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.

Excerpts from a nice article that appeared on rediff.com

1. Put all your eggs in one basket and watch that basket!

This saying comes from Mark Twain, but has been applied to stock market investment more or less verbatim by both John Maynard Keynes and Warren Buffett. Modern portfolio theory suggests that one can reduce risk by diversification.

However, if you were an active investor you would do better to concentrate your shareholdings in a limited number of companies which you feel you understand. This can actually reduce risk.

2. When the ducks quack, feed them

This is an old Wall Street adage relating to initial public offerings. Investment bankers are out to make money and will sell the public anything within the bounds of the law.

Research suggests that, in general, IPOs rocket upwards on the first day’s trading but tend to under perform comparable companies over a three-year period. Since small investors don’t receive fair allocations of the best IPOs but are landed with the duds, they should avoid the new issue market entirely.

3. Markets make opinions, not the other way round

When markets rise, commentators find a way of rationalising the gains. Take the tech bull market. We were told that the ‘valuation clocks’ were broken and that companies deserved to trade on a higher price-earnings ratio.

We were also told that US productivity had risen and that the US would experience a higher growth rate in the past. We were also told that Greenspan et al would prevent another cyclical downturn. All these comments were spurious rationalisations of an ‘irrationally exuberant’ market.

4. Buy low, sell high

If you were invested in - stocks, real estate, gold or for that matter any asset, this year has been a roller coaster. So how bad was it for stocks compared to other years. The chart below says it all,

If you are looking for the year 2008, check the bar on your extreme left. Thanks to fellow blogggers at dinksfinance  for making me aware of this graph.

There are 2 ways you can interpret this graph. Look at your returns for this year in your portfolio and sulk OR look at stocks that you can buy now at a 50% cheaper price compared to last year. If you like something for 100 dollars and now it is selling for 50 dollars, you should not be sulking but be delighted.

There are many stocks which are insanely priced at this point. If you liked Google, Apple and Microsoft a year back. You should like them all the more now since they have fallen big time. For example Google has fallen > 60% year to date.

As always the usual disclaimers,

• Do your own thinking before buying stocks. You CANNOT and SHOULD NOT buy stocks because some random guy on the internet blogs that a stock is good.
• Diversify your portfolio.
• Your investments might tank another 50%. If you cannot digest such churns in the market you are better off depositing your money in a savings account.

However if you are willing to take risks, there are seriously some nicely priced bounties out there for you. Now go raid!!!

Bear market» historic returns» recession» stock» stocks»

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I came across a great article today on http://valueinvestingresource.blogspot.com/2008/05/2008-berkshire-hathaway-shareholder.html. In the above link the author shares his experience on the Berkshire Hathaway annual meeting. I highly recommend you to read the entire article. It is a bit lengthy but very informative.

For the less informed, Berkshire Hathaway is a company owned by Warren Buffet. It is very unlikely that you haven’t heard about Mr. Buffet. Apart from being the world’s richest man, Mr. Buffet is known for his generosity. He has pledged to donate 95% of his wealth to charity. He is regarded as one of the world’s greatest stock market investors. He is popularly known as the Oracle from Omaha.

About the Berkshire Hathaway Annual meeting: The mass migration of investors to Omaha for Warren Buffet’s annual shareholder meeting is the biggest pilgrimage from this side of Mecca. More than 30,000 people from every state in the Union and dozens of foreign countries go to soak up the wisdom of Buffet and his business partner, Charlie Munger, who sit for hours and answer questions from all comers.

The article mostly is a question/ answer session with Mr. Buffet and Mr. Munger. I found this particular piece of advice on investing from the annual meeting very enlightening: