Last year, I wrote an article entitled Understanding a Bear Market. The
first sentence read, "If you've only begun investing in the past few
years, you aren't aware of what a bear market is." Unfortunately, that
isn't the case anymore. In the past few months, Wall Street has reeled,
stumbled, picked up speed, fallen on its side, and gone in circles.
Professional and average investors alike have no idea where the market
is headed, but everyone seems to have an opinion.
What is a bear market and what causes it?
By
definition, a bear market is when the stock market falls for a
prolonged period of time, usually by twenty percent or more. It is the
opposite of a bull market. This sharp decline in stock prices is
normally due to a decrease in corporate profits, or a correction of
overvaluation (i.e., stocks were too expensive and fell to more
reasonable levels). Investors who are scared by these lower earnings or
lofty valuations sell their stock, causing the price to drop. This
causes other investors to worry about losing the money they've invested,
so they sell as well; the vicious cycle begins.
One of the best
examples of a prolonged bear market is that of 1970's when stocks went
sideways for well over a decade. Experiences such as these are generally
what scare would-be investors away from investing. Ironically, this
keeps the bear market alive; because no few buyers are purchasing
investments, the selling continues.
How does a bear market affect my investments?
Generally,
a bear market will cause the securities you already own to drop in
price. The decline in their value may be sudden, or it may be prolonged
over the course of time, but the end result is the same: the quoted
value of your holdings is lower. This leads to two fundamental
principles:
1.) A bear market is only bad if you plan on selling your stock or need your money immediately.
2.) Falling stock prices and depressed markets are the friend of the long-term, value investor.
In
other words, if you invest with the intent to hold your investments for
decades, a bear market is a great opportunity to buy. It always amazes
me that the "experts" advocate selling after the market has fallen. The
time to sell was before your stocks lost value. If they know everything
about your money, why they didn't warn you the crash was coming in the
first place?
What do I do with my money in a bear market?
The
first thing you need to do is to look for companies and funds that are
going to be fine ten or twenty years down the road. If the market
crashed tomorrow and caused Gillette's stock price to fall 30%, people
are still going to buy razors. The basics of the business haven't
changed. This brings us to our third principle:
3.) You must
learn to separate the stock price from the underlying business. They
have very little to do with each other over the short-term.
When
you understand this, you will see falling stock markets like a clearance
sale at your favorite furniture store; load up on it while you can,
because history has borne out that prices will eventually return to more
reasonable levels.
Courtesy:
About.com
Investing for Beginners
Everybody has to start somewhere.
It’s easy to look
at investing “gurus” like Warren Buffett and Peter Lynch, and feel as if
you could never hope to emulate their success.
But the Buffett’s and the Lynch’s of this world were once naïve newbies. In this post we’ll take a look at the very first stock Warren Buffett, Peter Lynch and other famous investors ever purchased.
We’ll look at what
their investing rationale was and how it worked out for them. Then
we’ll see what you can learn from their successes or mistakes.
Peter Lynch
What He Bought and Why: As
a teenager in the 1950s, Peter Lynch worked as a golf caddy. While he
was carrying bags and handing out putters, he used to make a mental note
of the stocks he heard people talking about, and looked them up later
on.
When he was in
college and had some money to invest, he started researching the air
freight industry and “thought this air cargo was going to be a thing of
the future.” He put his first $1,000 investment into a company called
Flying Tiger.
What Happened Next: Lynch’s
research paid off, as the stock soared ten-fold and helped pay for
graduate school. He acknowledges the role of luck, too: the stock’s
spectacular returns were partly due to the escalation of the Vietnam War
and the profits Flying Tiger made from transporting troops.
In 1988, Flying
Tiger was bought by a younger, fast-growing competitor called Federal
Express. Lynch was right about this air cargo thing having a future.
The Lesson: Do your research.
Peter Lynch is famous for preaching the importance of understanding
what you’re investing in, and you can see that principle at work in his
very first investment. Luck played a role, but even at that early stage
he’d done his research and formed a sound investing rationale.
Ray Dalio
What He Bought and Why: He’s
known now for founding the world’s largest hedge fund firm, but Ray
Dalio, just like Peter Lynch, started out as a golf caddy. At the age of
12, he used his earnings to buy his first stock, Northeast Airlines.
His investment
thesis was not as sophisticated as those he’d develop later in his
career. His caddying savings were limited, and Northeast was the only
company he knew of that was trading for less than $5 per share.
What Happened Next: Northeast
was on the verge of going broke, but Dalio got lucky: the firm was
bought out by Delta Airlines, and its stock tripled. Dalio continued to
trade stocks throughout his teens, quickly learning that it wasn’t always as easy to make money, and ended up with a portfolio worth several thousand dollars by the time he graduated high school.
The Lesson: Luck
plays a part in investing, but successful investors don’t get carried
away. Dalio soon understood that his success with Northeast Airlines was
a one-off event, and developed better methods of picking his stocks in
the future. Or perhaps the lesson is that teenage golf caddies make great investors?
Warren Buffett
What He Bought and Why: When
he was just 11 years old, Warren Buffett pooled his savings with his
sister Doris and bought six shares of oil company Cities Service (now
called Citgo) at $38 per share.
From
visiting his father’s stock brokerage and chalking in stock prices on
the blackboard, he’d marked this out as an undervalued stock, and was
confident he and his sister would make money.
What Happened Next: In the first few months, the stock dropped almost 30%,
and Doris harassed him every day about the money they’d lost. When
Cities Service finally recovered to $40 a share, he quickly sold to book
a small profit.
But then the young Buffett watched from the sidelines as the stock soared to $200 a share. His original investing rationale had been vindicated, but it was too late.
As for Citgo, it’s
no longer publicly traded. It was acquired by Occidental Petroleum in
1982, and is now owned by Petróleos de Venezuela.
The Lesson: The first stock Warren Buffett bought taught him the value of patience in investing.
He got halfway there by not panicking when the stock dropped 30%, but
missed out on big gains by selling too early. Spotting an undervalued
stock is one thing, but often it can take the market a while to reach
the same conclusion.
Seth Klarman
What He Bought and Why: Buy what you know. It’s age-old investing advice, and it worked for billionaire investor Seth Klarman on his first foray into the stock market.
As a 10-year-old boy, Klarman was always getting little cuts and scrapes, and putting Band-Aids on them. So he figured he’d invest in the company that made Band-Aids, Johnson & Johnson. He bought one share.
What Happened Next: Shortly
after Klarman made his purchase, the stock split three for one, and he
sold for a tidy profit. Johnson & Johnson has had five more stock
splits in subsequent years, and Klarman’s single share would have
multiplied to 144 shares if he’d held onto it, and would be worth more than $13,000. Not bad for a 10-year-old kid.
The Lesson: “Buy
what you know” is advice that’s stood the test of time for good reason.
It’s simple, but it makes sense. The growth of Klarman’s single J&J
share also shows the powerful wealth-building effect of buy-and-hold
investing over the long haul.
Bill Miller
What He Bought and Why: Bill Miller’s Legg Mason mutual fund famously beat the market for 15 straight years,
before coming seriously unstuck in the financial crisis of 2008. His
stock-picking prowess started at 16, when he took $75 he’d earned from
umpiring baseball games and invested it in long-established electronics
firm RCA.
The rationale was
simple: it was recommended by his dad, who managed a Jacksonville truck
terminal and liked to invest in stocks in his spare time. It was
watching his father combing through the stock quotes in the newspaper
that first got Miller interested in investing, as he realized he could
make money much more easily with stocks than by mowing lawns and
umpiring baseball games.
What Happened Next: RCA
stock soared, giving Miller a $300 gain on his $75 investment. He blew
it on a second-hand Triumph TR4 convertible. It’s just as well he didn’t
hold – RCA fell on hard times in the 1980s, and in 1986 GE acquired it
and broke it up.
The Lesson: When he talked about his RCA investment in a 2007 interview, Miller focused not on the gain but on the missed opportunity: “Had
I reinvested that $300 in the market continuously, I’d have a lot more
money. So, that was a really expensive used car that I bought.”
http://blog.wallstreetsurvivor.com/2014/03/04/first-stock-warren-buffett-bought/