Your investment policy and what it entails
Mr Market, volatility, advisors....
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Every day, learn to master your finances and live fully.May this new year bring you success, prosperity, and fulfillment in all your endeavors, whether personal or financial. May it be marked by wise decisions, sound investments, and flourishing health. 🌟
Happy New Year 2025! 🎉
Day 3:
Chapters 7 to 9
Key Points:
Choose quality stocks from well-established companies with financial stability.
Select companies with a stable dividend history of at least 20 years.
Focus on companies with consistent and predictable earnings over the past ten years.
Look for companies with moderate price/earnings (P/E) ratios, ideally a maximum of 25 times the average earnings of the past seven years.
Avoid speculative sectors and favor established sectors with proven track records.
Diversify your portfolio with 10 to 30 different stocks spread across various sectors to minimize risks.
Carefully analyze buying opportunities by focusing on undervalued companies.
Differentiate growth stocks from value stocks and understand their respective dynamics.
Set limits to protect against losses and maximize gains, including the use of stop-loss orders.
Learn to read and interpret financial statements to assess a company's health.
Use key ratios to analyze the performance and viability of potential investments.
Understand market trends and their impact on investment decisions.
Regularly rebalance your portfolio to maintain the desired asset allocation.
Explore alternative investments, such as real estate and commodities, to diversify and potentially improve returns.
Actively monitor the market, identify buying and selling opportunities, and adjust your portfolio according to changing market conditions.
Chapter 7: Portfolio Policy for the Enterprising Investor – The Opportunity for Superior Performance
In this chapter, Benjamin Graham explores the strategies that the enterprising investor can use to achieve superior returns.
Unlike the defensive investor, who prioritizes safety and stability, the enterprising investor is willing to dedicate more time and effort to their investments and take calculated risks to maximize gains.
In-depth Security Analysis
Graham emphasizes the importance of detailed financial analysis of the companies in which to invest.
This includes a thorough examination of financial statements, management quality, the company's competitive position, and general market conditions.
For example, the investor might analyze a company's financial reports to identify signs of undervaluation, such as a low price/earnings (P/E) ratio or strong revenue growth that is not yet reflected in the stock price.
Analysis enables more informed investment decisions and the identification of market opportunities.
Special Situations
Graham recommends seeking unique investment opportunities, such as mergers, acquisitions, restructurings, or other corporate events that can offer exceptional opportunities.
For example, if a large company announces a merger with another company, the target company's shares may be undervalued by the market.
The enterprising investor can buy these shares in anticipation of a price increase once the merger is completed.
Merger Arbitrage
This strategy involves buying the shares of a target company in a merger or acquisition at a price lower than the final acquisition price and profiting from the price difference once the transaction is completed.
For example, if a company announces it will acquire another company for $50 per share, but the target company's shares are currently trading at $45, the enterprising investor can buy the shares and realize a profit once the transaction is finalized at $50 per share.
Investment in Undervalued Securities
Graham advises investing in securities that the market has temporarily overlooked but that have solid fundamentals.
For example, a company may have temporarily poor results due to external factors, but if its fundamentals are solid and its long-term prospects remain positive, the enterprising investor can buy its shares at a reduced price in anticipation of a recovery.
These securities often offer capital appreciation opportunities.
Active Trading
Unlike the defensive investor who adopts a buy-and-hold approach for the long term, the enterprising investor can engage in more active trading to take advantage of short-term price fluctuations.
For example, the investor can buy shares after a significant price drop due to temporary negative news and then sell them once the price has recovered.
However, Graham warns against excessive trading, which can lead to high transaction costs and reduce overall returns.
Portfolio Monitoring and Adjustment
The enterprising investor must regularly monitor their investments and adjust their portfolio according to market changes and company performance.
For example, if a stock held in the portfolio becomes overvalued according to the investor's criteria, they can sell it and reinvest the funds in another undervalued opportunity.
This proactive approach allows for maximizing gains and minimizing risks.
Graham insists that superior returns can only be achieved with constant effort and a rigorous analytical approach. By integrating these strategies and staying vigilant, the enterprising investor can seize opportunities that the broader market may overlook.
Chapter 8: The Investor and Market Fluctuations
In this chapter, Benjamin Graham explores how investors can navigate and take advantage of market fluctuations without being emotionally affected by them.
He introduces the concept of "Mr. Market," a metaphor for the irrational and capricious forces that influence stock prices.
Understanding "Mr. Market"
Graham describes "Mr. Market" as an imaginary partner who offers to buy or sell stocks at varying prices each day.
Sometimes, "Mr. Market" is euphoric and offers very high prices, while other times, he is depressed and offers very low prices.
Graham emphasizes that the investor should see "Mr. Market" as a servant and not as a guide.
The rational investor uses "Mr. Market's" offers to take advantage of buying opportunities when prices are low and to sell when prices are high without being influenced by emotions.
Volatility as an Opportunity
Graham emphasizes that market fluctuations should not be feared but rather seen as opportunities.
Investors should take advantage of price drops to buy quality stocks at reduced prices and sell when prices are excessively high.
It is crucial to maintain a long-term perspective and not be swayed by short-term market movements.
Investors should remain faithful to their fundamental investment principles and use market fluctuations to their advantage.
Buy and Hold
Graham recommends a buy-and-hold approach, where investors purchase quality stocks and hold them for the long term, using market fluctuations to adjust their positions.
This strategy allows investors to avoid common mistakes related to market timing and reduce transaction costs.
By focusing on the fundamentals of companies and maintaining a long-term vision, investors can overcome market volatility and achieve their financial goals.
Maintaining Discipline and Patience
Discipline and patience are essential for successful investing.
Graham emphasizes that investors should remain calm and rational in the face of market fluctuations, avoiding impulsive decisions based on emotions.
By maintaining a disciplined approach and being patient, investors can take advantage of the opportunities created by market fluctuations without being carried away by the ups and downs.
Steps to Follow
Graham recommends that investors set clear criteria for their buy and sell decisions, based on rigorous fundamental analysis.
They should also regularly reassess their portfolios to ensure that their investments remain aligned with their long-term goals.
By following a systematic approach and remaining faithful to their investment principles, investors can effectively manage market fluctuations and achieve superior returns.
Chapter 9: The Investor and Financial Advisors
In this chapter, Benjamin Graham addresses the relationship between investors and their financial advisors, offering advice on how to choose a competent advisor and highlighting the importance of cooperation and communication between the investor and the advisor.
Choosing a Competent Financial Advisor
Graham begins by emphasizing the importance of choosing a competent and trustworthy financial advisor.
He recommends looking for advisors with solid financial training, a good reputation, and significant experience in the investment field.
For example, an advisor with professional qualifications such as the Chartered Financial Analyst (CFA) or the Certified Financial Planner (CFP) can be a good indicator of competence.
Graham also advises checking the advisor's background to ensure that they have no major disputes or complaints against them.
Assessing the Advisor's Motivations
It is crucial to understand the financial advisor's motivations.
Graham warns against conflicts of interest that may arise if the advisor receives commissions or incentives for recommending certain financial products.
For example, an advisor who only offers investment funds from their own firm may not act in the best interest of the investor.
Graham recommends choosing an advisor whose compensation is aligned with the investor's interests, such as fees based on a percentage of assets under management rather than transaction commissions.
Communication and Cooperation
Graham stresses the importance of clear and open communication between the investor and the financial advisor.
It is essential for the investor to transparently express their goals, expectations, and risk tolerance.
For example, if an investor prefers a conservative approach with a low-risk tolerance, the advisor should be informed to align recommendations accordingly.
Cooperation between the investor and the advisor is essential to develop an investment strategy that aligns with the investor's long-term financial goals.
Avoiding Advice Based on Market Forecasts
Graham warns against financial advisors who base their recommendations on short-term market forecasts.
He emphasizes that no one can accurately predict market movements, and investment decisions should not be influenced by speculations about market fluctuations.
For example, an advisor who recommends selling all stocks in anticipation of an imminent recession could encourage the investor to make impulsive and potentially disastrous decisions.
Graham encourages investors to focus on fundamentals and adopt a long-term perspective.
Roles and Responsibilities of the Advisor
Graham also discusses the roles and responsibilities of the financial advisor.
He explains that the advisor should provide informed advice based on a thorough analysis of the investor's finances and market conditions.
The advisor should also help the investor remain disciplined and avoid impulsive decisions based on emotions.
For example, a good advisor will remind the investor of the importance of diversification and asset allocation, even when markets are volatile.
Monitoring and Adjusting the Investment Strategy
Finally, Graham emphasizes the importance of regularly reassessing the investment strategy based on changes in financial goals, personal circumstances, and market conditions.
The financial advisor should help the investor adjust their portfolio to ensure it remains aligned with their long-term goals.
For example, if the investor's goals change due to new life circumstances, such as retirement or buying a home, the advisor should adapt the investment strategy accordingly.
That’s a wrap for today !
See you tomorrow!
NID Wawzgit
(P.S.: As usual, if you want to chat, my LinkedIn is open 👋)
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DISCLAIMER: None of this constitutes financial advice. This information is strictly educational and does not constitute investment advice or a solicitation to buy or sell assets or make financial decisions. Be cautious and do your own research