reach their expected level thanks to natural growth, you will be better off thanks to the crash.

So, the key is to be disciplined to constantly add to your investment portfolio on a monthly basis, especially if stocks crash. We have seen how long-term investment returns are skewed towards the positive and in the high single digits no matter when you start investing or the valuations at the time. So, if you keep investing month after month, no matter what is going on, you’ll do well. The only thing you have to be is to be the opposite of greedy.

3) Don’t be greedy – be the opposite and only be greedy when others are fearful

The thing is that given the volatility of the stock market, you will be given the opportunity to cash out at favorable terms at some point in time. Will it be when you have 55, 63, or 67, I don’t know, but if you patiently wait, the market will give you the opportunity to cash out and reach your financial goals. When that happens, don’t be greedy and risk what you have and need for something that you don’t have but also don’t need.

You can invest in both index funds and in individual businesses that you understand. Just compare what is the risk-reward of the investment, how it fits your investment goals, and then make the decision. As would Buffett say: “you only need a few good investments in your lifetime.”

Given Graham’s quote, before looking at an investment, before even putting your money into a brokerage account, you have to first learn about yourself and how will you react if the unpredictable happens on the stock market.

Business action is a bit more predictable. “Forget about the word stock”, it means that businesses are what delivers return, not the stock market and that by focusing on the stock market, you might divert your focus from what is really important. So, the next time you see your stock fall, be sure to ask yourself whether you are investing in a business or in the stock. 

1) What and why you have bought something

If you are investing in businesses, then you care about what are the assets you bought, the profitability, long-term growth aspects, cash flow projections, and business quality. You don’t really care about stock prices. Focusing on something before buying, getting to know it really well, is the key thing that will save you from selling at the wrong moment in time.

2) How much are you going to buy something

We have seen how even Google stock can fall 50% at any moment in time. Thus, it is always up to you to decide how much to buy something.

3) At what price you buy

Here come fundamentals in play, the most important thing to focus on and confront to stock prices. You need to understand the long-term fundamentals of a business. Understanding the long-term fundamentals of a business is key when it comes to investing as long-term business fundamentals withstand crises, crashes, recessions, presidents, and all other things that can hit the stock market. You need to be able to estimate the future cash flows the business might return to you. When you can do that, you compare the present value to the current stock market price, and then you are an investor. All the rest is speculation.

If stocks go down, you buy more, if stocks go up, great. This is why investing in growth stocks is considered risky and why investors expect a high return when doing so.

Should not listen to professionals because you don’t know what they are doing and why they have a position nor when they change their mind.

Smart money isn’t so smart and dumb money is dumb money only when it follows smart money.

You can outperform the market by THINKING FOR YOURSELF.

Use the common knowledge you have, look around you and within your business, and then analyze the stocks you can understand.

Peter Lynch’s stock market crash lessons

- Ignore the ups and downs of the market: In order to forget about the market and focus on investing in businesses, you should also forget about stock prices. “When you sell in desperation, you always sell cheap”

- Stocks go up over the long-term: stocks recovered, passed through the previous high, and never looked back

- Don’t let nuisances ruin a good portfolio: when investing, you can’t predict crashes, but what you can do is to own good businesses that will survive crashes and be better afterward as the competition gets crushed. People often sell the stocks that went upmost in order to protect themselves from a possible crash, but often the stocks that go up the most are the best stocks in a portfolio.

- Both Bull And Bear Markets Don't Last Forever.

Should you invest in stocks –the mirror test

QUESTION 1 – Do I own a house?

What has owning a house to do with the stock market? Well, stocks are just a part of your financial life. Lynch discusses how a house is usually a good investment everyone manages to make. The point is that a house is something you can get financed, thus 80% financed by somebody elsewhere what you pay for rent is usually equal to what you pay for a mortgage.

QUESTION 2 – Do I need the money? 

If you do need the money for your children’s college tuition, down payment on a house, retirement, or whatever, it is better that you don't invest in stocks.

What happens is that you keep the thing you need in mind and watch your portfolio go down when a stock market crash occurs, and those always come. Thus, people usually panic, fear they will lose more, and sell exactly at the wrong moment in time. 

QUESTION 3 – Do I have the personal qualities it takes to succeed?

How do you behave in uncertainty? Things are never clear on Wall Street and therefore you have to keep in mind that even with 4 out of 10, you will do good. The key to keep in mind is that you don’t sell low and buy high.

Can you go against the herd? The best investments are made by not selling when everybody around you is panicking. Thus, when others sell in frenzy, you have to buy more. 

The key is to resist your human nature and your “gut feelings”. You can’t predict the economy nor stock prices, all you can do is focus on the quality of the businesses you own.

The only thing you have to do when it comes to investing is to find a company you like, if you find that, it is never too soon nor too late to buy shares.

You don’t need financial education to be a great investor – all you need is common sense.

Lynch’s points to remember are:

• Invest in companies, not stocks
• Ignore the market and short-term fluctuations
• You can’t predict the economy
• You can’t predict the stock market in the short term
• The long-term returns will be good and in line with earnings
• If the company keeps delivering, keep it
• See whether stocks are for you
• Buy a house before a stock
• Don’t listen to professionals
• Take advantage of what you know (your business, your circle of competence, your spouse’s shopping)
• Look where others are not looking

"Investing without research is like playing stud poker and never looking at the cards"

Peter Lynch

BIG STOCKS SMALL MOVES - focus on small caps if possible. Big companies perform well in certain markets but don't expect miracles.

So, to find really great investments, you might want to look into the stocks that are not that famous, small caps.

The Six Stocks Categories Tool

1) Slow growers - Stocks to avoid. Keep in mind that fast growers turn into slow growers at some point in time (sooner or later all stocks hit the upper limit).

Slow grower expectations:

• Flat chart (flat earnings – stock can move on valuation)
• The generous and regular dividend
• CHECK THE DIVIDEND SAFETY – low payout gives a cushion, high payout makes it risky (both the dividend and the stock)

2) The stalwarts - keep some in your portfolio for recession protection

These grow a bit faster than slow growers, but not that fast. 10 to 12 percent earnings growth is what defines them for Lynch.

Be careful when a big company announces a merger with something not really within their circle of competence.

Stalwarts expectations:

• Make 30 to 50 percent and sell
• Always keep some in your portfolio because of recession protection
• However, check how it did in previous recessions and see how much protection it gives
• Unlikely to go out of business
• Price to earnings ratio will tell you the value

3) The fast growers - The stock that makes an investing career

Fast growers expectations:

• If growth slows down the market doesn’t like it
• Look for good balance sheets making substantial profits
• Figure out when they’ll stop growing and how much to pay for growth.
• At some point, they will stop growing and turn into something else.
• 20 to 25 percent is the best growth –50 percent is for hot industries and you know what that means (hot industries attract many competitors)
• Proven, profitable expansion in more than one city or country
• PE ratio should be below the growth rate
• Check whether growth is expanding or slowing down.

4) The Cyclicals

These follow the economy, like automotive, airlines, steel, chemical, travel, etc. are all cyclical companies.

Cyclicals expectations:

• Flourish when the economy turns good again
• Suffer when there is no economic growth
• 50% drops are normal if you buy at the wrong part of the cycle
• You can wait for years before seeing another upswing
• Large and well-known companies that make the unwary stock picker most easily part with his money
• Timing is everything–watch for inventories and for new market entrants
• Stock usually declines when peak earnings are reached and investors expect the next recession
• Know your cyclical and figure out the cycles 
• Within the car industry, 3 to 4 bad years are usually followed by 3 to 4 good years. 
• The worse the slump, the better the recovery.
• Easier to predict an upturn than a downturn in the industry.

5) Turnarounds - Buy only when you know the market is wrong in estimating the magnitude of the crisis

Turnarounds expectations:

• Explode on the upside when things improve
• Go bust when things don’t improve
• Understand whether the issues are as big as perceived or not –if you can’t, say next
• Can the company survive a raid from creditors?
• Ask how will the company turn around?
• Restructuring is not good, even if perceived as such
• However, one-time losses make buying opportunities
• What will be the effect of cutting costs?

6) The asset plays

It is a company sitting on something valuable that the market is overlooking or the asset hasn’t yet started to print cash. The asset can be cash, real estate, even accounting losses, inventory, the number of users, etc.

Asset plays expectations:

• Know the asset
• Have patience until the value unlocks
• Look at the debt
• Look at hidden assets
• Is the management of destroying or creating value?
• Is there an activist investor involved?

Always put stock into the above categories:

- Figure out what kind of stock it is, closely follow, and then make decisions. 

- Putting into categories helps in defining the first story, next what we have to do is to watch the important parameters impacting the story.

Characteristics of The Perfect Stock to Buy

1) It sounds dull –or even better, ridiculous: The key here is that a boring name will not get recognized by Wall Street until earnings are extremely good which gives you the opportunity to buy a good business before others rush in.

2) It does something dull: If a boring company with a boring name has a good balance sheet, good earnings, it will get discovered by Wall Street one day, but you’ll have plenty of time to accumulate and then sell to the trend followers later.

3) It does something disagreeable (disagreeable but necessary) or there’s something depressing about it.

4) It is a spinoff: Spinoffs are companies that are separated from the parent company and left to operate independently. Shareholders of the parent company keep their share in the parent company but also get a new share in the new company.

The thing with spinoffs is that those are usually smaller companies and there is no incentive for analysts to follow them. Shareholders that got the new shares don’t know what to do with the shares because the business model is usually different and the pressure is often on the sell-side where the stock drops.

5) It is a no-growth industry: The nice thing about a boring, dull, disgusting, no growth industry is that it doesn’t attract the brightest minds, it doesn’t have much competition and it can focus on making money and growing within the no-growth industry.

6) It’s got a niche: A niche means no competition! Those are businesses that are required but it doesn’t pay for competitors to come in. It is either too small of a market or you have an exclusive franchise. Such a niche allows you to increase prices and that is what increases earnings over time.

7) People have to keep buying it: When you buy a stock that makes things people will keep buying no matter what, you are investing.

8) It’s a user of technology: Many are attracted by the new technology companies competing for market share. But the best investment might be the company that uses technology to lower its costs and increase margins.

9) The company is buying back shares: The logic between buybacks is simple, the company buys stocks on the market, removes them from circulation and the remaining shareholders divide everything on a smaller denominator. 

If everybody is excited about a stock - it might not be the best investment. So, should be better to stay away from the coolest stocks.

 

When to buy a stock? Don't put attention to the media always discussing short term prices, don't try to time the market, focus on owning businesses at a fair price, buying when you have money and when you like the investment you are buying.

Before investing, you must know that stocks can crash 70% anytime and 50% of individual stocks will likely deliver negative returns or below 2% while 75% will underperform the market. If you are not ready for that, better don't invest in stocks! It is that simple!

Predicting crashes is too risky, therefore the only thing we can do is accept it as a possibility, or even better, a certainty, and when it happens make the correct decision. It also gives you a good perspective on how much money to invest in stocks. 

Accepting mistakes is a must –simply put it into a statistical framework.

The S&P 500 is one of the major indexes that represent the stock market. It's essentially the largest 500 companies in the US stock market. So it's a good barometer for what's going on overall in the market.

Strategies to sell a stock (when to sell a stock)

#1 - Why did you buy it? Did that change? If the reasons have changed (slow growth, fewer earnings, etc)

Other things that can change, apart from the stock price are: 

- The fundamentals

- The dividend and be cut

- Fraud

- Incompetent management

- Acquisition

- Increased competition

- Government intervention etc.

When something changes you have to see how the change impacts your initial reasoning and perhaps the best way to analyze what has changed is to put it into a portfolio risk and reward perspective.

#2 - Risk and Reward changed? As the price increases, so do the risk when it comes to investing because as the price increases then the business has or delivers on riskier things, riskier promises to justify the higher price (higher prices increase investing risks).

Looking at the risk and reward situation of investment is extremely important because sometimes a stock can fall 50% or more due to short-term economic impacts, some news, market fear, scandals, some political situation, legal or environmental issues.

#3 - Portfolio balance: Selling a stock to do portfolio rebalancing depends on your portfolio strategy. It forces you to do what you might not want to do instinctively, which is buy low and sell high.

#4 - Something better out there: Investing is about comparing opportunities and buying when the risk is low and the rewards high, it seems logical to sell something and buy something that is better.

#5 - Stop loss: It is not a good strategy, but in some specific cases, could be needed to sell to stop losing.

#6 - When you have reached your goal: The best reason to sell a stock, when you have reached your goals.

#7 - NEVER sell it: Warren Buffett loves to say how his preferred holding period is forever.

You can never be smart about selling because you never know what is going to happen with the stock price next. Don’t beat yourself up if you sold at the wrong time, it was the right decision to make at that point in time so always look from that perspective. Looking back is ok, but don’t dwell too much on it, life goes on.

“Intrinsic value is the number that you get if you can predict all the cash the business can give you between now and judgment day, discounted at a proper discount rate.”

Intrinsic value is one of the best tools that allow you to compare investment opportunities by comparing their respective intrinsic values.

What is the term for how much a market participant is willing to pay for a stock? Bid is the amount a potential buyer is willing to pay.

What is the term for an instrument giving an investor the right but not the obligation to sell a stock at a given price for a pre-set period of time in the future? Put options give investors the right to sell, not buy.

What is the term for an instrument giving an investor the right but not the obligation to buy a stock at a given price for a pre-set period of time in the future? Call options give investors the right to buy a stock at a preset price.

An index such as the Dow Jones Industrial Average shows you how large companies are performing in the economy. This helps you time your stock purchases and the price to pay for large cap stocks.

A mutual fund invests in a pool of stocks that they think will rise in value on behalf of investors. This lets you have a basket of low-return and high-return stocks that will average to a high return and a lowered risk.

Bond: Long-term promissory note, issued by a borrower, promising to its holder a predetermined and fixed amount of interest per year and repayment of principal at maturity. These are issued by corporations, goverments, state, local municipalities, etc.

Why are municipal bonds more attractive to high-income investors than to other investors? Municipal bond returns are exempt from federal income tax. High-income individuals pay a larger percentage in federal tax, which makes tax-exempt municipal bonds very attractive.

FX (Foreign Exchange Market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. It includes all aspects of buying, selling and exchanging currencies, it's very risky, and small changes get magnified a lot through the power of futures.

What is meant by an intermediate currency in a triangular arbitrage? It is a step in converting currency, such as buying euros that have a higher exchange rate for Japanese yen, and then buying yen with the euros. Because they have a more favorable exchange rate with yen, the euros you buy are the intermediate currency.

When you're allocating to a stock portfolio, remember that while stocks overall have returned about 11% per year on average over the last half century. Value stocks tend to have returns closer to 13%, but they're a little riskier. Growth stocks have returns around 9%, but they aren't quite as volatile