Thursday 28 February 2013

My Set of Rules from Reading the Books

A way to prosperity

This post is a little bit complicated to make. I will bring it into the regular flow of the text but it will also be placed on the side as its own page. The rules will also change of time. New will be added and old ones might even be removed if found useless.

Many investors, Warren Buffett especially, is frequently saying that the first rule is not to loose money. The second rule is never to forget the first rule. I would say that this is highly personality based. Do you care more about winning or do you care more about not loosing? I care about not loosing. However I do not see how a rule saying to not to loose money will help me be to make better investment. Maybe later on in life when I am older and wiser I will be able to create fewer rules which will only be the two ones above, since all the others will be so obvious to me, but I am far from that point and need to more strictly regulate myself and my way of acting.

My never list:

1. Never buy stocks in IPOs (initial public offerings) - You will not be able to buy them early enough and you will definately not be able to sell them soon enough. After the rush is over, if it is a good company, then there will be cheaper moments to buy a part of that company with a higher potential value increase without the risk of being too late in selling the stocks.
2. Never buy stocks during a litigation. The outcome is not clear and especially not how the market will respond to this outcome. There will be moments, once the litigation is over and if the company is good, to buy part of it at a reduced price.
3. Never bet real money on a new or old financial product just to see how it works. There are sufficient ways to be able to test the new products with virtual money and with virtual stock portfolios. Hopefully you will in the meantime learn how the product works AND hopefully the virtual portfolio will go bad. Problem might be that in a bullmarket every product works out... for some time...
4. Never buy stocks based on what your neighbour, colleague, hairdresser or the stockbroker said. Investigate the company they mentioned and make up your own mind. In a very high percentage these companies are pure speculation.
5. Never speculate but own the companies. Buy their products, try to go the shareholders meeting. If you cannot then at least try to vote (many times easy today due to internet). If there is something you do not like then send a suggestion to the shareholders meeting that you and the rest of the company owners can vote about.
6. Never pay high fees for your financial products. If you invest in an index fond then the maximum cost is 0.5% per year. Every percentage point fee eats up your profit.

When it comes to investments I must say that I am splitted. I have ended up using several different strategies for buying stocks which then also means that I have several different strategies for when to sell it. For that reason I will only put up some general matters here and then for each and every stock write the reasons for buying and when I will try to sell it. In many cases I try to combine as many of the parameters as possible for getting hopefully better companies in my portfolio.

My rules of Investing:

1. P/E below 10 besides from when it is a cyclic company having a very good year.
2. P/B below 1 because I want to get 1 euro for 50 cents if possible.
3. Company pushed down due to either temporary bad name or that the specific industrial group is pushed down. This can be due to that they have done bad business or that the industrial group is in the downside/bottom of the cycle.
4. High dividend payment that is not a one-time occassion. This leads to a very easy investment strategy especially in countries where they pay dividends each quarter.
5. Growth companies with high potential. Go to your local shopping mall and see where the people are going. Check out the finances of the company and if it is good then buy it.

My rules of Divesting:

1. A highly simplified version of Benjamin Grahams formula. When the company reaches P/E = 8.5+2*g (g =expected yearly growth in % for the next couple of years) then the company is close to its real value and it is time to consider a sale of the stock.
2. P/B reaches 1. This does not mean that the stock should be sold but now at least the market gives the company the same value as what is in the books. Based on industrial group different P/Bs are widely accepted and an acceptable P/B ratio should be set. Personally I always look at the combination of P/E and P/B which means that once P/B is reached I will look at the P/E before making a sale.
3. When the companies name/industrial group has been re-established on the market then consider a sale.
4. When the dividend payment drops below a %-age then sell it and buy a new high dividend paying stock. The dividend payment %-age varies widely between different countries therefore one must make a fixed value for each owned company bought according to that principle.
5. When people stop going to the store then start to consider to sell the stock.

What I try to accomplish is a bit of a contrarian strategy. I know that I am not clever enough to find all the advantages/disadvantages that companies might have in their books. Since I am not born in Germany I also do not have the gift of "circle of competence" meaning that I did not grow up with all these companies around me and therefore do not have the built in knowledge of if a company is good or bad and how long they have been either. I therefore must base things on other set of rules. I do however continously try to improve my knowledge about the German and other companies but I am still far, far away from any native German.

Final rule: If I do not beat DAX in 3 years time then 50% of my portfolio value will be relocated into an index fond. If I also do not beat DAX in 6 years then 75% of my portfolio value will be relocated into an index fond. If I after 9 years still are the big loser then I must accept that and shuffle all of it into a low cost  index fond. I will keep my fingers crossed!

1 comment:

Fredrik von Oberhausen said...

The books that I ended up reading can be found here and for the rules that are changing over time based on my new experiences can be found here