What Will The Stock Market Do & Why You Should Care.

InvestWithAlex Wisdom 18

Today’s 5 Minute Podcast Covers The Following Topics:

Reader’s Question: “Hey, as long-term investors, why should we care about what the market does. Shouldn’t we just concentrate on picking good stocks? ” – Angela .

The answer that will shock you to your core.
How knowing what the market will do can easily double your returns.
Why timing is the most important element when it comes to investing.
What you can do now to combine timing with fundamentals to maximize your gains.

Please tweet me your questions @investwithalex

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November 10, 2013November 10, 2013

Little Known Way To Save Your Net Worth

Bloomberg Writes: Value Fund Managers Go on a Buyer’s Strike

Wally Weitz beat 90 percent of his rivals in the past five years by buying stocks he deemed cheap. Now he says bargains are so scarce that he’s letting his cash pile up. “It’s more fun to be finding great new ideas,” says Weitz, whose $1.1 billion Weitz Value Fund (WVALX) had 29 percent of its assets in cash and Treasury bills as of Sept. 30. “But we take what the market gives us, and right now it is not giving us anything.”

“We are having a more difficult time finding bargains,” Yacktman wrote in an e-mail.

Romick, managing partner of First Pacific Advisors, took a similar stance in his second-quarter letter to shareholders of the $14.1 billion FPA Crescent Fund. “We find it difficult to invest in an environment that seems manipulated to engineer higher asset prices regardless of business fundamentals,” he wrote.

Read The Rest Of The Article Here

I have mentioned this a number of times before, but we are now getting confirmations from some of the top money managers in the world.

Given current market environment, there isn’t that much to buy out there. Most stocks and markets are overpriced. Bullish sentiment is approaching all time highs and the situation is starting to get dangerous. Why dangerous? Well, this market is artificially maintained by massive infusions of cheap credit (QE) and speculation. Basically, there is no fundamental reason for most asset classes to be where they are today. It is all artificial. All assets are grossly mispriced to the upside and that will have to be corrected, sooner rather than later.

While I do not provide financial advice directly, I would suggest that people might want to look at the situation from the following vantage point. The market is providing you with an excellent opportunity to start selling and building your cash reserve for the next round of the bull/bear swing.

Can the market go even higher here? Sure, but the probability of a severe bear move in the near future is very high. Well, certain as per my mathematical work.

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November 8, 2013November 8, 2013

The Biggest Problems With Value Investing

Thus far value investing has been a perfect investment vehicle. After all, what’s not to like. It steers you to buy wonderful businesses at highly discounted prices. That in itself minimizes your risk by creating a margin of safety while maximizing your return potential, creating a highly desirable low risk and high return type of an investment scenario.

At the same time Value Investing is not perfect. While there is a number of shortcomings associated with Value Investing, the most important one from our vantage point is the issue of “TIMING”. Please allow me to explain.

Let’s assume that you have been able to find a value stock of your dreams. Let’s imagine for a second that it falls into either a Waking Beast or a Rocket Ship category. Let’s further assume that the company is clothe retailer who’s stock is selling at 70% discount to it’s Intrinsic Value. The company suffered over the last couple of years due to various financial and merchandising issues. Same store sales are down 50% over the last 3 years and the company recently closed 25 underperforming stores. As a result the stock price has collapsed over 80% in the last 2 years.

At the same time your in-depth fundamental research shows that things are about to get better. The company recently restructured and brought on a new management team with an excellent track record. That is already being evident in the companies same store sales and improved cash flow. The merchandise is hot again and the company is also getting ready to start opening up a lot of new stores over the next 2 years. Based on your research and calculations the stock price should be at least double of where it is today and much higher if the company continues to perform well. Overall, it’s a wonderful buying opportunity that you believe will make you a lot of money.

Yet, for some reason the stock price hasn’t moved to the upside yet. The market hasn’t yet recognized the change that you see and hasn’t yet re-priced the stock. If anything, the stock price continues to go down, on average losing about 1% per month. The question is….why?

The answer has to do with TIMING. This has always been an issue with value investing. While we can identify significantly undervalued assets, thus far no one has been able to determine WHEN these assets will begin to appreciate again to reflect their true intrinsic value. As today’s value investors very well know such appreciation can happen at any time. As in the example above the stock price can start climbing tomorrow, a few months from now, a year from now or five years from now. It can also never climb again.

The old value investing mantra states that such a scenario is fine and that it shouldn’t matter. For as long as you buy a stock at a significant discount to its intrinsic value and hold it until the stock reaches that value or appreciates significantly enough, you should be fine. Yes, it could take a long time but your eventual capital gain and lower risk profile should make up for your “unknown holding period”.

I respectfully disagree. (To be continued…)

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October 17, 2013October 17, 2013

The Secret To Margin Of Safety

Margin of safety is one of the most important concepts in value investing and as such deserves a more in depth look and analysis.

As I have mentioned earlier in this book, your margin of safety is the difference between the price you pay for an asset and how much that asset is truly worth. Let’s take a quick look at another example for better understanding.

Imagine a suburban street with 3 identical houses on it. The house on the right sold a few months ago for $500,000 and the house on the left is on the market right now for $520,000. Yet, you are interested in the house in the middle. The previous owner has defaulted on the loan and the house is soon to be auctioned off. Your house is not in as good of a shape as the other two houses. In fact, it has been run down by the previous owner and you estimate that it will cost you about $75,000 to bring it back to the condition of the two adjacent houses.

On the day of the auction you are able to purchase the house for $150,000. With an additional $75,000 in repair costs, your true cost is $225,000. At the same time you know the true value of the house is about $500,000.

So, $500,000-$225,000=$275,000 Is Your Margin Of Safety

By definition, the $275,000 or 55% discount from the true value of the said house becomes your Margin Of Safety. It becomes your safety net to prevent any losses, it becomes your security blanket against adverse developments and it becomes your possible profit margin.

What if it takes $150,000 to fix everything up instead of $75,000. That’s fine you are still in the black. What if you find out that there is an additional $50,000 lean against the house? That’s fine, you are still in the black. Your margin of safety on this house will protect you against various unpleasant developments to the tune of $275,000. Yet, an important question still lingers.

Is the Margin Of Safety your insurance policy or is it your profit margin?

Well, it is both and that is why it is so important when it comes to value investing. First and foremost, margin of safety is your insurance policy. As Warren Buffett so famously said “Investing rule number one…never lose money. Investing rule number two…..never forget rule number one”. Basically, the margin of safety is there to protect you against any losses and unforeseen events.

We live in a complex world where your fundamental analysis will not always be right. You will not always be able to predict unforeseen or as insurance industry calls them “Act Of God Events”. Should such events occur your investment will have a large cushion built into it to protect you against significant losses.

It is only after acting as an insurance policy does Margin Of Safety becomes your profit margin. Technically speaking, your asset should appreciate to its true value. As with the real estate example above your margin of safety of $275,000 becomes your profit if/when you decide to sell the house. Yet, that is not always the case in the stock market. When we deal with publicly traded companies the situation becomes a lot more complex.

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October 14, 2013October 14, 2013

What Everyone Is Ought To Know About Value Investing

If you have spent any time in financial markets, you probably already know what Value Investing is. If you are new to investing, Value Investing is probably the easiest investment style to understand and apply towards your own investment purposes. Also, while debatable, some very successful investors have proven that Value Investing is one of the best ways to approach financial markets over the long term. Let me first illustrate what Value Investing is with a real world example.

Imagine that you are strolling through your local mall in the middle of July. The sun is scorching hot and you are just trying to stay cool. After your 3rd Caramel Frappuccino you decide to check out a nearby sports superstore. Shortly after you walk in you see something and you can’t believe your eyes. The snowboarding jacket you have always wanted, but were never able to afford is on sale. And not just any kind of a sale. It is a seasonal liquidation sale. Typically selling at close to $250 during the winter season it is now just $19.99.

You can’t believe how lucky you are. You check the jacket to make sure there is no big gaping hole in the back of it. Nope, everything looks fine. The size is just right. All zippers work and it’s the color you want. You are beyond excited. You found exactly what you wanted at over 90% discount to what it is really worth. The timing is not perfect and you can’t use it for the next 6 months, but you know with 100% confidence that you have found a deal of a life time. In 6 months this jacket will be selling at $200-250 again. Without a second of hesitation you take out your wallet and head towards the register.

Value Investing is just like that.

Except, instead of a jacket you are buying shares (or other financial instruments) in publicly traded companies. Basically, you do a lot of fundamental research to find companies that are selling well below their intrinsic or real value and then proceed to buy them at a significant discount. Typically 50-99% discount. The bigger the discount you can obtain the bigger your margin of safety is. In fact, margin of safety is one of the most important concepts when it comes to Value Investing.

Margin of safety is there to protect your capital. The theory suggest that if you buy stocks at deep enough discounts to their intrinsic value you have an automatic safety net built in. After all, no fundamental research can be 100% accurate and you need something to limit your downside risk. In such a case you are unlikely to lose a lot of money on your stock trade/investment because your investment is unlikely do decline that much further. Remember, it is already very cheap.

In essences you are buying $1 bills for $0.50 cents or less. Over time these assets “should” appreciate back to $1 to reflect their true value. Providing you with a large return on your investment while minimizing risk. Yet, as with anything, there are numerous issues associated with value investing. I will cover them in greater detail over the next few chapters.

For now, let me quickly summarize value investing in a five easy steps.

Do a lot of fundamental research to find deeply discounted stocks or other assets.
Buy such bargains or stocks at a significant discount to their intrinsic value. Typically a 50% or more discount is required. By buying at a significant discount you create a margin of safety.
Margin of safety is your best friend. Maximize it. It protects your capital by limiting the downside.
Patiently wait for asset appreciation to reflect its true value. Such periods can range from days to years.
Watch your investment like a hawk by constantly updating your fundamental research. Should any developments alter your original investment thesis, you should re-evaluate your investment decision.

That about covers it.

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