Investing Archives

They say that if you want to learn something new, you should seek out an expert and let them teach you.

When it comes to investing, the top expert is definitely Warren Buffett, regarded by many people to be the greatest investor of the last hundred years (and also one of the top 5 richest people on the planet).

If there was ever a true expert at investing, Mr. Buffett is that person. With that in mind, we’ve put together a little bit of his best investing advice from over the years. Some of it might not be as specific as you’d like but, went taken as a whole, it’s advice that will help you to make much better investing decisions.

During a panel discussion after the documentary I.O.U.S.A,  Mr. Buffet told the audience that “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”

What he meant was that he looks for businesses that are extremely strong, product and service-wise, so that no matter who is running them the chance of them going under is slim, greatly lowering the chance that his stock purchase will go with them.

In his 2008 letter to shareholders, something that Berkshire Hathaway shareholders anticipate all year long,  Mr. Buffett had this to say about buying stocks;  “Price is what you pay: value is what you get. Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

In other words, the combination of an excellent company and a low-priced stock is what you should be looking for as an investor.

When talking at the Berkshire Hathaway annual meeting in 1997, Mr. Buffett had some things to say about the “margin of safety” that many investors look for when purchasing a stock.  “If you understood a business perfectly, and the future of the business, you would need very little in the way of a margin of safety,” he said.

What he meant was that the more vulnerable a business happens to be, the larger the margin of safety (i.e. lower price) that you’ll need in order to make a purchase, and vice-versa.

Finally, there’s possibly the best bit of advice that Mr. Buffett has given over the years, from his book ‘The Tao of Warren Buffett  (2006).  “Rule No.1: never lose money: rule No. 2: don’t forget rule 1”.

It doesn’t get much better than that.

With one of the most diverse economies on the planet, the United States drives global growth and has, for the most part, the best framework for shareholder protection. That’s why investors have always avoided investing in foreign stocks, because there simply wasn’t a need to take the extra risk. Besides that, there’s plenty of opportunity to get international exposure if you own stocks like ExxonMobil (NYSE: XOM) and Yum! Brands (NYSE: YUM).

The fact is, you don’t need to invest abroad but, that being said, it’s also recommended that you own at least one stock from an international company. Many may argue that investing in foreign companies is risky but the fact is that there is just as much risk investing in an American company as there is in a foreign company, and possibly more reward depending on the company itself.

For anyone that says investing in a foreign company is more risky, think about this; is it really riskier to invest in BHP Billiton (NYSE:BHP) that is to invest in FuelCell Energy (NASDAQ: FCEL), just because the first calls Melbourne, Australia home and the second is based in Connecticut? In fact, BHP has been generating billions in free cash flow while FuelCell, since 1998, hasn’t generated any.

If you look at them as a group, there is no more risk in investing in international stocks than investing in US stocks. Just like US companies offer substantial diversity, foreign companies offer it as well including companies like China Life Insurance (NYSE:LFC) and Vodafone (NYSE: VOD), both of which have seen massive cash flow, and VimpelCom (NYSE: VIP) which is surging at the moment.

In some ways, foreign stocks might actually be less risky than US stocks. As nearly every major currency in the world has gained value against the dollar, those investors who have invested heavily internationally have seen excellent benefits from this diversification. Anyone who’s got investments in pounds, rupees, dinars and other denominations is earning more than those who have invested in US dollars.

One reason that some people are looking even harder at foreign stocks is simply because so many money managers are telling them they shouldn’t. When you think about it, the fact that all of the foreign markets together exceed the total size of all US stocks, does it really make sense that allocating 25% of your portfolio to foreign stocks should be considered aggressive?

In many investors’ opinions there is a true lack of investment allocation in foreign companies, especially considering that there is a much more diverse volume of industries available internationally.

So the question of whether or not investing in international stocks is risky is pretty much a moot point. Yes it’s risky, but investing in US stocks is just as risky. From Finland to Taiwan, India, Brazil, Canada and China, there are plenty of intriguing stock bargains around the world that definitely are worth investigating.

When it comes to investing in stocks there are a lot of different choices that you need to make. One of those is whether to invest in so-called “small-cap” stocks and, if that’s what you’re considering, here are a couple of quick reasons that make it a good investment.

First off, since small-cap stocks are usually relatively unknown, it’s likely that you’ll find something that everyone else might have overlooked. The fact is, large, well-known companies are going to have plenty of people interested in buying their stocks, and the typical Wall Street analyst spends his or her day focusing completely on these companies, searching for any edge that will help them to earn a profit.

It’s almost exactly the opposite for small-cap stocks which, unlike a popular tourist attraction, are more like and abandoned warehouse; no one notices them, but they have a huge capacity. Many of these smaller companies are little gems that are just sitting, waiting for the right catalyst to thrust them in to view. Yes, they do come with a bit of risk but they also promise quite a bit of rewards as well.

Two of the best reasons to invest in small cap stocks are the fact that smaller companies are more agile than larger companies and also tend to be much less bureaucratic. At the helm of these companies are usually entrepreneurs that are quite focused on success, and most are often the actual founders of the business. They thus have a huge personal stake in the success of their company, something that bodes well for the success of their stocks.

One other reason that investing in small cap stocks is a good idea is that many institutional investors don’t bother with them because they handle too much money with large-cap stocks and have clients that are much too conservative to care. What this means for many small-cap companies, who might become tomorrow’s big winners, is that they are shunned by Wall Street analysts and the large investors that they cater to.

The fact is, if you want to focus on financial performance, high quality of management and high intrinsic value also, your best bet is to find small-cap stocks that are unknown today but will become tomorrow’s best investment. It might take a little bit of research and a bit of extra time, but the financial rewards could be significant.

Thinking of Buying Junk Bonds? Read This First

While it’s true that junk bonds still pay more than most, the fact is that bargains on junk bonds are becoming more scarce. With interest rates extremely low, buying junk bonds because of the extra income that you will get from their high yield can be tempting, but before you do, it’s best to know exactly what situation you’re getting into.

When a company has poor credit they issue what they call junk bonds and the yield on these bonds tends to be better than those of other low risk debt such as treasury bonds. In the last few years however, the demand for junk bonds from investors has pushed up their prices and cut back on their yields. (The reason is that bond prices move opposite to their yield.)

While the long-term average is approximately 9.5%, junk bonds recently paid out only 5.8%, a gap between their yield and that of comparable treasuries that’s almost 2 percentage points below average.

What that means, given their low yields, is that a junk bond pullback is possible. In July and August of this year it actually happened for about two weeks when, due to worries about the Middle East and Ukraine, US stocks retreated. Since junk bonds tend to move along with stocks, they also pulled back. Even one of the best benchmarks for junk bonds, Bank of America Merrill Lynch US High Yield Master II index junk bonds, declined 1%.

Thankfully the damage caused was minimal, stocks recovered and the US High Yield Master II index has since returned to 5.3%. Unfortunately, that also means that junk bonds are still relatively expensive. According to Mark Freeman, the co-manager of the Westwood Income Opportunity fund, “there hasn’t been a dramatic repricing,” in junk bonds.

That being said, holding on to some junk bonds still makes sense because of their higher interest payments, but financial advisors are still being cautious. Junk bonds could still be damaged if the economy begins to falter or a drop in share prices of 10% to 20%, a stock market correction, happens.

Most financial advisors still recommend keeping approximately 3 to 8% of your portfolio in junk bonds. 2 of the best choices available right now include;

  • Osterweis Strategic Income Fund (OSTIX).
  • Vanguard High-Yield Corporate (VWEHX).

Point being, while dumping your junk bonds completely isn’t necessary, picking and choosing them correctly is a must.

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