Friday, 30 April 2021
Quote for the day
"Success comes from taking the initiative and following up or persisting." - Tony Robbins
Thursday, 29 April 2021
Simple Formula for Living
1. Live beneath your means
2. Return everything you borrow3. Stop blaming other people
4. Admit it when you make a mistake
5. Give clothes not worn to charity
6. Do something nice and try not to get caught
7. Listen more; talk less
8. Take a 30 minute walk everyday
9. Strive for excellence, not perfection
10. Be on time. Don’t make excuses
11. Don’t argue.
12. Get Organized
13. Be kind to unkind people
14. Let Someone cut ahead of you in line
15. Take time to be alone
16. Cultivate good manners
17. Be humble
18. Realize and accept that life isn’t fair
19. Know when to keep your mouth shut
20. Go on an entire day without criticizing anyone
21. Learn from the past. Plan for the future
22. Live in the present
23. Don’t sweat the small stuff
24. It’s all small stuff
9. Strive for excellence, not perfection
10. Be on time. Don’t make excuses
11. Don’t argue.
12. Get Organized
13. Be kind to unkind people
14. Let Someone cut ahead of you in line
15. Take time to be alone
16. Cultivate good manners
17. Be humble
18. Realize and accept that life isn’t fair
19. Know when to keep your mouth shut
20. Go on an entire day without criticizing anyone
21. Learn from the past. Plan for the future
22. Live in the present
23. Don’t sweat the small stuff
24. It’s all small stuff
Source: www.lanesboro.k12.mn.us
Wednesday, 28 April 2021
Quote for the day
"There are two main drivers of asset class returns - inflation and growth." - Ray Dalio
Tuesday, 27 April 2021
Quote for the day
"A better world shall emerge based on faith and understanding." - Douglas MacArthur
Monday, 26 April 2021
Behavioural mistakes we make while investing, and how to avoid them
Behavioural mistakes we make while investing, and how to avoid them
Most of us understand the simple truths of investing. Haven't we been told not to hold on to losing positions for too long, or told not to panic and sell when the market corrects 10% in a single day? Although the basic rules of investing are simple enough to understand, following them can be quite tough. In the words of Warren Buffet, “Investing is simple, but not easy.”
So why is investing in equity so difficult? An investor's worst enemy is himself. The behavioural skills needed to invest successfully are often in direct conflict with how we respond to familiar situations. If our house is on fire, we listen to our intuition and run for safety. This helps us survive. However, in the case of investment decisions, this behaviour can land us in trouble. The moment we see signs of panic in the stock market, we run to sell all our stocks; when we see euphoria, we jump into the market. We tend to behave irrationally and in a biased manner in many investment situations. Your long-term investment success is determined by your ability to control your ‘inner demons’ and sidestep ‘psychological traps’.
The good news is that human behaviour is irrational in a predictive manner, as examined by Professor Dan Ariely in his highly acclaimed book Predictably Irrational.
Once we are internally alert and are able to recognize these ‘inner demons’, we can develop approaches to tackle them. Thoughtful investors can leverage this predictable irrationality of human beings by not getting swayed by the noise and making rational decisions, thereby taking advantage of others’ behavioural biases.
One such inner demon is ‘overconfidence’. Many a times, we tend to overrate our ability, knowledge and skill. Watching 24-hour news channels and listening to ‘experts’, we sometimes tend to believe that we have become experts and take investment decisions that are not thought through. We think we can predict and time every up and down of daily price movements and invest accordingly. Overconfidence can lead to excessive trading and poor investment decisions. To be a successful investor, one needs to follow a zero-based approach towards decision-making, and be a bit cautious and sceptical. In investment decisions, it pays to be humble rather than being overconfident about past successes.
Another common demon we need to fight is ‘anchoring’. While making a decision, we often tend to give disproportionate weight to the first information we receive. As a result, the initial data colours our subsequent analysis. One of the most common anchors is a past event or trend. How many times have we concluded that a stock is cheap because it is at a 52-week low? Even if fundamental prospects justify a change in value, we find it difficult to erase historical prices from our memory.
Another trap we frequently encounter is ‘mental accounting’, i.e. treating money differently depending on where it is kept, where it comes from, or how it is spent. Assume you buy a stock at Rs. 100 per share that surges to Rs. 200 in one month. Many investors divide the value of the stock into two distinct parts, the initial investment and the profit. They tend to treat each part differently – the original investment with caution and the profit portion with significantly less care. Haven’t you heard of people who choose an overtly conservative investment strategy for inherited wealth as it is “too sacred”? We need to treat every rupee equally, in order to avoid making irrational decisions. It does not matter whether you have received a sum of money by means of hard work or inheritance; once you have received the money, you must treat each penny of it equally, and plan your course of action accordingly.
‘Loss aversion’ is another behavioural bias that we frequently exhibit. Research has established that a loss has about two-and-a-half times the psychological impact of a gain the same size. People feel a lot worse about losses than they feel good about a gain of a similar magnitude. Since it is difficult for investors to accept their losses, they tend to sell their winners too soon and hold on to their losers too long. This is because they don’t want to take a loss on a stock. They want to at least recover their investment, despite the fact that the original rationale for purchasing the stock no longer appears valid.
Another important psychological trap we need to avoid is ‘herding’. People tend to follow the actions of a larger group, independent of their own knowledge. This large-scale social imitation can lead to significant gaps between actual value and price. The herd-like behaviour explains several booms and busts that we have witnessed in the past. These collective behaviour phenomena can create profitable opportunities for individual stocks. But taking advantage of collective irrationality, either for a specific stock or for the market as a whole, is difficult. Since most of us have a strong urge to be part of the crowd, acting independently is not an easy feat. But if we’re able to control this behaviour, it can result in significant investment gain for us. Warren Buffet sums this up by saying: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”. It requires significant control over one’s emotions to practice in real life.
There are many more demons that we need to tame. For example: Allowing emotions like anger or fear to override reason, becoming paralyzed by information overload, the tendency to seek only that information that confirms our opinions or decisions. They draw from our tendency to behave irrationally and use mental shortcuts while taking investment decisions.
The need of the hour: A disciplined approach towards investing
So how do we fight these inner demons and sidestep these psychological traps? The only uncomplicated way for most of us is to follow a disciplined approach towards investing.
Most of us understand the simple truths of investing. Haven't we been told not to hold on to losing positions for too long, or told not to panic and sell when the market corrects 10% in a single day? Although the basic rules of investing are simple enough to understand, following them can be quite tough. In the words of Warren Buffet, “Investing is simple, but not easy.”
So why is investing in equity so difficult? An investor's worst enemy is himself. The behavioural skills needed to invest successfully are often in direct conflict with how we respond to familiar situations. If our house is on fire, we listen to our intuition and run for safety. This helps us survive. However, in the case of investment decisions, this behaviour can land us in trouble. The moment we see signs of panic in the stock market, we run to sell all our stocks; when we see euphoria, we jump into the market. We tend to behave irrationally and in a biased manner in many investment situations. Your long-term investment success is determined by your ability to control your ‘inner demons’ and sidestep ‘psychological traps’.
The good news is that human behaviour is irrational in a predictive manner, as examined by Professor Dan Ariely in his highly acclaimed book Predictably Irrational.
Once we are internally alert and are able to recognize these ‘inner demons’, we can develop approaches to tackle them. Thoughtful investors can leverage this predictable irrationality of human beings by not getting swayed by the noise and making rational decisions, thereby taking advantage of others’ behavioural biases.
One such inner demon is ‘overconfidence’. Many a times, we tend to overrate our ability, knowledge and skill. Watching 24-hour news channels and listening to ‘experts’, we sometimes tend to believe that we have become experts and take investment decisions that are not thought through. We think we can predict and time every up and down of daily price movements and invest accordingly. Overconfidence can lead to excessive trading and poor investment decisions. To be a successful investor, one needs to follow a zero-based approach towards decision-making, and be a bit cautious and sceptical. In investment decisions, it pays to be humble rather than being overconfident about past successes.
Another common demon we need to fight is ‘anchoring’. While making a decision, we often tend to give disproportionate weight to the first information we receive. As a result, the initial data colours our subsequent analysis. One of the most common anchors is a past event or trend. How many times have we concluded that a stock is cheap because it is at a 52-week low? Even if fundamental prospects justify a change in value, we find it difficult to erase historical prices from our memory.
Another trap we frequently encounter is ‘mental accounting’, i.e. treating money differently depending on where it is kept, where it comes from, or how it is spent. Assume you buy a stock at Rs. 100 per share that surges to Rs. 200 in one month. Many investors divide the value of the stock into two distinct parts, the initial investment and the profit. They tend to treat each part differently – the original investment with caution and the profit portion with significantly less care. Haven’t you heard of people who choose an overtly conservative investment strategy for inherited wealth as it is “too sacred”? We need to treat every rupee equally, in order to avoid making irrational decisions. It does not matter whether you have received a sum of money by means of hard work or inheritance; once you have received the money, you must treat each penny of it equally, and plan your course of action accordingly.
‘Loss aversion’ is another behavioural bias that we frequently exhibit. Research has established that a loss has about two-and-a-half times the psychological impact of a gain the same size. People feel a lot worse about losses than they feel good about a gain of a similar magnitude. Since it is difficult for investors to accept their losses, they tend to sell their winners too soon and hold on to their losers too long. This is because they don’t want to take a loss on a stock. They want to at least recover their investment, despite the fact that the original rationale for purchasing the stock no longer appears valid.
Another important psychological trap we need to avoid is ‘herding’. People tend to follow the actions of a larger group, independent of their own knowledge. This large-scale social imitation can lead to significant gaps between actual value and price. The herd-like behaviour explains several booms and busts that we have witnessed in the past. These collective behaviour phenomena can create profitable opportunities for individual stocks. But taking advantage of collective irrationality, either for a specific stock or for the market as a whole, is difficult. Since most of us have a strong urge to be part of the crowd, acting independently is not an easy feat. But if we’re able to control this behaviour, it can result in significant investment gain for us. Warren Buffet sums this up by saying: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”. It requires significant control over one’s emotions to practice in real life.
There are many more demons that we need to tame. For example: Allowing emotions like anger or fear to override reason, becoming paralyzed by information overload, the tendency to seek only that information that confirms our opinions or decisions. They draw from our tendency to behave irrationally and use mental shortcuts while taking investment decisions.
The need of the hour: A disciplined approach towards investing
So how do we fight these inner demons and sidestep these psychological traps? The only uncomplicated way for most of us is to follow a disciplined approach towards investing.
Some ways to bring about investment discipline are as follows:
(1) Use a ‘check-list’ approach towards entry / exit of stocks. Keep it short and reasonable.
(2) Do your due diligence before investing. Keep a margin of safety while investing; never invest to lose.
(3) Adopt a ‘buy and hold’ strategy with periodic reviews. The less frequently you track the market and check your portfolio, the less likely you would be to react emotionally to the natural ups and downs of the stock market. For most investors, checking the portfolio in a structured manner (once in three to six months) is sufficient.
(4) Be more thoughtful while taking long-term investment decisions. Losing one day’s return will not matter if you want to keep the stock for 10 years. When you see signs of panic or euphoria, the best advice would be to wait for another day. If the investment is meaningful from a long-term perspective, the opportunity will continue to remain a good one, even in the future.
(5) Have appropriate asset allocation, and rebalance your portfolio periodically.
(6) Invest at regular intervals.
(7) Be patient. Do not focus on instant returns, and do not change your investment decisions based on short-term returns.
(8) Overall, be humble, and learn from your mistakes. When you succeed, evaluate which of your actions contributed to the success, and which ones did not. Don’t claim the credit for successes that have occurred by chance. Avoid rationalisation when you fail. Don’t exaggerate the role of bad luck in your failures.
Summing up…
Research has shown that behavioural mistakes can reduce the return on investments by 10% to as much as 75%. So what do you need to avoid this? It can be summarized in one word: discipline. One need not always focus on becoming too smart. Instead, if one can focus on avoiding silly behavioural mistakes, one could become a successful long-term investor. Warren Buffet once said, “You only have to do a very few things right in your life, so long as you don’t do too many things wrong”. If we can avoid making big mistakes, the right decisions would take care of themselves. A disciplined approach towards investing allows you to do just that.
Like the central theme of the Mahabharata, the battle for investment success is about systematic adherence to dharma – financial dharma. As stated in the epic, “The road to heaven is paved with bad intentions.” Our journey towards financial heaven is filled with such inner demons. Our ability to identify and tame the ‘inner demons’ is essential for long-term superior returns. Just as a lot of mental discipline and willingness is required to forego short-term pleasures to wake up every day and jog for good health, a similar discipline and willpower is required to follow the simple but powerful mantras of enhancing long-term financial health.
(1) Use a ‘check-list’ approach towards entry / exit of stocks. Keep it short and reasonable.
(2) Do your due diligence before investing. Keep a margin of safety while investing; never invest to lose.
(3) Adopt a ‘buy and hold’ strategy with periodic reviews. The less frequently you track the market and check your portfolio, the less likely you would be to react emotionally to the natural ups and downs of the stock market. For most investors, checking the portfolio in a structured manner (once in three to six months) is sufficient.
(4) Be more thoughtful while taking long-term investment decisions. Losing one day’s return will not matter if you want to keep the stock for 10 years. When you see signs of panic or euphoria, the best advice would be to wait for another day. If the investment is meaningful from a long-term perspective, the opportunity will continue to remain a good one, even in the future.
(5) Have appropriate asset allocation, and rebalance your portfolio periodically.
(6) Invest at regular intervals.
(7) Be patient. Do not focus on instant returns, and do not change your investment decisions based on short-term returns.
(8) Overall, be humble, and learn from your mistakes. When you succeed, evaluate which of your actions contributed to the success, and which ones did not. Don’t claim the credit for successes that have occurred by chance. Avoid rationalisation when you fail. Don’t exaggerate the role of bad luck in your failures.
Summing up…
Research has shown that behavioural mistakes can reduce the return on investments by 10% to as much as 75%. So what do you need to avoid this? It can be summarized in one word: discipline. One need not always focus on becoming too smart. Instead, if one can focus on avoiding silly behavioural mistakes, one could become a successful long-term investor. Warren Buffet once said, “You only have to do a very few things right in your life, so long as you don’t do too many things wrong”. If we can avoid making big mistakes, the right decisions would take care of themselves. A disciplined approach towards investing allows you to do just that.
Like the central theme of the Mahabharata, the battle for investment success is about systematic adherence to dharma – financial dharma. As stated in the epic, “The road to heaven is paved with bad intentions.” Our journey towards financial heaven is filled with such inner demons. Our ability to identify and tame the ‘inner demons’ is essential for long-term superior returns. Just as a lot of mental discipline and willingness is required to forego short-term pleasures to wake up every day and jog for good health, a similar discipline and willpower is required to follow the simple but powerful mantras of enhancing long-term financial health.
Source: http://www.itsallaboutmoney.com/
Quote for the day
"Don't play games that you don't understand, even if you see lots of other people making money from them." - Tony Hsieh
Sunday, 25 April 2021
Quote for the day
"If you are not willing to risk the unusual, you will have to settle for the ordinary." - Jim Rohn
Saturday, 24 April 2021
Quote for the day
"If you want to be an entrepreneur, it's not a job, it's a lifestyle." - Niklas Zennstrom
Friday, 23 April 2021
Quote for the day
"Successful people are always looking for opportunities to help others. Unsuccessful people are always asking, What's in it for me?" - Brian Tracy
Thursday, 22 April 2021
Quote for the day
"Success ... seems to be connected with action. Successful men keep moving. They make mistakes, but they don't quit." - Conrad Hilton
Wednesday, 21 April 2021
Quote for the day
"We, whoever we are, must have a daily goal in our lives, no matter how small or great, to make that day mean something." - Maxwell Maltz
Tuesday, 20 April 2021
Quote for the day
"I can teach anybody how to get what they want out of life. The problem is that I can't find anybody who can tell me what they want." - Mark Twain
Monday, 19 April 2021
Quote for the day
"Obstacles are what you see when you take your eyes off your goals." - Brian Tracy
Sunday, 18 April 2021
Quote for the day
"The more generous we are, the more joyous we become. The more cooperative we are, the more valuable we become. The more enthusiastic we are, the more productive we become. The more serving we are, the more prosperous we become." - William Arthur Ward
Saturday, 17 April 2021
Quote for the day
"You never really understand a person until you consider things from his point of view." - Harper Lee
Friday, 16 April 2021
Thursday, 15 April 2021
Quote for the day
"Character is higher than intellect... A great soul will be strong to live, as well as strong to think." - Ralph Waldo Emerson
Wednesday, 14 April 2021
Quote for the day
"Every conflict we face in life is rich with positive and negative potential. It can be a source of inspiration, enlightenment, learning, transformation, and growth-or rage, fear, shame, entrapment, and resistance. The choice is not up to our opponents, but to us, and our willingness to face and work through them." - Kenneth Cloke
Tuesday, 13 April 2021
Quote for the day
"The quality of our lives depends not on whether or not we have conflicts, but on how we respond to them." - Thomas Crum
Monday, 12 April 2021
Quote for the day
"Relationships are based on four principles: respect, understanding, acceptance and appreciation." -Mahatma Gandhi
10 Ways to Get Rich Without Luck Alone
The majority of millionaires and billions in the world were not born into their level of wealth, they earned or they created it in most cases. Too many times the children of the wealthy are more consumers than producers. Here are 10 principles for wealth building that are primarily based on skill and some luck can help when you are doing the right thing at the right time in the right place.
1. Your goal should be wealth not material things. The things you own should be cash flowing assets or things that grow in value over time and not things that burden you with large payments or go down in value.
1. Your goal should be wealth not material things. The things you own should be cash flowing assets or things that grow in value over time and not things that burden you with large payments or go down in value.
2. Understand wealth is not bad, capitalists do not steal money they create it through providing value.
Capitalists create products, jobs, and businesses and are rewarded with money from what their creation is worth.
3. Your goal should be wealth and not status. There are a lot of blue collar business owners that created businesses that are not glamorous but make a lot of money. There are a lot of millionaires driving paid off used cars and living in middle class homes.
4. Wealth is not built by selling your time to an employer, real wealth is created through owning equity in companies. That is how the wealthiest people in the world got so rich owning huge stakes in their own company like Warren Buffett, Bill Gates, and Jeff Bezos.
5. Wealth creation is equal to the size of value created for the most people.
6. The path to wealth is easiest through creating a business about something you are already passionate about. It will take thousands of hours and you will quit if you don’t love what you are doing.
7. The internet has removed a lot of the edges that traditional businesses use to have in the marketplace. The barrier of entry has been mostly removed for an aspiring capaitalist for production, distribution, and creation of their own products or services.
8. The power of compounding can turn a small business into a big business or a small amount of capital into a large amount of money over time with consistent growth.
9. Never stop learning, college can be the beginning of your education but it should never be the end of your learning and growing.
10. Your financial returns and wealth are usually correlated with the amount of risk and uncertaninty you are willing to take on.
Source: www.newtrader.com
Sunday, 11 April 2021
Quote for the day
"Constant effort and frequent mistakes are the stepping stones to genius." - Elbert Hubbard
Saturday, 10 April 2021
Quote for the day
"Fear is the path to the dark side. Fear leads to anger. Anger leads to hate. Hate leads to suffering." - George Lucas
Trading Psychology: 10 Things that Separate Winners from Losers
Even if you have a valid trading system and good risk management if you don’t have the right trading psychology you will not be able to execute it consistently over the long term.
Here are the 10 principles of trading psychology that separate the winning traders from the losing traders.
6. Exit a trade when price action shows your trade didn’t work out. Admit when you are wrong and keep your losses as small as possible.
10. Focus on your future goals not your present setbacks. If you focus on your long term goals and are willing to do whatever it takes to be successful only time separates you from success.
To trade you must have the faith in your trading system that it will be profitable over the long term and confidence in yourself to trade it with discipline.
Here are the 10 principles of trading psychology that separate the winning traders from the losing traders.
1. Stop looking for a Holy Grail of trading. There is no perfect trading strategy that works every time, quit looking for it and focus on a profitable system that fits your own risk tolerance and return goals.
2. Accepting that all trading systems and traders have losing trades and drawdowns. Not wanting to lose can cause a trader to never take the risks needed to have winning trades.
3. Stop asking for other people’s predictions and opinions. Focus on what is happening in the markets and what it is signaling not what you or anyone thinks should happen.
4. Have entry signals that tell you the best time to get into a trade. Get into a trade when the risk/reward ratio is favorable.
5. Have exit signals that tell you the best time to get out of a trade. Have a plan to exit a trade and lock in profits while they are still there.
6. Exit a trade when price action shows your trade didn’t work out. Admit when you are wrong and keep your losses as small as possible.
7. Trade based on your system not your emotions or ego. Don’t let your own fear, greed, or ego direct your decisions in the markets.
8. Keep a positive mindset. Focus on the success of following your system with discipline and everything good that happens in your trading. Be careful to not focus on the negative.
9. Overcome the fear of trading real money. There comes a time to trade after you do all your homework. After you build a trading system with an edge and understand position sizing and the reality of an equity curve then you have to start trading your capital. Some never have the confidence in their system and their self to execute it and start trading.
10. Focus on your future goals not your present setbacks. If you focus on your long term goals and are willing to do whatever it takes to be successful only time separates you from success.
To trade you must have the faith in your trading system that it will be profitable over the long term and confidence in yourself to trade it with discipline.
Source:www.newtraders.com
Friday, 9 April 2021
Quote for the day
"Learn from yesterday, live for today, hope for tomorrow. The important thing is not to stop questioning." - Albert Einstein
Thursday, 8 April 2021
Quote for the day
"We are all faced with a series of great opportunities brilliantly disguised as impossible situations." -Charles R. Swindoll
Wednesday, 7 April 2021
Quote for the day
"Positive thinking can be contagious. Being surrounded by winners helps you develop into a winner." - Arnold Schwarzenegger
Tuesday, 6 April 2021
Sir John Templeton 16 Rules For Investment Success
Interesting set of rules from legendary investor John Templeton:
1. Invest for maximum total real return
2. Invest — Don’t trade or speculate
3. Remain flexible and open minded about types of investment
4. Buy Low
5. When buying stocks, search for bargains among quality stocks.
6. Buy value, not market trends or the economic outlook
7. Diversify. In stocks and bonds, as in much else, there is safety in numbers
8. Do your homework or hire wise experts to help you
9. Aggressively monitor your investments
10. Don’t Panic
11. Learn from your mistakes
12. Begin with a Prayer
13. Outperforming the market is a difficult task
14. An investor who has all the answers doesn’t even understand all the questions
15. There’s no free lunch
16. Do not be fearful or negative too often
Complete explanation after the jump
No. 1 INVEST FOR MAXIMUM TOTAL REAL RETURN
This means the return on invested dollars after taxes and after inflation. This is the only rational objective for most long-term investors. Any investment strategy that fails to recognize the insidious effect of taxes and inflation fails to recognize the true nature of the investment environment and thus is severely handicapped.
It is vital that you protect purchasing power. One of the biggest mistakes people make is putting too much money into fixed-income securities.
Today’s dollar buys only what 35 cents bought in the mid 1970s, what 21 cents bought in 1960, and what 15 cents bought after World War II. U.S. consumer prices have risen every one of the last 38 years.
If inflation averages 4%, it will reduce the buying power of a $100,000 portfolio to $68,000 in just 10 years. In other words, to maintain the same buying power, that portfolio would have to grow to $147,000— a 47% gain simply to remain even over a decade. And this doesn’t even count taxes.
No. 2 INVEST—DON’T TRADE OR SPECULATE
The stock market is not a casino, but if you move in and out of stocks every time they move a point or two, or if you continually sell short… or deal only in options…or trade in futures…the market will be your casino. And, like most gamblers, you may lose eventually—or frequently.
You may find your profits consumed by commissions. You may find a market you expected to turn down turning up—and up, and up—in defiance of all your careful calculations and short sales. Every time a Wall Street news announcer says, “This just in,” your heart will stop.
Keep in mind the wise words of Lucien Hooper, a Wall Street legend: “What always impresses me,” he wrote,“is how much better the relaxed, long-term owners of stock do with their portfolios than the traders do with their switching of inventory. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional; he pays smaller capital gains taxes; he does not incur unnecessary brokerage commissions; and he avoids behaving like Cassius by ‘thinking too much.’”
No.3 REMAIN FLEXIBLE AND OPEN-MINDED ABOUT TYPES OF INVESTMENT
There are times to buy blue chip stocks, cyclical stocks, corporate bonds, U.S. Treasury instruments, and so on. And there are times to sit on cash, because sometimes cash enables you to take advantage of investment opportunities.
The fact is there is no one kind of investment that is always best. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and—when lost—may not return for many years.
Having said that, I should note that, for most of the time, most of our clients’ money has been in common stocks. A look at history will show why. From January of 1946 through June of 1991, the Dow Jones Industrial Average rose by 11.4% average annually—including reinvestment of dividends but not counting taxes—compared with an average annual inflation rate of 4.4%. Had the Dow merely kept pace with inflation, it would be around 1,400 right now instead of over 3,000, a figure that seemed extreme to some 10 years ago, when I calculated that it was a very realistic possibility on the horizon.
Look also at the Standard and Poor’s (S&P) Index of 500 stocks. From the start of the 1950s through the end of the 1980s—four decades altogether—the S&P 500 rose at an average rate of 12.5%, compared with 4.3% for inflation, 4.8% for U.S. Treasury bonds, 5.2% for Treasury bills, and 5.4% for high-grade corporate bonds.
In fact, the S&P 500 outperformed inflation, Treasury bills, and corporate bonds in every decade except the ’70s, and it outperformed Treasury bonds—supposedly the safest of all investments—in all four decades. I repeat: There is no real safety without preserving purchasing power.
No. 4 BUY LOW
Of course, you say, that’s obvious. Well, it may be, but that isn’t the way the market works. When prices are high, a lot of investors are buying a lot of stocks. Prices are low when demand is low. Investors have pulled back, people are discouraged and pessimistic.
When almost everyone is pessimistic at the same time, the entire market collapses. More often, just stocks in particular fields fall. Industries such as automaking and casualty insurance go through regular cycles. Sometimes stocks of companies like the thrift institutions or money-center banks fall out of favor all at once.
Whatever the reason, investors are on the sidelines, sitting on their wallets. Yes, they tell you: “Buy low, sell high.” But all too many of them bought high and sold low. Then you ask: “When will you buy the stock?” The usual answer: “Why, after analysts agree on a favorable outlook.”
This is foolish, but it is human nature. It is extremely difficult to go against the crowd—to buy when everyone else is selling or has sold, to buy when things look darkest, to buy when so many experts are telling you that stocks in general, or in this particular industry, or even in this particular company, are risky right now.
But, if you buy the same securities everyone else is buying, you will have the same results as everyone else. By definition, you can’t outperform the market if you buy the market. And chances are if you buy what everyone is buying you will do so only after it is already overpriced.
Heed the words of the great pioneer of stock analysis Benjamin Graham: “Buy when most people…including experts…are pessimistic, and sell when they are actively optimistic.”
Bernard Baruch, advisor to presidents, was even more succinct:
“Never follow the crowd.”
So simple in concept. So difficult in execution.
No. 5 WHEN BUYING STOCKS, SEARCH FOR BARGAINS AMONG QUALITY STOCKS
Quality is a company strongly entrenched as the sales leader in a growing market. Quality is a company that’s the technological leader in a field that depends on technical innovation. Quality is a strong management team with a proven track record. Quality is a well-capitalized company that is among the first into a new market. Quality is a well known trusted brand for a high-profit-margin consumer product.
Naturally, you cannot consider these attributes of quality in isolation. A company may be the low-cost producer, for example, but it is not a quality stock if its product line is falling out of favor with customers. Likewise, being the technological leader in a technological field means little without adequate capitalization for expansion and marketing.
Determining quality in a stock is like reviewing a restaurant. You don’t expect it to be 100% perfect, but before it gets three or four stars you want it to be superior.
No. 6 BUY VALUE, NOT MARKET TRENDS OR THE ECONOMIC OUTLOOK
A wise investor knows that the stock market is really a market of stocks. While individual stocks may be pulled along momentarily by a strong bull market, ultimately it is the individual stocks that determine the market, not vice versa. All too many investors focus on the market trend or economic outlook. But individual stocks can rise in a bear market and fall in a bull market.
The stock market and the economy do not always march in lock step. Bear markets do not always coincide with recessions, and an overall decline in corporate earnings does not always cause a simultaneous decline in stock prices. So buy individual stocks, not the market trend or economic outlook.
No. 7 DIVERSIFY. IN STOCKS AND BONDS, AS IN MUCH ELSE, THERE IS SAFETY IN NUMBERS
No matter how careful you are, you can neither predict nor control the future. A hurricane or earthquake, a strike at a supplier, an unexpected technological advance by a competitor, or a government-ordered product recall—any one of these can cost a company millions of dollars. Then, too, what looked like such a well-managed company may turn out to have serious internal problems that weren't apparent when you bought the stock.
So you diversify—by industry, by risk, and by country. For example, if you search worldwide, you will find more bargains— and possibly better bargains—than in any single nation.
No. 8 DO YOUR HOMEWORK OR HIRE WISE EXPERTS TO HELP YOU
People will tell you: Investigate before you invest. Listen to them. Study companies to learn what makes them successful.
Remember, in most instances, you are buying either earnings or assets. In free-enterprise nations, earnings and assets together are major influences on the price of most stocks. The earnings on stock market indexes—the fabled Dow Jones Industrials,for example—fluctuate around the replacement book value of the shares of the index. (That’s the money it would take to replace the assets of the companies making up the index at today’s costs.)
If you expect a company to grow and prosper, you are buying future earnings. You expect that earnings will go up, and because most stocks are valued on future earnings, you can expect the stock price may rise also.
If you expect a company to be acquired or dissolved at a premium over its market price, you may be buying assets. Years ago Forbes regularly published lists of these so-called “loaded laggards.” But remember, there are far fewer of these companies today. Raiders have swept through the marketplace over the past 10 to 15 years: Be very suspicious of what they left behind.
No. 9 AGGRESSIVELY MONITOR YOUR INVESTMENTS
Expect and react to change. No bull market is permanent. No bear market is permanent. And there are no stocks that you can buy and forget. The pace of change is too great. Being relaxed, as Hooper advised, doesn’t mean being complacent.
Consider, for example, just the 30 issues that comprise the Dow Jones Industrials. From 1978 through 1990, one of every three issues changed—because the company was in decline, or was acquired, or went private, or went bankrupt. Look at the 100 largest industrials on Fortune magazine’s list. In just seven years, 1983 through 1990, 30 dropped off the list. They merged with another giant company, or became too small for the top 100, or were acquired by a foreign company, or went private, or went out of business. Remember, no investment is forever.
No.10 DON'T PANIC
Sometimes you won't have sold when everyone else is buying, and you'll be caught in a market crash such as we had in 1987. There you are, facing a 15% loss in a single day. Maybe more.
Don’t rush to sell the next day. The time to sell is before the crash, not after. Instead, study your portfolio. If you didn’t own these stocks now, would you buy them after the market crash? Chances are you would. So the only reason to sell them now is to buy other, more attractive stocks. If you can’t find more attractive stocks, hold on to what you have.
No. 11 LEARN FROM YOUR MISTAKES
The only way to avoid mistakes is not to invest—which is the biggest mistake of all. So forgive yourself for your errors. Don’t become discouraged, and certainly don’t try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience. Determine exactly what went wrong and how you can avoid the same mistake in the future.
The investor who says, “This time is different,” when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing.
The big difference between those who are successful and those who are not is that successful people learn from their mistakes and the mistakes of others.
No. 12 BEGIN WITH A PRAYER
If you begin with a prayer, you can think more clearly and make fewer mistakes.
No.13 OUTPERFORMING THE MARKET IS A DIFFICULT TASK
The challenge is not simply making better investment decisions than the average investor. The real challenge is making investment decisions that are better than those of the professionals who manage the big institutions.
Remember, the unmanaged market indexes such as the S&P 500 don’t pay commissions to buy and sell stock. They don’t pay salaries to securities analysts or portfolio managers. And, unlike the unmanaged indexes, investment companies are never 100% invested, because they need to have cash on hand to redeem shares.
So any investment company that consistently outperforms the market is actually doing a much better job than you might think. And if it not only consistently outperforms the market, but does so by a significant degree, it is doing a superb job.
No. 14 AN INVESTOR WHO HAS ALL THE ANSWERS DOESN'T EVEN UNDERSTAND ALL THE QUESTIONS
A cocksure approach to investing will lead, probably sooner than later, to disappointment if not outright disaster. Even if we can identify an unchanging handful of investing principles, we cannot apply these rules to an unchanging universe of investments—or an unchanging economic and political environment. Everything is in a constant state of change, and the wise investor recognizes that success is a process of continually seeking answers to new questions.
No.15 THERE’S NO FREE LUNCH
This principle covers an endless list of admonitions. Never invest on sentiment. The company that gave you your first job, or built the first car you ever owned, or sponsored a favorite television show of long ago may be a fine company. But that doesn't mean its stock is a fine investment. Even if the corporation is truly excellent, prices of its shares may be too high.
Never invest in an initial public offering (IPO) to “save” the commission. That commission is built into the price of the stock—a reason why most new stocks decline in value after the offering. This does not mean you should never buy an IPO.
Never invest solely on a tip. Why, that’s obvious, you might say. It is. But you would be surprised how many investors, people who are well-educated and successful, do exactly this. Unfortunately, there is something psychologically compelling about a tip. Its very nature suggests inside information, a way to turn a fast profit.
No. 16 DO NOT BE FEARFUL OR NEGATIVE TOO OFTEN
And now the last principle. Do not be fearful or negative too often. For 100 years optimists have carried the day in U.S. stocks. Even in the dark ’70s, many professional money managers—and many individual investors too—made money in stocks, especially those of smaller companies.
There will, of course, be corrections, perhaps even crashes. But, over time, our studies indicate stocks do go up…and up… and up.
With the fall of communism and the sharply reduced threat of nuclear war, it appears that the U.S. and some form of an economically united Europe may be about to enter the most glorious period in their history.
As national economies become more integrated and interdependent, as communication becomes easier and cheaper, business is likely to boom. Trade and travel will grow. Wealth will increase. And stock prices should rise accordingly.
By the time the 21st century begins—it’s just around the corner, you know—I think there is at least an even chance that the Dow Jones Industrials may have reached 6,000, perhaps more.
Chances are that certain other indexes will have grown even more. Despite all the current gloom about the economy, and about the future, more people will have more money than ever before in history. And much of it will be invested in stocks.
And throughout this wonderful time, the basic rules of building wealth by investing in stocks will hold true. In this century or the next it’s still “Buy low, sell high.”
Source:
BY SIR JOHN TEMPLETON
Franklin Templeton Investments
1. Invest for maximum total real return
2. Invest — Don’t trade or speculate
3. Remain flexible and open minded about types of investment
4. Buy Low
5. When buying stocks, search for bargains among quality stocks.
6. Buy value, not market trends or the economic outlook
7. Diversify. In stocks and bonds, as in much else, there is safety in numbers
8. Do your homework or hire wise experts to help you
9. Aggressively monitor your investments
10. Don’t Panic
11. Learn from your mistakes
12. Begin with a Prayer
13. Outperforming the market is a difficult task
14. An investor who has all the answers doesn’t even understand all the questions
15. There’s no free lunch
16. Do not be fearful or negative too often
Complete explanation after the jump
No. 1 INVEST FOR MAXIMUM TOTAL REAL RETURN
This means the return on invested dollars after taxes and after inflation. This is the only rational objective for most long-term investors. Any investment strategy that fails to recognize the insidious effect of taxes and inflation fails to recognize the true nature of the investment environment and thus is severely handicapped.
It is vital that you protect purchasing power. One of the biggest mistakes people make is putting too much money into fixed-income securities.
Today’s dollar buys only what 35 cents bought in the mid 1970s, what 21 cents bought in 1960, and what 15 cents bought after World War II. U.S. consumer prices have risen every one of the last 38 years.
If inflation averages 4%, it will reduce the buying power of a $100,000 portfolio to $68,000 in just 10 years. In other words, to maintain the same buying power, that portfolio would have to grow to $147,000— a 47% gain simply to remain even over a decade. And this doesn’t even count taxes.
No. 2 INVEST—DON’T TRADE OR SPECULATE
The stock market is not a casino, but if you move in and out of stocks every time they move a point or two, or if you continually sell short… or deal only in options…or trade in futures…the market will be your casino. And, like most gamblers, you may lose eventually—or frequently.
You may find your profits consumed by commissions. You may find a market you expected to turn down turning up—and up, and up—in defiance of all your careful calculations and short sales. Every time a Wall Street news announcer says, “This just in,” your heart will stop.
Keep in mind the wise words of Lucien Hooper, a Wall Street legend: “What always impresses me,” he wrote,“is how much better the relaxed, long-term owners of stock do with their portfolios than the traders do with their switching of inventory. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional; he pays smaller capital gains taxes; he does not incur unnecessary brokerage commissions; and he avoids behaving like Cassius by ‘thinking too much.’”
No.3 REMAIN FLEXIBLE AND OPEN-MINDED ABOUT TYPES OF INVESTMENT
There are times to buy blue chip stocks, cyclical stocks, corporate bonds, U.S. Treasury instruments, and so on. And there are times to sit on cash, because sometimes cash enables you to take advantage of investment opportunities.
The fact is there is no one kind of investment that is always best. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and—when lost—may not return for many years.
Having said that, I should note that, for most of the time, most of our clients’ money has been in common stocks. A look at history will show why. From January of 1946 through June of 1991, the Dow Jones Industrial Average rose by 11.4% average annually—including reinvestment of dividends but not counting taxes—compared with an average annual inflation rate of 4.4%. Had the Dow merely kept pace with inflation, it would be around 1,400 right now instead of over 3,000, a figure that seemed extreme to some 10 years ago, when I calculated that it was a very realistic possibility on the horizon.
Look also at the Standard and Poor’s (S&P) Index of 500 stocks. From the start of the 1950s through the end of the 1980s—four decades altogether—the S&P 500 rose at an average rate of 12.5%, compared with 4.3% for inflation, 4.8% for U.S. Treasury bonds, 5.2% for Treasury bills, and 5.4% for high-grade corporate bonds.
In fact, the S&P 500 outperformed inflation, Treasury bills, and corporate bonds in every decade except the ’70s, and it outperformed Treasury bonds—supposedly the safest of all investments—in all four decades. I repeat: There is no real safety without preserving purchasing power.
No. 4 BUY LOW
Of course, you say, that’s obvious. Well, it may be, but that isn’t the way the market works. When prices are high, a lot of investors are buying a lot of stocks. Prices are low when demand is low. Investors have pulled back, people are discouraged and pessimistic.
When almost everyone is pessimistic at the same time, the entire market collapses. More often, just stocks in particular fields fall. Industries such as automaking and casualty insurance go through regular cycles. Sometimes stocks of companies like the thrift institutions or money-center banks fall out of favor all at once.
Whatever the reason, investors are on the sidelines, sitting on their wallets. Yes, they tell you: “Buy low, sell high.” But all too many of them bought high and sold low. Then you ask: “When will you buy the stock?” The usual answer: “Why, after analysts agree on a favorable outlook.”
This is foolish, but it is human nature. It is extremely difficult to go against the crowd—to buy when everyone else is selling or has sold, to buy when things look darkest, to buy when so many experts are telling you that stocks in general, or in this particular industry, or even in this particular company, are risky right now.
But, if you buy the same securities everyone else is buying, you will have the same results as everyone else. By definition, you can’t outperform the market if you buy the market. And chances are if you buy what everyone is buying you will do so only after it is already overpriced.
Heed the words of the great pioneer of stock analysis Benjamin Graham: “Buy when most people…including experts…are pessimistic, and sell when they are actively optimistic.”
Bernard Baruch, advisor to presidents, was even more succinct:
“Never follow the crowd.”
So simple in concept. So difficult in execution.
No. 5 WHEN BUYING STOCKS, SEARCH FOR BARGAINS AMONG QUALITY STOCKS
Quality is a company strongly entrenched as the sales leader in a growing market. Quality is a company that’s the technological leader in a field that depends on technical innovation. Quality is a strong management team with a proven track record. Quality is a well-capitalized company that is among the first into a new market. Quality is a well known trusted brand for a high-profit-margin consumer product.
Naturally, you cannot consider these attributes of quality in isolation. A company may be the low-cost producer, for example, but it is not a quality stock if its product line is falling out of favor with customers. Likewise, being the technological leader in a technological field means little without adequate capitalization for expansion and marketing.
Determining quality in a stock is like reviewing a restaurant. You don’t expect it to be 100% perfect, but before it gets three or four stars you want it to be superior.
No. 6 BUY VALUE, NOT MARKET TRENDS OR THE ECONOMIC OUTLOOK
A wise investor knows that the stock market is really a market of stocks. While individual stocks may be pulled along momentarily by a strong bull market, ultimately it is the individual stocks that determine the market, not vice versa. All too many investors focus on the market trend or economic outlook. But individual stocks can rise in a bear market and fall in a bull market.
The stock market and the economy do not always march in lock step. Bear markets do not always coincide with recessions, and an overall decline in corporate earnings does not always cause a simultaneous decline in stock prices. So buy individual stocks, not the market trend or economic outlook.
No. 7 DIVERSIFY. IN STOCKS AND BONDS, AS IN MUCH ELSE, THERE IS SAFETY IN NUMBERS
No matter how careful you are, you can neither predict nor control the future. A hurricane or earthquake, a strike at a supplier, an unexpected technological advance by a competitor, or a government-ordered product recall—any one of these can cost a company millions of dollars. Then, too, what looked like such a well-managed company may turn out to have serious internal problems that weren't apparent when you bought the stock.
So you diversify—by industry, by risk, and by country. For example, if you search worldwide, you will find more bargains— and possibly better bargains—than in any single nation.
No. 8 DO YOUR HOMEWORK OR HIRE WISE EXPERTS TO HELP YOU
People will tell you: Investigate before you invest. Listen to them. Study companies to learn what makes them successful.
Remember, in most instances, you are buying either earnings or assets. In free-enterprise nations, earnings and assets together are major influences on the price of most stocks. The earnings on stock market indexes—the fabled Dow Jones Industrials,for example—fluctuate around the replacement book value of the shares of the index. (That’s the money it would take to replace the assets of the companies making up the index at today’s costs.)
If you expect a company to grow and prosper, you are buying future earnings. You expect that earnings will go up, and because most stocks are valued on future earnings, you can expect the stock price may rise also.
If you expect a company to be acquired or dissolved at a premium over its market price, you may be buying assets. Years ago Forbes regularly published lists of these so-called “loaded laggards.” But remember, there are far fewer of these companies today. Raiders have swept through the marketplace over the past 10 to 15 years: Be very suspicious of what they left behind.
No. 9 AGGRESSIVELY MONITOR YOUR INVESTMENTS
Expect and react to change. No bull market is permanent. No bear market is permanent. And there are no stocks that you can buy and forget. The pace of change is too great. Being relaxed, as Hooper advised, doesn’t mean being complacent.
Consider, for example, just the 30 issues that comprise the Dow Jones Industrials. From 1978 through 1990, one of every three issues changed—because the company was in decline, or was acquired, or went private, or went bankrupt. Look at the 100 largest industrials on Fortune magazine’s list. In just seven years, 1983 through 1990, 30 dropped off the list. They merged with another giant company, or became too small for the top 100, or were acquired by a foreign company, or went private, or went out of business. Remember, no investment is forever.
No.10 DON'T PANIC
Sometimes you won't have sold when everyone else is buying, and you'll be caught in a market crash such as we had in 1987. There you are, facing a 15% loss in a single day. Maybe more.
Don’t rush to sell the next day. The time to sell is before the crash, not after. Instead, study your portfolio. If you didn’t own these stocks now, would you buy them after the market crash? Chances are you would. So the only reason to sell them now is to buy other, more attractive stocks. If you can’t find more attractive stocks, hold on to what you have.
No. 11 LEARN FROM YOUR MISTAKES
The only way to avoid mistakes is not to invest—which is the biggest mistake of all. So forgive yourself for your errors. Don’t become discouraged, and certainly don’t try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience. Determine exactly what went wrong and how you can avoid the same mistake in the future.
The investor who says, “This time is different,” when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing.
The big difference between those who are successful and those who are not is that successful people learn from their mistakes and the mistakes of others.
No. 12 BEGIN WITH A PRAYER
If you begin with a prayer, you can think more clearly and make fewer mistakes.
No.13 OUTPERFORMING THE MARKET IS A DIFFICULT TASK
The challenge is not simply making better investment decisions than the average investor. The real challenge is making investment decisions that are better than those of the professionals who manage the big institutions.
Remember, the unmanaged market indexes such as the S&P 500 don’t pay commissions to buy and sell stock. They don’t pay salaries to securities analysts or portfolio managers. And, unlike the unmanaged indexes, investment companies are never 100% invested, because they need to have cash on hand to redeem shares.
So any investment company that consistently outperforms the market is actually doing a much better job than you might think. And if it not only consistently outperforms the market, but does so by a significant degree, it is doing a superb job.
No. 14 AN INVESTOR WHO HAS ALL THE ANSWERS DOESN'T EVEN UNDERSTAND ALL THE QUESTIONS
A cocksure approach to investing will lead, probably sooner than later, to disappointment if not outright disaster. Even if we can identify an unchanging handful of investing principles, we cannot apply these rules to an unchanging universe of investments—or an unchanging economic and political environment. Everything is in a constant state of change, and the wise investor recognizes that success is a process of continually seeking answers to new questions.
No.15 THERE’S NO FREE LUNCH
This principle covers an endless list of admonitions. Never invest on sentiment. The company that gave you your first job, or built the first car you ever owned, or sponsored a favorite television show of long ago may be a fine company. But that doesn't mean its stock is a fine investment. Even if the corporation is truly excellent, prices of its shares may be too high.
Never invest in an initial public offering (IPO) to “save” the commission. That commission is built into the price of the stock—a reason why most new stocks decline in value after the offering. This does not mean you should never buy an IPO.
Never invest solely on a tip. Why, that’s obvious, you might say. It is. But you would be surprised how many investors, people who are well-educated and successful, do exactly this. Unfortunately, there is something psychologically compelling about a tip. Its very nature suggests inside information, a way to turn a fast profit.
No. 16 DO NOT BE FEARFUL OR NEGATIVE TOO OFTEN
And now the last principle. Do not be fearful or negative too often. For 100 years optimists have carried the day in U.S. stocks. Even in the dark ’70s, many professional money managers—and many individual investors too—made money in stocks, especially those of smaller companies.
There will, of course, be corrections, perhaps even crashes. But, over time, our studies indicate stocks do go up…and up… and up.
With the fall of communism and the sharply reduced threat of nuclear war, it appears that the U.S. and some form of an economically united Europe may be about to enter the most glorious period in their history.
As national economies become more integrated and interdependent, as communication becomes easier and cheaper, business is likely to boom. Trade and travel will grow. Wealth will increase. And stock prices should rise accordingly.
By the time the 21st century begins—it’s just around the corner, you know—I think there is at least an even chance that the Dow Jones Industrials may have reached 6,000, perhaps more.
Chances are that certain other indexes will have grown even more. Despite all the current gloom about the economy, and about the future, more people will have more money than ever before in history. And much of it will be invested in stocks.
And throughout this wonderful time, the basic rules of building wealth by investing in stocks will hold true. In this century or the next it’s still “Buy low, sell high.”
Source:
BY SIR JOHN TEMPLETON
Franklin Templeton Investments
Quote for the day
"Decide what you want ... believe you can have it, believe you deserve it, believe it's possible for you." - Rhonda Byrne
Monday, 5 April 2021
Quot for the day
"The happiness of most people is not ruined by great catastrophes or fatal errors, but by the repetition of slowly destructive little things." - Ernest Dimnet
Sunday, 4 April 2021
Quote for the day
"Every ant knows the formula of its ant-hill, every bee knows the formula of its beehive. They know it in their own way, not in our way. Only humankind does not know its own formula." - Fyodor Dostoevsky
Saturday, 3 April 2021
Harry Browne’s 17 Golden Rules of Financial Safety
When you read in the news that a person whom you know as rich and wealthy is in financial trouble or has declared bankruptcy, it is easy to feel a sense of futility about managing your own money. You start to think that if such a rich person, who has access to the best financial advice, can come to this state, what chance do I have?
If you read deeper into his or her story you will find that he has come to this state because he violated some basic rule of life. The Golden Rules of Financial Safety of Harry Browne are the basic rules for financial success. They are simple and obvious and if you abide by them, there is less chance than one in a million that you could lose all that you have….
Let us learn what they are…
Rule 1: Your career provides your wealth
Build your wealth upon your career.You most likely will make far more money from your business or profession than from your investments. Only very rarely does someone make a large fortune from investments.
Your investments can make your future more secure and your retirement more prosperous. But they can't take you from rags to riches. So don't take risks with complicated schemes in the hope of multiplying your capital quickly. Your investment plan should be aimed, first and foremost, at preserving what you have -preserving it from investment loss, government intervention, or mismanagement.
Most part-time investors who try to beat the markets lose part or all the savings they've worked so hard to accumulate.
Can you make big profits by relying on an expert who does have the proper qualifications? How do you find a true expert? That task is no easier than picking the right investments. If you don't understand investing as well as the pros, you won’t know how to check those who seek to advise you. And you can't rely on an advisor’s track record, even when it’s presented honestly. Track records tell you only how advisors did in the past – not how they will do next year.
You’re violating Rule #1 if you think your investments can be the sole source of your retirement wealth – or if you steal time from your work to manage your investments – or if you think about abandoning your job to become a full-time investor.
Your Wealth May Be Non-Replaceable
Rule 2: Don't assume you can replace your wealth.
The fact that you earned what you have doesn't mean that you could earn it again if you lost it. Markets and opportunities change, technology changes, laws change. Conditions today may be considerably different from what they were when you built the estate you have now. And as time passes, increasing regulation makes it harder and harder to amass a fortune.
So treat what you have as though you could never earn it again. Don’t take chances with your wealth on the assumption that you could always get it back.
You earned your wealth because your talent and effort harmonized with the circumstances in which you found yourself. But the world won’t stand still for you or repeat itself when you need it to.
So assume that what you have now is irreplaceable, that you could never earn it again – even if you suspect you could.
Say “No!” to any proposition that asks you to risk losing it.
When you invest, you accept the return the markets are paying investors in general. When you speculate, you attempt to beat that return - to do better than other investors are doing - through astute timing, forecasting, or stock selection, and with the implied belief that you're smarter than most other investors.
You're speculating when:
* You select individual stocks, mutual funds, or stock market sectors you believe will do better than the market as a whole.
* You move your capital in and out of markets according to how well you think they’ll perform in the near future.
* You base your investments on current prospects for the nation’s economy.
* You use fundamental analysis, technical analysis, cyclical analysis, or any other form of analysis or system to tell you when to buy and sell.
There’s nothing wrong with speculating - provided you do it with money you can afford to lose. But the money that’s precious to you shouldn't be risked on a bet that you can outperform other investors.
If you read deeper into his or her story you will find that he has come to this state because he violated some basic rule of life. The Golden Rules of Financial Safety of Harry Browne are the basic rules for financial success. They are simple and obvious and if you abide by them, there is less chance than one in a million that you could lose all that you have….
Let us learn what they are…
Your career
Build your wealth upon your career.You most likely will make far more money from your business or profession than from your investments. Only very rarely does someone make a large fortune from investments.
Your investments can make your future more secure and your retirement more prosperous. But they can't take you from rags to riches. So don't take risks with complicated schemes in the hope of multiplying your capital quickly. Your investment plan should be aimed, first and foremost, at preserving what you have -preserving it from investment loss, government intervention, or mismanagement.
Most part-time investors who try to beat the markets lose part or all the savings they've worked so hard to accumulate.
Can you make big profits by relying on an expert who does have the proper qualifications? How do you find a true expert? That task is no easier than picking the right investments. If you don't understand investing as well as the pros, you won’t know how to check those who seek to advise you. And you can't rely on an advisor’s track record, even when it’s presented honestly. Track records tell you only how advisors did in the past – not how they will do next year.
You’re violating Rule #1 if you think your investments can be the sole source of your retirement wealth – or if you steal time from your work to manage your investments – or if you think about abandoning your job to become a full-time investor.
Your Wealth May Be Non-Replaceable
The fact that you earned what you have doesn't mean that you could earn it again if you lost it. Markets and opportunities change, technology changes, laws change. Conditions today may be considerably different from what they were when you built the estate you have now. And as time passes, increasing regulation makes it harder and harder to amass a fortune.
So treat what you have as though you could never earn it again. Don’t take chances with your wealth on the assumption that you could always get it back.
You earned your wealth because your talent and effort harmonized with the circumstances in which you found yourself. But the world won’t stand still for you or repeat itself when you need it to.
So assume that what you have now is irreplaceable, that you could never earn it again – even if you suspect you could.
Say “No!” to any proposition that asks you to risk losing it.
Investing vs. Speculating
Rule 3: Recognize the difference between investing and speculating.When you invest, you accept the return the markets are paying investors in general. When you speculate, you attempt to beat that return - to do better than other investors are doing - through astute timing, forecasting, or stock selection, and with the implied belief that you're smarter than most other investors.
You're speculating when:
* You select individual stocks, mutual funds, or stock market sectors you believe will do better than the market as a whole.
* You move your capital in and out of markets according to how well you think they’ll perform in the near future.
* You base your investments on current prospects for the nation’s economy.
* You use fundamental analysis, technical analysis, cyclical analysis, or any other form of analysis or system to tell you when to buy and sell.
There’s nothing wrong with speculating - provided you do it with money you can afford to lose. But the money that’s precious to you shouldn't be risked on a bet that you can outperform other investors.
Forecasting the Future
Rule 4: No one can predict the future.Beware of fortune tellers.
Events in the investment markets result from the decisions of millions of different people. Investor advisors have no more ability to predict the future actions of human beings than psychics and fortune-tellers do. And so events never unfold as we were so sure they would.
Yes, there have been forecasts that came true. But the only reason we notice them is because it’s so exceptional for even one to come true. We forget about all the failed predictions because they’re so commonplace.
No one can reliably tell you what stocks will do next year, whether we’ll have more inflation, or how the economy will perform.
As with the rest of your life, safety doesn't come from trying to peer into the future to eliminate uncertainty. Safety comes from devising realistic ways to deal with uncertainty.
We live in an uncertain world – and that no one can eliminate the uncertainty for you.
Look for ways to assure that the uncertain future won’t hurt you – no matter what it turns out to be.
Investment Advice
Rule 5: No one can move you in and out of investments consistently with precise and profitable timing.Don't expect anyone to make you rich. You’ll hear about many Wall Street wizards, but the investment advisor with the perfect record up to now most likely will lose his touch the moment you start acting on his advice.
Investment advisors can be very valuable. A good advisor can help you understand how to do the things you know you need to do. He can help call your attention to risks you may have overlooked. And he can make you aware of new alternatives.
The Helper (accountant, etc) is worth listening to. He or she can acquaint you with investment alternatives you weren't aware of, and that might be a good fit for you. He can teach you the mechanics and procedures for getting things done in the investment world. He can raise the questions you need to answer in order to devise a portfolio that suits your needs. He can help you reduce the tax bill on your investment profits.
You don’t act on the advice of someone you never heard of. And you hear of him only after – and because – he has made several profitable recommendations in a row.
The investment expert with the perfect record up to now will lose his touch as soon as you start acting on his advice.
But no one can guarantee to have you always in the right place at the right time. And worse, attempts to do so can sometimes be fatal to your portfolio.
Trading Systems
Rule 6: No trading system will work as well in the future as it did in the past.You’ll come across many trading systems or indicators that seem always to have signaled correctly where your money should have been, but somehow the systems never come through when your money is on the line.
Trading systems generally arise from one of two sources.
The first source is a common sense observation about human behavior - which someone then tries to transform into a quantifiable, mechanical system.
For example, Contrary Opinion is a theory that says, among other things, that an investment is likely to be near its peak when everyone seems to know how good its prospects are.
The idea makes some sense. If everyone already knows something is a good investment, most people who are likely to buy it probably already have done so – leaving very few investors to buy it and push its price still higher.
In such a case, you should be skeptical about its prospects as a speculation.
But that doesn't mean we know precisely when or at what price the investment will peak. You know only that there doesn't seem to be room for the price to go much higher.
But people who devise trading systems aren’t satisfied with anything so indefinite. They devise indicators to measure the precise degree of bullishness and bearishness surrounding a specific investment – and then construct formulas that provide specific signals for buying and selling.
This is similar to taking an obvious truth – such as that attendance at sporting events is generally smaller on rainy days than on sunny days – and constructing a formula that supposedly translates the number of inches of rainfall into an exact forecast of the attendance.
The second source is probably finding something that has worked in the past and assuming it will work in the future. Trading systems are based on the unstated assumption that the world doesn't change. But the world is in constant change – as desires change, demand changes, and supplies change.
Operate on a Cash Basis
Rule 7: Don't use leverage.When someone goes completely broke, it’s almost always because he used borrowed money. In many cases, the individual was already quite rich, but he wanted to pyramid his fortune with borrowed money.
Using margin accounts or mortgages (for other than your home) puts you at risk to lose more than your original investment. If you handle all your investments on a cash basis, it’s virtually impossible to lose everything - no matter what might happen in the world - especially if you follow the other rules given here.
Make Your Own Decisions
Rule 8: Don't let anyone make your decisions.Many people lost their fortunes because they gave someone (a financial advisor or attorney) the authority to make their decisions and handle their money. The advisor may have taken too many chances, been dishonest, or simply incompetent. But, most of all, no advisor can be expected to treat your money with the same respect you do.
You don't need a money manager. Investing is complicated and difficult to understand only if you're trying to beat the market. You can preserve what you have with only a minimum understanding of investing. You can set up a worry-proof portfolio for yourself in one day - and then you need only one day a year to monitor it. Allowing the smartest person in the world to make your decisions for you isn’t nearly as safe as setting up a safe portfolio for yourself.
Above all, never give anyone signature authority over money that’s precious to you. If you should put money into an account for someone else to manage, it must be money you can afford to lose.
Understand What You Do
Rule 9: Don't ever do anything you don't understand.Don't undertake any investment, speculation, or investment program that you don’t understand. If you do, you may later discover risks you weren't aware of. Or your losses might turn out to be greater than the amount you invested.
It’s better to leave your money in Treasury bills than to take chances with investments you don’t fully comprehend. It doesn't matter that your brother-in-law, your best friend, or your favorite investment advisor understands some money-making scheme. It isn't his money at risk. If you don’t understand it, don’t do it.
Diversification
Rule 10: Don’t depend on any one investment, institution, or person for your safety.Every investment has its time in the sun - and its moment of shame. Precious metals ruled the roost in the 1970s while stocks and bonds were in disgrace. But then gold and silver became the losers of the 1980s and 1990s, while stocks and bonds multiplied their value. No one investment is good for all times. Even Treasury bills can lose real value during times of inflation.
And you can't rely on any single institution to protect your wealth for you. Old-line banks have failed and pension funds have folded. The company you think will keep your wealth safe might not be there when you're ready to withdraw your life savings.
We live in an uncertain world, and surprises are the norm. You shouldn't risk the chance that a single surprise will wipe out a large part of your holdings.
Diversify across investments and institutions - and keep things simple enough to manage yourself – you can relax, knowing that no one event can do you in.
Balanced Portfolio
Rule 11: Create a bulletproof portfolio for protection.For the money you need to take care of you for the rest of your life, set up a simple, balanced, diversified portfolio. I call this a “Permanent Portfolio” because once you set it up, you never need to rearrange the investment mix— even if your outlook for the future changes.
The portfolio should assure that your wealth will survive any event — including an event that would be devastating to any individual element within the portfolio. In other words, this portfolio should protect you no matter what the future brings.
It isn't difficult or complicated to have such a portfolio this safe. You can achieve a great deal of diversification with a surprisingly simple portfolio.
The portfolio should assure that your wealth will survive any event – including events that would be devastating to any one investment.
Three absolute requirements for such a portfolio are:
1. Safety: It should protect you against every possible economic future. You should profit during times of normal prosperity, but you also should be safe (and perhaps even profit) during bad times – inflation, recession, or even depression.
2. Stability: Whatever economic climate arrives, the portfolio’s performance should be so steady that you won't wonder whether the portfolio needs to be changed. Even in the worst possible circumstances, the portfolio’s value should drop no more than slightly – so that you won’t panic and abandon it. This stability also permits you to turn your attention away from your investments, confident that your portfolio will protect you in any circumstance.
3. Simplicity: The portfolio should be so easy to maintain, and require so little of your time, that you’ll never be tempted to look for something that seems simpler, but is less safe.
You leave it alone – to hold the same investments, in the same proportions, permanently. You don’t change the proportions as you, your friends, or investment gurus change their minds about the future.
Your portfolio needs to respond well only to those broad movements.
1. Safety: It should protect you against every possible economic future. You should profit during times of normal prosperity, but you also should be safe (and perhaps even profit) during bad times – inflation, recession, or even depression.
2. Stability: Whatever economic climate arrives, the portfolio’s performance should be so steady that you won't wonder whether the portfolio needs to be changed. Even in the worst possible circumstances, the portfolio’s value should drop no more than slightly – so that you won’t panic and abandon it. This stability also permits you to turn your attention away from your investments, confident that your portfolio will protect you in any circumstance.
3. Simplicity: The portfolio should be so easy to maintain, and require so little of your time, that you’ll never be tempted to look for something that seems simpler, but is less safe.
You leave it alone – to hold the same investments, in the same proportions, permanently. You don’t change the proportions as you, your friends, or investment gurus change their minds about the future.
Your portfolio needs to respond well only to those broad movements.
And they fit into four general categories:
1. Prosperity:A period during which living standards are rising, the economy is growing, business is thriving, interest rates usually are falling, and unemployment is declining.
2. Inflation: A period when consumer prices generally are rising. They might be rising moderately (an inflation rate of 6% or so), rapidly (10% to 20% or so, as in the late 1970s), or at a runaway rate (25% or more).
3. Tight money or recession: A period during which the growth of the supply of money in circulation slows down. This leaves people with less cash than they expected to have, and usually leads to a recession – a period of poor economic conditions.
4. Deflation: The opposite of inflation. Consumer prices decline and the purchasing power value of money grows. In the past, deflation has sometimes triggered a depression – a prolonged period of very bad economic conditions, as in the 1930s.
Investment prices can be affected by what happens outside the financial system - wars, changes in government policies, new tax rules, civil turmoil, and other matters. But these events have a lasting effect on investments only if they push the economy from one to another of the four environments I've just described. The four economic categories are all-inclusive. At any time, one of them will predominate. So if you’re protected in these four situations, you’re protected in all situations.
Thus four investments provide coverage for all four economic environments:
STOCKS take advantage of prosperity. They tend to do poorly during periods of inflation, deflation, and tight money, but over time those periods don’t undo the gains that stocks achieve during periods of prosperity.
BONDS also take advantage of prosperity. In addition, they profit when interest rates collapse during a deflation. You should expect bonds to do poorly during times of inflation and tight money.
GOLD not only does well during times of intense inflation, it does very well. In the 1970s, gold rose twenty times over as the inflation rate soared to its peak of 15% in 1980. Gold generally does poorly during times of prosperity, tight money, and deflation.
CASH is most profitable during a period of tight money. Not only is it a liquid asset that can give you purchasing power when your income and investments might be ailing, but the rise in interest rates increases the return on your dollars. Cash also becomes more valuable during a deflation as prices fall. Cash is essentially neutral during a time of prosperity, and it is a loser during times of inflation.
Any attempt to be clever in assigning portions to the investments probably will do more harm than good. I prefer the simplicity of allocating 25% to each of the four investments.
The only maintenance required is to check the portfolio’s makeup once a year.
If any of the four investments has become worth less than 15%, or more than 35%, of the portfolio’s overall value, you need to restore the original percentages.
When you make your once-a-year check of the portfolio’s value, if all four investments are within the 15-35% range, no rebalancing is necessary. During the year, if you happen to notice that there’s been a big change in investment prices, you may want to check the values of the investments. Again, if any investment has strayed outside the 15-35% range, go ahead and rebalance the entire portfolio.
The test of a Permanent Portfolio is whether it provides peace of mind. A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity. No actual or threatened event should trouble you, because you’ll know that your portfolio is protected against it.
If someone warns about the “alarming parallels” between the current decade and the 1920s, you shouldn't wonder whether you need to sell all your stocks. You’ll know that your Permanent Portfolio will take care of you – even if next year turns out to be 1929 revisited. The deflation that could devastate stocks would push interest rates downward and bring big profits for your bonds.
When someone claims the inflation rate is headed back to 15%, you shouldn't wonder whether to dump all your bonds. You’ll know that the gain in your Permanent Portfolio’s gold would far outweigh any losses on the bonds.
When someone announces that a new debt crisis is on the way, or that a bull market is about to begin in stocks, bonds, or gold, you won’t feel pressured to decide whether he’s right. You’ll know that the Permanent Portfolio will respond favorably to any eventuality.
I can’t list every potential event. So if you become concerned by any possibility, reread this chapter and you should be reassured that there’s an investment in your Permanent Portfolio that will cover you if the worst should occur. Whatever the potential crisis or opportunity, your Permanent Portfolio should already be taking care of you.
The portfolio can’t guarantee a profit every year; no portfolio can. It won’t outperform the hotshot advisor in his best year. And it won’t outperform the best investment of the year. But it can give you the confidence that no crisis will destroy you, the assurance that your savings are secure and growing in all circumstances, and the knowledge that you’re no longer vulnerable to the mistakes in judgment that you or the best advisor could so easily make.
If you want to try to beat the market, set up a second - separate - portfolio with which you can speculate to your heart’s content. But make sure this portfolio contains no more of your wealth than you can afford to lose.
I call this second pool of money a “Variable Portfolio” because its investments will vary as your outlook for the future changes. It might be all or part in stocks or gold or something else - whatever looks good at any time - or just in cash. You can take chances with the Variable Portfolio because you know that, whatever happens, no loss can be devastating. You can lose only the money you've already decided isn't precious to you.
Don’t allow everything you own to be where your government can touch it. By having something outside the reach of your government, you’ll be less vulnerable - and you'll feel less vulnerable. You’ll no longer have to worry so much about what the government will do next.
For example, maintaining a foreign bank account is quite simple; it’s little different from having a mail or Internet account with an American bank or broker.
Keeping some investments abroad provides safe and easy protection against surprises that might happen anywhere – confiscation of gold holdings by the government, exchange controls, civil disorder, even war.
No one knows how the people elected in the coming years might choose to solve the economic problems the country will face. It might strike them that the quick and easy solution is to take your property – as has happened so often already. Your assets will be safe even if war, civil disorder, a weakening of law enforcement, or a physical catastrophe should disrupt record-keeping in your own country.
Your entire estate will no longer be vulnerable to economic, political, or legal setbacks in your own country.
Geographic diversification is a necessary part of making sure the Permanent Portfolio can handle whatever hazard materializes.
Tax rates are still low enough in the U.S. that you might gain very little from the risk and effort of constructing elaborate tax shelters. And a great deal of money has been lost by people who hoped to beat the tax system. The losses came from investments that provided special tax advantages but didn't make economic sense, and from tax shelters that were disallowed by the IRS - incurring penalties and interest on top of the liabilities.
There are a number of simple ways available to minimize taxes - through such things as IRAs and 401(k) plans. Take advantage of these tax reduction plans. These plans are effective but non-controversial. They won’t come back to haunt you.Tax deferral is the basic method for reducing the tax burden on your investment program. With tax deferral, the money you don't pay in taxes today can work to produce more earnings every year until you finally have to pay the tax.
In what economic circumstances is the investment’s price likely to go down?
Are other investments in your portfolio likely to take up the slack by gaining in those same circumstances?
Under what circumstances could I lose a substantial share – 20% or more – of my investment?
Under what circumstances could my entire investment be lost?
Would I have any residual liability – that is, can I lose even more than the cash I invested?
Interest rates generally reflect an investment’s risk. A higher interest rate means there’s a greater possibility the capital can be lost – through default or inflation.
Under what circumstances, if any, is the investment likely to appreciate?
Under what circumstances, if any, is the investment likely to depreciate?
In good circumstances for the investment, will the overall return – yield plus capital appreciation – help your portfolio overcome losses in other investments?
If the investment is a mutual fund, you want the fund with the lowest yield – other things being equal. Any dividend paid by a mutual fund simply reduces the price of your shares
“Is this company a potential takeover candidate?”
The crowd isn't always wrong, but you can't make much betting with it – because you will buy at a price that’s already high. By going against the crowd, you buy when an investment is out of favour and cheap; if it does succeed, there’s a long way for it to go up. So the most important factor in speculating is whether you expect something that most people don’t expect. For example, the time to consider buying inflation hedges speculatively is when most people believe inflation is under control. The time to consider buying a particular company is when everyone knows what a dog it is – not when everyone talks about its great promise. Unpopularity does not guarantee profits, but you'll never make a killing with a popular investment.
“Do the technical factors favour the investment now?”
You must have an investment plan. Without a plan, you will be tossed and turned by all the conflicting ideas you read and hear - and you’ll never ask the right questions. With a plan, you'll have a basis for evaluating whatever you hear. You'll know to ask the questions that help you determine whether an investment furthers your plan.
Your wealth is of no value if you can’t enjoy it. But it’s easy to spend too much while the money’s flowing in. To enjoy your wealth, establish a budget of money that you can spend yearly without concern. If you stay within that amount, you can feel free to blow the money on cars, trips, anything you want — knowing that you aren't blowing your future.
If you pass up an opportunity to increase your fortune, another one will be along soon enough. But if you lose your life savings just once, you might never get a chance to replace it.
If you wind up losing something, let it be only an opportunity that was lost – not precious capital. People rarely go broke playing it safe. But many go broke taking great risks or making investments they know too little about.
If you’re hesitating, it’s because you don’t yet know enough about the investment or the problem to make a confident decision. That means you shouldn't take the plunge until you know more and you’re sure you understand all the ramifications.
The premise for speculation is that you’re more astute than most other investors – that you understand the market better, that you have information not available to other investors, that you can make better decisions, or that your interpretation of available information is especially perceptive. The elements of speculation are timing, forecasting, trading systems, and selection. Any time you use any of these tactics you’re speculating.
Investment forecasts can be exciting. But in other areas of our lives, we think of fortune-tellers as entertainers.
Forecasts are not entirely useless. Someone’s predictions can help you recognize that your own expectations for the future aren't the only possible outcome. This can help keep you humble and prudent.
If you come to feel a given event is quite possible but most people disagree with you, the market probably will provide a big pay off if you bet on that event and prove to be right. So if you like to watch the investment markets closely and you see a potential future that most people are ignoring, you may want to make a small speculation with money you can afford to lose.
A sure way to lose what you've accumulated is to risk the funds that are precious to you on the idea that some event is inevitable.
In 1970, the chief gold trader at the largest Swiss bank told a friend of mine that the gold price would never go above $40. When asked how he could be so sure, the trader replied, “Because we control the market.”
“Insiders” are no more help than fortune tellers or high-priced pros.
You can protect yourself against the possibility of institutional crisis by using more than one institution. You can protect yourself against the failings of individuals by relying only on yourself. And you can protect yourself against investment roller coasters by diversifying across investment markets.
Split the 25% stock-market portion among three mutual funds.
For the bond portion, you don’t want to have to monitor credit risk, so buy only U.S. Treasury bonds. So long as the U.S. government has the ability to tax people or print money to pay its bills, there is virtually no credit risk.
Put the 25% in the Treasury bond issue that currently has the longest time until it matures. That will be close to 30 years. Ten years later, the bond will have only 20 years to maturity; at that time replace it with a new 30-year bond.
Buy bullion coins – coins whose only value is the gold bullion they contain. They sell for about 3-5% more per ounce than gold bullion. That means a one-ounce coin will sell for about $310-$315 if the price of gold is $300 an ounce.
The cash portion should be kept in a money market fund investing only in short-term U.S. Treasury securities, so that you don’t have to evaluate credit risk. These securities are safer than bank accounts and other debt instruments. If your cash budget is large enough, divide your holdings between two or three funds – for further protection against the unthinkable.
The value of real estate in your portfolio is indivisible, and everything else must accommodate it. Just like a 15-foot piano in the living room, you have to arrange the rest of the furniture around it.
Your house is a consumption item – the place where you live and enjoy your life.
Don't play games with your Permanent Portfolio. Don’t wait for any investment to become cheaper before you buy it. And don't go overboard investing in something that happens to be doing well now. Just put 25% in each of the four categories.
No matter how strong your expectations about the near future, you could easily be mistaken. And the point of the Permanent Portfolio is to ignore your own expectations and let the portfolio take care of you no matter what may come.
Fund it with equal portions of all four investments and don’t worry over which is going to do best. It is a package of investments that provides the safety you need. Tear apart the package and you tear apart the safety.
A foreign account in any country outside your own is a tremendous improvement over having everything in your home country. But some countries are more hospitable than others. And some have legal traditions that protect your privacy. I've always been partial to Switzerland and Austria, because each has a centuries-old tradition of respecting privacy and fending off inquiries from other governments.
If you buy and hold gold through the foreign bank, the gold most likely will be stored within the bank itself.
The secret – that things rarely work out as expected – is shared unwittingly by investors, brokers, advisors, newsletter writers, and financial journalists, few of whom can bring themselves to acknowledge it. Each wants to appear to be in command of the situation, on top of the markets, aware of what’s happening and what’s going to happen – and to appear as though everything that has already happened was anticipated. A professional needs to keep up this guise because he must look sharper than his competitors. Even investors often pose as members of the all-knowing – perhaps because no one wants to appear to be the only loser, and everyone else seems to be so smart.
1. Prosperity:A period during which living standards are rising, the economy is growing, business is thriving, interest rates usually are falling, and unemployment is declining.
2. Inflation: A period when consumer prices generally are rising. They might be rising moderately (an inflation rate of 6% or so), rapidly (10% to 20% or so, as in the late 1970s), or at a runaway rate (25% or more).
3. Tight money or recession: A period during which the growth of the supply of money in circulation slows down. This leaves people with less cash than they expected to have, and usually leads to a recession – a period of poor economic conditions.
4. Deflation: The opposite of inflation. Consumer prices decline and the purchasing power value of money grows. In the past, deflation has sometimes triggered a depression – a prolonged period of very bad economic conditions, as in the 1930s.
Investment prices can be affected by what happens outside the financial system - wars, changes in government policies, new tax rules, civil turmoil, and other matters. But these events have a lasting effect on investments only if they push the economy from one to another of the four environments I've just described. The four economic categories are all-inclusive. At any time, one of them will predominate. So if you’re protected in these four situations, you’re protected in all situations.
Thus four investments provide coverage for all four economic environments:
STOCKS take advantage of prosperity. They tend to do poorly during periods of inflation, deflation, and tight money, but over time those periods don’t undo the gains that stocks achieve during periods of prosperity.
BONDS also take advantage of prosperity. In addition, they profit when interest rates collapse during a deflation. You should expect bonds to do poorly during times of inflation and tight money.
GOLD not only does well during times of intense inflation, it does very well. In the 1970s, gold rose twenty times over as the inflation rate soared to its peak of 15% in 1980. Gold generally does poorly during times of prosperity, tight money, and deflation.
CASH is most profitable during a period of tight money. Not only is it a liquid asset that can give you purchasing power when your income and investments might be ailing, but the rise in interest rates increases the return on your dollars. Cash also becomes more valuable during a deflation as prices fall. Cash is essentially neutral during a time of prosperity, and it is a loser during times of inflation.
Any attempt to be clever in assigning portions to the investments probably will do more harm than good. I prefer the simplicity of allocating 25% to each of the four investments.
The only maintenance required is to check the portfolio’s makeup once a year.
If any of the four investments has become worth less than 15%, or more than 35%, of the portfolio’s overall value, you need to restore the original percentages.
When you make your once-a-year check of the portfolio’s value, if all four investments are within the 15-35% range, no rebalancing is necessary. During the year, if you happen to notice that there’s been a big change in investment prices, you may want to check the values of the investments. Again, if any investment has strayed outside the 15-35% range, go ahead and rebalance the entire portfolio.
The test of a Permanent Portfolio is whether it provides peace of mind. A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity. No actual or threatened event should trouble you, because you’ll know that your portfolio is protected against it.
If someone warns about the “alarming parallels” between the current decade and the 1920s, you shouldn't wonder whether you need to sell all your stocks. You’ll know that your Permanent Portfolio will take care of you – even if next year turns out to be 1929 revisited. The deflation that could devastate stocks would push interest rates downward and bring big profits for your bonds.
When someone claims the inflation rate is headed back to 15%, you shouldn't wonder whether to dump all your bonds. You’ll know that the gain in your Permanent Portfolio’s gold would far outweigh any losses on the bonds.
When someone announces that a new debt crisis is on the way, or that a bull market is about to begin in stocks, bonds, or gold, you won’t feel pressured to decide whether he’s right. You’ll know that the Permanent Portfolio will respond favorably to any eventuality.
I can’t list every potential event. So if you become concerned by any possibility, reread this chapter and you should be reassured that there’s an investment in your Permanent Portfolio that will cover you if the worst should occur. Whatever the potential crisis or opportunity, your Permanent Portfolio should already be taking care of you.
The portfolio can’t guarantee a profit every year; no portfolio can. It won’t outperform the hotshot advisor in his best year. And it won’t outperform the best investment of the year. But it can give you the confidence that no crisis will destroy you, the assurance that your savings are secure and growing in all circumstances, and the knowledge that you’re no longer vulnerable to the mistakes in judgment that you or the best advisor could so easily make.
Speculation
Rule 12: Speculate only with money you can afford to lose.If you want to try to beat the market, set up a second - separate - portfolio with which you can speculate to your heart’s content. But make sure this portfolio contains no more of your wealth than you can afford to lose.
I call this second pool of money a “Variable Portfolio” because its investments will vary as your outlook for the future changes. It might be all or part in stocks or gold or something else - whatever looks good at any time - or just in cash. You can take chances with the Variable Portfolio because you know that, whatever happens, no loss can be devastating. You can lose only the money you've already decided isn't precious to you.
International Diversification
Rule 13: Keep some assets outside the country in which you live.Don’t allow everything you own to be where your government can touch it. By having something outside the reach of your government, you’ll be less vulnerable - and you'll feel less vulnerable. You’ll no longer have to worry so much about what the government will do next.
For example, maintaining a foreign bank account is quite simple; it’s little different from having a mail or Internet account with an American bank or broker.
Keeping some investments abroad provides safe and easy protection against surprises that might happen anywhere – confiscation of gold holdings by the government, exchange controls, civil disorder, even war.
No one knows how the people elected in the coming years might choose to solve the economic problems the country will face. It might strike them that the quick and easy solution is to take your property – as has happened so often already. Your assets will be safe even if war, civil disorder, a weakening of law enforcement, or a physical catastrophe should disrupt record-keeping in your own country.
Your entire estate will no longer be vulnerable to economic, political, or legal setbacks in your own country.
Geographic diversification is a necessary part of making sure the Permanent Portfolio can handle whatever hazard materializes.
Tax Shelters
Rule 14: Beware of tax-avoidance schemes.Tax rates are still low enough in the U.S. that you might gain very little from the risk and effort of constructing elaborate tax shelters. And a great deal of money has been lost by people who hoped to beat the tax system. The losses came from investments that provided special tax advantages but didn't make economic sense, and from tax shelters that were disallowed by the IRS - incurring penalties and interest on top of the liabilities.
There are a number of simple ways available to minimize taxes - through such things as IRAs and 401(k) plans. Take advantage of these tax reduction plans. These plans are effective but non-controversial. They won’t come back to haunt you.Tax deferral is the basic method for reducing the tax burden on your investment program. With tax deferral, the money you don't pay in taxes today can work to produce more earnings every year until you finally have to pay the tax.
Questions
Rule 15: Ask the right questionsIn what economic circumstances is the investment’s price likely to go down?
Are other investments in your portfolio likely to take up the slack by gaining in those same circumstances?
Under what circumstances could I lose a substantial share – 20% or more – of my investment?
Under what circumstances could my entire investment be lost?
Would I have any residual liability – that is, can I lose even more than the cash I invested?
Interest rates generally reflect an investment’s risk. A higher interest rate means there’s a greater possibility the capital can be lost – through default or inflation.
Under what circumstances, if any, is the investment likely to appreciate?
Under what circumstances, if any, is the investment likely to depreciate?
In good circumstances for the investment, will the overall return – yield plus capital appreciation – help your portfolio overcome losses in other investments?
If the investment is a mutual fund, you want the fund with the lowest yield – other things being equal. Any dividend paid by a mutual fund simply reduces the price of your shares
“Is this company a potential takeover candidate?”
The crowd isn't always wrong, but you can't make much betting with it – because you will buy at a price that’s already high. By going against the crowd, you buy when an investment is out of favour and cheap; if it does succeed, there’s a long way for it to go up. So the most important factor in speculating is whether you expect something that most people don’t expect. For example, the time to consider buying inflation hedges speculatively is when most people believe inflation is under control. The time to consider buying a particular company is when everyone knows what a dog it is – not when everyone talks about its great promise. Unpopularity does not guarantee profits, but you'll never make a killing with a popular investment.
“Do the technical factors favour the investment now?”
You must have an investment plan. Without a plan, you will be tossed and turned by all the conflicting ideas you read and hear - and you’ll never ask the right questions. With a plan, you'll have a basis for evaluating whatever you hear. You'll know to ask the questions that help you determine whether an investment furthers your plan.
Enjoyment
Rule 16: Enjoy yourself with a budget for pleasure.Your wealth is of no value if you can’t enjoy it. But it’s easy to spend too much while the money’s flowing in. To enjoy your wealth, establish a budget of money that you can spend yearly without concern. If you stay within that amount, you can feel free to blow the money on cars, trips, anything you want — knowing that you aren't blowing your future.
When in Doubt . . .
Rule 17: Whenever you're in doubt about a course of action, it is always better to err on the side of safety.If you pass up an opportunity to increase your fortune, another one will be along soon enough. But if you lose your life savings just once, you might never get a chance to replace it.
If you wind up losing something, let it be only an opportunity that was lost – not precious capital. People rarely go broke playing it safe. But many go broke taking great risks or making investments they know too little about.
If you’re hesitating, it’s because you don’t yet know enough about the investment or the problem to make a confident decision. That means you shouldn't take the plunge until you know more and you’re sure you understand all the ramifications.
The premise for speculation is that you’re more astute than most other investors – that you understand the market better, that you have information not available to other investors, that you can make better decisions, or that your interpretation of available information is especially perceptive. The elements of speculation are timing, forecasting, trading systems, and selection. Any time you use any of these tactics you’re speculating.
Investment forecasts can be exciting. But in other areas of our lives, we think of fortune-tellers as entertainers.
Forecasts are not entirely useless. Someone’s predictions can help you recognize that your own expectations for the future aren't the only possible outcome. This can help keep you humble and prudent.
If you come to feel a given event is quite possible but most people disagree with you, the market probably will provide a big pay off if you bet on that event and prove to be right. So if you like to watch the investment markets closely and you see a potential future that most people are ignoring, you may want to make a small speculation with money you can afford to lose.
A sure way to lose what you've accumulated is to risk the funds that are precious to you on the idea that some event is inevitable.
In 1970, the chief gold trader at the largest Swiss bank told a friend of mine that the gold price would never go above $40. When asked how he could be so sure, the trader replied, “Because we control the market.”
“Insiders” are no more help than fortune tellers or high-priced pros.
You can protect yourself against the possibility of institutional crisis by using more than one institution. You can protect yourself against the failings of individuals by relying only on yourself. And you can protect yourself against investment roller coasters by diversifying across investment markets.
Split the 25% stock-market portion among three mutual funds.
For the bond portion, you don’t want to have to monitor credit risk, so buy only U.S. Treasury bonds. So long as the U.S. government has the ability to tax people or print money to pay its bills, there is virtually no credit risk.
Put the 25% in the Treasury bond issue that currently has the longest time until it matures. That will be close to 30 years. Ten years later, the bond will have only 20 years to maturity; at that time replace it with a new 30-year bond.
Buy bullion coins – coins whose only value is the gold bullion they contain. They sell for about 3-5% more per ounce than gold bullion. That means a one-ounce coin will sell for about $310-$315 if the price of gold is $300 an ounce.
The cash portion should be kept in a money market fund investing only in short-term U.S. Treasury securities, so that you don’t have to evaluate credit risk. These securities are safer than bank accounts and other debt instruments. If your cash budget is large enough, divide your holdings between two or three funds – for further protection against the unthinkable.
The value of real estate in your portfolio is indivisible, and everything else must accommodate it. Just like a 15-foot piano in the living room, you have to arrange the rest of the furniture around it.
Your house is a consumption item – the place where you live and enjoy your life.
Don't play games with your Permanent Portfolio. Don’t wait for any investment to become cheaper before you buy it. And don't go overboard investing in something that happens to be doing well now. Just put 25% in each of the four categories.
No matter how strong your expectations about the near future, you could easily be mistaken. And the point of the Permanent Portfolio is to ignore your own expectations and let the portfolio take care of you no matter what may come.
Fund it with equal portions of all four investments and don’t worry over which is going to do best. It is a package of investments that provides the safety you need. Tear apart the package and you tear apart the safety.
A foreign account in any country outside your own is a tremendous improvement over having everything in your home country. But some countries are more hospitable than others. And some have legal traditions that protect your privacy. I've always been partial to Switzerland and Austria, because each has a centuries-old tradition of respecting privacy and fending off inquiries from other governments.
If you buy and hold gold through the foreign bank, the gold most likely will be stored within the bank itself.
The secret – that things rarely work out as expected – is shared unwittingly by investors, brokers, advisors, newsletter writers, and financial journalists, few of whom can bring themselves to acknowledge it. Each wants to appear to be in command of the situation, on top of the markets, aware of what’s happening and what’s going to happen – and to appear as though everything that has already happened was anticipated. A professional needs to keep up this guise because he must look sharper than his competitors. Even investors often pose as members of the all-knowing – perhaps because no one wants to appear to be the only loser, and everyone else seems to be so smart.
When you give up the search for certainty, an enormous burden is lifted from your shoulders.
The less you know – and the more honestly you recognize the limits of your knowledge – the more likely your investment program will turn out okay. Humility is accepting that you don't know everything, or even everything about any particular topic, and it is an investor’s most vital asset. Arrogance eventually ruins any investor.
The Rules of Life
The rules of safe investing are little different from the rules of life: recognize that you live in an uncertain world, don’t expect the impossible, and don't trust strangers. If you apply to your investments the same realistic attitude that produced your present wealth, you needn't fear that you’ll ever go broke.Source: http://thetaoofwealth.wordpress.com/
Quote for the day
"He who learns but does not think, is lost. He who thinks but does not learn is in great danger." - Confucius
Friday, 2 April 2021
Quote for the day
"Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted." - Albert Einstein
Thursday, 1 April 2021
The Bargain Hunter's Checklist
10 things to check before you press the buy button.
Here is the 10-point check-list of things to reassure yourself about before you make that snap judgement. Think of it like the AA's used car check-list.
1. Check the P/E and share price history
It's probably a low P/E that makes it look a bargain share. But compare the latest and forecast P/Es with their historical levels. If it's always been cheap, then it's not cheap now. Have a look at the share price graph over 5 years as well as shorter periods.
2. Check dividend cover and track record
Alternatively it might be the dividend that attracts you. But don't rely on a juicy dividend yield if it is not well covered. If you are buying for the yield, then you'll want to see a decent track record too.
3. Are revenues and operating profit rising?
Check the latest financials. At minimum check if revenues and operating profit increased in the latest period. If performance is declining at this level then the company may have serious problems.
4. Does the company generate cash?
Compare cash flow from operations with the operating profit. If it's a much lower figure then the company may have difficulty generating cash. Also look if net cash increased or decreased. If there was a large decrease then it needs further investigation.
5. Check debt
Look at net gearing and also interest cover, which is harder to window-dress. In the current environment companies with high debt are vulnerable to economic downturns, credit crunches and (eventually) interest rate rises.
6. Check net asset cover
Compare the tangible net asset per share with the share price. Tangible assets may provide a bit of a safety net.
7. Do you know how the company makes money?
This is a two part question: a) What does the company do? And b) How does it make money from that?
Ideally it includes looking at the geographic and segmental analysis of revenues and profit, which you need to get from the company's latest report.
8. Look at the latest news
Check recent regulatory news and press articles for any important items.
9. Check directors' dealings
Recent purchases or sales of shares by directors may be significant, as well as directors total holdings. What price did the directors buy at?
10. Check brokers' recommendations
I'm not suggesting slavishly following brokers' recommendations, but a decision to buy a share if, say, five out of five brokers rate it a sell is different from buying when five out of five rate it a buy. It's a test of your conviction.
You can get all of this information from a financial website and the company's own website. Apart from the geographic and segmental analysis, it shouldn't even require looking at the company's reports. It should take about half an hour, though maybe longer if you don't have much idea what the company does.
Ideal
Of course it is much better to thoroughly research and analyse a company. The ideal opportunity arises when you have previously researched a share and liked the investment case, but thought it was too expensive.
Even better if you have already decided what your maximum entry price would be. Then on a dip you can act swiftly, with just a quick review of recent news to make sure nothing has fundamentally changed.
But things are rarely ideal, and people are rarely as thorough as they mean to be. It's better to spend half an hour than five minutes. Having a checklist such as this provides a discipline to ensure you "kick the tyres" every time. I plan to cut out and keep it myself.
Source:www.fool.co.uk
(Edited)
Here is the 10-point check-list of things to reassure yourself about before you make that snap judgement. Think of it like the AA's used car check-list.
1. Check the P/E and share price history
It's probably a low P/E that makes it look a bargain share. But compare the latest and forecast P/Es with their historical levels. If it's always been cheap, then it's not cheap now. Have a look at the share price graph over 5 years as well as shorter periods.
2. Check dividend cover and track record
Alternatively it might be the dividend that attracts you. But don't rely on a juicy dividend yield if it is not well covered. If you are buying for the yield, then you'll want to see a decent track record too.
3. Are revenues and operating profit rising?
Check the latest financials. At minimum check if revenues and operating profit increased in the latest period. If performance is declining at this level then the company may have serious problems.
4. Does the company generate cash?
Compare cash flow from operations with the operating profit. If it's a much lower figure then the company may have difficulty generating cash. Also look if net cash increased or decreased. If there was a large decrease then it needs further investigation.
5. Check debt
Look at net gearing and also interest cover, which is harder to window-dress. In the current environment companies with high debt are vulnerable to economic downturns, credit crunches and (eventually) interest rate rises.
6. Check net asset cover
Compare the tangible net asset per share with the share price. Tangible assets may provide a bit of a safety net.
7. Do you know how the company makes money?
This is a two part question: a) What does the company do? And b) How does it make money from that?
Ideally it includes looking at the geographic and segmental analysis of revenues and profit, which you need to get from the company's latest report.
8. Look at the latest news
Check recent regulatory news and press articles for any important items.
9. Check directors' dealings
Recent purchases or sales of shares by directors may be significant, as well as directors total holdings. What price did the directors buy at?
10. Check brokers' recommendations
I'm not suggesting slavishly following brokers' recommendations, but a decision to buy a share if, say, five out of five brokers rate it a sell is different from buying when five out of five rate it a buy. It's a test of your conviction.
You can get all of this information from a financial website and the company's own website. Apart from the geographic and segmental analysis, it shouldn't even require looking at the company's reports. It should take about half an hour, though maybe longer if you don't have much idea what the company does.
Ideal
Of course it is much better to thoroughly research and analyse a company. The ideal opportunity arises when you have previously researched a share and liked the investment case, but thought it was too expensive.
Even better if you have already decided what your maximum entry price would be. Then on a dip you can act swiftly, with just a quick review of recent news to make sure nothing has fundamentally changed.
But things are rarely ideal, and people are rarely as thorough as they mean to be. It's better to spend half an hour than five minutes. Having a checklist such as this provides a discipline to ensure you "kick the tyres" every time. I plan to cut out and keep it myself.
Source:www.fool.co.uk
(Edited)
Quote for the day
"The true secret of success in the investment and speculative world is not so much which good securities to buy, but rather which investments to avoid." - Morton Shulman
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