OFTEN we hear some financial experts say we need to hold stocks long term, especially during the weak stock market situation like what we are experiencing currently.

Some gurus say the “buy and hold” strategy is the best investment strategy. However, some retail investors may argue that “buy and hold” is not suitable in Malaysia because if they pick the wrong stocks, some companies might even get delisted after a while.

The question of how long to hold has always been on the mind of investors when they purchase any stocks. Given the present weak economic and stock market conditions, some investors may lose patience as they do not know when the market will recover again.

In this article, we will look at the number of years that we need to hold our stock investments in Malaysia. We use the KL Composite Index average daily indices to compute the stock returns.

The following data was provided by Dynaquest Sdn Bhd. With its permission, we will provide the historical rolling annual compounded returns from 1970 to 2008.

The table shows the rolling historical annual compounded returns for holding the stocks for one, three, five, seven and 10 years.

It shows the average annual compounded returns and risks (measured by standard deviation) regardless of any starting or ending dates.

For example, the 25% returns in the second row and the second column of the table was the annual compounded returns of investing for one year from 1970 to 1971. The three-year returns of 56.7% was what you would’ve got if you started your investment in 1970 and ended in 1973.

If you started investing in 1970 and held it for five years (up to 1975), seven years (up to 1977) and 10 years (up to 1980), your annual compounded returns will be 16%, 14% and 21.8% respectively.

In terms of the overall average returns, except for one-year and three-year holding periods of 13.4% and 9.8% respectively, we notice that the annual compounded returns for five-year, seven-year and 10-year holding periods were almost the same, about 8% per annum.

However, the longer we hold our investment, the lower the risks that we face, which are measured by using standard deviations.

For example, if we hold our investment for one year, the standard deviation is 30.8%.

However, if we hold it a bit longer to three, five and seven years, the standard deviation will drop to 16.8%, 11.4% and 8.6% respectively.

For 10-year holding, the standard deviation is 6.6%. Based on two standard deviations, we are 95% confident that our returns will range from -5.1% (8.1% - 2 x 6.6%) to 21.3% (8.1% + 2 x 6.6%).

This is supported by the minimum returns of -2% and the maximum return of 23.6% for 10-year holding periods.

In conclusion, we need to hold stocks long term. We may not need to hold them up to 10 years.

However, we need to understand that we will face very high volatility on returns if we invest only for one year.

Besides, we need to make sure that we are buying good fundamental stocks in order to avoid poor quality stocks that are not suitable for long-term investment.

http://biz.thestar.com.my/news/story.asp?f...94&sec=business

http://biz.thestar.com.my/archives/2009/2/.../p6-compcht.JPG

perhaps they are refering to holding Blue Chip Stock? Blue cheap stock won't 200% or 300% like the others, but at least when they drop they won't kena sampai delist?
No the cheap stock?
i have no experience in share trading, just guessing arround hehez..

Most investors tend to agree that the decision to sell a stock is one of the most difficult to make. Sometimes it is more difficult to decide when and what to sell than to buy. Ever wondered why?

* People tend to sell winners too soon and hold on to losers too long

You will find that regardless of whether the market is running hot or is coming down, there are still a lot of people out there who either sell their stocks too early only to realize that the prices continue to soar, or hold on to losers for too long only to see them continue to bleed further.

From a behavioural finance standpoint, this phenomenon is held by Hersh Shefrin and Meir Statman (1985) as the "disposition effect". This was discovered from their research entitled, "The disposition to sell winners too early and ride losers too long: theory and evidence".

Based on research, individual investors are more likely to sell stocks that have gone up in value, rather than those that have gone down. By not selling, they are hoping that the price of the losers will eventually go back to their purchase price or even higher, saving them from experiencing a painful loss.

In the end, most investors will end up selling good quality stocks the minute the prices move up and hold on to those poor fundamental stocks for the long term, while the performances of these stocks continue to deteriorate.

* People tend to forget their original objectives

In stock market investment, there are two types of investment activities, trading versus investing. Trading means "buy and sell" while investing means "buy and hold". The stock selection criteria for these two types of activities are entirely different.

Most of the time those involved in trading will choose stocks based on factors which will affect the price movement in short term, paying less attention to the companies' fundamentals whereas those involved in investment will go for good quality stocks which are more suitable for long-term holding.

However, you will find that many people get their objectives mixed up in the process. They get distracted by external factors so much so that some panic when the market goes in the direction that is not in line with their expectation, and as a result, end up selling the stocks that they find too expensive to buy back later.

On the other hand, some force themselves to change the status of the stocks that were originally meant for short-term trading into long-term investment as they are unable to face the harsh fact that they have to sell the stocks at a loss, even though they know that the stocks are not good fundamental stocks that can appreciate in value.

So, when to sell then?

There are few different schools of thoughts on this. Based on the advice from the investments gurus, like Benjamin Graham, Warren Buffet and Philip Fisher, when you buy a stock, you need to make sure that you understand the companies that you are buying, and these are good fundamental stocks, which will provide good income and appreciate in value in long term.

Therefore, you will be treating your stock purchase as a business you bought, which is meant for long term. You should not be affected by any temporary price movement due to overall market volatility.

You will only consider selling the company if the growth of the company's intrinsic value falls below "satisfactory" level or you find out that a mistake was made in the original analysis as you grow more familiar to the business or industry.

However, if you find that your investment portfolio is highly concentrated on one single company, then you might want to consider diversifying your portfolio and lowering your risk.

Any single investment that is more than 10 per cent to 15 per cent of your portfolio value should be reconsidered no matter how solid the company performance or prospect is, suggested Pat Dorsey of Morningstar.

Last but not least, if you find that by selling the stock, you can invest the money in a better option, then that is a good reason to sell.

In summary, successful investing is highly dependent on your self-discipline, taking away the emotional factors and not going with the crowd. It should always be backed by sound investment principles.

Always remember there is no short cut in investment, only hard work and patience.

http://www.btimes.com.my/Current_News/BTIM...icle/index_html

This is the first in a weekly series of articles by the Securities Industry Development Corp to help educate investors.

"TO ACHIEVE satisfactory investment results is easier than most people realise; to achieve superior results is harder than it looks." - these were the wise words of Benjamin Graham, the father of two fundamental investment disciplines - security analysis and value investing.

Not a name unheard of in the investing world, Benjamin Graham was an icon for many, including William J. Ruane and Irving Kahn. One of his most loyal and notable disciples, however, was Warren Buffet.

There is no better way to learn how to make it big in the investing world than learning it from the best and it doesn't get any better than Benjamin Graham.

Benjamin Graham was born in the UK in 1894 and moved to US when he was eight and a half years old. Although he came from a poor family, he was exceptionally bright at a young age. He graduated from Columbia University in 1914 and started his investment career by joining Wall Street as a financial analyst.

He established his first private investment organisation, the Benjamin Graham Joint Account, at the age of thirty two. During the Great Depression, between 1929 and 1932, he lost 70 per cent of his US$2.5 million (RM9.05 million) fund. Although some of his clients gave up, his fund managed to survive the worst, and by 1935, he recovered all the losses.

What did Graham consider as critical elements to successful investing? Here, we will briefly note the investing principles propoun-ded by Benjamin Graham.

* Understand the difference between investment and speculation.

Graham established a clear distinction between an investment and a speculation. To qualify as an investment, it must go through analysis, must have a good margin of safety and a satisfactory return. Speculation, on the reverse, merely involves timing and profiting from market fluctuation.

* Do a detailed analysis as stocks represent a share of business.

In the process of doing a detailed analysis, investors need to have the mindset of treating stock purchasing as if they own a piece of the business to evaluate stock prices from the perspective of the underlying asset value, financial strength and future earning prospect, instead of focusing on the short-term fluctuation of the market. This is regarded as the intrinsic value of the company.

* Build Margin of Safety.

Graham's most famous and influential motto is 'margin of safety'. The experiences that he cumulated during the frenzy of the Great Depression made a deep impression on him. He became a very cautious investor whose number one investment concern is the safety of investment principal.

If the intrinsic value of a stock is RM1 and you buy the stock at the price of 67 sen, then your margin of safety is 33 per cent. This serves as a cushion to your investment in the case of a market downturn or to provide you with a margin of error in calculating the intrinsic value, so that the chances of you losing your principal are at the lowest.

* Have a realistic return objective.

The objective of making an investment is to make money. However, Graham warns against aiming for unrealistic return objective. If you expect an abnormally high return from your investment, chances are you will be exposing yourself to unnecessary risk in order to achieve your return objective, which will become speculation instead of investment.

There is no short cut or quick ways to making money. Graham's way of investing is to set a realistic return objective and making investments based on sound investment principles and having the discipline to follow through.

* Treat the market as servant, not master.

Graham believes that risks and returns do not increase proportionately. He sees the opportunities in market volatilities. To him, the stock market is manic-depressive and investors should go for a bargain hunt during a market down turn.

The risk of investment can be significantly reduced if investors understand the business and apply good judgment based on the above first three elements in searching for good fundamental stocks, which are temporarily depressed due to market reasons.

However, he discourages making decisions based on any form of forecast and timing of the market. Instead, the decision making should be made based on price attractiveness.

Graham's stock selection criteria include a price-to-book ratio of 1.5 times, price-to-earnings ratio of below 20 times and debt-to-equity ratio of 0.5 times.

From the above, you can observe that Graham advocates defensive investing approaches. This later became the foundation of the investing principles of the famous investing guru, Warren Buffet, who learned about the quantitative screening process from Graham while working in Graham's company.

However, for a lay person to successfully apply Graham's approaches, you need to be prepared to overcome some hurdles. You need to do a lot of hard work and have good accounting knowledge in order to dissect the financial information provided in the annual report or other financial publications.

In addition to that, you will have to be highly sensitive to any news that will affect the performance of the company or the relevant industries. Having the ability to derive your own conclusion from your research, you will also then need to have the determination and faith in your work so as to prevent yourself from being blown away by the market.

http://www.btimes.com.my/Current_News/BTIM...icle/index_html

Keep up the great work, you are providing a great resource on the Internet here regarding Business,Finance and Stock Exchange.....

Four key habits an investor might want to adopt are: Preserve capital and minimise risk taking; do homework before investing; have an investment philosophy and system; and, be patient.

IT IS a fact that the local market condition is very hard to predict since it is affected by both global and local factors. As an investor, it may not be possible to predict what is going to happen next, but there are certainly ways to learn from people who have succeeded in riding the waves of good and bad times throughout the years.

In the book "The Winning Investment Habits of Warren Buffett & George Soros", Mark Tier listed out 23 winning habits based on the habits of these two of the world's richest and most successful investors. Summarised below, are four main key habits that you might want to adopt as the fundamentals to successful investing.

Successful investor habit 1: Preserve your capital and minimise risk taking

All successful investors preserve their capital as a foundation and they do this through risk minimisation. Most investors have the perception that in order to make profits in the market, there is a need to take high risks and it is right to say that risk and return come hand in hand.

However, in order to ensure a long-term success, you should not just simply take any risks, but only calculated risks. This requires you to analyse the situation thoroughly as to be confident that the chances of having a good result on your side is high.

With that in mind, you would only end up investing in what Warren Buffett calls "high probability events", where the risk of loss is at the lowest and you are almost certain to make money. Always remember Warren Buffett's 'Investing Rules: "Rule No. 1: Never Lose Money! Rule No. 2: Never Forget Rule No. 1"

Successful investor habit 2: Do your homeworkbefore you invest

There are nearly one thousand companies listed in our stock market. Which one should you invest in? Having Habit No.1 as the foundation, you will know that the safest companies to invest in should be companies or industries that you are most familiar with, as you can only make good judgments if you have in-depth knowledge and understanding.

This means that you will have to do your own homework and research through all available sources, such as company annual reports, industry reports or public announcements, in order to obtain the facts on the industry, the company of your interest and its competitors.

This is necessary to ensure that you can draw good conclusions on the company's performance and future prospects. Therefore, time and hard work are the two essential elements in turning yourself into an informed and knowledgeable investor. In practicing this, you will also need to be selective and focused on certain industries in which you the have most interest and experience.

Successful investor habit 3: Have your own investment philosophy and system

What is an investment philosophy? An investment philosophy is a set of beliefs that you use as the foundation in developing your personal investment system for buying and selling investments. This will make sure you are fully aware of the reasons behind every investment decision you make. As a beginner in the investing world, you could probably start by following the investment philosophies and systems of some of the great investors that come closest to your heart.

However, along the way, you should tailor your investment system to suit your personality, goals and unique circumstances so that you can practice this entire system without stress and worries.

If you have the discipline to practice the right system religiously, you will not be easily influenced by the voices or rumours in the market and will not be tempted to simply follow the crowd. Hence, the chances of your making the wrong decisions will be minimised.

Successful investor habit 4: Be patient!

There is a Spanish proverb that says "The secret of patience is doing something else in the meantime". If you somehow managed to inculcate the above 3 habits, you will know exactly what you are looking for and as such, will be well equipped with the patience to wait for the right moment to buy or sell your stocks. Both Buffett and Soros stressed the fact that the secret of their success is having the patience to wait. Use your free time to explore and strategise other new opportunities as there are so many companies listed in the market. Always remember that identifying the right candidates does require time and patience.

On a last note, try to adopt the above habits now! Remember, good strategies will only be successful when executed with the right mindset!

http://www.btimes.com.my/Current_News/BTIM...icle/index_html

5th: don't be greedy.

This post has been edited by fatw3apon: Mar 4 2009, 10:32 PM

Seven pitfalls to avoid in stock investing

Investopedia columnist explores ‘forehead-slapping stock blunders’.

The past one month has been agonising for equity investors across the globe who have seen their portfolio deplete considerably. This then may be the time to take stock of the situation and analyse what are the pitfalls to avoid when investing in equities.

There are some basic principles of investing that one should always bear in mind. In a recent slideshow presentation, Investopedia columnist Glenn Curtis explored seven “forehead-slapping stock blunders” made by investors. We analyse these factors in the Malaysian context.

● Mistake No. 1: Ignoring catalysts

According to Curtis, the No. 1 mistake is ignoring catalysts that drive companies’ earnings. He says proper valuation, calculating price/earnings (PE) ratios, and running cash-flow spreadsheets only provide half the picture when selecting a stock, as they merely depict where a company stands at that point in time and not, more importantly, where it is heading.

Therefore, in addition to a quantitative evaluation of a company, investors need to do a qualitative study to determine which catalysts will drive future earnings.

Take for example, Astro All Asia Networks plc. The counter, not unlike countless others, has been on a steady downtrend since January 2008.

It seemed to matter little that it was offering a dividend yield of some 7%, had cash of RM1.06bil and achieved record domestic subscriber base of 374,000 as of January this year.

While from a valuation perspective, one may deem the counter an attractive buy, but its share price kept falling. Why? Because investors were more concerned over its operations in Indonesia and the high provisions it has had to make. It recently announced a wider-than-expected loss of RM529mil for financial year ended Jan 31, 2009, largely due to losses from its Indonesian venture.

However, some analysts believe the company will return to the black in the current year (no further writedowns expected) and that it may declare higher dividends in the absence of any major capital expenditure requirement.

● Mistake No. 2: Catching the falling knife

Buy when everyone is selling. That is easier said that done. Too often, investors buy in before all of the bad news is out, or before the stock stops its freefall.

“New lows in a company’s share price often beget further new lows, as investors see the shares dropping, they become disheartened and sell their shares. Waiting until the selling pressure has subsided is almost always your best bet to avoid getting cut on a falling-knife stock,” says Curtis.

In Malaysia, remember when crude palm oil prices were plunging alongside crude oil? Plantation heavyweights saw their share prices fall, which has yet to subside even now.

This time last year, Sime Darby Bhd was at RM9. Today, it hovers at RM5.55. Asiatic Bhd too was trading at RM7.40 a year ago while today it is RM4.04. IOI Corp Bhd has seen its share price drop from RM6.65 to RM3.82 on Thursday.

For investors who had started accumulating commodities or commodities-related stocks last October, they would have seen their portfolios dip by an average 30%.

For those who accumulated Resorts World Bhd last December, thinking its downside was close, especially since it hit its 52-week low of RM2.15 on Dec 12, how wrong they must have been.

The stock is now trading at its new low of RM1.92 despite its cash pile of RM4.55bil. It continues to be haunted by corporate governance and related-party transaction issues.

Looking purely at the historical PE ratio of a stock can be deceptive. More so when trying to buy a stock at its lowest historical PE.

“This is because if price is constant and earnings continue to drop, then the PE ratio will rise and distort the picture. You never know if you’re buying at the lowest price,” says a head of retail research at a local brokerage.

He says it is better to buy a stock when the related sector bottoms out.

“The way to gauge this point of inflection will be to compare the sectoral data with historicals during previous economic crisis,” he says.

● Mistake No. 3: Failing to consider macroeconomic variables

Let’s say an investor finds a spectacular company to invest in. Valuations are reasonable and it has several new developments pending announcement. Fund managers are accumulating the shares and the stock looks ready to rock!

Hold your horses and check that enthusiasm.

The current macroeconomic conditions, both global and local, are going to largely dictate the sentiment and buying momentum of the stock.

“If the whole market is falling, there will be very few stocks that will go up. The odds of a retailer selecting these quality stocks are slim,” says a retail head.

The Malaysian investing environment at the moment is far from encouraging, particularly after the fourth quarter 2008 gross domestic product growth of 0.1% stunned the market.

● Mistake No. 4: The issue with dilution

Another red flag to look out for are companies that issue millions of shares, hence causing a dilution in earnings per share.

Malayan Banking Bhd (Maybank) fell below RM4 on Monday, the first time in more than a decade, on concerns over its proposed RM6bil cash call and potential hefty impairment losses.

Following the announcement of a rights issue on Feb 24, the stock price has fallen 26% to RM3.98 from RM5.40.

Recall that Maybank has offered a rights issue of up to 2.2 billion new shares on the basis of nine-for-20.

The issue price for its proposed renounceable rights issue is fixed at RM2.74 per share, which represents a 34% discount to the theoretical ex-rights price of RM4.17 per share and a discount of 43% to the closing price of RM4.82 on Feb 24.

AmResearch says Maybank’s estimated earnings per share for the year ending June 30, 2010 will be diluted to 38 sen from 52.2 sen previously.

“The general perception of a company that raises capital during difficult times is that it is desperate and this will have a negative effect on its stock price,” says the retail head.

Curtin instead advises to try seeking companies that are repurchasing stock and, therefore, reducing the number of shares outstanding. This process not only increases earnings per share but also tells investors that the company feels there is no better investment than its own company at the moment.

● Mistake No. 5: Not recognising seasonal fluctuations

Most sectors go through booms and bust. In other words, they are cyclical. Investors looking for stocks to buy, need to take into account the sectors that are at present in vogue.

For instance, would it be a good idea to invest in the semiconductor sector, knowing full well there’s a major slowdown in chip sales and a case of layoffs and inventory building up?

In the case of the retail and consumer sector, their sales go up and down depending on which part of the year it is. The year-end school holidays and festivities normally see sales picking up. At other times, sales are fairly staid.

Similarly, would it be wise to invest in a property company when the sector has gone through a five-year bull market, and will probably need to undergo a period of correction before it rises again?

“The fact is that many companies, such as retailers, go through boom-and-bust cycles year-in and year-out. Luckily, these cycles are fairly predictable, so do yourself a favour and look at a five-year chart before buying shares in a company,” says Curtis.

● Mistake No. 6: Missing sector trends

While stocks can buck the larger trend, this behaviour usually occurs because there is some huge catalyst that propels the stock.

For the most part, companies trade in relative parity to their peers. This keeps the stock price movements within a trading band.

Let’s say an investor owns a banking stock in Malaysia. While Malaysian banks are not exposed to the huge debts and toxic assets of Citigroup, American International Group or Bank of America, Malaysian banks may likely be affected in a protracted downturn.

Not surprisingly, Public Bank Bhd, Maybank and Bumiputra-Commerce Holdings Bhd have come under heavy selling pressure on negative newsflow and a worsening economic outlook.

Financial valuations in Malaysia have pulled back substantially from a peak of 2.5 times price-to-book (P/B) in January 2008 versus 1.2 times P/B currently.

Hence, if other banks are experiencing certain negative perceptions or problems, most likely the Malaysian banks will also be affected. The same is true if the situation was reversed.

● Mistake No. 7: Avoiding technical trends

Learning basic technical analysis can be very useful when deciding to take a position in a stock. For instance, would you bet heavily on stocks on Bursa Malaysia when the Dow Jones Industrial Average is trending down every day? Curtis says investors don’t have to be a chartist to be able to perform technical analysis.

“A simple graph depicting 50-day and 200-day moving averages as well as daily closing prices can give investors a good picture of where a stock is headed,” he says.

He advises investors to be wary of stocks that trade close to their average as it usually means it can sink even lower. The same can be said to the upside. Also, when volume trails off, so does the stock price.

“Sticking purely to fundamental analysis can be detrimental to one’s portfolio,” says the retail head.

He says technical analysis measures the real demand and supply for a particular stock. “It helps guide investors to determine the exit and entry points,” he says.

http://biz.thestar.com.my/news/story.asp?f...51&sec=business

Good posts TS. I think this should be made one of the main titles in this sub-forum.

Very useful and informative guides.

Folks,

The FIRST LAW in Sun Tzu art of war, know what you are fighting for.

If you buy a STOCK but you have NO IDEA when you should sell it, you have NO BUSINESS buying it to begin with. This is COMMON SENSE. It so happened that after so many BS posts in this thread, this item NEVER show up. But, what do you expect?? Posts contributed by stock broker will NEVER discourage you from buying stock. Ditto for insurance agent on insurance.

Buyer beware!!! Reader beware.

The GOAL to buy stock is to MAKE MONEY.

To MAKE MONEY, you have to

A) Collect dividend

and/or

B) Sell stock

If you DO NOT KNOW when you should sell stock because of (A) is not happening or (B) hit your target price, you SHOULD NOT buy stock to begin with. Most of the people has NO BUSINESS buying stock to begin with. They have NO IDEA what they are doing and they are little fishes to be eaten by the BIG FISH.

Dreamer

So what recommended stock to buy? In this period?

mynewuser,

if you have to ask, you are in NO BUSINESS to buy ANY STOCK.

The answer is NONE.

Dreamer

NONE, why say so?

What dreamer meant is if you know nothing obviously you don't plunge yourself into it.
Simple as that. If you want something, than you have to do your homework to analyse which is the best value for money.

If you don't know. The best help will be asking.

mynewuser,

You can ASK but it will be useless. You NEED to know how to THINK and CALCULATE yourself. Or else, even if people give you the RIGHT advice, you cannot follow it.

Dreamer

According to Warren Buffett, the best is to hold a stock forever provided that the stock always fulfils all the criterion set by him...

Since he is the second richest man in the world, if I am not mistaken, we should follow his advice and do our research ourselves before investing in shares...

lcl832002,

Warren Buffett does not buy stock. He buys companies. He buys the business.

Please notice the difference.

Dreamer

maybe a better question is to
table a specific stock case
rationalize your case and decision
and seek advice/opinion from forumers?

just my 2penny worth