There is more to it than you expected!

For two weeks now, I have been spending a lot of time with veteran investors: individual ones and professional ones. And talking to them has made me realize that there is always much more to an investment idea that anyone could ever expect. 

After developing an investment thesis on a particular stock, you expect that the performance of that company goes hand in hand with your fundament. Nevertheless, many times, that is not the case. And you might end up with the wrong perception of what really happened after you took your chances with the company! It might have risen very nicely, which would've make you tremendously happy, but, maybe, not for the reasons you had hypothesized about. Or, the other way around, it could've dropped significantly with your investment thesis being right, but the market might have felt the time was not right. Either way, it makes you think. And, many of the reasons behind it, we, as investors, don't have control over them. We simply believe in our thesis. Because, there is never a sure investment! 

But, there is a solution that might help me and anyone understand the reasons that go beyond the company's control. And, the solution is looking at the periphery. In other words, we need to look at the industry the company is, we need to briefly analyze the industry peers to understand if there is a problem or an opportunity that might make the companies in the same sector benefit. We need to know how consumers are reacting to new product and pricing strategies, and that is not a hard thing to do, we can look at our own behavior, listen to what friends say and simply comparing sales of similar products. Also, we need to, at least, take into account how sales trends around the main country groups are changing. We need to know what situations, like the economic crisis with the problems in Greece, can affect our investment thesis. We need to know what sectors have the greatest potential at the present moment and in 3-5 years. For example, right now, the auto industry can be seen as one of great potential due to the great advances in renewable and environmentally friendly fuel energy. Companies, in Europe, such as Renault or BMW, have showed that their technology has a lot of potential in that area. And if, in 2-3 years, they double the durability of renewable fuel for their cars, the companies are going to enjoy handsome profits! 

Unfortunately, nowadays it's harder to determine investment opportunities than it was 20-30 years ago. But, that doesn't mean there are no opportunities, there is just much more to research and places to find them, which makes it more frustrating though. But, in reality, there are plenty and much more opportunities than before!

Now, talking is easy. But, when it comes to actually determining how the trends seem to be shifting is harder. And having lots of stocks in a portfolio to follow and analyze is not an easy task. But you've got to start somewhere! There are plenty of free websites/blogs that once in a while talk about new trends and new potential growth industries. For example, the blog www.seekingalpha.com, www.finance.yahoo.com and may others do provide starting points for further research. And, if you have the time and a bit of money, you can buy trend reports from Reuters and other Research agencies.  Or, you can subscribe to services like Valueline.com, which as Peter Lynch viewed it as "The next best thing to having a personal stock analyst". I have done this myself, and it proved quite useful, I must say.

Bottom line here is that it is not enough to conduct valuation metrics, ratio analysis and other financial analysis. Because, even if the company seems to be great, maybe undervalued, it might be affected by factors outside it's range of control. And you have to be alert when that happens. So, my advice, for all investors, and to myself, research about the industry and try to understand what is happening within it: peers, trends, margins, global conflicts, etc. There's always an explanation to what seems an involuntary movement.

Keep Investing.

Take care,

J.P 

Ownership - I own 0,000001% of that!

One of the most self-fulfilling things of life is owning things. Be it a house, a car, a company, an airplane...Whenever you buy something, you know you worked for it and it makes you feel good! Which leads me to, owning stock of a company. Because that's precisely what it is! When you buy shares through your broker, you're buying a piece of a company! And there is no one else that is going to take that away from you, even if it's just 0,000001% of it! Unless the company goes bankrupt...

Have you ever wondered about when you drive in your hometown or travel and see a building, a supermarket, a gas station that belongs to the company you own stock in? For example, GALP in Portugal? And then thought to yourself: Well son, I own part of that! - I DID! - And it feels great, especially, when you checked the fundamentals, know who is behind the company and you know the prospects! All of this is very important for the psychology of owning shares of companies, because if you don't fully trust the companies, what sense does it make to own them? None! Exactly. Obviously, if you don't know the company you will react to any movement in the price. Either, selling at a lower price than you bought it or selling higher but too early.

The bottom line to purchasing shares in companies is for either price appreciation or dividends. Maybe both in some cases. So, you should have an objective when you buy shares. Just like Peter Lynch describes in his book One Up On Wall Street, most people spend more time choosing a microwave than choosing stocks. And this is still a reality! I have done it myself during the beginning of my investment journey and I know people who do. And this is a big problem for many reasons: People react when they should be sitting still and holding own to their positions; it makes people take rash decisions in the future and feel anger towards their investments and try to take revenge on them by buying on a dip or short-selling; It leads people to shift to other financial products, usually with high levels of leverage (Cfd's, Forex, Futures, Options, Spread betting) which strangely makes people feel better because of the adrenaline of watching the value of their financial instruments change so quickly. It's complicated what goes through the human mind when it comes to investments. 

And that's when people start losing more than they have. But, honestly, who likes to research? No one! But it has to be done. There is no other way to beat the market, unless you put your money into an index fund, which matches the performance of a stock index or you find a very well managed fund that manages to make better averages than the market over a considerable amount time.

Coca-Cola, one of my all-time favorite stocks has been consistently beating the market, and it has a rather nice dividend yield. But what makes Coca-Cola one of my favorite stocks is that it can still grow earnings at an average of 10% a year, while being one of the largest Dow stocks. They have more than 25% Return on Equity, more than 10% Return on Assets, more than 15% Return on Investment, controlled debt, they have a nice pile of cash, great margins, valuable assets and much more. If I were to put all of my money in a company, Coca-Cola would be it! But this is my opinion, I could go on and on about it, so don't go and buy Coca-Cola just because I said it is a beautiful company! Make your own judgment! RESEARCH! My point here is that, with Coca-Cola, you can easily achieve price appreciation and receive a regular dividend, which is great!

But, remember, when you buy a company, you expect to receive something in return. So, if you don't know how likely that is going to happen, just don't gamble your money away because a friend or someone told you Stock A is a great company and is expected to grow 1000% over 3 years! Research your companies, and buy them to receive something in return! Price appreciation or dividend. Or both! Buy companies like if you were a fund manager and have the objective of returning 5% above the market average. Define an objective and follow it. Anyone can do it!

Keep investing.

Take care,

J.P

Uncertainty. Volatility. Fear

3 words that have been constantly attached to the recessionary economy and consequently to companies in the stock market while falling. Luckily for me, these are the type of words that I try to and most of times successfully ignore. And here is why you should do the same:

What is Uncertainty? For me, it is the momentary inability to make a decision under strange and difficult to understand situations. And we, as investors and human beings, tend to become overwhelmed with it during economic crisis, stock market sharp decreases and crashes.  Uncertainty causes dispair and stress, which is certainly not good for anyone's health, and learning to ignore it, is the hardest part. Great value investors have taught us that we should take market uncertainty as a buy signal, generally speaking, and I do believe this true. If you have read 'One up on Wall Street' by Peter Lynch, you know that, historically speaking, during the times when people pull their money out of the stock market because of sharp declines, those are, usually, the times in which great companies get marked down. So there's an opportunity. And this keeps happening, it's not just 10, 20, 40, or 60 years ago. Take January 2009 for example, practically anything you bought would have risen many percentage points two years after. Who would have guessed it? After Lehman Brothers collapse who would buy company stock? Insane people? NO. Value investors were! A lot of intelligent buying was coming in, and it didn't take a rocket scientist to see that opportunity. And this is what is important to understand! There is no better time to invest as when people are afraid of losing more than they have lost already and they take the money out of their stocks and put it in money market funds, time deposits or bonds. 

Nevertheless, I am an apologist of buying companies for their fundamentals rather than attempting to filter the economy sentiment, or the market sentiment. Great companies are successful with bad or good market sentiment, the question is: Which ones? Only you know. But, once you find those companies you need to hold on to them as long as their value is far from fair or even if they reach their fair value, they might be great dividend-payers and recession survivors, so you should keep them for protection and extra income.

Volatility is an investor's worse enemy. I have, many times, succumbed to the 'powers' of volatility and sold stocks when I should have been buying more or simply holding on to them. Great Value Investors have taught us that if you have a great company, hold on to it, during bad or good times, because value will eventually out. But learning to cope with volatility and trying to ignore it, is hard, but it is something every Value Investor needs to learn. I have learned it the hard way when I started out. Although I didn't lose thousands and thousands or millions and millions of euros and dollars, I lost some money. But happily enough, I have managed to recover it and some more. Today I keep a portfolio of stocks from many countries, ranging from small caps to large caps. Interestingly, I have recently started to build a portfolio of Portuguese companies, simply because I've checked the fundamentals, spoke to insiders and I believe in most of them. And because eventually our economy will improve and so will the companies. Maybe my Market Timing isn't the best, but importantly enough I do not Fear volatility or market declines anymore. Timing the market is a rather hard skill to develop, the largest percentage of that skill is luck I believe. With the amount of variables playing the market and the economy it is impossible to do it with 100% efficiency. I want to keep those stocks until I make a handsome profit on them. And if that takes 5, 6, 8 years. So be it! Unless the business starts to deteriorate, I sell them, otherwise I will keep them.

I am currently reading 'The Intelligent Investor' by Benjamin Graham, and I highly recommend ir for those who suffer from these 3 conditions.

The key take away from this post is that, Value Investors know their companies and believe in their investments, so it's not volatility, uncertainty or fear that will make them sell their companies. It's their own judgment and opinion of the companies that might. Other than that, they keep their companies until they've reach a stagnant point of growth, and even then, they might start paying nice dividends making them keep the companies for a long time.

Keep investing.

Take care,

J.P