Battle for investment survival - short term inv reveals mistakes faster

Books & Tutorials
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Top five take aways:

  1. Itas very difficult to make money in stock market and great majority will fail in market.

  2. One fails todistinguishbetween results obtained by chance and those secured through knowledge.

  3. Short term is better than long term, as experience is gained much more rapidly that way. Invest only when you see the probability of huge gain(at-least30%) in any stock.

  4. Write down your reason and analysis for buying any stock

  5. Willingness and ability to hold funds uninvested for long timewhile awaiting realopportunities

This is one of the first book where I found author giving his advice right from spending habit, utilisation of leisure time, building career in investment industry, risk of inflation, short term trading, investment in house vs rental etc. "The Battle for investment survival" makes it repeatedly clear that its very difficult to make money in stock market and great majority will fail in market. So if you do not have requisite skill and time better to rely on experts and opt for mutual funds.

Loeb book was really an eye opener for me. Irealizedthat you should never restrict your reading to your beliefs. For eg. I am one who believes in fundamental analysis and buying for long term. But Irealizedafter reading this book that there are so many things to which a value investor do not agree, but I realised it is very important to be aware of that. Most important principle and the one which Loeb repeats quite often in the book is buy only when you see the probability of huge gain(at-least30%).**He also explains how in short term investing (6 months to 18 months) your errors are revealed much faster compared to when your holding period is ultra long term. (**This made me to start my research on special situation and value trading read this (http://valueinvestorindia.blogspot.in/2012/09/value-trading_27.html). I have also decided to read Active value investing (http://www.amazon.com/Active-Value-Investing-Range-Bound-ebook/dp/B008NC0VOW/ref=tmm_kin_title_0) and will post my review once I am done.

I believe for people who do not believe in fundamental analysis and buy and hold, the alternative suggested in this book is the far less risky than the current prevalent practice of buying hot stocks on tips, without doing any background checks. Some of the chapters are really useful to retail investors like “Speculative attitude essential”, “How to invest for capital appreciation”, “What to look for in corporate reports”, “Investment and spending” and “Diversification of investments”. As this is a very old book, author has used the word speculation for investment in equity shares and restrict the term investment to only those which offers assured rental or interest.

Let me highlight some of the quotes from the book to give you someflavor:

  1. Frequently one fails todistinguishbetween results obtained by chance and those secured through knowledge.
  2. **Longterm vs shorterm: **Does not matter, we are investing for appreciation.To begin with short term is better than long term, as experience is gained much more rapidly that way. You should never sell_without a reason._One simply cannot continue to buy and sell successfully_without being good._Without a succession of varying trades one cannot be sure of one’s ability and consequent safety. Short term requires one to trade for a reason and if later situation changes one can buy again either at profit or may be at loss, which is in effect cost paid for insurance.Long term has its uses and often the taxes. However opening trade must be done on short term principles. Some of the really vital last chance selling points first look like minor temporary tops.
  3. **Aim High:**Trying to invest for 6% return is like retirement. You will let the money work by itself.But when you aim to double your money, you have to think actively. It’s OK to make less, but when you aim high, atleast you will beat inflation and make decent returns. Aim at real profits. Reject everything that does not promise to advance generously in price. Keep cash if enough issues with such promise cannot be found or if the investment per issues becomes very small.
  4. Willingness and ability to hold funds uninvested for long timewhile awaiting realopportunitiesis a key to success in the battle for investment survival. Market valuations of most securities change in a single period of very few months by a amount equivalent to many years of dividend.It is advisable always to keep uninvested reserve fund on hand in order to take advantage of unexpected opportunities.
  5. **Trend is your friend:**Try to follow profitability a trend upwards or downwards than to attempt to determine the price level. No one can really know when aparticularsecurity is cheap or dear in the sense that cheapness would occur around a real market bottom and dearness around a real top.
  6. **Advantages of investing in limited issues:**One can know a great deal about a very few issues, but it is impossible to have a thorough knowledge of all the ones which go into diversified list. The chance for errors injudgmentis thus increased by diversification and certainly keeping posted on a broad list after it is purchased is much more difficult than keeping posted on a very few select shares.Diversificationas to issues and type of securities is a type of hedging,a method of averaging errors or covering up for lack ofjudgment.Desertificationis necessary in issues of different situations or industries which are in different cycles.Geographicaldiversificationis must to protect against wars and natural calamities.

**Write down your reason and analysis for buying any stock.And also before selling any stock write down your reason why you are selling it. IN this way you are less likely to take impulse decision and it will act as note for future references.**One of the greatest causes of loss in securitytransactionis to open a commitment for a particular reason and then fail to close it when the reason proves to invalid.

**Knowing facts which others do not know not enough:**You should be able to make ajudgmentwhat is the impact of these facts for future profitability and share price.

PS: I have also posted this book review on another blog.

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Anil bhai,

Please post link of your blog, want to add the same to my blogroll.

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Thanks a lot Anil for the review,

One key takeaway from my side is,

Willingness and ability to hold funds uninvested for long timewhile awaiting realopportunitiesis a key to success in the battle for investment survival. Market valuations of most securities change in a single period of very few months by a amount equivalent to many years of dividend.It is advisable always to keep uninvested reserve fund on hand in order to take advantage of unexpected opportunities.

This is indeed very difficult to do, specially in a rising market, you tend to deploy the cash in hand faster, lest you don’t miss out on the returns, getting rid of this bias is critical.

Like Donald said, if you can’t visualize a 25% CAGR in a stock from CMP, book out and wait for the next one where you can see a 25% growth for next 2-3 years sustained, at least.

Holding on to cash is extremely important in such scenarios. Need to incorporate this.

4

while in general strategy seems to be fine in theory however it has been a personal experience thatthe stock you want to buy shall keep onmoving up leaving you to repent of not buying in time even with liquidity in hand.

what need to be seen is that whether you are at initial stage of upmove already begun or at matured stage of upmove.

holding cash for long have been difficult for me till now… need to be developed this part.

** Willingness timewhile awaiting realopportunitiesis **** lest returns, **

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I have developed a solution to this. If you find any stock with a solid story, good fundamental, and positive uptrend, I feel the best idea is to be bit less greedy (for finding a better entry point), and add little bit for each 5-10% increase and add a big chunk if it you get a better entry point in future.

I seems to work for me, as it automatically increased the portfolio percentage with each increase in the stock price. So the winners end up taking the upper half of my portfolio and looser toward the end.

This is not an optimal strategy, but you can get decent result if you work within the circle of fundamentally good stock with ROE, ROCE 20+, low DE, good valuation, and a good story (preferably discussed at valuepickr)

while in general strategy seems to be fine in theory however it has been a personal experience thatthe stock you want to buy shall keep onmoving up leaving you to repent of not buying in time even with liquidity in hand.

what need to be seen is that whether you are at initial stage of upmove already begun or at matured stage of upmove.

holding cash for long have been difficult for me till now… need to be developed this part.

** Willingness timewhile awaiting realopportunitiesis **** lest returns, **

6

Thanks Subash

I do not have any blog and no plans for the near future. Generally I post on valuepickr and sometime on safalniveshak.com

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Gerald M Loeb was “the most quoted man” of his era. He was among 12 richest man in Wall Street then. Also, he was a very succesful stock broker preaching and practicing " you can’t sell anything to anybody if you can’t first sell it to yourself".

He advocated never to lose more than 10% on any trade. When asked by William J O’Neil ( needs no introduction ) whether he himself used that 10% loss cutting rule, he replied " I would hope to get out long before it ever reaches 10%".

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Hi Anil,

Thanks for posting the summary. Yes, its very important that one sees a short term potential too while looking at a long term idea.

Often I see people talking about potential in a co over very long term but and they end up making mistakes and often the price is wrong. So it has be a mix of valuations and long term story.

Ayush

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