Stock Share Investing | 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

Dealing With The Shortcomings Of The Human Brain

February 21, 2011 2 Comments

Since we can’t overcome the tendency of the human brain to make mistakes while working through heuristics , here is a list of things we can do to reduce the effects of the shortcomings of the human brain.The more we can incorporate these points into our investing procedures and systems , the better the quality of our returns.The checklist is form Whitney Tilson’s ‘How to Avoid – and Profit From – Manias , Bubbles and Investor Irrationality’.

•Be humble–Avoid leverage, diversify, minimize trading

•Be patient

–Don’t try to get rich quick

–A watched stock never rises

–Tune out the noise

–Make sure time is on your side (stocks instead of options; no leverage)

•Get a partner

–someone you really trust –even if not at your firm Read more of this post

Filed under Paper Assets, Theory, Tool Kit Tagged with bearish, behavioural finance, circle of competence, contrary opinions, diversify, get rich quick, good business, heuristics, How To Avoid and Profit From Manias Bubbles and Investor Irrationality, leverage, randomness, regression to mean, Stock Share Investing, stocks, Whitney Tilson

The Difference Between Stock Market Investors and Speculators

February 9, 2011 30 Comments

The following is an excerpt from Seth Klarman’s ‘Margin of Safety.’I got around to reading this book based on the recommendations of one of the readers of this blog.Thank you Andy!I think the following is a nice way of making a distinction between stock market investment and speculation.BTW the book is pretty nice and I will blog more about it as and when I come across more interesting stuff.

To investors stocks represent fractional ownership of underlying businesses and bonds are loans to those businesses.Investors make buy and sell decisions on the basis of the current prices of securities compared with the perceived values of those securities. They transact when they think they know something that others don’t know, don’t care about, or prefer to ignore. They buy securities that appear to offer attractive return for the risk incurred and sell when the return no longer justifies the risk.Investors believe that over the long run security prices tend to reflect fundamental developments involving the underlying businesses. Investors in a stock thus expect to profit in at least one of three possible ways: from free cash flow generated by the underlying business, which eventually will be reflected in a higher share price or distributed as dividends; from an increase in the multiple that investors are willing to pay for the underlying business as reflected in a higher share price; or by a narrowing of the gap between share price and underlying business value.Speculators, by contrast, buy and sell securities based on whether they believe those securities will next rise or fall inprice. Their judgment regarding future price movements is based, not on fundamentals, but on a prediction of the behavior of others. They regard securities as pieces of paper to be swapped back and forth and are generally ignorant of or indifferentto investment fundamentals. They buy securities because they “act” well and sell when they don’t. Indeed, even if it were certain that the world would end tomorrow, it is likely that some speculators would continue to trade securities based on what they thought the market would do today.Speculators are obsessed with predicting-guessing-the direction of stock prices. Every morning on cable television,every afternoon on the stock market report, every weekend in Barron’s,every week in dozens of market newsletters, andwhenever businesspeople get together, there is rampant conjecture on where the market is heading. Many speculators attempt to predict the market direction by using technical analysis-past stock price fluctuations-as a guide. Technical analysis is based on the presumption that past share price meanderings,rather than underlying business value, hold the key to future stock prices. In reality, no one knows what the market will do;trying to predict it is a waste of time, and investing based upon that prediction is a speculative undertaking.