Saturday, January 30, 2016

The Ups And Downs Of Investing In Cyclical Stocks

Courtesy : Investopedia

Imagine being on a Ferris wheel: one minute you're on top of the world, the next you're at the bottom - and eager to head back up again. Investing in cyclical companies is much the same, except the the time it takes to go up and down, known as a business cycle, can last years.
What Are Cyclical Stocks?Identifying these companies is fairly straightforward. They often exist along industry lines. Automobile manufacturers, airlines, furniture, steel, paper, heavy machinery, hotels and expensive restaurants are the best examples. Profits and share prices of cyclical companies tend to follow the up and downs of the economy; that's why they are called cyclicals. When the economy booms, as it did in the go-go '90s, sales of things like cars, plane tickets and fine wines tend to thrive. On the other hand, cyclicals are prone to suffer in economic downturns. 

Given the up-and-down nature of the economy and, consequently, that of cyclical stocks, successful cyclical investing requires careful timing. It is possible to make a lot of money if you time your way into these stocks at the bottom of a down cycle just ahead of an upturn. But investors can also lose substantial amounts if they buy at the wrong point in the cycle. 

Comparing Cyclicals to Growth Stocks

All companies do better when the economy is growing, but good growth companies, even in the worst  conditions, still manage to turn in increased earnings per share year after year. In a downturn, growth for these companies may be slower than their long-term average, but it will still be an enduring feature.

Cyclicals, by contrast, respond more violently than growth stocks to economic changes. They can suffer mammoth losses during severe recessions and can have a hard time surviving until the next boom. But, when things do start to change for the better, dramatic swings from losses to profits can often far surpass expectations. Performance can even outpace growth stocks by a wide margin.

Investing in Cyclicals
So, when does it pay to buy them? Predicting an upswing can be awfully difficult, especially since many cyclical stocks start doing well many months before the economy comes out of a recession. Buying requires research and courage. On top of that, investors must get their timing perfect.

Investment guru Jim Slater offers investors some help. He studied how cyclical industries fared against key economic variables over a 15-year period. Data showed that falling interest rates are a key factor behind cyclicals' most successful years. Since falling rates normally stimulate the economy, cyclical stocks fare best when interest rates are falling. Conversely, in times of rising interest rates, cyclical stocks fare poorly. But Slater warns us to be careful: the first year of falling interest rates is also unlikely to be the right time to buy. He advises that it's best to buy in the last year of falling interest rates, just before they begin to rise again. This is when cyclicals tend to outperform growth stocks.
Before selecting a cyclical stock, it makes sense to pick an industry that is due for a bounce. In that industry, choose companies that look especially attractive. The biggest companies are often the safest. Smaller companies carry more risk, but they can also produce the most impressive returns.
Many investors look for companies with low P/E multiples, but for investing in cyclical stocks this strategy may not work well. Earnings of cyclical stocks fluctuate too much to make P/E a meaningful measure; moreover, cyclicals with low P/E multiples can frequently turn out to be a dangerous investment. A high P/E normally marks the bottom of the cycle, whereas a low multiple often signals the end of an upturn.

For investing in cyclicals, price-to-book multiples are better to use than the P/E. Prices at a discount to the book value offer an encouraging sign of future recovery. But when recovery is already well underway, these stocks typically fetch several times the book value. For instance, at the peak of a cycle, semiconductor manufacturers trade at three or four times book value.
Correct investment timing differs among cyclical sectors. Petrochemicals, cement, pulp and paper, and the like tend to move higher first. Once the recovery looks more certain, cyclical technology stocks, like semiconductors, normally follow. Tagging along near the end of the cycle are usually consumer companies, such as clothing stores, auto makers and airlines.

Insider buying, arguably, offers the strongest signal to buy. If a company is at the bottom of its cycle, directors and senior management will, by purchasing stock, demonstrate their confidence in the company fully recovering.

Finally, keep a close eye on the company's balance sheet. A strong cash position can be very important, especially for investors who buy recovery stocks at the very bottom, where economic conditions are still poor. The company having plenty of cash gives these investors more time to confirm whether their strategy wisdom was a wise one.

Don't rely on cyclicals for long-term gains. If the economic outlook seems bleak, investors should be ready to unload cyclicals before these stocks tumble and end up back where they started. Investors stuck with cyclicals during a recession might have to wait five, 10 or even 15 years before these stocks return to the value they once had. Cyclicals make lousy buy-and-hold investments.

Wednesday, January 27, 2016

Saturday, January 16, 2016

How To Retain Your Sanity In A Volatile Market

Courtesy : Investopedia

In the long term, stocks outperform bonds and bonds outperform cash. Can you name a 20-year period over the past 100 years when they didn't? Unfortunately this is something that many people forget as soon as the markets get ugly. People forgot in 1974, 1987, 2002 and 2008 as they panicked and sold, only to miss a recovery in prices. Why does this happen?

We often make our long-term investment decisions using historic market data to determine an asset allocation. Market return data are typically presented in literature and marketing material using annual, quarterly and monthly returns. These periods are fine for measurement, but they often miss what is really happening day to day, especially the terrifying moments that occur over a few days or even intraday. It is these anxious periods when sleepless nights occur and when investors make emotional decisions.

There are a few days during every bear market when we all wonder how low the market can go. Those are the days when you cannot flip on the television, the radio or even check your e-mail without in-your-face bad news about stock prices. Those are the days when you can be certain the headlines on the six o'clock news and in the newspapers will highlight the money you are losing, and they will feature countless gurus forecasting deeper losses.
The terrifying days are also the times when you should turn off the television, tune out the gurus and take the dog for a walk. If you can't get your mind off your money, you're not sleeping at night because you are worried about your portfolio, and you are teetering on the verge of making an emotional decision to "sell it all!" then action needs to be taken. Here is what you should do:

First, look at the amount of income you are getting from your current investments. The income coming from your investments generally does not go down even though prices do. Stocks and bonds continue to pay dividends and interest. When your annual expenses can be covered by the cash flows from dividends, interest and outside income, it makes it easier to ride out a bear market. This income reality check helped a lot of my clients get through the 2008 bear market.

Second, if the income reality check does not put you at ease and you are still sick to your stomach about the future of your portfolio, you have too much stock exposure and need to permanently reduce it. How do you do that? Lower your equity position by 10 percentage points. For example, if you are at 60%, go to 50%. If you are at 40% in stocks, reduce to 30%. A 10-point reduction in equity exposure usually reduces investor anxiety long enough for the stock market to recover.

Once the 10-point reduction in stocks is completed, keep the allocation as is through the bottom of the market and beyond. Don't go back to the risk level you once had in your portfolio, because you may be setting yourself up for another emotional sell during the next bear market. This small reduction will likely have only a small effect on the long-term return of your portfolio and a huge effect on your short-term psyche.

Third, if you are still having an emotional reaction after a 10-percentage-point stock reduction in your portfolio, you still have too much risk. Reduce the equity allocation by another 10 points. This should allow you to think clearly and get past the bear market. Once you get to this level of risk, stay there, even when the market recovers.

We have all made an asset allocation mistake during our lives. These mistakes tend to manifest themselves in bull or bear markets when we realize our portfolios are not in line with who we are emotionally.

I have no idea when the next bear market will occur, but it will occur--and when it does, some people will feel the need to panic. Don't do that. Any adjustment to portfolio allocation should be done in a logical and controlled way. These changes require deep thinking and even-handed judgment. A good investor checks and rechecks his or her feelings for symptoms of irrationality and then deals with the situation appropriately.

Saturday, January 9, 2016



Buying stocks is easy, but do you have stock selling strategies? Do you consider your exit strategy prior to buying a company? The exit strategy is just as important as the entry strategy. The entry strategy is something everyone considers, but when do you sell? 

 Here are some  reasons for stock selling :
  • You made a mistake in judging the company
  • The company fundamentals have changed
  • A better value or opportunity comes along
  • The need for emergency cash
  • Too far above intrinsic value
Acknowledging a Mistake

I believe this to be one of the key psychological barriers that an investor has to break in order to be successful. You have to be honest with yourself and remember your mistakes. Nobody wants to admit they are wrong, but as human beings, we are wrong quite often.Too often, investors know they’ve made a bad decision but choose to hang onto the losers until they can at least break even or come out with a tiny gain. This usually leads to a larger loss. If that stock is able to break even and we sell at that point, our mind does not recognize this as a shock. This bad decision eventually gets swept away only to be re-enacted at a later time.

If we know that a mistake has been made, sell.

Change in Business Fundamentals

This is pretty self explanatory. If a fashion company decides to start expanding or change its business to the agriculture industry, then we have a problem.Even if the prospects in the  same industry turn bleak and no chance for a revival on foreseeable future -Sell

Better Value Investment Ideas

An investment is defined as
The investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value. – dictionary
If the reason we are investing is to obtain profitable returns, doesn’t it make sense to sell a current investment in order to invest in a better, more profitable opportunity?. This is not just limited to stocks. You could find better value in real estate, bonds, coins, cars, antiques etc.

Better value knocking on your door? Sell.

Sell Stocks for Emergency Use

Life brings all sorts of situations. If you are in need of emergency cash, there is no real reason to visit a loan shark or bank to borrow money that you may already have.
This is a hard situation to call, but if this emergency is extremely urgent, sell.

Over priced and Valued

Intelligent investors monitor their companies, not the stock symbol. We understand that all companies have an intrinsic value. If you bought a great company at a discounted price and the price has now reached the intrinsic value, you could sell or hang onto it because you can fairly expect to receive a certain rate of return from your intrinsic value analysis and discount rate.But due to Mr Market’s craziness, say the price of the company shoots beyond the intrinsic value. Selling in this type of scenario is also psychological. Your greed is nudging you, grinning and nodding, telling you “you know it’s going up further”. If this ever comes around, halt, and reread or rethink your analysis and get back to basics. Price follows value, and if the price is pushed up due to speculation and hype, price will eventually meet value.


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