Have the Discipline to Say No

1.  A particular security is selling in the market for $25 a share.

2.  The strong fundamental qualities of this security are well known, and as a result, the stock has typically traded at a fair to overvaluation.

3.  At the current price of $25 a share, the stock is indeed slightly above fair value.

4.  Eager to buy, an investor is on constant watch for any dip in stock price, but the dip never comes.

5.  Instead, over the next few weeks the stock seems only to go up in price and is now at $35.

6.  Not wanting to miss out on the continued rise, the investor rushes to buy in. 

7.  In the next few weeks, the stock is back at $25 and the investor, an able and bright fellow, feels like the dumbest man on the planet.

8.  His downfall had nothing to do with intelligence. 

9.  Instead, it had everything to do with emotions dictating the investment decision.

10.  Whether the security will trade above his purchase price a year from now is irrelevant. 

11.  Even if that happens, it's just foolish to dismiss the investment as an intelligent one because the investment process was manipulated by emotional decision making.  

12.  Next to taking a loss, nothing is more painful than the aforementioned chain of events.

13.  Learning to say no until the price is right is of paramount importance.


Referring to the above example, the ultimate failure (or success) of the investment decision was not based on intelligence but on emotion. The investor could not allow himself to "miss" the continued rise in the price of stock.  Disregarding any fundamentals whatsoever, he made the assumption that because the shares had continued to go up for weeks, they would continue to do so.  What is important here is not the investment performance but rather the process employed to make the investment.

Discipline is what separates sensible market loss from foolish market loss.  If you are disciplined and your approach to investment is sound and businesslike, your winners will more than compensate for your losers.  The undisciplined investor is the one who racks up losses similar to the example given earlier.  Succumbing to investment losses in this manner can mean the difference between an above-average and a below-average investment track record.

In cases like this, be disciplined enough to walk away and search elsewhere.  Always remember that any business is undervalued at one price, fairly valued at another, and overvalued at yet another.  The intelligent investor's goal is to buy at the undervalued price, avoid at the fairly valued price, and sell at the overvalued price.  Only by maintaining a very disciplined approach can this strategy be carried out effectively.

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The Role Of Parents In Financial Education

As the global economic recovery continues to lose momentum, the issue of financial literacy is becoming increasingly prevalent. This has already prompted political leaders in the United Kingdom and Australia to propose mandatory financial education for students, while the Consumer Financial Protection Bureau (CFPB) in the United States has made numerous recommendations concerning the advancement of fiscal literacy within independent states. Providing a comprehensive financial education to youngsters represents a significant responsibility; however, it is a duty that cannot be carried by schools and local authorities alone.

The Link Between Financial Literacy and Economic Growth
To understand the importance of financial literacy, it is important to consider the recent economic crisis that has engulfed the world. Essentially the result of irresponsible lending and reckless investment, the crisis showcased how poor financial decision-making impacts citizens, business owners and political leaders alike. While banks and lending institutions may have accepted considerable criticism for their role in triggering the recession, it is important to remember that millions of consumers were also willing to enter into poorly thought out and unmanageable financial agreements.

Further support for the importance of financial literacy can also be found in household debt levels from the last five years. Cumulative consumer debt reached its peak of $12.68 trillion at the height of the global recession during the third quarter of 2008, while it has continued to fall as the economy has showed tentative signs of growth. Totaling $11.23 million during the first quarter of 2013, its decline shows that decreased borrowing and more considered financial decision-making has resulted in a more prosperous economy.

So when it comes to economic growth, it is clear that the fiscal decisions that we make as individuals have a tangible impact on the overall economy.Joint research products between the George Washington University School and the University of Pennsylvania have sought to provide more context to this theory by evaluating how low levels of financial literacy lead directly to money-losing decisions and transactions. The results reveal considerable gaps in consumer knowledge concerning pension accounts, credit agreements and the impact of interest rates, which can now be measured in dollars and cents and afford a monetary value to the importance of financial literacy.

Who Should Shoulder the Burden for Imparting Financial Education?
As education remains a matter for the local authority in each state, it is unlikely that the U.S. will see mandatory reforms implemented at a federal level. Despite this, however, there is a common consensus among political leaders that dictates that financial education will be a universal feature of the K-12 curriculum by the end of 2014. While this will make local schools and government bodies primarily responsible for teaching financial literacy nationwide, it is also important to appraise the role of parents and established fiscal institutions.
In general terms, parents and schools must collaborate to deliver a comprehensive education to their children. While parents are charged with cultivating positive behavioral patterns and imparting fundamental values, it is the role of educational authorities to teach academic skills and subject matter. There is an imbalance when it comes to financial literacy, as the current generation of adults are hindered by a distinct lack of money management skills. According to a recent Consumer Financial Literacy survey conducted in 2012, just 59% of adult respondents had savings, while approximately one in four continued to spend outside of their means.

This skills gap is a vast and obvious one, and it has prompted both local authorities and banking organizations to drive financial literacy themselves. In fact, the American Bankers Association has been a keen supporter of financial education since 1997, when it introduced the innovative "Teach Children to Save" program as a way of emphasizing the importance of saving money. While these efforts and recent work by the CFPB have partially offsetthe lack of parental knowledge, guardians cannot ignore the importance of financial literacy and must instead be encouraged to support a detailed program of education.

The Bottom Line
The need for a concerted program of financial education cannot be ignored, and even though many parents are ill-equipped to lead the charge, they can at least support the efforts of state schools and banking institutions. They certainly cannot afford to adopt the same approach as parents during Chef Jamie Oliver's drive to introduce healthy and nutritional school dinners in the U.K., as thousands allowed their ignorance and lack of knowledge to compromise an extremely beneficial government initiative. By understanding their own shortcomings when it comes to financial literacy and welcoming the local governments' attempts to redress this considerable imbalance, parents can still play a proactive role in creating an entire generation of responsible adults.

Check out our series of guides designed to help you teach financial literacy to children of all ages.

http://www.investopedia.com/articles/personal-finance/052313/role-parents-financial-education.asp?utm_source=financial-edge&utm_medium=Email&utm_campaign=PF-5/28/2013

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Somebody Got It Right..yea its a relief rally

I told my readers that I will not participate in the rally if BN wins. I just got invitations by  local stock brokers to attend their market outlook briefings. In short, they are saying the retail investors should buy stocks since the big risk risk has been removed. Most also said we are yet to catch up with the regional stock markets. I deleted those invitations without hesitations. It's bullshit and a waste of time.

Somebody got it right called it as a relief rally. There was a huge buying panic when the stock market opened on Monday.  A little bit of today too. That basically because the local fund managers were panic and afraid of being under-perform the index if the stay in cash. They sold down a lot of stocks prior to GE. Their game plan was to buy at lower price. It's turnout that they were forced to buy even at higher prices pre-GE. Smart money? My ass, smart money.  A super high volume spike is not sustainable.

Long term fundamentals are deteriorating.  A few reasons:

1. The foreign funds begin to get worry actually. Credit Suisse for example sounded cautious

Those reforms now seem in doubt, Credit Suisse said in a report on Monday, although Najib is expected to push ahead with $444 billion Economic Transformation Programme aimed at boosting private investment and doubling per capita incomes by 2020.

If there is no follow through buying by foreign funds, who will be the next buyer?

2. Stretched balance sheet

Najib was trying to do window dressing to prop up Malaysia GDP growth by stretching our balance sheet. Debt/GDP has never come down to less than 50% in last 4 years.

It simply cannot continue with this trajectory or else risking our credit worthiness downgrade.

Malaysia economy growth will risk slow down if BN were force to "deleverage" in the first 2 years. 

Najib may be an economist by training but I think his administration has one the worst economy mis-management.  

3. Subsidy cut and widening revenue base like GST may not come true. I won't be surprise if Malaysia gets a downgrade as there were already warnings firing shots last year. We never get serious with what we promised. 1 Janji? Only orang kampung tertipu. 

4. Perceived political stability may come into question. If MCA were to leave BN or no multi-racial BN coalition government is form. O I was wrong, MCA? It's non-existence actually. Eunuch roles suits them better.

The rural/urban divides will continue to expand.  You can see how the kampung folks are so easily bought with RM 500 or easily get intimidated during this round of GE.

The intellectual divide will continue to widen.You can see which side got "brains" by observing how PR components' brains at work during campaign period. Even though they don't have much money, they are really creative and able to connect with people. 

Look at their manifesto. Scrutinize their shadow budget. PRs got more professionals and smart brains. BN got old tired people that keep thinking how to rob people's wealth and share the left over with the kampung folks. They copy unashamedly. 

Premium of safe heaven? Looks pretty shaky to me.

5. It's not peaking yet because no sheep or pigs got slaughtered. True.........small cap is yet to make its all time high. 

6. Najib's position is really shaky. The next successor can be even more radical not moderate. They must be thinking if they have survived "Chinese tsunami" this time, why bother to reconcile? They won't accept it's a Malaysian tsunami. Or what ever lah,menang tetap menang. More complacency will come in. More money will go into Iskandar. Bla...........

7. For many high net worth retail investors, money is already started to leave Malaysia. More soon. Not only Malaysia suffers brain drains, it will suffer capital drains as well. Why Robert Kuok leaves Malaysia in the 70s. A far sighted man like him deserves my respect. He saw what was coming post May 13 1969 and New Economic Policy. We had lost decades. We will lose may be another decade or more........

I personally have started to invest outside Malaysia and that percentage will continue to go higher over time.

I am not a smart man when come to predictions and wanted to be wrong badly with all these arguments.

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Are You Making These Investing Mistakes

One of the ways that you can build wealth, and live a little more abundantly is to invest. Investing can provide a way for you to put your money to work on your behalf. While there are risks involved in investing, and the possibility of loss, you can reduce some of that chance of loss by avoiding some of the more common investing mistakes.

As you consider investing, and how to build a portfolio that works for your situation, here are some common mistakes to avoid:

1.  Panicking with the Crowd

It’s easy to get scared and panic — especially when everyone else is doing it. However, you need to be careful about when you sell investments. While there are some very good reasons to sell a stock, it’s rarely a good idea to sell a stock just because everyone is in panic mode.

Instead, take a step back and look at the big picture. Are assets losing ground because the whole market is tanking? If so, you might not want to pull the trigger too quickly. Instead, consider the fundamentals. If the fundamentals are still solid, there is a good chance that your assets will recover in time.

2.  Trading Too Often

This can be tied with panicking, but it can also be its own problem. Too many of us get caught up in to day to day movements, and think that we need to trade a lot. While there are day traders who manage to make good money on regular market movements, it’s important to realize that these traders are dedicated to what they do.

Most of us regular folks are better off trading at wider intervals, or employing a dollar cost averaging strategy. Trading too often can cost you in terms of transaction fees, and there is a bigger chance that you will lose out.

3.  Lack of Diversity

If you want to reduce the overall risk of your portfolio, you need to remember to diversify to some degree. You need to make sure that your investments are diversified in terms of asset class, as well as across different sectors and industries. It also doesn’t hurt to diversify geographically and include investments from other countries. Avoid investing heavily in your company’s stock.

It’s fairly easy to start investing, and to diversify. There are index funds and ETFs that allow you to diversify easily, while at the same time helping you avoid some of the bigger risks that can come with investing.

4.  Failure to Understand What You're Investing In.

One of the reasons it’s good to start with stocks and bonds, and investments that are based on them (like index funds and ETFs), is because they are fairly easy to understand. You shouldn’t invest in things that you don’t understand. Take a few minutes to learn how different asset classes are traded, and how different investments work. It is also worth to learn what factors influence different investments. Get a handle on how different investments work, and you will be far more likely to find success and avoid some of the pitfalls that bring down investors.

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Organizing Your Investing Bucket

With the Easter bunny relaxing after a busy holiday, kids from all over are given the task of organizing the candy and money collected during their hunts. Investors are also constantly reminded that their portfolio eggs should not be solely placed in one basket either. Instead, investors are told to diversify their investments across a whole host of asset classes, geographies, styles, and sizes. In other words, this means investors should be spreading their money across commodity, real estate, international, emerging market, value, growth, small-cap, and large-cap investments. As Jason Zweig, journalist from a the Wall Street Journal points out, much of the diversification benefits can be achieved with relatively small change in the position count of a portfolio:

“As many studies have shown, at least 40% of the variability in returns can be reduced by moving from a single company to 20. Once a portfolio contains 20 or 30 stocks, adding more does little to damp the fluctuations in wealth over time.”

 But wait. Going from one banking stock to 20 banking stocks is not going to provide you with the proper diversification you want or need. Rather, what is as important as investing across asset class, geography, style, and size, is to follow the individual stock strategies of guru Peter Lynch. In order to put his performance into perspective, Lynch’s Fidelity Magellan fund averaged +29% per year from 1977 – 1990 – almost doubling the return of the S&P 500 index for that period.

More specifically, to achieve these heroic returns, Lynch divided the stocks in his fund into the following categories:

Slow Growers: This group of stocks wasn’t Lynch’s favorite because these companies typically operate in mature industries with limited expansion opportunities. For these single-digit EPS growers, Lynch focused more on identifying high dividend-paying stocks that were trading at attractive valuations. In particular, he paid attention to a dividend-adjusted PEG ratio (Price-to-Earnings Growth). A utility company would be an example of a “Slow Grower.”

Stalwarts: These are large established companies that still have the ability to achieve +10% to +12% annual earnings growth regardless of the economic cycle. Lynch liked these stocks especially during recessions and downturns. Valuations are still very important for Stalwarts, and many of them pay dividends. An investor may not realize a “home run” with respect to returns, but a +30% to 50% return over a few years is not out of the question, if selected correctly. Former examples of “Stalwarts” include Coca Cola (KO) and Procter & Gamble (PG).

Fast Growers: This categorization applies to small aggressive firms averaging about +20% to +25% annual earnings growth. While “Fast Growers” offer the most price appreciation potential, these stocks also offer the most risk, especially once growth/momentum slows. If timed correctly, as Lynch adeptly achieved, these stocks can increase multi-fold in value. The great thing about these “Fast Growers” is they don’t have to reside in fast growth industries. Lynch actually preferred market share gainers in legacy industries.

Cyclicals: These companies tend to see their sales and profits rise and fall with the overall economic cycle. The hyper-sensitivity to economic fluctuations makes the timing on these stocks extremely tricky, leading to losses and tears – especially if you get in too late or get out too late. To emphasize his point, Lynch states, “Cyclicals are like blackjack: stay in the game too long and it’s bound to take all your profit.” The other mistake inexperienced investors make is mistaking a “Cyclical” company as a “Stalwart” at the peak of a cycle. Examples of cyclical industries include airline, auto, steel, travel, and chemical industries.

Turnarounds: Lynch calls these stocks, “No Growers,” and they primarily of consist of situations like bail-outs, spin-offs, and restructurings. Unlike cyclical stocks, “Turnarounds” are usually least sensitive to the overall market. Even though these stocks are beaten down or depressed, they are enormously risky. Chyrysler, during the 1980s, was an example of a favorable Lynch turnaround.

Asset Plays: Overlooked or underappreciated assets such as real estate, oil reserves, patented drugs, and/or cash on the balance sheet are all examples of “Asset Plays” that Lynch would consider. Patience is paramount with these types of investments because it may take considerable time for the market to recognize such concealed assets.

Worth noting is that not all stocks remain in the same Lynch category. Apple Inc. (AAPL) is an example of a “Fast Grower” that has migrated to “Stalwart” or “Slow Grower” status, therefore items such as valuation and capital deployment (dividends and share buyback) become more important.

Peter Lynch’s heroic track record speaks for itself. Traditional diversification methods of spreading your eggs across various asset class baskets is useful, but this approach can be enhanced by identifying worthy candidates across Lynch’s six specific stock categories. Hunting for these winners is something Lynch and the Easter bunny could both agree upon.

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Warren Buffett on "The Key of Investing"

Warren Buffett had this to say in a 1999 Fortune article that was written as the tech bubble was coming to an end:

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors."

In the article, Buffett also points out that many of the most"glamorous" businesses -- many that have changed the world dramatically for the better -- did not ultimately reward their investors.

One often has little to do with the other.

At the time, he was saying that stocks, due to excessive valuations and the high expectations of investors, were likely to disappoint (of course, he supposedly didn't get the "new paradigm"). Yet, Buffett was still optimistic that the businesses themselves would keep increasing in value and that, over time, investors would be "considerably wealthier, simply because the American business establishment that they own will have been chugging along, increasing its profits..."

The intrinsic worth of American business has been increasing since that article was written. Businesses just needed a good chunk of the past decade plus for the per-share value to catch up to the then prevailing premium market prices.

At the time that article was written, Buffett made it clear he wasn't predicting what stock prices might do in the near-term or even longer. Those who have read and listened to him over the years knows Buffett has never really been interested in that sort of thing.

Instead, he was thinking in terms of how price compared to valuation, and likely longer term outcomes, not trying to predict price action. Eventually, value is what counts, but individual marketable securities, and markets more generally, are capable of moving in ways that have little to do with value for very long periods of time.

The intrinsic worth of American business might be increasing over time, but stock prices may not necessarily reflect that until much later.

So while valuations may be less nonsensical these days, it still reveals nothing about what stocks might do over the next several years. Attempting to judge where market prices stand in relation to per-share value is time well spent. Guessing what the price action might be over the next month or even several years is not.

Buffett added this in the most recent Berkshire Hathaway (BRKa) shareholder letter:

"American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don't forget that shareholders received substantial dividends throughout the century as well.)

Since the basic game is so favorable, Charlie and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of 'experts,' or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it."

It's understandable, even if not particularly enriching, that investors and other market participants weigh the risk of loss versus the possibility of gains asymmetrically.

Loss aversion is a very powerful thing.*

Having said that, those who think they can "dance in and out"effectively (and many certainly seem to try!) might want to carefully consider the last line in the above excerpt from the letter.

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Benjamin Graham: Timing vs Pricing Stocks

"By timing we mean the endeavor to anticipate the action of the stock market—to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward. By pricing we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value. A less ambitious form of pricing is the simple effort to make sure that when you buy you do not pay too much for your stocks. This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as such it represents an essential minimum of attention to market levels.

We are convinced that the intelligent investor can derive satisfactory results from pricing of either type. We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator's* financial results." - Benjamin Graham

Back in 2009, Warren Buffett said the following:

"We don't try to pick bottoms. To sit around and not do something sensible because you think there might be something better…. doesn't make sense. Picking bottoms is not our game. Pricing is our game. And that's not so difficult. Picking bottoms is, I think, impossible." - Warren Buffett

Buffett: Picking bottoms is impossible

Market participants attempting to get the timing right (something that seems more close to futile than not) end up distracted from what's important: Making price versus valuation judgments that, over the long haul, will get the best possible result at the least risk.

Attempts at timing is inherently speculative and a distraction away from the all-important price versus value discipline.

Mispriced assets often seem to get sorted out in nearly, if not completely, unpredictable ways in terms of timing. It's important to be realistic -- when the timing does happen to work out -- about the real reasons why. Successful moves don't always get the scrutiny they deserve.

Sometimes the favorable outcome was more about luck than great foresight.

Sometimes it has little to do with having some unusual talent for predicting the amount and timing of price movements.

Not knowing when a favorable outcome was mostly accidental is a recipe for future mistakes.

An approach dependent on lucky or accidental outcomes is destined to result in even bigger losses down the road if it leads to unwarranted overconfidence. A few successful outcomes resulting more from good fortune, less on real foresight, might encourage that market participant to put even larger amounts of capital at risk (with maybe less favorable outcomes). I'm not saying no one can effectively time these things (even though my interest in such an approach is effectively zero). I'm saying those that try had better have a realistic view of their own abilities.

Overestimation of one's own talent in this regard will likely end up being very expensive.

The good news is a long-term investor doesn't have to get the timing right if sound price versus value judgments are mostly being made. Mistakes are inevitable, of course. The key is keeping them small and infrequent. One way to keep them small and infrequent is to always pay an appropriate discount to a well-judged valuation. An appropriate margin of safety is protection against small misjudgments (since valuation even done well is inherently imprecise) and the unforeseen adverse developments that inevitably arise in an unpredictable world.

Developing competence when it comes to understanding how price relates to the value of an asset is a good use of energy.

Attempts at timing the market generally isn't.

Expect wild fluctuations in price and allow that inevitable dynamic -- Mr. Market's inherent moodiness and -- to serve.

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