Sunday, 13 July 2014

10 Amazingly Awesome Warren Buffett Quotes to Live By

10 Amazingly Awesome Warren Buffett Quotes to Live By #infographic

Common investment strategies of fund managers

The criteria that mutual fund managers use to select their assets vary widely according to the individual manager. So when choosing a fund, you should look closely at the manager's investment style to make sure it fits your risk-reward profile.

"Investment style is incredibly important because of the way that investing works," says Chris Geczy, director of The Wharton School's wealth management program at the University of Pennsylvania.

"Both risk and return are connected to style. According to current practice portfolio theory, you can optimize a blend of styles for diversification, balancing reward and risk."

Here's a look at a half-dozen common investment strategies among fund managers.

Top-down or Bottom-up investing
Top-down investing strategies involve choosing assets based on a big theme. For example, if a fund manager anticipates that the economy will grow sharply, he or she might buy stocks across the board. Or the manager might just buy stocks in particular economic sectors, such as industrial and high technology, which tend to outperform when the economy is strong.

If the manager expects the economy to slump, it may spur him or her to sell stocks or purchase shares in defensive industries such as health care and consumer staples.

Bottom-up managers choose stocks based on the strength of an individual company, regardless of what's happening in the economy as a whole or the sector in which that company lies.

"The great advantage of top-down is that you're looking at the forest rather than the trees," says Mick Heyman, an independent financial adviser in San Diego. That makes screening for stocks or other investments easier.

And, "When you're right, you're really right," says Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, N.Y.

Of course, managers might be wrong on their big idea. And even if they're right, that doesn't guarantee they'll choose the right investments.

"A good example is gold," says James Holtzman, a shareholder at Legend Financial Advisors in Pittsburgh. "That would make sense for a top-down investor. But what if you're looking at a gold mining stock and the company is being run into the ground? The particular stock could be ready to collapse, even though investing in gold makes sense."

A bottom-up manager benefits from thorough research on an individual company, but a market plunge often pulls even the strongest investments down.

Fundamental or Technical analysis
Fundamental analysis involves evaluating all the factors that affect an investment's performance. For a stock, it would mean looking at all of the company's financial information, and it may also entail meeting with company executives, employees, suppliers, customers and competitors. "You want to analyse management, really understand what's driving the company and where growth is coming from," Heyman says.

Technical analysis involves choosing assets based on prior trading patterns. You're looking at the trends of an investment's price.

Most managers emphasize fundamental analysis, because they want to understand what will drive growth. Investors expect the stock to rise if a company is growing profits, for example.

But fundamentals don't always carry the day. "You can have a period of time where the market moves on technicals," Holtzman says.

Heyman sees power in technical analysis, because he believes an asset's price at any single moment reflects all the information available about it.

The best managers use both fundamentals and technicals, he says. "If a stock has good fundamentals, it should be stable to rising. If it's not rising, the market is telling you you're wrong or you should be focusing on something else."

Contrarian investing
Contrarian managers choose assets that are out of favour. They determine the market's consensus about a company or sector and then bet against it.

The contrarian style is generally aligned with a value-investing strategy, which means buying assets that are undervalued by some statistical measure, says Wharton's Geczy.

"In the long run, value has beaten growth in assets around the world, though during certain periods that's not true," he says. "The contrarian style generally rewards investors, but you have to choose the right assets at the right time."

The risk, of course, is that the consensus is right, which results in wrong bets and losses for a contrarian manager.

Dividend investing
As the name suggests, dividend funds buy stocks with a strong record of earnings and dividends. Because of the stock market volatility of recent years, many investors like the idea of a fund that offers them a regular payout.

"Even if the price goes down, at least you're getting some income," says Russ Kinnel, director of mutual fund research at Morningstar. "It's a nice way to supplement income if you're retired."

However, the recent popularity of dividend stocks causes some market pundits to wonder if they’re currently overvalued. Also, beware of funds with extremely high yields. That could be a sign that companies are taking out-sized risk and are headed for declines.

Most experts advise diversifying among investment styles. "In the end, a balanced way of looking at things tends to create fewer errors," Heyman says.

Phil Fisher's 15 Rules for Evaluating Companies

Warren Buffett has said he is 85% Ben Graham and 15% Phil Fisher.

Phil Fisher, in his watershed book Common Stocks and Uncommon Profits and Other Writings (Wiley Investment Classics) laid out 15 rules for investing in companies:

1. Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?

2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potential when the growth potential of currently attractive product lines have largely been exploited?

3. How effective are the company’s research and development efforts in relation to its size?

4. Does the company have an above-average sales organization?

5. Does the company have a worthwhile profit margin?

6. What is the company doing to maintain or improve profit margins?

7. Does the company have outstanding labor and personnel relations?

8. Does the company have outstanding executive relations?

9. Does the company have depth to its management?

10. How good are the company’s cost analysis and accounting controls?

11. Are there other aspects of the business somewhat peculiar to the industry involved that will give the investor important clues as to how the company will be in relation to its competition?

12.Does the company have a short-range or long-range outlook in regard to profits?

13. In the foreseeable future, will the growth of the company require sufficient financing so that the large number of shares then outstanding will largely cancel existing shareholders’ benefit from this anticipated growth?

14. Does the management talk freely to investors about its affairs when things are going well and “clam up” when troubles or disappointments occur?

15. Does the company have a management of unquestioned integrity?

Quote for the day

“A great trader is like a great athlete . You have to have natural skills, but you have to train yourself how to use them.” – Marty Schwartz