]]> http://dividendpirate.com/2009/03/05/too-big-to-fail/feed/ http://dividendpirate.com/2009/03/05/too-big-to-fail/ http://feedproxy.google.com/~r/DividendPirate/~3/hRC2H2YArIo/ http://dividendpirate.com/2009/03/01/the-credit-crisis-visualized/#comments Sun, 01 Mar 2009 19:49:27 +0000 Dividend Pirate bearcreditcredit crisisdepressionlendingrecession http://dividendpirate.com/2009/03/01/the-credit-crisis-visualized/ Great visualization of the credit mess.

The Dow and S&P 500 tumbled to levels not seen in nearly 12 years Monday, as investors continue to worry that the government’s efforts to slow the recession won’t be sufficient.

The Dow Jones industrial average (INDU) lost 250 points, or 3.4%, ending at the lowest point since May 7, 1997.

The S&P 500 (SPX) index lost 26 points, or 3.5%, ending at the lowest point since April 11, 1997.

The Nasdaq composite (COMP) lost 53 points, or 3.7%. The tech-fueled index has held up better than the rest of the market so far this year, closing at the lowest points since Nov. 20, 2008.

“It’s fear-based selling,” said Dave Hinnenkamp, CEO at KDV Wealth Management. “The fact that we’re touching these multi-year lows tells you we don’t know where the bottom of this thing is.”

“There is just nobody who wants to buy right now,” said Ron Kiddoo, chief investment officer at Cozad Asset Management.

“Worries about how long it will take for the government programs to have an impact and worries about the health of the banks and the autos are all there,” Webb said.

But there is also just the day-to-day reality that many investors are losing money and don’t know when they are going to stop losing money, he said.

The other way to look at this is that if you were waiting for a 50% discount on stocks and didn’t have the resources to buy, now or the near future *might* be a good time. That being said I feel that we are going to hear some more bad news in the coming few months.

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.

There are many lessons to learn from his story,

• Be humble: When everything is going right for you, you tend to lose touch of reality. You might feel that you are the smartest, richest and the most intelligent guy around. If you ever feel this way, do a reality check. Fortunes can change on the fall of a hat. It is said an Eastern monarch once charged his wise men to invent him a sentence, to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: “And this, too, shall pass away.” How much it expresses! How chastening in the hour of pride! How consoling in the depths of affliction
• Avoid greed: During the DotCom boom, a lot of people became paper millionaires from companies that didnt make a single dime in profit.But they were greedy and didnt sell shares. They wanted more. In the end they were left with worthless stocks. Similarly a lot of investors get greedy during boom times and expect unrealistic returns on their investments.
• Realize what you are good at and don’t get distracted: Carlos mentions that “My business is selling real estate and I decided to become an investor, that was really my downfall.” We have seen the same thing happen with many sports celebrities too. Realize what you like doing, become good at that and then stick to it.
• Own up: OK, so you screwed up. Own it up. Its always easy to blame it on someone else or circumstances. Take responsibility for your failures.
• Confront your demons: It’s always easy to give up and accept failure. But a real man decides to face his fears and overcome them. I have seen that the experiences that I cherish the most in life are the ones when I was completely beaten down, but I held myself together and fought back. Even today when I am faced with a difficult situation, I look back to those experiences and they motivate me to overcome challenging situations. Remember it is darkest before dawn.

What did you learn from the story. Please share your experience on the post through your comments.

“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.

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.

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

This advice seems obvious, but investors always ignore it. The demand curve for investment assets is like that for a luxury good — the higher the price, the greater the demand.

Hence we see turnover rising during a bull market and falling during a bear market. Investors should always be prepared to act contrary to the market.

5. When the rest of the world is mad, we must imitate them in some measure

This observation came from the mouth of an eighteenth-century banker, John Martin, during the South Sea Bubble of 1720. It is another expression of the ‘greater fool’ theory, namely that you can buy over-priced shares and sell them on at a profit to some sucker.

This speculative attitude has been much in evidence in recent years in the form of momentum investing. Of course, you can make money if you find a greater fool, but you also will lose your money if you don’t.

6. During a bull market nobody needs a broker. During a bear market nobody wants one

This is another Wall Street saying, cited more recently by Alan Abelson in Barron’s. We are now more aware than ever that most brokerage research is generally of a low quality and that broker recommendations cannot be followed profitably.

Investors should avoid reading research by brokers whose parent company provides financial services for the company concerned.

7. Every man his own broker

This is, in fact, the title of the first investment book, written by Thomas Mortimer in the 1750s. It was republished several times. If you can’t trust brokers, you must replace them. The problem is that the private investor is not well-equipped to do so. So, first learn, then invest.

8. Markets can remain irrational longer than you can remain solvent

This saying comes from John Maynard Keynes, the great English economist. He was also an acute observer of markets and a speculator. The point of Keynes’s comment is that your observation may be fundamentally correct but it can take the market a long time to catch up.

For example, the dotcom bubble ran for almost five years from the flotation of Netscape in the summer of 1995 to the Nasdaq collapse in March 2000. Many people lost a lot of money shorting the likes of eToys and Amazon.com before the market woke up to its absurd overvaluation of the sector.

9. A mine is a hole in the ground with a liar standing over it

This saying also comes from Mark Twain. It should remind investors to be wary of all projectors, whether they are promoting gold mines, biotech or some other new-fangled technology.

In general, the promise of outsize profits are followed by the reality of painful losses. You will make more money in the long run by restraining your greed.

10. Be diffident when others exalt, and with a secret joy buy when others think it in their interests to sell

This advice comes from the English writer, Sir Richard Steele, in an article for The Spectator in the early 1700s. To my knowledge it is the first expression of a contrarian investment philosophy.

The art of investment lies in judiciously going against the crowd. It is both intellectually more fulfilling to refute the market consensus and in the long run should be more profitable. Academic research suggests that unloved ‘value shares’ tend to outperform so-called ‘growth stocks’ over the long run.

Link to the article, http://www.rediff.com/money/2008/dec/16slde1-10-valuable-investing-rules-from-history.htm

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!!!

If you had purchased $1,000 of Delta Air Lines stock one year ago, you would have $49 left…

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With Fannie Mae, you would have $2.50 left of the original $1,000.

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With AIG, you would have less than $15 left.

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But, if you had purchased $1,000 worth of beer one year ago, drunk all of the beer, then turned in the cans for the aluminum recycling REFUND, you would have $214 cash.