Watch List

High Dividend Appreciation Firms: AT&T Johnson and Johnson All State(?) Norfolk Southern? Bank of America, Nike, ConocoPhilips, Eli Lilly,Paychex, Avon Products
Other Watch Lists: Disney Verizon Apple Costco

Long Term vs Short Term Investing

Peter L Bernstein: Long term returns are more uncertain than short term despite the conventional wisdom that short term returns are more volatile.
e.g.$100 invested today could become $90 or $110 in 1 year if we say that 1 year time frame is very volatile and could produce returns from -10% to 10% (high std deviation). Now same $100 over a longer 15 year term could produce $207 for 5% returns and $417 for 10% returns. Thus long term, despite having small standard deviation compared to short term, results in a much larger "spread" in total $ returns. (20% spread in ST vs 200% in LT).
Now What?: To bring down the uncertainty over long term, focus on not only "stock price appreciation" but also on "income appreciation (dividends)". Dividends greatly reduce the uncertainty over long term.
e.g. $100 invested in a dividend paying stock in 1925 ,which let's assume had 0 price appreciation, would have produced higher annual returns upto 1965 (!!!!) compared to a high growth no dividend stock. Only after 1965, Price appreciation would take over Income appreciation!
So: morale of the story is, long term returns is a relative term depending on your time horizon. Whatever be the horizon, focusing on stocks that can pay you steadytream of dividends will help reduce the uncertainty invovled.
And: Another key point is, dividend yield will keep going up for you with every passing year.
e.g. if GE pays 5% dividend every year, then $100 invested today become $105 next year. Let's say stock appreciated to $105 at5% growth. Next year GE dividend will be 5% of $105, the then stock price. Your dividend yield is still based off of $100 you invested and hence is 10.25% next year (1.05*$105 = $110.25)! Think about this over a 10 year, 20 year time frame. The dividend yield appreciation combined with moderate price appreciation is a winning combination. One might think this is similar to a compound interest in a bank account. But no. In a bank account your base will remain $100 forever unless you reinvest the interest you receive every year. In our example, we are not reinvesting the $5 dividend we received in year 1. It's the price appreciation that really does the trick which in a bank account would never happen. The underlying asset of $100 will remain $100 if the interest is not reinvested.

Most recycled material

Steel is more recycled than 4 times (glass+plastic+ aluminum)! ...Surprising ha? But Steel stocks get dumped every time there is sign of recession. Besides, emerging coutnries dump a lot of cheap steel in US.

Pearls of Wisdom

Warren Buffet (Oracle of Omaha): Don't pay too much for any stock. P/E ratio, P/B ratio and ROE are critical indicators for Buffet. We pay for businesses we feel good about owning by tracking management performance and business performance over a long 5 -10 year horizon.
Jim Rogers: He invested in countries! Went against the tide and invested in Lebanon and made a killing. He suggested to carefully listen to media and TV. He suggests tricks to spot tops and bottoms. Tops: trees will keep growing up and up. Bottoms: media declaring 'stocks are dead'. Fortunes can be made by timing these tops and bottoms but it can be done. Note that all large bottoms and tops are alike. Look in history and you will see very similar patterns. At bottoms, many who have been in business for a long time will leave or diversify. At tops, companies with no experience will also crowd in. The key is not to be a market genius but a market observer and thinker.
Peter Lynch (Fidelity): Buy things close to your home. The edge you get from buying companies you know (such as company where you work, who you do daily business with, who your kids love eating at etc) is much higher than even most informed stock market investors. Lynch bought things like Taco Bell, ADP etc. He seemed to stay away from tech stocks. He ran the famous Fidelity Magellan fund.
John Bogle (Vanguard): Active investing is a fool's play. Use market indices to play the market. Use various sector indexes for diversification. Active investing
One more wise guy:
Stock market has ups and downs because investors exhibit irrational exhuberance (Alan Greenspan's term) on the way up and down. That's why if you play a contrarian...when market and everyone is saying up ..up and above, you start selling...when everyone is saying this is the worst market, don't get in ...you start buying. "If you want to be with the crowd, you need to be cautious. If you are going against it, you need to be bold". Learning to analyze market opinion from TV and Newspaper news and then taking an opposite view has worked great for him.
Henry Markovitz : Markets are efficient and every investor should try to buy portfolio on the efficient frontier which is consistent with his risk levels. It pays to follow mean variance optimized (MVO) portfolios.

Bear Market Over??

At Least Cramer thinks so....as of 24th March!

Key Redings

Investor's Business daily: good stock analysis although more focused on technical analysis.
Blog: Three Cents , Hingefire

Spotting Stock Bottoms and Tops

Taking a leaf out of Jim Cramer's book:

Spotting Stock Tops (time to sell):

1. Every analyst has buy rating on the stock. Somebody has to be able to bring the bearish sentiment. Let that be you.
2. When you feel you have made a lot of money in a stock and it has had a great rally, get circumspect and think of the top. No stock would keep going on and on in the upward direction. Very few analysts on street talk about tops...they don't want to. That's the behavioral bias...unrealistic optimism.
3. If you follow fundamental analysis and pick a stock with low PE and that stock rallies up and goes to become a high PE, may be it's time not to keep holding but to get off - at least some.
4. Monitor the entire sector and watch out for Competition. Competition can come from anywhere and can destroy stocks. People like Cramer spend an hour studying competition every week.
5. Accounting irregularities = Sell ....no matter what...no exceptions! Numbers are fraud..(option backdating is a compensation issue not an accounting issue..option backdating might be a sign to buy actually)
6. Overexpansion: acquisitions, too many store openings, too much growth that can't be managed. (key word: "Integration Problems")
7. Government Intervention

Spotting a bottom

1. market sentiment must be bad. Front page of NYTime (right top corner) has mail letters from people talking all negative.
2. Wendesdays - investor's intelligent survey of money managers. If there are too many bears there.
3. Mutual funds pulling out of market in a significant way
4. Big bottoms have a catalyst usually ..market sentiment in gutter....you get some bad news in the market that has widespread effect on market. (e.g days before Iraq war..uncertainty is not good for investors and hence market reaches a bottom)

Spotting Sector Rotations

Cyclical: Airlines, Auto, Raw Materials, Consumer Durables (washing machines),

Secular: utlities such as P&G and General Mills

When economy is growing, buy seculars and sell cyclicals. When economy is in gutter, buy cyclcial and sell seculars.

Earnings Revisions

Spot earnings revisions by analysts before they do. Read the news...follow suppliers. If Intel's doing well, AMAT should be expected to do well.