It's All A Big Mistake

[Temperament]

Sir John Templeton 16 Rules For Investment Success

By Guest Author - September 29th, 2012, 2:00PM
Interesting set of rules from legendary investor John Templeton:
1. Invest for maximum total real return
2. Invest — Don’t trade or speculate
3. Remain flexible and open minded about types of investment
4. Buy Low
5. When buying stocks, search for bargains among quality stocks.
6. Buy value, not market trends or the economic outlook
7. Diversify. In stocks and bonds, as in much else, there is safety in numbers
8. Do your homework or hire wise experts to help you
9. Aggressively monitor your investments
10. Don’t Panic
11. Learn from your mistakes
12. Begin with a Prayer
13. Outperforming the market is a difficult task
14. An investor who has all the answers doesn’t even understand all the questions
15. There’s no free lunch
16. Do not be fearful or negative too often

Complete explanation after the jump


No. 1 INVEST FOR MAXIMUM TOTAL REAL RETURN
This means the return on invested dollars after taxes and after inflation. This is the only rational objective for most long-term investors. Any investment strategy that fails to recognize the insidious effect of taxes and inflation fails to recognize the true nature of the investment environment and thus is severely handicapped.
It is vital that you protect purchasing power. One of the biggest mistakes people make is putting too much money into fixed-income securities.
Today’s dollar buys only what 35 cents bought in the mid 1970s, what 21 cents bought in 1960, and what 15 cents bought after World War II. U.S. consumer prices have risen every one of the last 38 years.
If inflation averages 4%, it will reduce the buying power of a $100,000 portfolio to $68,000 in just 10 years. In other words, to maintain the same buying power, that portfolio would have to grow to $147,000— a 47% gain simply to remain even over a decade. And this doesn’t even count taxes.
No. 2 INVEST—DON’T TRADE OR SPECULATE
The stock market is not a casino, but if you move in and out of stocks every time they move a point or two, or if you continually sell short… or deal only in options…or trade in futures…the market will be your casino. And, like most gamblers, you may lose eventually—or frequently.
You may find your profits consumed by commissions. You may find a market you expected to turn down turning up—and up, and up—in defiance of all your careful calculations and short sales. Every time a Wall Street news announcer says, “This just in,” your heart will stop.
Keep in mind the wise words of Lucien Hooper, a Wall Street legend: “What always impresses me,” he wrote,“is how much better the relaxed, long-term owners of stock do with their portfolios than the traders do with their switching of inventory. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional; he pays smaller capital gains taxes; he does not incur unnecessary brokerage commissions; and he avoids behaving like Cassius by ‘thinking too much.’”
No.3 REMAIN FLEXIBLE AND OPEN-MINDED ABOUT TYPES OF INVESTMENT
There are times to buy blue chip stocks, cyclical stocks, corporate bonds, U.S. Treasury instruments, and so on. And there are times to sit on cash, because sometimes cash enables you to take advantage of investment opportunities.
The fact is there is no one kind of investment that is always best. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and—when lost—may not return for many years.
Having said that, I should note that, for most of the time, most of our clients’ money has been in common stocks. A look at history will show why. From January of 1946 through June of 1991, the Dow Jones Industrial Average rose by 11.4% average annually—including reinvestment of dividends but not counting taxes—compared with an average annual inflation rate of 4.4%. Had the Dow merely kept pace with inflation, it would be around 1,400 right now instead of over 3,000, a figure that seemed extreme to some 10 years ago, when I calculated that it was a very realistic possibility on the horizon.
Look also at the Standard and Poor’s (S&P) Index of 500 stocks. From the start of the 1950s through the end of the 1980s—four decades altogether—the S&P 500 rose at an average rate of 12.5%, compared with 4.3% for inflation, 4.8% for U.S. Treasury bonds, 5.2% for Treasury bills, and 5.4% for high-grade corporate bonds.
In fact, the S&P 500 outperformed inflation, Treasury bills, and corporate bonds in every decade except the ’70s, and it outperformed Treasury bonds—supposedly the safest of all investments—in all four decades. I repeat: There is no real safety without preserving purchasing power.
No. 4 BUY LOW
Of course, you say, that’s obvious. Well, it may be, but that isn’t the way the market works. When prices are high, a lot of investors are buying a lot of stocks. Prices are low when demand is low. Investors have pulled back, people are discouraged and pessimistic.
When almost everyone is pessimistic at the same time, the entire market collapses. More often, just stocks in particular fields fall. Industries such as automaking and casualty insurance go through regular cycles. Sometimes stocks of companies like the thrift institutions or money-center banks fall out of favor all at once.
Whatever the reason, investors are on the sidelines, sitting on their wallets. Yes, they tell you: “Buy low, sell high.” But all too many of them bought high and sold low. Then you ask: “When will you buy the stock?” The usual answer: “Why, after analysts agree on a favorable outlook.”
This is foolish, but it is human nature. It is extremely difficult to go against the crowd—to buy when everyone else is selling or has sold, to buy when things look darkest, to buy when so many experts are telling you that stocks in general, or in this particular industry, or even in this particular company, are risky right now.
But, if you buy the same securities everyone else is buying, you will have the same results as everyone else. By definition, you can’t outperform the market if you buy the market. And chances are if you buy what everyone is buying you will do so only after it is already overpriced.
Heed the words of the great pioneer of stock analysis Benjamin Graham: “Buy when most people…including experts…are pessimistic, and sell when they are actively optimistic.”
Bernard Baruch, advisor to presidents, was even more succinct:
“Never follow the crowd.”
So simple in concept. So difficult in execution.
No. 5 WHEN BUYING STOCKS, SEARCH FOR BARGAINS AMONG QUALITY STOCKS
Quality is a company strongly entrenched as the sales leader in a growing market. Quality is a company that’s the technological leader in a field that depends on technical innovation. Quality is a strong management team with a proven track record. Quality is a well-capitalized company that is among the first into a new market. Quality is a wellknown trusted brand for a high-profit-margin consumer product.
Naturally, you cannot consider these attributes of quality in isolation. A company may be the low-cost producer, for example, but it is not a quality stock if its product line is falling out of favor with customers. Likewise, being the technological leader in a technological field means little without adequate capitalization for expansion and marketing.
Determining quality in a stock is like reviewing a restaurant. You don’t expect it to be 100% perfect, but before it gets three or four stars you want it to be superior.
No. 6 BUY VALUE, NOT MARKET TRENDS OR THE EconOMIC OUTLOOK
A wise investor knows that the stock market is really a market of stocks. While individual stocks may be pulled along momentarily by a strong bull market, ultimately it is the individual stocks that determine the market, not vice versa. All too many investors focus on the market trend or economic outlook. But individual stocks can rise in a bear market and fall in a bull market.
The stock market and the economy do not always march in lock step. Bear markets do not always coincide with recessions, and an overall decline in corporate earnings does not always cause a simultaneous decline in stock prices. So buy individual stocks, not the market trend or economic outlook.
No. 7 DIVERSIFY. IN STOCKS AND BONDS, AS IN MUCH ELSE, THERE IS SAFETY IN NUMBERS
No matter how careful you are, you can neither predict nor control the future. A hurricane or earthquake, a strike at a supplier, an unexpected technological advance by a competitor, or a government-ordered product recall—any one of these can cost a company millions of dollars. Then, too, what looked like such a well-managed company may turn out to have serious internal problems that weren’t apparent when you bought the stock.
So you diversify—by industry, by risk, and by country. For example, if you search worldwide, you will find more bargains— and possibly better bargains—than in any single nation.
No. 8 DO YOUR HOMEWORK OR HIRE WISE EXPERTS TO HELP YOU
People will tell you: Investigate before you invest. Listen to them. Study companies to learn what makes them successful.
Remember, in most instances, you are buying either earnings or assets. In free-enterprise nations, earnings and assets together are major influences on the price of most stocks. The earnings on stock market indexes—the fabled Dow Jones Industrials,for example—fluctuate around the replacement book value of the shares of the index. (That’s the money it would take to replace the assets of the companies making up the index at today’s costs.)
If you expect a company to grow and prosper, you are buying future earnings. You expect that earnings will go up, and because most stocks are valued on future earnings, you can expect the stock price may rise also.
If you expect a company to be acquired or dissolved at a premium over its market price, you may be buying assets. Years ago Forbes regularly published lists of these so-called “loaded laggards.” But remember, there are far fewer of these companies today. Raiders have swept through the marketplace over the past 10 to 15 years: Be very suspicious of what they left behind.
No. 9 AGGRESSIVELY MONITOR YOUR INVESTMENTS
Expect and react to change. No bull market is permanent. No bear market is permanent. And there are no stocks that you can buy and forget. The pace of change is too great. Being relaxed, as Hooper advised, doesn’t mean being complacent.
Consider, for example, just the 30 issues that comprise the Dow Jones Industrials. From 1978 through 1990, one of every three issues changed—because the company was in decline, or was acquired, or went private, or went bankrupt. Look at the 100 largest industrials on Fortune magazine’s list. In just seven years, 1983 through 1990, 30 dropped off the list. They merged with another giant company, or became too small for the top 100, or were acquired by a foreign company, or went private, or went out of business. Remember, no investment is forever.
No.10 DON’T PANIC
Sometimes you won’t have sold when everyone else is buying, and you’ll be caught in a market crash such as we had in 1987. There you are, facing a 15% loss in a single day. Maybe more.
Don’t rush to sell the next day. The time to sell is before the crash, not after. Instead, study your portfolio. If you didn’t own these stocks now, would you buy them after the market crash? Chances are you would. So the only reason to sell them now is to buy other, more attractive stocks. If you can’t find more attractive stocks, hold on to what you have.
No. 11 LEARN FROM YOUR MISTAKES
The only way to avoid mistakes is not to invest—which is the biggest mistake of all. So forgive yourself for your errors. Don’t become discouraged, and certainly don’t try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience. Determine exactly what went wrong and how you can avoid the same mistake in the future.
The investor who says, “This time is different,” when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing.
The big difference between those who are successful and those who are not is that successful people learn from their mistakes and the mistakes of others.
No. 12 BEGIN WITH A PRAYER
If you begin with a prayer, you can think more clearly and make fewer mistakes.
No.13 OUTPERFORMING THE MARKET IS A DIFFICULT TASK
The challenge is not simply making better investment decisions than the average investor. The real challenge is making investment decisions that are better than those of the professionals who manage the big institutions.
Remember, the unmanaged market indexes such as the S&P 500 don’t pay commissions to buy and sell stock. They don’t pay salaries to securities analysts or portfolio managers. And, unlike the unmanaged indexes, investment companies are never 100% invested, because they need to have cash on hand to redeem shares.
So any investment company that consistently outperforms the market is actually doing a much better job than you might think. And if it not only consistently outperforms the market, but does so by a significant degree, it is doing a superb job.
No. 14 AN INVESTOR WHO HAS ALL THE ANSWERS DOESN’T EVEN UNDERSTAND ALL THE QUESTIONS
A cocksure approach to investing will lead, probably sooner than later, to disappointment if not outright disaster. Even if we can identify an unchanging handful of investing principles, we cannot apply these rules to an unchanging universe of investments—or an unchanging economic and political environment. Everything is in a constant state of change, and the wise investor recognizes that success is a process of continually seeking answers to new questions.
No.15 THERE’S NO FREE LUNCH
This principle covers an endless list of admonitions. Never invest on sentiment. The company that gave you your first job, or built the first car you ever owned, or sponsored a favorite television show of long ago may be a fine company. But that doesn’t mean its stock is a fine investment. Even if the corporation is truly excellent, prices of its shares may be too high.
Never invest in an initial public offering (IPO) to “save” the commission. That commission is built into the price of the stock—a reason why most new stocks decline in value after the offering. This does not mean you should never buy an IPO.
Never invest solely on a tip. Why, that’s obvious, you might say. It is. But you would be surprised how many investors, people who are well-educated and successful, do exactly this. Unfortunately, there is something psychologically compelling about a tip. Its very nature suggests inside information, a way to turn a fast profit.
No. 16 DO NOT BE FEARFUL OR NEGATIVE TOO OFTEN
And now the last principle. Do not be fearful or negative too often. For 100 years optimists have carried the day in U.S. stocks. Even in the dark ’70s, many professional money managers—and many individual investors too—made money in stocks, especially those of smaller companies.
There will, of course, be corrections, perhaps even crashes. But, over time, our studies indicate stocks do go up…and up… and up.
With the fall of communism and the sharply reduced threat of nuclear war, it appears that the U.S. and some form of an economically united Europe may be about to enter the most glorious period in their history.
As national economies become more integrated and interdependent, as communication becomes easier and cheaper, business is likely to boom. Trade and travel will grow. Wealth will increase. And stock prices should rise accordingly.
By the time the 21st century begins—it’s just around the corner, you know—I think there is at least an even chance that the Dow Jones Industrials may have reached 6,000, perhaps more.
Chances are that certain other indexes will have grown even more. Despite all the current gloom about the economy, and about the future, more people will have more money than ever before in history. And much of it will be invested in stocks.
And throughout this wonderful time, the basic rules of building wealth by investing in stocks will hold true. In this century or the next it’s still “Buy low, sell high.”


Source:
BY SIR JOHN TEMPLETON
Franklin Templeton Ivestments
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Category: Investing, Rules.
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Comments
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
One Response to “Sir John Templeton 16 Rules For Investment Success”
1. Conan Says:
September 29th, 2012 at 5:20 pm
The problem with these generic lists is they really don’t work in application.. They are good for you to read and learn from, but you have to know yourself. Are you 20 years old or 60. Do you have 100 dollars a month to “invest” or are you managing 100,000 or a million or more. Are you of a value bent or trend follower? Do you use fundamentals or technical analysis or a hybrid? Who are you? Where do you need to go? What is the vehicle to get you there?
How much time did you dedicate to reading and learning? How many what if scenarios did you build and test? Folks this is your money, you will get out of it hopefully what you put in it. Catchy lists are not going to get you there. Put in the time or just to do it right or put in the time to hire the right person or look for something else that you understand, i.e. a personal business, real estate, etc.
I understand the good intentions that Barry has for making this available, but at best these lists are a starting point to develop an investment plan with rules and carefully vetted. However many may make the mistake of believing that they are some kind of system and unfortunately have a false sense of confidence when they are investing.
Investing and making a steady risk adjusted return is hard to do. Those that can do it have dedicate much time and effort to get their rewards. Earned luck – not blind luck. Real systems – Not Catchy Lists!
~~~
BR: Anyone who assumes these lists are an end point (not a starting point) deserves all the losses they suffer.

[Temperament]

What you really can DIY and what you can't? Even real professional is the same. [attachment=348]

[Temperament]

From
Seeking Alpha:
Building A Buy-Low, Sell-High Portfolio
(Added - Building A Market Timing & Value Investing Portfolio?)

Economics Professor Joe Taffet was part of my upbringing. Joe taught “Money and Banking” and “Stocks and Bonds” at City College in New York, where he was known as much for his humor as for his scholarship. Whenever the subject of investing came up, people would ask Joe for his advice. His advice never varied: “Buy low, sell high.” Usually this elicited a twitter or a guffaw. But Professor Joe was right, not just amusing. If you are an individual investor who invests in individual stocks rather than through mutual funds, buying low and selling high has to be what you are after, and you never should take your eye off that ball.
Even if you like dividends, buying low and selling high is paramount because if you get a 4% dividend and the stock loses 10% of its value, your supposed 4% income was illusory—you were just living off your capital. Total return is the only real deal. Yes, high dividends tend to support a stock price, but a dividend cut can be lethal, as stockholders of companies like Bank of America Corp. (BAC) know too well.

The Total Portfolio Approach (Added - Retirement Portfolio-Suitable?)

These days, I live mostly off my investments. And what matters is the relationship between the value of my total portfolio, net of what I have spent, at the end of the year (or other period) compared with the end of the prior year. Whether my gains consisted of dividends or interest or capital gains or unrealized gains is important only for tax purposes, and taxes I paid will be factored into my computation automatically because they will appear as withdrawals from the portfolio (admittedly, slightly in arrears). This total portfolio approach tells me graphically when I am living beyond my earnings.
Once you decide to see your investments this way, on a net gain-or-loss, total portfolio basis, you can become free to pursue buying low and selling high. You free yourself from benchmarks and become free to “seek alpha”. Now you can select sectors based on how you see macroeconomic factors, future technologies, and demography to maximize your possibilities of selecting companies that will perform well. Now you can select companies based on careful research about their likely earnings performance compared with their current share prices. Now you can decide to change your percentages of portfolio invested in stocks, bonds and cash, not based on a formula but based on your evaluation of the markets. When stocks are high, you can sell, and when stocks are low, you can buy. You can treat cash and bonds interchangeably based on risk/return rather than on an idea of what you need to earn in interest or dividends to support yourself.

Macro Forces Matter

This way of looking at your investments takes advantage of the fact that most investments are highly correlated. Diversification can help you only so much, since in recent years—and probably in the future—stock averages—even internationally—have tended to move in the same direction. This means that a good investor spends much more time than usually has been recommended studying the macro factors—indeed, studying the global macro factors. This is because allocation between stocks and cash is so important to the portfolio’s returns. (High-rated bonds are little different from cash when interest rates are low, and low-rated bonds should be seen like stocks—dependent on performance of the economy.)

(Added - Is It Market Timing?)

Changing allocations in accordance with macro factors used to be decried as “market timing”, and it was said that one could not time markets. But it is not true that one cannot time markets. One is unlikely to time markets precisely, but one does not have to do that to succeed. One only has to be long stocks during periods of market rises and not as long stocks in periods of market declines. If you move 25% of your portfolio from stocks to cash while the market is declining, then increase your holding of stocks by that 25% near the start of a market resurgence, then you can be way ahead of most investors, will make money in most climates, and will make a lot more money over the long term.
Where are we today? Is this a time to be “all in”? All out? Unfortunately, I do not know. I think 2012 will not be a bad year for stocks. But I am not sure. Therefore I am mostly invested in stocks but hedging my bets, leaving some cash on the sidelines to invest at the right time, but protecting myself on the upside as well. Big opportunities come along only after big market swings, one way or the other, and 2011 did not provide any extremes.
Markets overshoot. That is their nature. And we should be all in or all out only when it is fairly clear that we are at or near such a time. October 2007 was an obvious high—selling was called for. February 2009 was an obvious low. Going all in was called for. 2003 was a great year. And you could see it coming—maybe not right then, but soon. Most times are in between, when you have to be good at picking stocks and sectors.
From the losses I, like most investors, incurred in 2008, I learned to respect the macroeconomic downside even more than I had. I also learned that I had to pay more attention to the macro factors affecting each business. Few companies were able to paddle uphill against the flood of bad macroeconomic news in 2008. But some sectors could do better than others. Low leverage was a key; companies with low leverage could live to fight another day; and some sectors naturally are less leveraged than others, such as most of the oil companies and technology companies. It did not matter whether companies were small cap or large cap—good balance sheets mattered, especially for companies that went through a year or two of losses. Companies in the medical field also outperformed because they continued to get paid by insurers, and the demand for health care was relatively inelastic.

Challenge Yourself to Reevaluate Every Stock You Own (Value Investing?)

I am now in the process of evaluating what kinds of businesses are going to flourish in 2012 through 2014. I will be ruthless with myself psychologically to weed out companies in my portfolio that do not match up. And I will start afresh with my portfolio over the next few months. I will do this because I know that Professor Joe was right: Buy low, sell high.
Here are a few of the things I am looking at:
• We know from demographics that, globally, more people are going to be buying cars, washing machines, refrigerators and other middle class goods. What companies are postured to benefit? If they are not American or European companies, how can I evaluate them and how can I buy them? Buying developing market stocks is quite different from buying American or European stocks. In the past, I have been reluctant to buy individual Chinese or Indian stocks and have invested in those markets through mutual funds (such as CHN, TDF, IIF and IFN, adjusting volumes based on my evaluation of market prices). I am wondering whether I should overcome my fears about developing legal systems and unknown standards of accounting and disclosure. I remain biased toward buying companies whose disclosure regimes I think I understand better.
• We know that globally more people are going to be demanding sophisticated medical care. But we also know that other countries are unlikely to copy the American model of high choice, high cost. What companies have the right business models to profit within the efficiency demands of the developing world? I do not think it will be Big Pharma.
• We know that IT and other technologies are going to continue to replace workers. And we know that this trend will accelerate as Chinese and Indian workers earn more, since replacing them will become more worthwhile. What companies will pioneer and profit from this replacement process?
• We know that the cost of communication will continue to get closer to zero. I will stay away from legacy companies that are doomed, like Verizon (VZ) and AT&T (T). But what companies will benefit? Will companies like Cisco (CSCO) continue to flourish by becoming more efficient themselves? Passenger railroads did not make money for a long time, but some of their suppliers did very well. Or will I have to take more apparent risk by investing in smaller, less proven companies?
• Incomes throughout the world are not likely to become more equal. What are the best stocks to take advantage of the spending power of the rich? And what should I do if those stocks are over-priced, as many of them are? I looked at buying more Coach (COH) and got scared off by the high ratios—price-to-earnings, price-to-book, price-to-sales. Again, do I have to look for less proven companies? Probably so. But those companies are most likely not going to be American, and I will be faced with the question of how to evaluate developing economy stocks.
Where might you find some additional big questions to ask yourself? Try, for example, the McKinsey Quarterly. It provides excellent insights about global trends.
As I go through my evaluation process, if I get insights that I think are worth sharing, I will write about them here. And by the way, the buy-low, sell-high goal is not for the faint of heart. If you are not prepared to suck it up when times are hard, you had better try some other investment methodology.

[Temperament]

TEST POST.
Trying to learn how to use "Mycode" to make my posting more "versatile". i like to learn how to copy image/photo and paste in my posting here. Can someone help? If i can learn something more, the better.
i look at MYcode help but find some of the explanations like Greek to me.
(Old Fogey still trying to learn new things if you don't mind)

Thank you very much.

[Temperament]

The First Golden Rule on Living the Good Life*
[Image: 319px-Broom_flowers.JPG]
When a 103-year-old man living in a small village was asked what his secret was, his answer was fairly simple: “I have always kept myself busy. I have been living my life. My hair has turned white, my hands and feet are not as strong as they used to be, but I can still reason. And as long as I reason, as long as I keep my mind engaged, my spirit, my soul is at peace. I can still examine and experience the world around me and participate in it, that’s what makes me happy. I can reason under the pine tree how to make better baskets. It now takes longer-much longer than it used to take to make each one for them. But it doesn’t matter. I no longer make them to earn a living. I make them just for the beauty of it, just for the pleasant thought of young men carrying grapes in vineyards. I can still examine life in the village coffee shop where I debate local, national, and international issues with my fellow villagers, and meet new people visiting the area. I examine life in the village church where I raise anew the question of our being. I examine life in the farm where I still plant and nurture olive trees, dreaming of the days the new generation will harvest them, and cut branches to crown Olympic victors.
I examine life by my fire place. I…,” the old man went on and on. “The day I stop examining life, I will be dead.“ That was two years later, just three months shy of his 105th birthday.

NB:
So what's your idea of "The First Golden Rule on Living the Good Life*":

[cyclone]

TEST POST.
Trying to learn how to use "Mycode" to make my posting more "versatile". i like to learn how to copy image/photo and paste in my posting here. Can someone help? If i can learn something more, the better.
i look at MYcode help but find some of the explanations like Greek to me.
(Old Fogey still trying to learn new things if you don't mind)

Thank you very much.

For a detailed explanation, visit this link http://docs.mybb.com/MyCode.html

[Temperament]

TEST POST
[Image: piggybank.gif]
2008/2009 Market Crash.
The once in a life time never to forget stock market crash.
Don't be surprised if there is going to be one worst then this. Never say never in stock investments. If it happens can you survive and then even prosper? Always be prepared for all eventuality if you want to invest in stock market for your lifetime. i always try my best to be prepared. Don't ask me how. Everyone should have his own preparation or prepared medicine to take for survival.
Shalom.