Wednesday, December 26, 2012

The Strategies from the Genus’ of Investing: Investing style is a mater of finding your personality type and risk tolerance


Warren Buffetts’ strategies on investing are to find companies that you trust, believe in and understand the business model. If not walk way. One must learn to be patient, to wait for these stock prices to fall to a value prices, and then hold on the stock for the long term at least 10 years, if not 20 years or even 30 years. Buffet shares the view the best way to avoid capital gains taxes is to hold the on the stocks for extremely long time if not indefinite.

What if you do not know of any of these companies what do you do then? Well, Warren Buffett openly releases his investment choices each year which companies that Berkshire Hathaway invests intimation. This will make the financial news, local business section of your newspaper. If you can’t think like a Warren Buffett just follow his choice. Or according to Buffett, it is better to have 10 quality “Great” stocks, and then have hundreds of average stocks. Now if you are not the personality or skills to truly buy low and sell high, what should you do? Warren Buffett states you are best to buy a passive fund or Index fund rather. Recommend books on Warren Buffett: The Tao of Warren Buffett Mary Buffett and David Clark. Warren Buffett and the interpretation of financial statements Mary Buffett and David Clark. Buffettology Mary Buffett & David Clark.

It sounds simply enough, but most people are not programmed to buy stock low and sell high. The reason is emotional investing theory most of the population is hardwired to sell low, and buy high this is due to human evaluation and our ability to survive. The same goes for fund managers; they often have to follow the majority of other investors, and often feel the need to always being in the market. Be careful there are many sales people going by the tiles of adviser, insurances agents are mostly and not always what I like to call mutual fund sales people. I would recommended you to become your own expert, and follow the advise of other experts that state that even a average investor can out pace the S&P 500.

The easy way to meet the S&P 500 is buy in a low cost passive fund the minors the S&P 500.  The easiest way to use cost averaging which simply means buying into mutual fund(s), every pay period, one a month, or once quarter. The idea behind these strategies is that you will be placed in automatic system that will buy mutual funds at the peek and the bottom of the market to avoid emotional buying or selling.

How do you out peace the S&P 500? Is not to purchase high cost managed mutual funds, and second follow the advice of Joel Greenblatt which is a Professor at Columbia University and former fund manager, he states in his book The Big Secret for the Small Investor: The Shortest Route to Long-Term Investment Success that most of the top funds manager at one time was at the bottom. And there is no way to predict who will be the next warren Buffet. He has developed a system of value index mutual funds based on the S&P 500 that are value based and are better way to buy low and sell high. He states that the problem with the S&P 500 it is how the system to purchases based on capitalization. Meaning that the top stock will have the highest weight, and the one ranked second will have the next and so one and so on. Until one will get to the 500th position will be a very small part of the fund. Joel Greenblatt believes that is creates and buy high and sell low buy strategies. Joel Greenblatt believes that a buying 1/500 of each stock would be a better system or one based on dividends or gross sales would be a better system. And can produced 1-2% better then the S&P 500 and even better then some fund managers. On his web site he gives the mutual funds symbols that he recommends at:  http://www.valueweightedindex.com/
   
The next strategy is to have the greatest diversification of your US stocks, bonds, and international stock markets. Not just investing in the top 500 US stocks, but in larger cap, mid cap and small cap stocks in Wilshire 5000 in encompasses the entire US stock market. This was developed by Burton Gordon. Malkiel Princeton professor in his book the random walk guide to investing: ten rules for financial success states this is the way to the greatest return.

All this strategies are complete contradiction, with each other, but each one can be used for different personality styles and risk tolerances. The question one need to ask is what ideology fits me the best? Am I willing to send a lot of time, some time, or no time reaching mutual funds, stock, and balance sheets? It is clear the Warren Buffett is the most risky and the one that will gain the best returns. Joel is little less complex, and invest value will give you better returns over aggressive growth, over the longer term, and Burton Gordon. Malkiel will give you a change to go auto pilot and invest the most passive method. The risk is diversified, over the largest amount of stock or bonds. Burton Gordon. Malkiel ran simulations, showing it is a smart investment style. In his book Burton Gordon. Malkiel the random walk guide to investing: ten rules for financial success states this is the way to the greatest return. States the mutual fund symbols and helpful list of allocation tables for different age groups.  

I personally see myself investing in all of these models, when the market is down, I invest like Warren Buffet. When the market is flat or not producing great returns I am applying a value based investing with great diversity. I do hold rather large low risk fund(s), based on my age, waiting for the market to crash. I can’t tell you when the market will crash, but I am sure it will sooner or later. I still have a portion of my investment actually in stocks, mutual funds, bonds, & treasury inflation protected securities (TIF’s) . When the market get too high I rebalance my trading account and the same is true when I see weakness in the market I rebalance once again. I am always looking for opportunity to make a good return. No, one knows when the market will be at the top or at the bottom. But one knows when the market is priced fairly or slightly over valued and when the market is under valued. This is when a smart person makes their move. When the market is high move some of your investment to save, like wise when the market is weak move some of your investment to risk.            

Created by Derek P.  Bliedung
The Columbus Financial Coach
The Art of Saving Money & Making Money