Taking advantage of volatility in the market
The stock market is controlled by people and, as a result, emotions. The two most prominent of these are fear and greed. Under their sway, the market makes very little sense in the short term. On the slightest news of a sales decline or the first glimmer of hope in a clinical trial for a new drug, a company's stock can plummet or skyrocket far beyond the ranges of reason and logic. The good news is, this volatility can make you very, very rich.
A stock market correction may be based on emotion, not logicPresume there is a bookstore in New York City that you wish to purchase. The store sells $300,000 worth of books annually and is quite profitable. This particular bookstore is painted a light shade of blue. Each morning, the investment banker representing the current owners comes to your office and offers to sell you the property for what he believes it is worth on that particular day.
On Monday, he comes and offers to sell you the business for $500,000. You refuse; overpaying for a business, even an excellent one, is always folly. On Tuesday, he stops by and offers the store to you for $800,000 because he believe bookstores that are painted blue are on the rise. Once again, you send him on his way.
On Wednesday, however, the banker arrives at your office in a panic. Apparently, a number of students at a local high school began to burn books en masse and he is gravely concerned the bookstore business will soon have no value. As a result, he offers to sell you the business for $50,000. Realizing that it is completely illogical to assume a book burning is going to have any effect whatsoever on long-term profits, you readily accept the deal and buy the company for a fraction of its intrinsic value.
"Well, I'd never get a deal that good!" you might say. You are presented with them every day! When a company's stock plummets, people often panic and sell. Unless the business is truly facing extinction or a drastic decrease in value, this is insane. If your favorite ice cream went on sale, would you wait until it had doubled in price before you bought it!? Why should your favorite stock be any different? Coca-Cola is certainly more attractive at $20 per share than it is at $50 per share, regardless of any short term difficulties that may arise. An investor should feel no shame in exploiting the folly of Mr. Market.
Stock market corrections are filled with opportunitiesTrue fortunes are made during times of economic distress or financial corrections. Only one year before he completed the formation of U.S. Steel (which financial historians have called the deal of the 20th century), J.P. Morgan said that such a feat could never be accomplished by any man - until the markets crashed. The depressed valuations of the companies involved allowed him to purchase the business entities at a fraction of what they had been selling for twelve months earlier.
The next time the market is cut drastically to its knees, look around for the great, solid, blue chip companies that have weathered depressions countless times before. The odds are substantial they will be selling at discount prices, and when the market finally does recover (which it inevitably will), your portfolio will profit from the shrewd, logical investment decisions you made while the investing public was in a panic. The secret to wealth has always been to "buy when there's blood running in the street and sell when everyone is pounding at your door, clawing to own your equities." You must have enough faith in yourself to buy when the rest of the market is selling. Most people don't have the self-confidence and resolve to do so, and always end up following the crowd.
Remember, just because you follow the majority of people, doesn't mean the majority of people aren't wrong. That's why 95% of investors aren't driving Mercedes and living in Key West three months out of the year. Base your decisions on analysis and value and you will, more often than not, come out ahead.
Article source written by, Joshua Kennon (Beginner's Investing Guide)
Friday, July 4, 2008
The Investor's Manifesto
18 traits and practices that lead to investing success
Most successful investors exhibit certain traits, beliefs and characteristics. This is a compilation of those attributes I call the investor's manifesto. Not only can the investor's manifesto help you make the most of your money, it can help you enjoy your life.
1.) I am not afraid to take risks if fairly compensated.
2.) My family and friends are more important than my portfolio.
3.) I refuse to be a victim. If my boss will not promote me, I will work, save, and invest to make my own pay raise.
4.) I understand the difference between price and value. Price is what you pay. Value is what you get.
5.) I don't own a piece of stock; I own part of a business.
6.) I understand the importance of financial advisors. Unless I plan on devoting large amounts of time to studying the art of successful investing, I will seek their advice.
7.) I put money away on a regular basis, whether it be every week, month, or quarter.
8.) I invest in myself. Every day, I learn something new. It can be taking classes at the local college, studying art, or learning a new job skill. I am my most valuable investment.
9.) I understand that the most important part of the wealth equation is time. One dollar invested tomorrow is not worth nearly as much as one invested today.
10.) I don't feel the need to brag about my wealth.
11.) In my mind "short-term" is at least five years.
12.) I understand that checking the price of my investments on an hourly or daily basis is unnecessary and a waste of my time. As long as the fundamentals of the company have not changed, the day to day fluctuations in price do not bother me.
13.) My time is one of the most valuable assets I have. Therefore, I use it wisely.
14.) Every year, I read the 10K and annual report of each company in which I have an investment.
15.) I never put money into a company unless I understand the business, am certain it is selling at a substantial discount to its conservatively estimated intrinsic value, I have personal motivations (e.g., someone in which I have great faith, boasts unquestionable integrity and a long history of business success has taken over a company that is reasonably priced), or I am engaged in an arbitrage operation. If none of these is true, I invest in equities by purchasing low-cost index funds via a dollar-cost averaging plan.
16.) I know that investing without research is gambling.
17.) I understand that over time, those who choose the buy-and-hold method outperform those who frequently trade.
18.) Unless the income from my investments (i.e., dividends and interest) are absolutely necessary to maintain my lifestyle, I reinvest them. I understand the power of compounding will cause these seemingly small amounts to increase the value of my portfolio several times over if given enough time.
Most successful investors exhibit certain traits, beliefs and characteristics. This is a compilation of those attributes I call the investor's manifesto. Not only can the investor's manifesto help you make the most of your money, it can help you enjoy your life.
1.) I am not afraid to take risks if fairly compensated.
2.) My family and friends are more important than my portfolio.
3.) I refuse to be a victim. If my boss will not promote me, I will work, save, and invest to make my own pay raise.
4.) I understand the difference between price and value. Price is what you pay. Value is what you get.
5.) I don't own a piece of stock; I own part of a business.
6.) I understand the importance of financial advisors. Unless I plan on devoting large amounts of time to studying the art of successful investing, I will seek their advice.
7.) I put money away on a regular basis, whether it be every week, month, or quarter.
8.) I invest in myself. Every day, I learn something new. It can be taking classes at the local college, studying art, or learning a new job skill. I am my most valuable investment.
9.) I understand that the most important part of the wealth equation is time. One dollar invested tomorrow is not worth nearly as much as one invested today.
10.) I don't feel the need to brag about my wealth.
11.) In my mind "short-term" is at least five years.
12.) I understand that checking the price of my investments on an hourly or daily basis is unnecessary and a waste of my time. As long as the fundamentals of the company have not changed, the day to day fluctuations in price do not bother me.
13.) My time is one of the most valuable assets I have. Therefore, I use it wisely.
14.) Every year, I read the 10K and annual report of each company in which I have an investment.
15.) I never put money into a company unless I understand the business, am certain it is selling at a substantial discount to its conservatively estimated intrinsic value, I have personal motivations (e.g., someone in which I have great faith, boasts unquestionable integrity and a long history of business success has taken over a company that is reasonably priced), or I am engaged in an arbitrage operation. If none of these is true, I invest in equities by purchasing low-cost index funds via a dollar-cost averaging plan.
16.) I know that investing without research is gambling.
17.) I understand that over time, those who choose the buy-and-hold method outperform those who frequently trade.
18.) Unless the income from my investments (i.e., dividends and interest) are absolutely necessary to maintain my lifestyle, I reinvest them. I understand the power of compounding will cause these seemingly small amounts to increase the value of my portfolio several times over if given enough time.
3 Fundamental Truths: Dealing with Capital Losses
Falling stock prices are sometimes a hard pill to swallow but long-term investors shouldn't be concerned
Many investors have a hard time dealing with falling stock prices but for the wrong reasons. No matter how often you preach the virtues of the buy-and-hold method, the true test of courage comes when you watch your holdings nose dive twenty percent in one afternoon.
Anyone who has been through a bear market knows that it takes tremendous discipline and dedication to stick to your guns while everyone else liquidates their holdings. Plagued by images of depression, recession, and corporate layoffs, manic Wall Street becomes a breeding ground for chaos and faulty logic. Perfectly good companies begin selling for fractions of their true value, despite a lack of change in the long-term economics of the business.
Article source written by, Joshua Kennon (Beginner's Investing Guide)
Here are three fundamental truths that will help you deal with short-term market losses.
Truth One: You own a business, not a stock
What you are holding in your portfolio is a piece of a business, not a stock. Investors who purchase shares of stock simply because they are going "up" or are going to be the "next big thing" are essentially gamblers. They buy a commodity with the belief (rational or not) that the next person in line will pay a higher price for it than they did. The problem is, this cycle can't go on forever, and at some point, someone is going to look around, realize what happened, and bail ship.
In order to be a successful investor you must do two things. First, remove all emotions from each of your financial decisions. Romeo and Juliet were terrific lovers, but not very logical people (and look where that got them). Letting your heart and emotions impact your actions is foolish in most circumstances, deadly in economic ones. Second, learn to separate the underlying business from the stock price; they are not the same thing (read that again). You've heard it said a million times; even a great company is a lousy investment if you pay too much for it.
Truth Two: If you are a long-term investor, falling prices are a blessing
The only time a bear market is bad for you is when you need your money immediately. For those who are investing with a time frame of ten or more years, declining prices represent only one thing: the opportunity to buy more of their favorite company at a lower price. It's kind of like a giant garage sale where the lady of the house decides she wants new drapes and, as a result, decides to sell all of her living room furniture for half price. It doesn't have to make sense to the buyer. Indeed, a smart one would jump at the opportunity. All too often, investors try to convince the woman that she shouldn't be selling her coffee table to them for so cheap.
Truth Three: It doesn't matter
Most of the investment crowd will fight it, but it's true. In the end, your pocketbook really isn't what matters. Think back to the time before you owned any investments. You were still alive then, right? You could still have a good time? You still had friends?
Money is literally a piece of colored paper with the picture of a dead person on it. Bottom line. Society has assigned value to it, so we accept it, and it can be a very powerful tool in our lives.
You must never make it an end unto itself. Wealth can never be the "goal". It is the means by which we accomplish things. It's like owning a hammer - no sane person wants to own the hammer for the sake of "owning it" - they want it for what it can do. It can build and create.
That's the goal of prosperity; to attain the financial freedom to provide a better life for yourself, your family, and everyone with whom you come in contact. If you make the pursuit of riches your highest goal in life, you will feel miserable and empty.
Your blessings, gifts, and finances only realize their true value when you give them. The guaranteed way to feel wealthier is to give what you already have. You see the joy it can bring others. The feeling of generosity and happiness that comes with giving is true wealth.
Many investors have a hard time dealing with falling stock prices but for the wrong reasons. No matter how often you preach the virtues of the buy-and-hold method, the true test of courage comes when you watch your holdings nose dive twenty percent in one afternoon.
Anyone who has been through a bear market knows that it takes tremendous discipline and dedication to stick to your guns while everyone else liquidates their holdings. Plagued by images of depression, recession, and corporate layoffs, manic Wall Street becomes a breeding ground for chaos and faulty logic. Perfectly good companies begin selling for fractions of their true value, despite a lack of change in the long-term economics of the business.
Article source written by, Joshua Kennon (Beginner's Investing Guide)
Here are three fundamental truths that will help you deal with short-term market losses.
Truth One: You own a business, not a stock
What you are holding in your portfolio is a piece of a business, not a stock. Investors who purchase shares of stock simply because they are going "up" or are going to be the "next big thing" are essentially gamblers. They buy a commodity with the belief (rational or not) that the next person in line will pay a higher price for it than they did. The problem is, this cycle can't go on forever, and at some point, someone is going to look around, realize what happened, and bail ship.
In order to be a successful investor you must do two things. First, remove all emotions from each of your financial decisions. Romeo and Juliet were terrific lovers, but not very logical people (and look where that got them). Letting your heart and emotions impact your actions is foolish in most circumstances, deadly in economic ones. Second, learn to separate the underlying business from the stock price; they are not the same thing (read that again). You've heard it said a million times; even a great company is a lousy investment if you pay too much for it.
Truth Two: If you are a long-term investor, falling prices are a blessing
The only time a bear market is bad for you is when you need your money immediately. For those who are investing with a time frame of ten or more years, declining prices represent only one thing: the opportunity to buy more of their favorite company at a lower price. It's kind of like a giant garage sale where the lady of the house decides she wants new drapes and, as a result, decides to sell all of her living room furniture for half price. It doesn't have to make sense to the buyer. Indeed, a smart one would jump at the opportunity. All too often, investors try to convince the woman that she shouldn't be selling her coffee table to them for so cheap.
Truth Three: It doesn't matter
Most of the investment crowd will fight it, but it's true. In the end, your pocketbook really isn't what matters. Think back to the time before you owned any investments. You were still alive then, right? You could still have a good time? You still had friends?
Money is literally a piece of colored paper with the picture of a dead person on it. Bottom line. Society has assigned value to it, so we accept it, and it can be a very powerful tool in our lives.
You must never make it an end unto itself. Wealth can never be the "goal". It is the means by which we accomplish things. It's like owning a hammer - no sane person wants to own the hammer for the sake of "owning it" - they want it for what it can do. It can build and create.
That's the goal of prosperity; to attain the financial freedom to provide a better life for yourself, your family, and everyone with whom you come in contact. If you make the pursuit of riches your highest goal in life, you will feel miserable and empty.
Your blessings, gifts, and finances only realize their true value when you give them. The guaranteed way to feel wealthier is to give what you already have. You see the joy it can bring others. The feeling of generosity and happiness that comes with giving is true wealth.
7 Rules of Wealth Building
Most parents want to teach their children responsibility - how to become self sufficient and succeed in life (after all, no one plans on raising a dead beat). However, very few actually accomplish this task. Why? Because, as parents, we are limited to the experiences our parents passed on to us; the antiquated notion that "responsibility" is simply getting a job, saving a little money, and maybe purchasing a car or some equally important item. Hopefully these seven rules will open your eyes and help you teach your children to avoid the traps that have stolen financial success from so many people.Wealth Building Rule 1: Put Off Marriage
Your biggest obstacle to attaining wealth is YOU. Too often, people live their lives in a manner that is not conducive to creating riches and then get frustrated at "the system" when they only really have themselves to blame.
One of the most important financial decisions you will ever make is marriage (more specifically who you marry and when). By putting off the walk down the aisle for a few years, you can save a decade worth of frustration. Your first goal should be to become financially independent, with little or no debt, and have your investments in place. Once you have these three things, your odds of success are drastically improved by beginning your journey on a level playing field (after all, the number-one reason for divorce is financial trouble).
Wealth Building Rule 2: Debt is a Disease
With a few notable exceptions, debt is a form of bondage; a disease that enslaves the borrower. A few years ago, there was a young lady attending college who shot herself because she couldn't pay back $2,300 in credit card debt. Although an extreme example, it is a testament to the power money has over peoples' lives. Imagine your life without owing anyone anything; your car, your house, your education, all paid for in full. Like what you see? When you want it badly enough, you will make extinguishing your debt your number one priority.
Wealth Building Rule 3: If You Don't Like Where your Parents Were at Your Age - Do Things Differently
The old cliché that "insanity is doing the same thing over and over expecting different results," holds just as true today as it did when it was originally written. If you don't like where your parents were at your age, stop what you are doing. During your childhood, they taught you all they knew about money. For many people, these early years established how they feel about their finances today. In order to become financially successful, you must do something different than they did. Otherwise, you will end up exactly as they are.
Wealth Building Rule 4: When you Begin a Job, Look at the Pay of the Highest Employee
Whether you are looking for employment now or are thinking about it sometime in the near future, one of the most important things for you to do is to look at what the top-dog gets at any company for which you are considering working. This will give you an idea of how high you can expect to climb in terms of earnings and promotion. If the CEO is making $30,000 a year, you have no chance to make six figures. Select a job accordingly.
Wealth Building Rule 5: Do Something You Love and Get Paid for It
I remember going into college and being surrounded with people who wanted to be artists, scientists, and businessmen, but instead did what their parents or grandparents told them to do. There is no honor in being a doctor or a lawyer if you wake up every morning and hate your job. Pick a profession you love and you'll never have to work a day in your life.
Wealth Building Rule 6: Understand the Money Myth
Money is nothing more than a piece of paper with the image of a long-dead person on it. When you understand that any power it has over you is derived from your relationship with it, you suddenly become free from the constant pressures and stress of thinking about it. Especially at times such as these, if you are putting money away for ten, fifteen, or twenty years down the road, stop checking your portfolio every day! There is nothing you can gain from it except stress.
Wealth Building Rule 7: Your New Commodity is Not Your Labor, It's Your Ideas
With the advent of the Internet and other technological advances, you are no longer limited to supporting yourself or making a living by your physical labor. The only limit you have on yourself now is your own imagination - your ideas are the most valuable thing you possess. Every man, woman, and child is a salesman for a living; if you don't own a business or investments, then you sell your manual labor to a company in exchange for a paycheck. Change your product. The gap between the rich and poor does indeed grow larger with each passing year, but not because of inequalities or any other such injustices. Instead, it is because the rich understand money and how to use it. Capital is literally a seed; learn how to plant it to produce the best harvest. When you do this, you will rule your finances, not the other way around.
Article source written by, Joshua Kennon (Beginner's Investing Guide)
How to Become Wealthy
1: Change the Way You Think About MoneyThe general population has a love / hate relationship with wealth. They resent those who have it, but spend their entire lives attempting to get it for themselves. The reason a vast majority of people never accumulate a substantial nest egg is because they don't understand the nature of money or how it works.
Cash, like a person, is a living thing. When you wake up in the morning and go to work, you are selling a product - yourself (or more specifically, your labor). When you realize that every morning your assets wake up and have the same potential to work as you do, you unlock a powerful key in your life. Each dollar you save is like an employee. Over the course of time, the goal is to make your employees work hard, and eventually, they will make enough money to hire more workers (cash). When you have become truly successful, you no longer have to sell your own labor, but can live off of the labor of your assets.
2: Develop an Understanding of the Power of Small Amounts
The biggest mistake most people make is that they think they have to start with an entire Napoleon-like army. They suffer from the "not enough" mentality; namely that if they aren't making $1,000 or $5,000 investments at a time, they will never become rich. What these people don't realize is that entire armies are built one soldier at a time; so too is their financial arsenal.
A friend of mine once knew a woman who worked as a dishwasher and made her purses out of used liquid detergent bottles. This woman invested and saved everything she had despite it never being more than a few dollars at a time. Now, her portfolio is worth millions upon millions of dollars, all of which was built upon small investments. I am not suggesting you become this frugal, but the lesson is still a valuable one. Do not despise the day of small beginnings!
3: With Each Dollar You Save, You Are Buying Yourself Freedom
When you put it in these terms, you see how spending $20 here and $40 there can make a huge difference in the long run. Since money has the ability to work in your place, the more of it you employ, the faster and larger it will grow. Along with more money comes more freedom - the freedom to stay home with your kids, the freedom to retire and travel around the world, or the freedom to quit your job. If you have any source of income, it is possible for you to start building wealth today. It may only be $5 or $10 at a time, but each of those investments is a stone in the foundation of your financial freedom.
4: You Are Responsible for Where You Are in Your Life
Years ago, a friend told me she didn't want to invest in stocks because she "didn't want to wait ten years to be rich..." she would rather enjoy her money now. The folly with this school of thinking is that the odds are, you are going to be alive in ten years. The question is whether or not you will be better off when you arrive there. Where you are right now is the sum total of the decisions you have made in the past. Why not set the stage for your life in the future right now?
5: Instead of Buying the Product... Buy the Stock!
Someone once asked me why they weren't wealthy. They always felt like they were putting money aside, yet never seemed to get any further ahead. The answer is simple. I told them to stop buying the products companies sell and start buying the company itself! A survey of America's affluent (those who make over $225,000 a year or own $3,000,000 in assets) revealed that 27-30% of all the income the wealthy earned went into investments and savings. That isn't a result of being rich, that is why they are rich. When the pain of getting out of the bondage of financial slavery is greater than the pain of changing your spending habits, you will become rich. Either change, or be content to live as you are.
6: Study and Admire Success and Those Who Have Achieved It... Then Emulate It
A very wise investor once said to pick the traits you admire and dislike the most about your heroes, then do everything in your power to develop the traits you like and reject the ones you don't. Mold yourself into who you want to become. You'll find that by investing in yourself first, money will begin to flow into your life. Success and wealth beget success and wealth. You have to purchase your way into that cycle, and you do so by building your army one soldier at a time and putting your money to work for you.
7: Realize that More Money is Not the Answer
More money is not going to solve your problem. Money is a magnifying glass; it will accelerate and bring to light your true habits. If you are not capable of handling a job paying $18,000 a year, the worst possible thing that could happen to you is for you to earn six figures. It would destroy you. I have met too many people earning $100,000 a year who are living from paycheck to paycheck and don't understand why it is happening. The problem isn't the size of their checkbook, it is the way in which they were taught to use money.
8: Unless Your Parents Were Wealthy, Don't Do What They Did
The definition of insanity is doing the same thing over and over again and expecting a different result. If your parents were not living the life you want to live then don't do what they did! You must break away from the mentality of past generations if you want to have a different lifestyle than they had.
To achieve the financial freedom and success that your family may or may not have had, you have to do two things. First, make a firm commitment to get out of debt. To find out which debts should be paid off before you invest and those that are acceptable, read Pay Off Your Debt or Invest?. Second, make saving and investing the highest financial priority in your life; one technique is to pay yourself first.
Purchasing equity is vital to your financial success as an individual whether you are in need of cash income or desire long-term appreciation in stock value. Nowhere else can your money do as much for you as when you use it to invest in a business that has wonderful long-term prospects.
9: Don't Worry
The miracle of life is that it doesn't matter so much where you are, it matters where you are going. Once you have made the choice to take control back of your life by building up your net worth, don't give a second thought to the "what ifs". Every moment that goes by, you are growing closer and closer to your ultimate goal - control and freedom.
Every dollar that passes through your hands is a seed to your financial future. Rest assured, if you are diligent and responsible, financial prosperity is an inevitability. The day will come when you make your last payment on your car, your house, or whatever else it is you owe. Until then, enjoy the process.
Article source written by, Joshua Kennon (Beginner's Investing Guide)
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