The Dividend Pirate

Happy 2009 to you all. Its been a tough and humbling last year for investors. We have seen great investment firms go belly up, numerous fraud schemes uncovered,  assets of every kind including home prices, stock prices, commodity prices and gold go down dramatically. In fact the economic award for last year goes to Ms. Jones.

My investments were no exception and fared pretty badly. But its all a part of the game and its important to take losses in your stride. The road to success is never straight. If you want your money to go up linearly, you should not be investing in stocks but in savings accounts and CD’s.  If you can’t withstand a 50% drop in your portfolio, investing is truly not for you. The sad truth is that everyone believes that they are aggressive investors during good times only to realize their true risk taking appetite during bad times such as last year.95% of investors invest at the wrong time because of a herd mentality. It somehow feels safer to do what everyone else does.Warren Buffet says it nicely,

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

The chart below shows the risks of going along with the herd mentality.

Be very careful of your emotions. Do not let them cloud your judgment. Its darkest before dawn. That being said I feel that we are going to hear some more bad news in the coming few months. The approach that I am taking is to wait and watch. If the market goes up, that’s good since I have enough money already invested. If the market goes down, that’s even better. You will see some insanely priced stocks. Would you buy a car if it was discounted at 80% value? You would, right. Its no different with stocks.There are experts who believe that the index might fall another 50%. Check this link to read more about it. If they turn out to be true, I cant emphasize enough the deals that you would be seeing.Talking about deals, there are already some stocks that have fallen below their book value and are looking very good.

What is book value? It is the net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities.  It is the total value of the company’s assets that shareholders would theoretically receive if a company were liquidated.

Let’s take an example of Volcom(VLCM). Volcom is a designer, marketer and distributor of surfing related products. The company has 3 dollars per share in cash, 0 long term debt and a book value per share of 8.321. In effect if they closed their shutters today and liquidated everything, stockholders would receive 8.321 dollars per share. Guess how much is it being traded for? The after hours price of Volcom was 7.85. The stock was downgraded today and is most likely to go down further. The company might even lose some money in the next 2 years. On the other hand in a few years  it could fetch you some good returns. Just a few weeks back Volcom fell below 7 dollars and then went up to 11 dollars, a return of more than 50%. Similarly there are many other stocks which are very lucrative right now and will become even more lucrative in the coming months. Keep an eye open for such opportunities and some cash in hand. When you feel the value is right, go  raid!!

Disclaimer: Before making any investments, do your own research. You cannot and should not invest in a stock just because a random guy on the internet thinks its a good idea. If you want to take out your money in a short time, you should not invest in stocks. If you do invest, remember to diversify your holdings.

bear» bull» cnn» herd» herd mentality» Ms. Jones investing award» recession» Stock investing» vlcm» volcom»

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