Holding Onto A Loser:
Warren Buffett once said: "Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks."
In other words, if you have invested in the wrong shares, then buying something better might be preferable to patching up past mistakes.
To average down is to increase your lost.
However, learning how to let go is vital if you want to take the first important step to become a better investor. After all, if your limited resources are tied up in patching up what you have, then you are much less likely to look for something else that could serve you better.
When we invest, we should always bear in mind that buying shares is about putting your money to work. That means looking at opportunities that will deliver the best possible returns for our capital.
That also means looking dispassionately at each of our holdings and deciding whether it merits a place in our portfolios. An often telling question is whether you would still buy a particular share if you did not already own it.
If the answer is no, then why are you still holding it?
The US Senate overwhelmingly approved a deal on Wednesday to end a political crisis that partially shut down the federal government and brought the world's biggest economy to the edge of a debt default that could have threatened financial calamity.
The House of Representatives quickly convened and was expected to follow suit after Republicans dropped their bid to link the spending measure to changes in President Barack Obama's healthcare law. Obama vowed to sign the bill as soon as it arrives on his desk and to begin reopening the government "immediately."
THE DEAL, HOWEVER, OFFERS ONLY A TEMPORARY FIX AND DOES NOT RESOLVE THE FUNDAMENTAL ISSUES OF SPENDING DEFICITS that divide Republicans and Democrats. It funds the government until January 15 and raises the debt ceiling until February 7, so Americans face the possibility of another government shutdown early next year.
WHEN TO RUN YOUR WINNERS
By David Kuo October 16, 2013
Dear foolish reaaders,
A very successful investor once told me that good investors are not always the ones that have the greatest ability to pick winning shares. Instead, he pointed out, they are generally those who are willing to cut their losses if things are not going right.
In his view, bad investors hug losses for too long and snatch profits far too early. The upshot is that they end up with small profits and huge losses.
So is the successful investor suggesting that we should run our winners and cut our losers?
Watering the weeds
The concept of "running your winners and cutting your losers" is so entrenched in stock market investing that many accept it to be gospel. But life is never that simple.
Peter Lynch once said: "Some people automatically sell their 'winners' - stocks that go up - and hold on to their 'losers' - stocks that go down, which is about as sensible as pulling out the flowers and watering the weeds".
He went on to say: "Others automatically sell their losers and hold onto their winners, which doesn't work much better. Both strategies fail because they are tied to the current movement of the stock price as an indicator of the company's fundamental value".
Peter Lynch is right, which explains why he was immensely successful as a money manager. Between 1977 and 1990, his Magellan fund averaged 29% return a year.
Point is, if we use the market as a guide to determine the true value of a company, then we are almost certainly on a hiding to nothing. We need to remember that SHARES MOVE UP AND DOWN for lots of reasons. And most of those reasons have nothing to do with the underlying business at all.
The thorny question
So rather than trying to predict what other investors may or may not buy and sell; second-guess what American politicians may or may not do and attempt to forecast when the US Federal Reserve may or may not taper, try instead to base your investment decisions on something more tangible. That is always going to be more rewarding.
For instance, LOOK FOR COMPANIES THAT PRODUCE THINGS THAT CAN GENERATE RELIABLE REVENUES. That would be a good place to start. Here in Singapore, we have lots of businesses that fit the bill. Some of those companies are integral components of the Straits Times Index. So you don't need to venture too far to find them.
So where does that leave us with regards the thorny question of running your winners and selling your losers?
"Running your winners" should, in fact, refer to the companies you already have in your portfolios. In my view, WINNERS ARE COMPANIES THAT ARE INCREASING THEIR PROFITS, IMPROVING THEIR COMPETIVE POSITION, REWARDING SHAREHOLDERS WITH DECENT RETURNS ON EQUITY AND THOSE THAT CAN PAY INCREASING DIVIDENDS. They should be kept.
There are two questions to answer that will help us figure out if a stock we see is right.
1) Are Earnings Moving in the Right Direction?
Over the long term, stock prices follow earnings. If a company's earnings consistently go up over time, its stock price should, too.
2) Is Cash Flow Following Earnings?
Folks sometimes confuse earnings with cash flow. Earnings, also called net income or profits, are reduced by all kinds of non-cash expenses such as depreciation and amortization. Those expenses lower profits (and taxes) but have no bearing on how much cash the company took in.
Non-cash expenses are not included when we calculate cash flow.
Fortunately, you don't have to calculate cash flow yourself. You can find it in the same place as the income statement. Just go down two links and you'll see cash flow.
Generally speaking, we want to see cash flow from operations going up every year. If earnings are rising and cash flow is not, that warrants further investigation.
If cash flow from operations is going down while earnings are going up, you'll want to understand why. Sometimes that can be a red flag that the company's earnings aren't especially stable.
However, if earnings are moving in the right direction and cash flow is following earnings, then you're starting from a very good place. Obviously, you'll want to do more work and see if earnings and cash flow are likely to continue rising. If you believe they will, that is a good candidate for a stock to add to your portfolio.
These 3 stocks Eratat, Midas & Rex International which are are popular among investors & traders.
On paper Eratat poformance & cash-flow looks excellence. Unfortunately there are issues that raise red flag.
Over the last 6 months this stock share price had been moving down hill from 15 cents to below 9 cents. Those who love this stock no doubt had make a lost. Worse still those who trying to average down during last few months probably had been burnt.
The key is to manage your risks & don't fall in love with the stock. Time will tell whether the market is fair or unfair to Eratat.
Midas business depends on contracts to supply aluminium alloy extrusion profiles and certain fabricated parts for the manufacture of high-speed trains in China. Total YTD order wins for Midas has now hit ~CNY812.6m. Midas revenue for the best year in 2011 was CNY1,080m. So far the contracts Midas secure cannot match-up to it's past year & the contract only bring one-off contribution. There is no recurring prfit to keep the business going.
Over the last 6 months if you buy Midas on price weakness at 45 cents and sell off on price recovery at 50 cents will achieve 10% profit on 4 occations.
Midas is a good trading stock. People who had been cheering & promoting Midas as 'gem' are living in their dream. Business have to grow like trees not comes in bits and pieces. Project secure will not guarantee profit & morever profit derive from project is only one-off.
Rex International is newly listed at 50 cents. It's an oil & gas exploration company. It claim it's superior technology with higher exploration accuracy than peers – success rate of over 50% vs. usual 10% to 15%. Portfolio of 15 licences (including the 3 licences in Trinidad and Tobago upon the completion of the investment in Caribbean Rex Limited
The stock bottom support intially at 70 cents and the support will move higher to 80 cents. The resistence is below a dollar. I believe Rex is an exciting stock. Once Rex sucessfully find oil, that will be the catalyst for Rex to break the dollar resistence & one dollar will eventually becomes it's support. Rex is an interesting stock for those who willing to take risk.
One rule of investment is never to rush in with the crowd. We should always be wary of investments and equities that everyone is scrambling to buy. A small portion of these investors may be fleeted-footed enough to have sold off during the feeding frenzy, and more people would rush in when they saw that these lucky few had made money. The tail-end of the crowd would then become the players who could not grab hold of a seat in the game of musical chairs, and this is the basic principle of all investments, wherever you go. However, droves of people would tend only to register the fact that those lucky few had made money, so they want to have a share in the pie, only to forget about risk.