Josh’s Twenty Common Sense Investing Rules

Source: http://www.thereformedbroker.com/2012/01/23/joshs-twenty-common-sense-investing-rules/

I get a lot of inquiries about investment help from people that aren’t suitable for what I do or people who simply don’t yet meet our minimums.  I hate having to turn folks away, especially loyal readers or people that truly need assistance and can’t find anywhere to get it in an unbiased way.

So with that in mind, I’m laying out my Twenty Common Sense Investing Rules.  Please understand that these are not intended to be taken as Iron Law applicable in all situations nor are they meant to be specifically geared toward any one person.  This list of rules is simply my accumulated common sense, learned in victory and defeat (lots of defeat) and it can be applied to a plain vanilla portfolio within one day.

The below is for ordinary investors, not professional traders or those aspiring to become professional traders…

1.  Buy mid-sized and large stocks that are growing earnings and revenue

2. Buy large and mega-sized stocks that are paying consistent dividends and have low debt-to-equity ratios

3. Read the news on your stocks once a week maximum, once a month minimum

4. The moment a stock disappoints you or makes you wish you hadn’t bought it, sell it.  Immediately and regardless of price.  Life is too short to hope a bad decision reverses itself

5. Don’t get In or Out of the market, but modulate your exposure up and down as a function of what you think is happening.  Your guess based on all the available news and indicators is as good as anyone else’s – and it is more important than anyone else’s for sure because it is your money on the line

6. You should be willing to take a 20% drawdown on every dollar you have in the stock market.  Obviously being down 20% is not the goal, but it’s the reality – it can happen at any time.  It’s not a permanent loss but you need to invest as though it could be

7. Don’t buy stocks trading over 30 times earnings or under 7 times earnings – something is wrong in both cases.  Stay away from anything not trading on a US exchange.  Avoid the 52-week low list – a loser is a loser

8. Don’t buy stocks with market caps under $500 million unless you are playing and can afford to lose 100% of that money

9. Sell any stock with a controversial development or red flag no matter what.  Let someone else be the hero that swoops in on a mispriced, misunderstood security.  You can cheer them on from the safety of the sidelines.  Earnings restatements, auditor resignations, massive unexpected earnings misses, filing delays, fraud allegations etc are all automatic sells.  Let’s not act like there aren’t 8000 other stocks to choose from in the market

10. Use ETFs to own sectors that are in favor as opposed to individual stocks, when a huge positive trend becomes apparent – you’ll get the upside without the single-stock risk.  The aging population and increasing demand for energy are big, fat pitches – it’s hard to swing and miss if you own big swathes of these industries via an ETF, make your life easier

11. Avoid all mutual funds except for asset allocators (balanced funds or go-anywhere can be very useful for investors).  Anything based on a discipline (value, growth) or a sector (tech, financial) or a cap size (large, small) is going to underperform its benchmark over the  long-term, mean revert versus its peers and cost you more than you need to spend in internal expenses.  This is fact not opinion

12. Don’t try to be a trader unless that’s going to be your full-time gig.  Trading as a hobby is not the same as being a trader – and it’s less fun than you might think.  If you’ve decided to become a trader, find a method and stick with it until you can do it regularly

13. Pay no attention to people who are always pessimistic.  The dirty secret is that even when things are terrible, they aren’t that bad.  2008 was the worst sell-off and economic conundrum in 70 years and it only took 18 months for the market  to come all the way back.  If you fell asleep in 2007 and woke up now five years later, your diversified portfolio including dividend  income and unrealized gains/losses looks like nothing ever happened at all

14. Pay no attention to people who are always optimistic.  They are selling something.  if someone can’t admit that things suck every once in a while, their cheerfulness has an ulterior motive.  Or they belong in an insane asylum

15. The financial media wants you to think you are missing out on something and that you need to tune in or click to get up to speed.  Pay attention only if you are generally interested and get some entertainment value out of it, most of the time the headlines and segments are dreamed up by editors and producers who need something interesting to talk about each day.  And that’s fine, everybody has to earn a living – but don’t think anyone is keeping you informed as a public service

16. Don’t follow gurus. Don’t buy software.  Don’t buy DVDs. Don’t listen to "Gut Traders". Read books by and about people who’ve been successful in the market – but only if you’re interested. They won’t help you become a better investor if you don’t care that much to begin with

17. Remind yourself about the difference between investors and traders: Investors make trades when necessary, traders make trades in the course of doing business – that is what they do for a living and your goals are different than theirs.  You don’t get paid out on closed positions or a daily p&l statement.

18. Don’t trade for excitement even though trading can be exciting at times

19. Don’t trade angry or for revenge (this stock owes me!)

20. When you finally do become wealthy, hire other people to do this for you and watch them.  Go about enjoying the short time we all have left on earth away from the screen. Kiss your kids and play tennis and read books and  get drunk during the day just because and go to Australia for a month and buy that car you drove in high school – fix it up and take your sweetheart for a ride. Don’t spend that time reading about inverse correlations between German bund yields and the gold/oil ratio.

Look, the market always goes up given enough time.  It is very hard to find a decade during which returns were negative even though we’re just coming off one now.  Stocks go up three out of four years and declines of twenty percent peak-to-trough are extremely rare (declines of 50% are even rarer still and are always a buying opportunity).  So for new or smaller investors the name of the game is to stay in, do smart things while you’re in and avoid blowing up. It’s that simple.

***

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source: Fwd Email

Few Trading Rules using Technical Charts which may be of use to Pure Traders! Investors should stay away from these. Trading Charts if used sensibly can be utilised for Long Term Investors also.

1. Forget the news, remember the chart. You’re not smart enough to know how news will affect price. The chart already knows the news is coming.

2. Buy the first pullback from a new high. Sell the first pullback from a new low. There’s always a crowd that missed the first boat.

3. Buy at support, sell at resistance. Everyone sees the same thing and they’re all just waiting to jump in the pool.

4. Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.

5. Don’t buy up into a major moving average or sell down into one. See #3.

6. Don’t chase momentum if you can’t find the exit. Assume the market will reverse the minute you get in. If it’s a long way to the door, you’re in big trouble.

7. Exhaustion gaps get filled. Breakaway and continuation gaps don’t. The old traders’ wisdom is a lie. Trade in the direction of gap support whenever you can.

8. Trends test the point of last support/resistance. Enter here even if it hurts.

9. Trade with the TICK not against it. Don’t be a hero. Go with the money flow.

10. If you have to look, it isn’t there. Forget your college degree and trust your instincts.

11. Sell the second high, buy the second low. After sharp pullbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try.

12. The trend is your friend in the last hour. As volume cranks up at 3:00pm don’t expect anyone to change the channel.

13. Avoid the open. They see YOU coming sucker

14. 1-2-3-Drop-Up. Look for downtrends to reverse after a top, two lower highs and a double bottom.

15. Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it.

16. Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again.

17. Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action.

18. Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.

19. Bottoms take longer to form than tops. Fear acts more quickly than greed and causes stocks to drop from their own weight.

20. Beat the crowd in and out the door. You have to take their money before they take yours, period.

Few Additional Rules:

MONEY: Never trade with money you cannot afford to lose

TREND: Always ride the trend and never try to decide a trend

SELECTION: Always select the stocks, for there are always bullish stocks in a bearish market and bearish stocks in a bullish market.

TIMING: Never initiate your trade at the opening bell, wait for a market to make initial high and lows

QUANTITY: Always while trading keep the amount same in each trade and not the quantity, ex: if have trade 50000/- in one, trade 50000/- in another rather than trading 100 shares in each trades

LEARNING: Blaming market is trying to hide your mistakes from yourselves,making fool of one’s self, thereby losing an opportunity to learn, markets are never wrong, the blame lies with trader.

INTROSPECTION: Always introspect at the end of every trading day, next day will work wonders.

R/R RATIO: Never ever enter a trade where the risk to reward ratio is less than 1:4

NO OF TRADES: Always trade in 2 to 3 stocks at any given point of time, how lucrative the market be, be master of some than being jack of all, keep buffering profits, you’ll find stock markets a wonderful place to be in…

STOP LOSS: Stop loss is essence for trading, never trade without a stop loss

AVERAGING: Averaging has no place in day trading, either u get out of the trade with the stop loss getting triggered or get the target

SUCCESS: Always use trailing stop loss, when the trade initiated, starts bearing results, to get maximum profit.

GREED: Always be ready to take the profits home, if the initial trades have worked for you, be ready to go home , do not trade for the broker

CONFIDENCE: If the markets are not making you confident do not trade, just for the sake of trading , wait for clear signals

RUMORS: Never trade on news or rumours, always follow the levels, remember, news does not make levels, it just triggers levels.

LEVELS: Never get panicked or exited by the happenings on the screen, stick to the levels and stop loss, else you’ll always end up loser

***

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Manas Chakravarty, Mint, 24/8/2011

source: http://www.livemint.com/2011/08/23221928/What8217s-the-correlation-b.html

Everybody knows that the growth in the gross domestic product (GDP) this year will be lower than last year. We also know that it will lead to lower earnings growth. The question is: how much lower? Real GDP growth in fiscal 2011 (FY11) was 8.5% and this fiscal, according to the latest estimate by Morgan Stanley, it’s going to be 7.2%. The government says it’ll be 8% or so.

Assuming it’ll be around 7.5%, how much lower will the earnings growth be? Citigroup Global Markets Inc. has brought out a report, The Asia Investigator— Where to with Earnings? that explores, among lots of other things, the relationship between GDP growth in the Asian nations and the growth in corporate earnings. Specifically, it finds out the impact of a 0.5 percentage point decline in nominal GDP growth on the corporate earnings growth. Note that it takes nominal and not real GDP because “top-line and bottom-line earnings are a nominal phenomenon, not real”.

The Citigroup analysts find that for India, a 0.5 percentage point downward revision in nominal GDP growth is associated with a decline of 2 percentage points in corporate earnings growth.

Well, assuming a 1 percentage point decline in real GDP growth estimates and no change in inflation expectations for FY12, that translates into a mere 4 percentage points decline in earnings growth. Citigroup estimates show that Sensex growth projections have been revised downwards from 23.6% in July to 20.1% in August. If the computation is correct, then, the necessary downward earnings revisions have more or less been done.

However, the chart shows the nominal GDP growth in the last six years along with the growth in Sensex earnings. As you can see, there’s hardly any correlation.

Another metric should appeal to the pessimists. The same Citigroup note shows that while currently its Country Earnings Revision Index is 1.16 standard deviations away from its mean, it was 1.68 standard deviations away from the mean during the 2000 downturn, 2.07 standard deviations down in 2008 and 1.38 standard deviations down during the Asian crisis. Simply put, according to this metric, earnings revision still has some way to go.

By Jonathan Burton

Rules may be meant to be broken, but with investing, ignoring the rules can break you.

Especially now. Investment rules are tailor-made for tough times, allowing you to stick to a plan just when you need it most. Indeed, a rulebook is important in any market climate, but it tends to get tossed when stocks are soaring. That’s why sage investors warn people not to confuse a bull market with brains.

The rules of investing

Jonathan Burton reports on 10 rules to survive this stormy stock market. (June 11)

So with the economy looking more and more like the oil-shocked, stagflation-strapped 1970s, and stocks recoiling from rising unemployment, record energy prices and falling home values, it makes sense to dust off the old playbook and see how it applies today.

One of the most relevant lists of rules, from a legendary Wall Street veteran, is also among the least known. Beginning in the late 1950s, Bob Farrell pioneered technical analysis, which rates a stock not only on a company’s financial strength or business line but also on the strong patterns and line charts reflected in the shares’ trading history. Farrell also broke new ground using investor sentiment figures to better understand how markets and individual stocks might move.

Over several decades at brokerage giant Merrill Lynch & Co., Farrell had a front-row seat to the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987′s crash. Out of those and other experiences came Farrell’s 10 "Market Rules to Remember."

These days, Farrell lives in Florida, and efforts to contact him were unsuccessful. Still, the following rules he advocated resonate during volatile markets such as this:

1. Markets tend to return to the mean over time

By "return to the mean," Farrell means that when stocks go too far in one direction, they come back. If that sounds elementary, then remember that both euphoric and pessimistic markets can cloud people’s heads.

"It’s so easy to get caught up in the heat of the moment and not have perspective," says Bob Doll, global chief investment officer for equities at money manager BlackRock Inc. "Those that have a plan and stick to it tend to be more successful."

2. Excesses in one direction will lead to an opposite excess in the other direction

Think of the market as a constant dieter who struggles to stay within a desired weight range but can’t always hit the mark.

"In the 1990s when we were advancing by 20% per year, we were heading for disappointment," says Sam Stovall, chief investment strategist at Standard & Poor’s Inc. "Sooner or later, you pay it back."

3. There are no new eras — excesses are never permanent

This harkens to the first two rules. Many investors try to find the latest hot sector, and soon a fever builds that "this time it’s different." Of course, it never really is. When that sector cools, individual shareholders are usually among the last to know and are forced to sell at lower prices.

"It’s so hard to switch and time the changes from one sector to another," says John Buckingham, editor of The Prudent Speculator newsletter. "Find a strategy that you believe in and stay put."

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways

This is Farrell’s way of saying that a popular sector can stay hot for a long while, but will fall hard when a correction comes. Chinese stocks not long ago were market darlings posting parabolic gains, but investors who came late to this party have been sorry.

5. The public buys the most at the top and the least at the bottom

Sure, and if they didn’t, contrarian-minded investors would have nothing to crow about. Accordingly, many market technicians use sentiment indicators to gauge investor pessimism or optimism, then recommend that investors head in the opposite direction.

Some closely watched indicators have been mixed lately. At Investors Intelligence, an investment service that measures the mood of more than 100 investment newsletter writers, bullish sentiment rose last week to 44.8% from 37.9% the week before. Bearish sentiment slipped to 31.1% from 32.2%. Meanwhile, the American Association of Individual Investors survey was less positive, with bearish sentiment at 45.8% and bulls at 31.4%

6. Fear and greed are stronger than long-term resolve

Investors can be their own worst enemy, particularly when emotions take hold.

Stock market gains "make us exuberant; they enhance well-being and promote optimism," says Meir Statman, a finance professor at Santa Clara University in California who studies investor behavior. "Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks."

After grim trading days like Friday’s nearly 400-point tumble, coming after months of downward pressure on stocks, it’s easy to think you’re the patsy at this card table. To counter those insecure feelings, practice self-control and keep long-range portfolio goals in perspective. That will help you to be proactive instead of reactive.

"It’s critical for investors to understand how they’re cut," says the Prudent Speculator’s Buckingham. "If you can’t handle a 15% or 20% downturn, you need to rethink how you invest."

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

Markets and individual sectors can move in powerful waves that take all boats up or down in their wake. There’s strength in numbers, and such broad momentum is hard to stop, Farrell observes. In these conditions you either lead, follow or get out of the way.

When momentum channels into a small number of stocks, it means that many worthy companies are being overlooked and investors essentially are crowding one side of the boat. That’s what happened with the "Nifty 50" stocks of the early 1970s, when much of the U.S. market’s gains came from the 50 biggest companies on the New York Stock Exchange. As their price-to-earnings ratios climbed to unsustainable levels, these "one-decision" stocks eventually sunk.

8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend

Is this a bear market? That depends on where you draw the starting line. With Friday’s close, the S&P 500 Index (SNC:SPX) is down 13.1% since its October 9 peak. Not the 20%-plus decline that typically marks a bear, but a vicious encounter nonetheless.

Where are we now? A chart of the S&P 500 shows a couple of sharp downs and subsequent rebounds in the past six months, with a tighter trading range since April. It remains to be seen if we can avoid a tortured period of the kind seen from 2000 to 2002, when sporadic rallies couldn’t snap a slow, protracted decline.

9. When all the experts and forecasts agree — something else is going to happen

As Stovall, the S&P investment strategist, puts it: "If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?"

Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets

No kidding.

***

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Source: Fwd Email

What is Mauritius treaty?

The Indo-Mauritius tax treaty, signed in 1983, spares investors based in Mauritius from paying capital gains tax on the sale of shares of Indian companies. The treaty made it clear that capital gains from sale of shares by residents in Mauritius does not tax capital gains, the tax rate is zero.

Why does India want to re-work the pact?

The official reason is that India wants to curb treaty shopping, a practise in which residents of a third country take advantage of a beneficial tax treaty between two countries to lower their tax liability. However, the fact that Mauritius has no domestic companies or financial investors capable of investing larger sums in India is well known to the government. The real reason is that India is confident that investors will come directly even if they have to pay tax.

What does the Indian government want?

It wants to tax foreign investors at the same rate as domestic ones. Currently, the long-term-defined as more than one year – capital gains tax for equity is zero while it is 10% for shares held for less than a year.

What about Mauritius?

Mauritius has resisted re-working the treaty with India. But the global regulatory environment towards so-called tax havens has hardened. As a result, Mauritius has agreed to resume a dialogue with India through a joint working group, comprising officials from both countries. The JWG had broken down in 2008 after six rounds of talks. The treaty can be reworked only if Mauritius agrees to do so and that will be long haul.

How far will Mauritius budge?

It may agree to re-work the pact on information exchange to end banking secrecy and provide information to India’s tax authorities and to agencies like CBI or ED even if such information is not of domestic interest to Mauritius. However, Mauritius would resist forgoing the beneficail tax treatment on capital gains. India wants to ensure that shell companies in Mauritius don’t enjoy tax benefits.But most companies registered in the Island nation have done so only to invest in India. Thus, Mauritius may never agree.

What is India’s other option?

India will introduce a new direct taxes code in April 2012 that will give authorities the power to lift the corporate veil and look at the substance of a deal. But if an entity being probed is located in Mauritius, then the authorities there have to agree.

How soon can the tax pact be re-worked?

Surely not in 2011. First, Mauritius has to agree to re-work the treaty and this can happen only after rounds of JWG talks. Secondly, after Mauritius agrees, it would take at least a year to re-work the treaty.

Is the treaty all about revenues and taxes?

No. With China’s strategic ‘string of pearls’ approach, India needs Mauritius to counter the threat of losing its foothold in the blue waters.

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