Want To Make Money In Stocks? Here Are 6 Things You Should NOT Do

One of my favourite Mungerisms is this: “Tell me where I’m going to die, that is, so I don’t go there.” This illustrates the importance of negative knowledge – the knowledge of what not to do.

With that, I’d like to share a list of “Don’ts” in investing that I’ve been using for years. This list is something that has been very helpful for me in generating solid returns in my own personal portfolio, and for The Motley Fool Singapore’s stock recommendation services. Without further ado…

1. Don’t jump in and out of stocks

Finance professors Brad Barber and Terry Odean once studied the six-year trading records (from 1991 to 1996) of over 66,000 households in the U.S. and published their findings in a paper titled “Trading Is Hazardous to Your Wealth”.

What they found was that in the six-year block, the investors who traded the most earned an average return of 11.4% per year. Sounds great? Turns out, the market had generated a return of 17.9% per year for the same period. What’s more, the average annual return for all the investors in the study was 16.4%.

David Swensen, the famed chief investment officer of Yale University’s multi-billion-dollar endowment, once gave a lecture and recounted how fund investors’ returns over a 10 year-period had lagged the returns of their funds, often badly, and by as much as 13.4% per year (!!). The reason, Swensen mentioned, was that the fund investors were buying and selling their funds at all the wrong times.

2. Don’t assume that a stock that has fallen hard can’t fall anymore.

There’s a joke that’s often attributed to famed hedge fund manager David Einhorn that goes:

“What do you call a stock that’s down 90%? A stock that was down 80% and then got cut in half.”

Here’s the story of a real stock that will show you why Einhorn’s joke is worth remembering.

Six months ago, on 29 September 2017, the stock was trading at S$0.395 apiece after falling by a stunning 75% in over a period of just 12 months (meaning that the stock was trading at S$1.60 on 29 September 2016). It can’t go any lower, can it? As of 28 March 2018, the stock in question – the embattled commodities trader Noble Group Limited  (SGX: CGP) – closed at a price of S$0.077. That’s a decline of a further 81% from 29 September 2017.

The lowest that a stock can theoretically reach is zero. If a stock has an extremely shaky underlying business with a debt-laden balance sheet (just like what Noble has) and goes bust as a result, its shareholders will be left holding an empty bag.

3. Don’t underestimate the power of simply holding onto stocks

Financial adviser Nick Murray once said that “Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage.” How true.

My own personal experience also provides an example of the power of simply holding onto stocks. I had bought shares of computer, console, and mobile games maker Activision Blizzard back in October 2010 at a price of US$11.31 each. For the next two-plus years after my purchase, the company’s stock price was languishing between US$11-US$13, basically doing nothing.

4. Don’t blindly invest in a company just because its stock looks cheap

Noble is useful here again. A year ago from 28 March 2018, Noble had price-to-book and price-to-sales ratios of just 0.44 and 0.03, respectively. But, in that one year period, its stock price has fallen by a massive 96% from S$1.91 to S$0.077. This comes after the company’s book value per share had been chopped from US$3.03 to a negative US$0.60 in that time-frame.

The lesson here is that a cheap valuation can’t give us much protection if a stock’s underlying business performance is poor.

5. Don’t overpay for a company’s shares

If you had bought shares of local real estate giant CapitaLand Limited  (SGX: C31)at the company’s pre-financial-crisis peak of S$5.51 (adjusted for dividends) that was reached more than 10 years ago on 26 April 2007, you would still be down by over 30% from today’s price of around S$3.50.

During that time frame, the real estate company’s book value per share actually increased by 4.5% per year. That’s not especially fast, but the company was still building value for its shareholders over time. So what had caused Capitalist's dismal performance in the stock market? Valuation is the answer. On 26 April 2007, the company was valued at 3.2 times book value – that was an expensive price to pay.

6. Don’t pay too much attention to what the economy is doing

It’s near-impossible to guess what the economy would do. And even if you could, there’s very little about the economy’s performance that can tell you what stocks would do next. The chart below shows how various US economic and financial indicators had fared when it comes to forecasting what US stocks would do over the next 10 years:

As you can see, even rainfall in the US can tell us more about the country’s future stock market returns than its GDP numbers, corporate profit margins, and bond yields.

Investing legend Peter Lynch once said that “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.” When it comes to the stock market, it’s best to study individual businesses and invest accordingly.

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UMW Holdings says no certainty offer

UMW Holdings Bhd (UMWH) said there is no certainty that it will extend the proposed mandatory offer (MO) for all the remaining MBM Resources Bhd (MBMR) shares it does not already own.

In a filing on behalf of UMWH to Bursa Malaysia this morning, Maybank IB said “UMWH wishes to emphasise that there is no certainty that the MBMR Offer will lead to any conclusive or definitive understanding between the parties.”

It said an appropriate announcement will be made by the Company as and when there are material developments relating to the Proposed MBMR Acquisition.

Shareholders are advised to exercise caution when dealing in MBMR Shares and to seek independent advice if they wish to do so.

On March 26, UMWH announced that Med-Bumikar Mara Sdn Bhd and its wholly-owned subsidiary Central Shore Sdn Bhd (CSSB) had rejected the conditional offer made by UMWH for their collective 50.07% equity interest in MBMR.

“As the board is of the opinion that the conditional offer is reasonable, being at a premium to the traded share price, the board intends to continue to engage Med-Bumikar, CSSB, their respective shareholders and key principals,” UMW had then said.


UMW on March 9 made an offer to acquire Med-Bumikar’s and CSSB’s stakes in MBM Resources for RM501 million, or RM2.56 per share, representing a premium of 13.3% to MBM Resources’ five-day volume-weighted average market price of RM2.26 at the time.

At 9.02am today, MBMR dipped 0.82% or 2 sen to RM2.41 with 3.000 shares done.

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Foreign funds buying on Bursa Malaysia

The research house said international investors acquired RM872.7mil net of local equities last week, higher than RM702.2mil net bought in the week before.

“Last week, foreign investors were net buyers on all five trading days. Foreign buying peaked on Tuesday, as foreign investors pumped in RM254.4mil net of funds, the highest acquisition in a day since Jan 8, 2018.

“We ascribe the intense buying on Tuesday to the strengthening of the ringgit to a 64-week high of RM3.927 and firmer oil prices,” MIDF said in its weekly fund flow report.

However on Wednesday, there was a big dip in buying activity as the net inflow retreated to RM93.7mil, the lowest in a day since Jan 17, 2017.

On this day, a similar trend was seen in the other emerging southeast Asian market such as Thailand.

While similar pattern was seen in Indonesia and the Philippine as well, the streams of inflows into both markets were snapped on Wednesday, with Indonesia experiencing the biggest outflow of US$23.64mil.

On Friday, the FBM KLCI continued its ascent to end the week at 1,853.92 points, due to steady oil prices and improved confidence in the economy following Bank Negara’s rate hike.

The ringgit, meanwhile, strengthened by 1.75% against the greenback to settle at 3.871.

MIDF said foreign participation remained vibrant as the foreign average daily trade value (ADTV) stood at above RM1bil market at RM1.13bil.

On the other hand, the retail market had a 20.5% decline in ADTV, but still remained healthy above the RM1bil mark at RM1.4bil.

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MARKET ENJOY PRE-CHRISTMAS CHEER

Asian markets were on course on Friday to see in the Christmas break on a positive note, picking up the baton from Wall Street while the euro stood firm against a sell-off despite a victory for Catalan separatists in a snap poll.Global equities rallied over the past year on hopes Donald Trump's key election promise to cut taxes would boost corporate profits and put money in people's pockets, but traders cashed in their profits soon after the bill was passed this week.However, buying perked up again on Thursday on bets that the tax reform will further fire the already healthy US economy, while there was also cheer for news lawmakers had agreed a deal to avert a painful government shutdown."A day after being nonplussed with the passage of the US tax bill through the House and Senate, it seems stock traders decided that yes, after all, they do think the tax cuts will help valuations and the economy," said Greg McKenna, chief market strategist at AxiTrader.The US gains extended into Asia with Hong Kong up 0.3 per cent, Shanghai 0.1 per cent higher, Sydney adding 0.2 per cent and Singapore putting on 0.3 per cent. Seoul, Wellington, Taipei and Jakarta were also stronger.Tokyo's Nikkei closed the morning flat."The US corporate tax cut will lead to better earnings results and have a positive impact on the economy," Hideyuki Ishiguro, a senior strategist at Daiwa Securities in Tokyo, told Bloomberg News.However, Stephen Innes, head of Asia-Pacific trading at Oanda, warned of possible headwinds for 2018, pointing out that Trump could struggle to push through a planned US$1 trillion infrastructure bill in the face of low poll ratings and possible mid-term election losses.On currency markets the euro edged down but held its own after Catalan separatists won the crucial election Thursday, fuelling fresh uncertainty in Spain, one of the eurozone's biggest economies.The vote came after a failed independence bid earlier this year rattled Europe and triggered Spain's worst political crisis in decades.While pointing out there had been little immediate negative impact on the single currency, Innes said the result "would deal a significant blow Spanish Prime Minister Mariano Rajoy that could potentially escalate".Bitcoin sank more than 17 per cent to below US$14,000 for the first time since December 7, hit by profit-taking in the volatile cryptocurrency, which hit a record $19,500 on Monday.AFP

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Local bourse sees slight gains on thin trading volume

The local bourse opened on a strong note on Monday amid strong economic data released by both the US and China. However, by midday, the FBM KLCI shaved gains to 0.65 points higher at 1,721.90 points.

Trading volume was lacklustre owing to the Selangor state holiday. Turnover was 812.08 million shares with a value of RM666.7mil. Market breadth was almost equal with 287 decliners to 279 gainers and 475 counters unchanged.

Hong Leong Bank pushed higher by 44 sen to RM16.44 while Genting Malaysia rose three sen to RM5.28.

Petronas Chemicals gained two sen to RM7.44 while Petronas Gas added six sen to RM16.06.

The leading decliners included IHH Healthcare, which dropped two sen to RM5.64, Genting, which slipped four sen to RM8.75 and IOI, which fell three sen to RM4.46.

Among the Sime Darby counters, Sime Darby Plantation continued to gain strength, rising seven sen to RM5.36, while Sime Darby Property rose 17 sen to RM1.45. Sime Darby, however, slipped one sen to RM2.17.

Oil refiners were among the stocks in investors' spotlights on Monday. Hengyuan rose 60 sen to RM11.88 and petron malaysia 

 gained 36 sen to RM61.50. 

Glovemakers were alo on the rise. Top Gove added 21 sen to RM6.61 while Hartalega gained 29 sen to RM9.48.

Among the leading laggards, Latitude Tree slipped 16 sen to RM4.13, A-Rank dropped 12.5 sen to 94.5 sen and United Malacca fell eight sen to RM6.50.

Meanwhile, in commodities, a rise in the number of US oil rigs pointed to a further increase in American production that could undermine Opec-led efforts to tighten markets, Reuters reported.

Us light crude dropped 20 cent sto US$57.16 a barrel while Brent crude shaved 23 cents to US$63.17 a barrel.

In currencies, the ringgit moved higher for its second consecutive session of gains following a correction earlier last week. The local currency strengthened 0.14% against the US dollar 4.0817 and 0.8% against the pound sterling at 5.4689. It weakened 0.03% against the Singapore dollar at 3.0200

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TRUE STORY A "DIVIDEND " MILLIONAIRE "

Dear Take Stock reader,

In 1995, Hayford Peirce, a science-fiction and mystery writer by avocation, sat down in a Tahitian café. He was 53 years old.

Peirce pulled out a legal pad and pen, and wrote down his list of stock investments. He had two groups: There were about a dozen high-yield but slow-growing stocks such as utilities and high-yield bonds.

The second group of stocks, seven in all, overlapped a little with the first. But these companies were comparatively high-growth, with a long history of increasing their dividends every year. All of them were well-known blue chips.

He predicted his high-growth portfolio would pay him about $14,000 in dividends in 1995 (the actual payout ended up being $14,267.50; the overall value of his portfolio back then was about $2 million). That would turn out to be 13.8% of his total income for the year, the rest coming from his low-growth "widows and orphans" stocks. "Let's see what would happen if we just increased this dividend payout by 10% every year for 30 years," he recalls saying to himself.

Thus began his 30-year plan.

Fast-forward to 2017. It turns out, Peirce's dividend payouts have increased 8.54% annually over the past 22 years (see chart below). That's shy of his goal of 10% per annum, but it's been enough to make him a "dividend millionaire."

In aggregate, from 1995-2017, Peirce's dividends alone have paid him more than a million dollars—$1,148,079.84, to be exact. (All dollar amounts quoted are USD.)

That's $49,916.51 per year, on average.

Here's how he did it.

When Peirce eventually returned to his home (he lived in the U.S.) back in 1995, he transferred his legal pad calculations to computerized spreadsheets. He's updated those spreadsheets annually for 22 years (and just completed the data entry for 2017).

His stated goal back then was to have his dividend income reach $250,000 in 2025. That would come on the back of a fairly concentrated investment portfolio. Today, it's comprised of 13 securities:

• Four common stocks.
• Eight master limited partnerships (MLPs): MLPs are unique to the U.S. market. According to Investopedia, MLPs combine “the tax benefits of a partnership—profits are taxed only when investors actually receive distributions—with the liquidity of a public company.” They tend to be energy-related stocks with high dividend payouts.
• One convertible bond.

That's it.

In 2017, this portfolio has paid him $86,611.76—62.2% of his total overall income from all sources. (Again, in 1995, it was just 13.8%.) Consider, too, that over the 22 years, Peirce has not added any principle to his stocks. Not bad.

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Though he's unlikely to achieve his goal of $250,000 from dividend payouts in 2025, and indeed his payouts this year are lower than 2015, Peirce says his portfolio hasn't caused him any stress. "I'm old enough to have been through many cycles," he told me. "And my income [from all sources] had reached about $165,000 by 2015, which was far more than I really need."

His grounded, humble outlook on the markets seems to have allowed Peirce to stay the course and not excessively trade or churn his portfolio. When he swapped one MLP for another, he said, "First it soared, and I told myself how smart I was. Then it bombed, and I told myself how stupid I was."

So it goes.

There's also his quip when I asked him what advice he'd give a 53-year-old reading about his story. "Do it just the way I did it back then, but stay away from [underperforming stocks]," he joked. "Work at it harder than I did. I'm basically lazy."

His self-assessment doesn't seem quite right, though. Peirce has exhibited some of the most important traits an investor could possess:

• He made a plan. Peirce set a long-term goal—30 years! That puts him in the minority of American savers. According to the U.S.-focused 2017 Retirement Confidence Survey, only 41% of people say they've ever even attempted to calculate how much money they will need to have saved so that they can live comfortably in retirement. Quoting the Survey, "Despite higher savings goals, workers who have done a retirement savings needs calculation are more likely to feel very confident about affording a comfortable retirement (77% at least somewhat confident vs. 52% at least somewhat confident for not doing a calculation)." Doing the math, and writing it down, matters.
• He kept score. Peirce paid attention to his portfolio, tweaking it along the way, and updating his spreadsheet annually. But—and this is key—he didn't trade or churn excessively, and therefore avoided frictional and trading costs that would dampen his investment income.
• He made his portfolio work for him. Peirce is wrapping up Year 22 of his 30-year plan, and has not wavered from the original intent—to provide sufficient income to live off of. Far from being wooed by can't-miss stocks, Peirce put his portfolio to work in service of his goals, and focused strictly on a steadily growing stream of dividend income. He's proof of Ben Graham's famous line, "Investment is most intelligent when it is most businesslike."

Of course, there's a built-in flaw to Peirce's plan. And it's his one major regret.

He'd have a lot more income today had he been able to reinvest all those dividends.

"My underlying problem has always been that I didn't have enough other independent income so that I could reinvest my dividends. If I could have done that over the past 22 years, I imagine I would be worth maybe $10 million today," Peirce said.

"Who knows?"

Let's call that the curse of the dividend millionaire.     SOURCE:FOOL.SG

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GOLD AS DOLLAR HOLDS NEAR 2 MONTH LOWS

GOLD AS DOLLAR HOLDS NEAR 2 MONTH LOWS

Gold prices were steady early on Monday, as the dollar held close to a two-month low hit in the previous session against a basket of major curriences.Spot gold was nearly unchanged at US$1287.67 an ounce at 0045 GMT.US gold futures for December delivery were flat at US$1,287.20.The dollar index / which measures the greenback against a basket of six major currencies, was little-changed at 92.806 and hovered near a two-month low of 92.675 hit on Friday. US President Donald Trump will meet with Senate Republicans this week to discuss their party's efforts to pass tax reform legislation, the chairman of the Senate Republican Policy Committee said on Friday. Market players are looking to the Congressional hearing on Fed Chair nominee Jerome Powell on Tuesday.With the US stock market at a record high and daily stock gyrations near multi-decade lows, some investors have raised concerns about the lack of fear in the market, but US equity options market data suggests investors are far from complacent.Businesses are heading into 2018 in a pretty optimistic mood, surveys will more than likely show in the coming week, pointing to a potential boost for already solid growth in the world's biggest economies.The European Union handed Prime Minister Theresa May a 10-day "absolute deadline" to improve her Brexit divorce offer or face failure in persuading EU leaders to open trade talks with Britain at a December summit.German business confidence hit a record high in November, putting Europe's largest economy on track for a boom, the Ifo economic institute said on Friday, allaying some concerns about political instability over forming a new government.Leaders of German Chancellor Angela Merkel's conservative party agreed on Sunday to pursue a "grand coalition" with the Social Democrats (SPD) to break the political deadlock in Europe's biggest economy.Bank of Japan board member Hitoshi Suzuki said there is room to debate a fine-tuning of the central bank's yield curve control (YCC) policy, the Mainichi paper reported, signaling the chance it may raise interest rates before inflation hits its target.The buying of physical gold remained muted across major Asian centres last week as higher prices dented demand, though seasonal demand could boost activity in top consumer China next month.Russia is increasing the share of gold in its state reserves to beef up national security, Central Bank First Deputy Governor Sergei Shvetsov said on Friday.

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