PostHeaderIcon Stock Market Investing reader mail #2

I’m always delighted when readers ask me questions. This way I get to address the things that they are concerned about and also gives me some ideas on what specific stock market topics to focus on.

Today’s reader mail is from somebody named Ben who is new stock market investing. Here is his letter.

“Hi,

I’m new to stocks and still afraid to venture into it. That’s why few months ago I decided to invest in mutual fund first as analysis of stocks seems to be very complicated, I’m starting to try understanding it and after reading several books from the U.S.A, to me, the whole picture is still not very clear

Anyway, I’m surfing the internet for Pinoy stock sites and I was impressed by your site, unique compared to other local sites, and it is clear that you have a profound knowledge on the subject

I hope to visit your site more often in the future, and tell my friends about it, my interest grew more when a couple of weeks ago, I noticed the NAVPS of my mutual fund was going down, most experts say that a short term bear market is beginning to happen but the last couple of days, thursday and friday, showed the opposite, I am confused right now, any comment please ? And can I receive a regular newsletter from you, maybe your weekly comments about the stock market”

Here’s my response to Ben’s email:

Dear Ben,

Thanks for visiting my blog. Reading an email like yours always brings me great delight as helping educate the public about the benefits and joys of stock market investing has always been my desire. I not only wish to give readers a general idea about stock market investing but rather to point the “right way” on how to do it.

There are lots of books about stock market investing and definitely lots of systems to follow. I am not surprised when you said that “analysis of stocks seems to be very complicated” and despite reading several books on the subject “the whole picture is not very clear.” The stock market is certainly seemingly much more complicated then investing in Property Turkey.

I hope that somehow by reading the stuff that I write in my site, the whole picture about stock market investing will become much clearer to you. I remember reading somewhere about Warren Buffett who spent about several years in his life trying to get a clear picture of what stock market investing is all about and trying to figure out what system he should follow. Afterwards he had his “Eureka” moment and soon got a very clear picture on the proper way to do stock market investing.

The same is true with me. I spent several years chasing one system after another to try to get a clearer picture on the right way to do stock market investing. Finally after reading a book entitled “Rule #1” the whole world of value investing opened up to me. I devoured book upon book on the subject of value investing and Warren Buffett.

The proper way to do stock market investing might not become clear to you as of now, in fact when I read value investing books I really did not get it at first. I’ve literally read value concepts hundred it of times. But it took me some time to really absorb and know by heart what the value investing gurus were trying to say. So let me try to make this is simple as possible. I don’t know if you will get it the first time, but just keep your mind open and never stop learning. Anyway here is my attempt to make the picture clear for you.

Warren Buffett learned from Benjamin Graham that the three most important words in stock market investing is “MARGIN OF SAFETY.” Now what does he mean by that? To further understand it let me explain further.

Stock market investing is very simple. No need to know about weird terms, use sophisticated software or read charts. The entire value investing strategy can be summarized in this single phrase. Now take note this is not my original idea but somewhat my convoluted way of putting the entire value investing strategy in a nut shell and that is “Don’t jus buy stocks, invest in a business and when you invest, buy wonderful companies with durable competitive advantage with a margin of safety or a fair price and hold them forever or otherwise be fearful when everybody else is greedy and be greedy when everybody else is fearful”

The first part of the phrase “Don’t just buy stocks, buy business” is the heart of value investing strategy. Stocks are not just symbols on a ticker screen. They represent actual businesses. If you treat stock as businesses you would only buy stocks of business you understand. If you get this and truly understand this concept, you would have understood the core principle of value investing.

The second part of the phrase which is “ . . . and when you invest, buy wonderful companies with durable competitive advantage with a margin of safety or a fair price . . .” answers the two vital questions that each stock market investor should ask. The first one is “What to buy” and the second one is “At what price.” Stock market investors and traders ask these two questions all the time. That is why people are always asking for stock tips, stock recommendations or whether or not this stock or that stock will rise or fall next week or whether or not the market is bullish or bearish etc. This is because they are trying to answer the question “What to buy” that is which specific company to buy and “At what price” and that is at what price should they buy that company. As to what companies are companies with durable competitive advantages and how much is a price with a sufficient margin of safety, this will be discussed further in this blog. However if you want to read it up, get a value investing book like Phil Town’s Rule #1 or check out my recommended books section.

The last part of the phrase “ . . . and hold them forever or otherwise be fearful when everybody else is greedy and be greedy when everybody else is fearful. . . ” gives you an idea on when to buy and sell. You could choose to hold stocks “forever” subject of course to certain factors or you could simply be fearful when everybody else is greedy and be greedy when everybody else is fearful, that is buy when everybody else is selling and sell when everybody else is buying.

Now take note that these are very simple concepts but very powerful concepts. If you will seek to know these by heart, you are on your path to join the ranks of the best stock market investors.

Now with regards to your question that you “. . . noticed the NAVPS of my mutual fund was going down, most experts say that a short term bear market is beginning to happen but the last couple of days, thursday and friday, showed the opposite” and that you are confused right now and ask for my comment on this. Well I have this to say, disregard short term market fluctuations. As Warren Buffett puts it become a “Rip Van Winkle” investor. Buffett once said, “As far as you are concerned, the stock market does not exist. Ignore it.” He further adds, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

If you have chosen truly wonderful companies with durable competitive advantage and bought your stocks with a significant margin of safety then choose to deliberately forget about your stock purchases. Sure read the newspaper, watch the business news, read the market reports but don’t mind whether the market is bearish today or bullish the next day. Base your buy and sell decision solely on the fundamentals of each individual company.

With regards to your last question, on receiving a news letter from me, actually I do not personally issue a stock market investing news letter. However I write a weekly stock market update at www.batangastoday.com (Click on business section) This weekly stock market investing update is more of a “look back” or an update on what the market players has been doing. I don’t do any specific forecast nor do I discuss any technical analysis at all. The weekly stock market updates includes a round up of news from listed companies that happened within the week, this is important just in case you miss the news on a specific company. The purpose of the market update is not to give stock tips or give a forecast. It is just market news plain and simple. You’d be more lucky consulting Madame Auring than relying on market forecast.

I do give my monthly stock picks on the same website. However these stock picks are based on company fundamentals. Again, I will not be giving any technical analysis mumbo jumbo, but will rather be presenting the basics of the company’s fundamentals and as to why the company is a good buy in the long run.

I hope I have satisfactorily answered your questions. Let me leave you this quote from the world’s greatest investor, Warren Buffett “’Success in investing doesn’t correlate with IQ once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

Sincerely,

D’ Intelligent Investor

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8 Responses to “Stock Market Investing reader mail #2”

  • ben says:

    thanks very much for the very informative reply, i think now u can consider me a big fan of yours, your ideas are really unique, atleast i havent heard similar views so far, i wil try to find the book/s u suggested, thanks a lot again for the reply and patience in answering questions,have a nice day

  • Edwin says:

    Hi Zig,

    How about those companies doing an IPO, are they good to invest at? You will become one of the firsts to buy their stocks, does it mean that the share price is initially cheap? Thanks.

  • zigfred says:

    Edwin: Hello, you have an interesting question which I believe qualifies for a blogpost as it requires extensive discussion. I will write something on IPO and will let you know once the post is up.

  • zigfred says:

    Ben: You are more than welcome !

  • panitanfc says:

    Hi Zig,

    Your blogs is spot on. I’m really interested with your analysis based on Phil Town investing strategy. I’m a Phil Town follower too, and I have applied his investing strategy for a year now. I hope you could share more of your experience and Ideas in your blogs. Thanks

  • zigfred says:

    panitanfc: Hello there. Glad to meet another Rule#1 investor. Thanks for dropping by my blog.

  • regor dadivas says:

    Hi Zig, it’s been a while that you have posted in your blog. Have you read the PaybackTime of Phil Town. Where do you get your research on company financial data. I’m using bloomberg and reuters for my initial or filter test,the ball park. They only provide 4 years of financial data, unlike in the US with MSNmoney. I hope you point me in the right direction in digging the right data for the company.

    I hope you could drop me down a PM with regards to buying quality business and share more insights with Rule # 1 investing.

    Regor

  • zigfred says:

    regor: Hi ! Yes its true, its been a long time that I haven’t posted in this blog. Had been very busy for a while. It’s really hard to keep up with things when you have various interest. I’ll be starting to write for this blog again soon, just drop by from time to time 🙂

    I’ve not read “Payback” by Phil Town but I read his “Rule #1” I will get a copy of that book soon and will share my thoughts in my blog.

    With regards to the data, yep it is very hard to get data here in the Philippines that stretches back to several years unlike in the U.S and other countries. What I did was that I went to the Philippine stock exchange and got the data from there. You need to go to their library and do your research this. Some of the data can also be bought and burned to a CD for a minimal fee. I also have the PSE corporate handbook which has several years of data which unfortunately they have stopped publishing.

    The new BPItrade also has a great feature that reflects I think 5 years of data so you can obtain data from there. You can also request data from the company you wish to do a study on.

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D’ Intelligent investor is one of the first few updated value investing blogs in Asia and probably the only updated value investing blog in the Philippines where you can learn stock market investing through intelligent investing that makes business sense. The stock market investing strategies are very different from what most stock market players advocate. The strategies featured here are mainly value investing principles more specifically inclined with what are perceived to be Warren Buffett’s style of investing. Other value investing strategies by great value investors such as Benjamin Graham, Peter Lynch, John Boggle among others are also featured.