Hi, Welcome to the 5th Special Edition
Brief Overview of What We will cover in this Issue
Detailed Key Takeaways from the book I am reading Currently
Key Takeaways from Investing Articles and Blogs
investing during a crash (+4 Articles)
Small Important Investing Video Clips
Why you shouldn’t look at every business from the same lens- case study (+ Many Clips)
Key Learning and Takeaways from Learn to Earn Book By Peter Lynch
What’s often left out is how saving money from an early age is the key to future prosperity, how investing that money in stocks is the best move a person can make, next to owning a house, and how the earlier you start saving and investing in stocks, the better you’ll do in the long run.
The principles of finance are simple and easily grasped. Principle number one is that savings equals investment.
Those who save and invest for the future will be more prosperous in the future than those who run out and spend all the money they get their hands on.
A lot of people must have told you by now that it’s important to get a good education, so you can find a promising career that pays you a decent wage. But they may not have told you that in the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.
The AT& T case is a good example of what’s wrong with monopolies and why competition is in everyone’s best interest. (Before the AT&T breakup, the company employed 1 million people—one out of every one hundred American workers had a job with Ma Bell. Today, Ma Bell and the seven Baby Bells together employ only six hundred thousand workers, while the volume of phone calls has more than tripled.)
Great Depression 1929 (Why Retail Investor Lose Money in Crash)
A lot of investors lost everything in the Crash of 1929, but the brokerage firms that sold them their stocks survived the calamity. A few lesser-known brokerage houses went bankrupt, but the majority stayed in business. In those days, people could buy stocks for 10 percent down, which is why the Crash wiped them out. They ended up owing much more money than they had invested in the first place. The brokerage houses had to collect on these debts, and they went after their customers’ assets with a vengeance. Wall Street firms also bought stocks on borrowed money, but the banks that loaned it to them were sympathetic and gave them extra time to pay their bills. Individual investors weren’t so lucky.
The majority of people didn’t lose a penny in the Crash
Most historians will tell you the Depression wasn’t caused by the Crash of 1929, although it often gets blamed as the cause. Only a tiny percentage of Americans owned stocks at the time, so the vast majority of people didn’t lose a penny in the Crash. The Depression was brought about by a worldwide economic slowdown, coupled with the government’s mishandling of the money supply and raising interest rates at the wrong time. Instead of putting more cash into circulation to perk up the economy, our government did just the opposite, pulling cash out of circulation. The economy came to a screeching halt.
The real victims of the Crash were the people who bought stocks with borrowed money, or “margin.”
Possibility of Next Great Depreciation
So in the last fifty years or so, the odds of a slowdown turning into depression have been quite remote— in fact, they’ve been zero in nine chances. Nobody can be sure you’ll never see a depression in your lifetime, but so far, in the past half-century, you would have gone broke betting on one.
People who stay out of stocks to avoid a 1929-style tragedy are missing out on all the benefits of owning stocks, and that's a bigger tragedy.
Consumer Discretionary Stocks
Certain kinds of companies can ride out depressions and recessions and other periods when money is scarce. These are called consumer growth companies. They sell inexpensive items: beer, soft drinks, snacks, and so forth, or necessities, such as medicines that people can’t live without.
But in business, there’s always a threat lurking around somewhere. The tricky part is, you never know exactly what the threat will be. This is one of the biggest mistakes investors make.
Why you should start investing early
If you start investing late then you would lose valuable years when stocks could have been working in your favor. your money could have been piling up. Instead, you spend what you have as if there’s no tomorrow. Many of your expenses are unavoidable.
Whether it’s ten dollars a month, one hundred dollars a month, or five hundred dollars a month, save whatever amount you can afford, on a regular basis.
It’s cool to drive around in a flashy new Camaro instead of a used Ford Escort, but that kind of cool is very costly in the long run.
Money is a great friend, once you send it off to work. It puts extra cash in your pocket without your having to lift a finger.
Buying House with Morgage Loan
If you buy a $ 100,000 house that increases in value by 3 percent a year, after the first year it will be worth $ 3,000 more than what you paid for it. At first glance, you’d say that’s a 3 percent return, the same as you might get from a savings account. But here’s the secret that makes a house such a great investment. Of the $ 100,000 it takes to buy the house, only $ 20,000 comes out of your pocket. So, at the end of year one, you’ve got a $ 3,000 profit on an investment of $ 20,000. Instead of a 3 percent return, the house is giving you a 15 percent return. Along the way, of course, you have to pay the interest on the mortgage, but you get a tax break for that
Fifteen years up the road, if you’ve got a fifteen-year mortgage and you stay in the house that long, the mortgage is paid off, and the house you bought for $ 100,000 is worth $ 155,797, thanks to the annual 3 percent increase in the price.
Equity Vs Bond
Companies are constantly raising the dividend on their stock to reward the stockholders, but you’ll never hear of a company raising the interest rates on its bonds to reward the bondholders.
The worst part about being a bondholder is watching the stock go through the roof and knowing that you won’t see a penny of the gain.
No matter what happens in the stock market, the company must repay its debts to the bondholders on the date when the loans terminate and the bonds “come due.” That’s why a bond is less risky than stock. There’s a guarantee attached to it.
Stock Market is not a gambling
If stocks are such a gamble, why have they paid off so handsomely over so many decades? When people consistently lose money in stocks, it’s not the fault of the stocks.
Basic Stock Market Investing
You don’t have to be a math whiz to be a successful investor in stocks. You don’t have to be an accountant, although learning the basics of accounting may help.
you have the basic skills. The next thing you need is a plan.
In fact, a small amount of money invested early is worth more in the long run than a larger amount invested later.
Twenty years or longer is the right time frame. That’s long enough for stocks to rebound from the nastiest corrections on record, and it’s long enough for the profits to pile up. (Time horizon to invest in Equity)
It’s not always brainpower that separates good investors from bad; often, it’s discipline.
People are always looking around for the secret formula for winning on Wall Street, when all along, it’s staring them in the face: Buy shares in solid companies with earning power and don’t let go of them without a good reason. The stock price going down is not a good reason.
These days, it’s hard to find anybody who doesn’t claim to be a long-term investor, but the real test comes when stocks take a dive.
Psychology of retail Investor in Crash/Bear-Market
they begin to worry that stock prices will hurtle toward zero and their investment will be wiped out. They decide to rescue what’s left of their money by putting their stocks up for sale, even at a loss. They tell themselves that getting something back is better than getting nothing back. It’s at this point that large crowds of people suddenly become short-term investors,
They forget the reason they bought stocks in the first place— to own shares in good companies. They go into a panic because stock prices are low, and instead of waiting for the prices to come back, they sell at these low prices. Nobody forces them to do this, but they volunteer to lose money. Without realizing it, they’ve fallen into the trap of trying to time the market.
But anybody who sells stocks because the market is up or down is a market timer for sure. A market timer tries to predict the short-term zigs and zags in stock prices, hoping to get out with a quick profit. Few people can make money at this, and nobody has come up with a foolproof method. In fact, if anybody had figured out how to consistently predict the market, his name (or her name) would already appear at the top of the list of richest people in the world, ahead of Warren Buffett and Bill Gates. Try to time the market and you invariably find yourself getting out of stocks at the moment they’ve hit bottom and are turning back up,
Nobody can outsmart the market. People also think it’s dangerous to be invested in stocks during crashes and corrections, but it’s only dangerous if they sell. They forget the other kind of danger—not being invested in stocks on those few magical So to get the most out of stocks, especially if you’re young and time is on your side, your best bet is to invest money you can afford to set aside forever
You’ll suffer through the bad times, but if you don’t sell any shares, you’ll never take a real loss.
Few Big Winners a decade is all you need
But a few big winners a decade is all you need. If you own ten stocks, and three of them are big winners, they will more than make up for the one or two losers and the six or seven stocks that have done just OK.
Why you shouldn’t borrow conviction & avoid tips from Experts
The problem with expert tips is that when the expert changes his mind, you have no way of finding that out— unless he goes back on TV to inform the viewers and you happen to catch the show. Otherwise, you’ll be holding on to the stock because you think the expert likes it, long after he’s stopped liking
The more you learn about investing in companies, the less you have to rely on other people’s opinions, and the better you can evaluate other people’s tips. You can decide for yourself what stocks to buy and when to buy them.
The world through a stockpicker’s eyes
Doctors know which drug companies make the best drugs, but they don’t always buy the drug stocks. Store managers and the people who run malls have access to the monthly sales figures, so they know for sure which retailers are selling the most merchandise. But how many mall managers have enriched themselves by investing in specialty retail stocks? Once you start looking at the world through a stockpicker’s eyes, where everything is a potential investment, you begin to notice the companies that do business with the companies that got your attention in the first place.
Investing is not an exact science, and no matter how hard you study the numbers and how much you learn about a company’s past performance, you can never be sure about its future performance. What will happen tomorrow is always a guess. Your job as an investor is to make educated guesses and not blind ones. Your job is to pick stocks and not pay too much for them, then to keep watching for good news or bad news coming out of the companies you own. You can use your knowledge to keep the risks to a minimum.
If you want to buy a share and become an owner of the public company of your choice, the company can’t stop you. And once you’ve become a shareholder, they can never kick you out.
Why you should read Annual Report
Once a year, the company sends out an annual report that sums up the year in great detail. Most of these annual reports are printed on fancy paper with several pages of photographs. It’s easy to mistake them for an upscale magazine.
They can’t hide the facts, no matter how unpleasant those facts may be. They must tell the whole story, good and bad, so every shareholder knows exactly what’s happening. It’s the law. If there’s a foul-up on the assembly
How to Catch a Twelve-Bagger (Nike Story)
If you’re going to invest in a stock, you have to know the story. This is where investors get themselves in trouble.
When the price goes up, they think the company is in great shape, but when the price stalls or goes down, they get bored or they lose faith, so they sell their shares.
Confusing the price with the story is the biggest mistake an investor can make. It causes people to bail out of stocks during crashes and corrections when the prices are at their lowest, which they think means that the companies they own must be in lousy shape.
Some stories are more complicated than others.
But there are occasions when the picture is clear and the average investor is in a perfect position to see how exciting it is. These are the times when understanding a company can really pay off.
After Few Painful Quaterely Result of Nike, in late July 1987 along with the annual report, there was a positive note. Sales were still down, but only by 3 percent; earnings were still down, but future orders had turned up.
By reading the annual report of that year, you would also have learned that in spite of its several quarters of declining earnings, Nike was still making a nice profit. That’s because sneakers are a very low-cost business.
When you opened the first-quarter report of 1988, which arrived in late September 1987, you could hardly believe your eyes. Sales were up 10 percent, earnings up 68 percent, and future orders up 61 percent. This was proof that Nike was on a roll. In fact, the roll lasted for five more years: twenty straight quarters of higher sales and higher earnings. In September 1987, you didn’t know yet about the twenty straight quarters. You were happy the company had turned itself around, but you weren’t rushing out to buy more stock. You were worried about the price, which had moved up sharply from $ 7 to $ 12.50.
Stock prices came tumbling down in the Crash of October 1987. Investors who confuse the stock price with the story were selling everything they owned, including their Nike shares. They heard commentators on the nightly news predict a worldwide collapse of the financial markets.
because you realized the Nike story was getting better. The Crash gave you a gift: the opportunity to buy more shares of Nike at a bargain price. The stock dropped to $ 7 after the Crash and sat at that level for eight days, so you had plenty of time to call your broker. From there, it began a five-year climb to $ 90, while the story kept getting better. By the end of 1992, Nike shares were worth twelve times more than you’d paid for them in 1987. That’s your twelve-bagger.
Excerpts and Learning from Articles/Blogs
How Do Investors Fail?
People spend a lot of time studying greatness. They don’t study failure.
A little decline becomes a big decline in a hurry. For example, a 3x long S&P 500 ETF would have declined by nearly 75% in March 2020, which is much worse than the 33% decline in the underlying index (Too Much Leverage)
if the crash had been much worse, it could’ve destroyed nearly all of your capital. It’s these rare, big declines that wipe out many investors.
Don’t borrow money and then invest it
when you sell for a capital gain, always set aside some of it to pay your taxes.
Concentration is one of the few paths to extreme wealth, but it’s also one of the few paths to absolute ruin as well. So if you use concentration to win the battle, make sure to use diversification to win the war. (Too Much Concentration)
Making large all-or-nothing decisions with your investments is a recipe for disaster. (100% Cash During Crash)
your gains are uncertain, your liabilities are guaranteed
Investing what you can’t afford to lose might be the riskiest investment choice of all.
If you want to be more successful as an investor, sometimes it’s good to know how to fail.
Investing in the crash
In the last 11 years of our advisory, we have seen all kinds of micro and macro events occur. At that time, the event appeared to be a big deal, and then eventually everyone adapted to the new situation
Holding onto an outdated thesis and hoping it works out is a recipe for disaster
if you should add to positions that have dropped below the buy price. The simple answer is Yes. The only time when this happens is when there is chaos and crisis in the world. Such prices come only during times of trouble
The best option is to invest in a steady and measured way keeping in mind that your purchases could show a loss in the short to medium term. Invest only if you don’t need that money for the next 3-5 years and the amount is such that these losses will not cause you to lose sleep
Due Diligence to be done when you start investing
Successful investing is a game of subtraction – looking at thousands of businesses and filtering them down to a select few that you can believe in and hold through the volatility.
- Ian Cassel
Investor Psychology During a Sell-Off
Notes from the latest Warren Buffett's 2021 Annual Letter
Notes on Warren Buffett’s 2021 Letter to Shareholders by Vishal Khandelwal
(Note: From Now onwards will give only links(3-4 or more) to Must Read Brilliant blogs from next week as I said on the very first issue)
Small Video Clips
Invest During Market Crash (Time In the market > Timing in the market) 32:30 to 35:23
1 Hour Masterclass on New-Age Listed companies (Must Watch) Whole Video is worth watching so no small clips from this :)
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