Tool Kit | wealthymatters

5 Ways To Lose Money On Stocks

March 7, 2011 Leave a comment

Here are 5 situations that Whitney Tilson lists where investors can lose money:

1. The game has changed.Bargain Hunters and Bottom Fishers Beware!There’s a fine line between opportunity and trouble when a once-strong business goes into decline.

2. High and rising debt. Value investors are naturally drawn to companies in trouble — that’s what makes stocks cheap if the difficulties prove to be temporary. But too much debt can ruin even the best-planned turnaround.

3. Consumer fads. When investors extrapolate far into the future what are highly likely to be impossible-to-maintain growth levels, trouble follows.

4. Serial acquirers or mega-acquisitions. Given the research showing that a significant majority of acquisitions are value destroyers for the buyers, it’s remarkable how frequently investors get excited about roll-up stories or big acquisitions.

5. Aggressive accounting. The gray areas in accounting leave managements considerable leeway in how aggressively or conservatively to represent company operations. When a company’s accounting treatment creates more questions than answers, something is usually wrong.

Filed under Paper Assets, Theory, Tool Kit Tagged with accounting, acquisitions, debt, fads, postaday2011, RandomBlog2011, Stock Share Investing, Whitney Tilson

Advice on Buying a Business

March 6, 2011 Leave a comment

This is a repetition of material from the last post.I just think the matter is important enough to merit a post by itself.This is Mohnish Pabrai’s list of to-dos when buying a business.By paying attention to the following 9 principles of the Dhandho Framework you ensure that you bear the least risk and have the highest chance of a big pay-off.Of course, buying shares is buying parts of a business so you can apply the same criteria to come out ahead.

Buy an existing business: you get a defined business model and have to invent nothing new.
Buy businesses in simple industries with a low rate of change: buy businesses that are necessary and not about to be replaced any time soon.
Buy distressed businesses in distressed industries: the very best time to buy a business is when it is hated and unloved.
Buy businesses with a durable competitive advantage: this advantage can come from being low-cost to having a brand to having captive customers.
Bet heavily when the odds are in your favour: if you must, wait for several years till the right opportunity comes by, then invest big-time.
Focus on arbitrage: exploit any discrepancy between price and value.
Buy businesses at big discounts to their intrinsic values: the odds of a permanent loss are low when this approach is followed.
Look for low-risk, high-uncertainty businesses: the uncertainty leads to severely depressed prices.
It’s better to be a copycat than an innovator: “innovation is a crapshoot, but scaling carries far lower risk.”

Filed under Entrepreneurship, Paper Assets, Tool Kit Tagged with 9 Principles of the Dhandho Framework, arbitrage, bet heavily, business with low rate of change, buy an existing business, buying a business, copycat, distressed business, distressed industry, durable competitive advantage, Entrepreneurship, innovator, low risk high uncertainity, Mohnish Pabrai, postaday2011, RandomBlog2011

6 Investment Rules

March 2, 2011 Leave a comment

The secret to doing well in stocks over the long term is to avoid making big mistakes rather than being spectacularly right a few times in one’s career.After all it just takes just one big enough mistake to wipe away all the gains of the previous years.The following checklist is to help avoid making major mistakes.

1. Avoid following the crowd.
Avoid the hottest stocks in the hottest sectors, which are invariably priced high.It’s far safer and more profitable to invest in stocks of companies that are either well-known but currently out of favour or not tracked at all by analysts often simply because they are too small to be of interest to institutional investors.

2. Look for consistently positive cash flow and beware of debt.
Share holders make money through dividends.The company first needs to throw off cash through its operations to be in a position to reward shareholders consistently.Debt reduces the surplus available for share holders.Excessive debt might kill a company in bad times.

3. Avoid serial acquirers and if necessary buy stocks of good companies after big acquisitions.
Making many small acquisitions or one big one are both fraught with peril, yet some managements insist on engaging in such behaviour regularly. They often fritter away the resources of their companies and shareholders in this way.If you must buy a company that has just made an acquisition buy after the deal , when the share price has dropped , not in the frenzy before the deal. Read more of this post

Filed under Paper Assets, Theory, Tool Kit Tagged with acquisitions, avoid hot stocks, Beating the Street, Buffett Quotes, checklist, debt, ipo's, Long term stock investment, Peter Lynch, positive cash flow, postaday2011, RandomBlog2011, share investing, short sellers, stock investing, Warren Buffett

The Perfect Business

March 1, 2011 3 Comments

The best and easiest way to make money either as a businessperson or an investor is to get hold of an as near to perfect business as possible.The best businesses have the following features:

High profitability. If the business provides customers a product or service they need or want very much, and only this business can provide it, and there are few substitutes available then this firm can charge a premium price far above the costs it incurs.
High returns on capital. A business with high margins ceases to be very attractive if it is very capital intensive and requires massive amounts of capital to launch and/or remain in business. The greatest businesses require little or no money to start, can grow without major additions of capital, and do not require much maintenance cap ex.
An enormous moat. To ensure high margins and return on capital in the future it’s critical for a business to have major competitive advantages that are unlikely to dissipate over time. The key here is lack of change .Rapid change as in the hi- tech sector,benefits consumers but is very bad for investors. To quote Warren Buffett, “We see change as the enemy of investments… so we look for absence of change. We don’t like to lose money. Capitalism is pretty brutal. We look for mundane products that everyone needs…. I guarantee that Coke, Wrigley’s , and Gillette will dominate. The Internet won’t change what brands people like.”
Profitable reinvestment opportunities. The greatest businesses can reinvest their robust free cash flows back into the business at equally high rates of return on capital. Consider this: Warren Buffett has often lamented the fact that See’s Candies has never been able to expand much beyond its historical West Coast markets. It’s a fabulous company and was one of his best acquisitions ever, but the inability to reinvest its free cash flows back into growing its operations makes it an inferior business to, say, Wrigley, which has been able to grow globally over the years. Read more of this post

Filed under Entrepreneurship, Paper Assets, Theory, Tool Kit Tagged with accounts payable, accounts receivable, businessperson, cap ex, capital intensive, Cash Conversion Cycle, cash flow, Coke, competitive advantage, entrepreneur, free cash flows, gillette, growth, inventory, Investor, Perfect Business, postaday2011, profitability, RandomBlog2011, Return on Capital, See's Candies, Warren Buffet Quotes, Warren Buffett, Wrigley's

Psychology of Wealth

February 24, 2011 1 Comment

The question why some people accumulate substantial wealth and others struggle so much in this field has attracted the attention of quite a few psychologists.There have been many studies to correlate various personality traits and behaviour patterns, cognitive patterns , self motivation habits, moods and emotional behaviours and social behaviours with the wealth a person accumulates.

The results of these studies have been used to construct the various quizzes here http://www.marketpsych.com/personality_test.php .They are free and a pretty good way to get to know both one’s strengths and weaknesses as an entrepreneur , investor and/or speculator.

Taking these tests is a great way to get to know the strengths we can play to and the weaknesses to guard against.The results sheets also have many good psychological tips to work around our individual weaknesses.