Investment in Stocks

Archive for June, 2010

Why I don’t follow the Financial News?

Personally, I do not follow the financial news. I won’t know that the market had crashed until a friend tells me.

I remembered that Warren Buffett’s teacher, Benjamin Graham once telling him to look at the stock market as a partner named, Mr Market. He also mentioned that Mr Market is a great partner, but is a lousy advisor. Mr Market had mood swings and would at times price stocks at high price and at times price stocks at low price. If we know that ABC stock is a good price, when we buy it from Mr Market? Of course we should buy it at the low price!

The reason why I don’t follow financial news, is because my judgement may be clouded by the news. Those reporters and advisors on TV are really persuasive… Even though I know that my judgement on a business has been through logical studies, but when these fellows speak on TV, my confidence began to shake… And come on, if you follow news long enough, you know that 95% of the time, these guys are not accurate in their predictions!

So rather than listen to the news, I wait for people to tell me that the market is in a bad shape. There is when I go into the market to look at the price of the stocks I shortlisted. Read  carefully, I go in and look at the price, not the news and stories… And when the price makes sense, I grab them at a bargain – sweet!

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Sean
Master Trainer (Value Investing Options Strategy)
Investment in Stocks Blog
Value Investing Academy – the Warren Buffet Way
http://www.investment-in-stocks.com

The 4 Steps of Stock Investing

Whenever friends ask me what stocks to buy? I will answer that if I tell them “what stocks to buy” is only 1 step out of the 4 steps of the investing process and it will not be complete unless I show them the entire 4 steps.

Lets take a look at the 4 steps A-B-C-D stock investment process:

A – Assess: Going though this step will give the answer to what most people ask. “What stocks to buy?” When we are able to assess winning stocks (I rather call stocks = “businesses”) the rest, we will know which stocks to shortlist. After we do that, we can move on to step 2.

B – Buy: Ah ha. Hold your horses. Although step 2 is “Buy”, it does not mean we buy anytime and anyhow. We only buy when the business (stock) is at a discount. In this step, we calculate and find out how much the business is worth. Only then should we take a look at the current stock price and see if it is at a discount. By at a discount, I mean the stock price is below what it is worth. Well, if we find a winning stock (Step 1) and calculate its worth, but realise that the stock is not at a discount, we should WAIT. But if it is at a discount, we can buy the stock.

C – Cash

In stock investments, many people do not know how to cash it. This is something I formulated years back when I was studying and researching on how to create consistent passive income at very low risk. One obvious way is by receiving dividends. The other less known way is through sales of options. Yes – selling options. This is not options trading. it is based on Value investing. It is my personal strategy which I termed as VIOs – Value Investing Options Strategies. I will talk more about it in subsequent postings.

D – Delete

We must know when to delete this stock from our portfolio. Yes, when to sell? Not knowing when to sell can make you lose your money. But this comes from knowing why you buy the stock and at what price is it worth.

This should give you an overview of the entire process. I will share from insights as we move along.

Click HERE to book a Free Investing Workshop.

Sean
Master Trainer (Value Investing Options Strategy)
Investment in Stocks Blog
Value Investing Academy – the Warren Buffet Way
http://www.investment-in-stocks.com

Investment in Stocks

We all need to invest and I love to invest in various investments. Some of the investment vehicles could be:

1)     Stock

2)     Bonds

3)     Mutual Funds

4)     Real Estate

5)     Land Banking

6)     Precious Metals

7)     Collectibles

8)     Small Businesses

Of all these, I love the stock market for these reasons:

1)     Small Capital Outlay

You need not have huge capital to start stock investments. I am comparing this to investments such as real estate, land banking, precious metals, collectibles and small businesses. You can start with a few hundred and compound them to millions, literally.

2)     Liquidity

If you need cash, you can withdraw it from your brokerage account easily within days. This differs from most other investments where it may take months. Etc Real estate.

3)     High Returns

Stock investments have historically given the highest return compared to the rest of the investments.

4)     Passive Income

Ah ha… my favourite topic. Besides dividends, I found ways to generate passive income! I will share more on this.

Click HERE to book a Free Investing Workshop.

Sean
Master Trainer (Value Investing Options Strategy)
Investment in Stocks Blog
Value Investing Academy – the Warren Buffet Way
http://www.investment-in-stocks.com

Understanding Financial Health of a Company

In dissecting a business to check its “health”, we make use of the 3 Financial Statements:

1. Balance Sheet
2. Income Statement
3. Cash Flow

In this post, we will look into the balance sheet:

The Balance Sheet

The Balance Sheet is a financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.

The balance sheet must follow the following formula:

Assets = Liabilities + Shareholders’ Equity

This means that assets, or the means used to operate the company, are balanced by a company’s financial obligations along with the equity investment brought into the company and its retained earnings.

Assets are what a company uses to operate its business, while its liabilities and equity are two sources that support these assets. Owners’ equity, referred to as shareholders’ equity in a publicly traded company, is the amount of money initially invested into the company plus any retained earnings, and it represents a source of funding for the business.

It is important to note that a balance sheet is a snapshot of the company’s financial position at a single point in time. It can be used to calculate how much a company is worth at that point of time.

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Compound Your Way to Financial Freedom

So, how does Value Investing help us achieve Financial Freedom? Let me give you an illustration.

We assume that Charles is going to win the Money Game and achieve financial freedom solely by Employing his Money to work for him. Charles monthly basic need is $2,500, so he must employ his money in a way that gives him $2,500 a month.

Through Afterthe reading of this book, Charles acquired the skill to Make his money Money work Work at a return of 20% per year. (I will teach you how to get do this in a while.). Let’s calculate when how long it takes for him tohe can achieve financial freedom.

Because he can achieve 20% per year and he needs a passive income of $30,000 ($2,500 x 12 months) per year to achieve financial freedom, he needs:

20% x Capital = $30,000

A capital of $200,000.

He decided to start saving $3,600 and also keepby setting aside $300 per month to save for his financial future. That means he will save $3,600 every year. When can he reach the amount of $200,000 and become financially free?

$200,000/$3,600 = 55.5 Years!

What? He needs to wait 55 years?
Wait a minute, why doesn’t he invest his initial $3,600 and all the subsequent $3,600 since he can get a 20% returns? Let’s do that and see if there is any difference.

Here is a table that shows what happens if Charles invests his $3,600 every year.

Year Capital 20% End Of Year
Year 0 $3,600.00 $720.00 $4,320.00
Year 1 $7,920.00 $1,584.00 $9,504.00
Year 2 $13,104.00 $2,620.80 $15,724.80
Year 3 $19,324.80 $3,864.96 $23,189.76
Year 4 $26,789.76 $5,357.95 $32,147.71
Year 5 $35,747.71 $7,149.54 $42,897.25
Year 6 $46,497.25 $9,299.45 $55,796.71
Year 7 $59,396.71 $11,879.34 $71,276.05
Year 8 $74,876.05 $14,975.21 $89,851.26
Year 9 $93,451.26 $18,690.25 $112,141.51
Year 10 $115,741.51 $23,148.30 $138,889.81
Year 11 $142,489.81 $28,497.96 $170,987.77
Year 12 $174,587.77 $34,917.55 $209,505.32

Note that from Year 1 onwards, we add in another $3,600 because he will continuously invest. So what it means is that today he invests $3,600 and gets back a 20% return of $720. So at the end of the year, he has $4,320. At the same time, he has also saved another $3,600 to invest. So at the beginning of Year 1, he will have $4,320+$3,600=$7920 to invest.

Looking at the table, Charles will be able to accumulate $200,000 byin 13 years. That is far better than 55 years, isn’t it? And of course if he chooses to invest more, the results will be even faster.

So what are you waiting for? If you are serious about becoming Financially Free, you got to start investing already.

Click HERE to book a Free Investing Workshop.

Sean
Master Trainer (Value Investing Options Strategy)
Investment in Stocks Blog
Value Investing Academy – the Warren Buffet Way
http://www.investment-in-stocks.com

The 4 Question Check List

There is some probing questions you can ask when faced with a company you suspect has a competitive advantage

Q1: What is the Value the business is providing?

Lets take for example we talk about KFC. The value is yummy chicken.

We then move on to the next question.

Q2: Can you get it else where?

The answer is yes to this question. We can buy yummy chicken from many other places. We move on the the next question. But if the answer to this question is no, we find that we have pick a monopoly with nu competition.

Q3: If yes, then why don’t you get it else where?

If we can get chicken from else were, why don’t we get it from these other places? If your answer is that you will get from these places, then you realize that the business do not have a competitive advantage. If you realize that you only go to KFC because you want the KFC chicken’s consistency, the unique taste and the entire meal. You know that KFC has a competitive advantage over other fast food or fried chicken restaurant.

Q4: Is the competitive advantage discovered in Q3 easily sustainable?

We want a business which have sustainable competitive advantage. If a business needs to spend huge amount of money to sustain the competitive advantage, it is not easily sustainable. Looking at KFC again, the unique taste is not something that is easily duplicable by its competitors, nor is it something that is expensive to maintain. There is little need for Research and Development on the KFC’s recipe.

Click HERE to book a Free Investing Workshop.

Sean
Master Trainer (Value Investing Options Strategy)
Investment in Stocks Blog
Value Investing Academy – the Warren Buffet Way
http://www.investment-in-stocks.com