Wednesday, January 2, 2008

Nerves of Steel

Investing in todays financial markets takes at least a bit of control over your emotions. Some say it takes nerves of steel. It is certainly true that last months market turmoil has rattled investors. Consider many of the big boys having to write off billions due to bad loans. What does that mean for the smaller private investors?

Of course to a very large extent it depends on what type of investor you are. Are you a traditional Buy and Hold type of person? In that case the current market slide probably won't stir you that much. You may view it as a nice moment to get some bargains and add some friendly priced stocks or mutual funds to your portfolio. The only slightly difficult thing here is that seemingly hard to grasp phenomenon known as market timing. Who knows what a good price is? Is it good today just because it was higher yesterday? If so, will you still consider it good tomorrow if tomorrows price turns out to be even lower? Of course fundamental analysis can give you some guidance on what a good price could be, but these days P/E ratio's don't always carry the same meaning as they used to.

Of course to someone who is more of a trader the last few weeks have probably been pretty exciting. Whether or not that is positive or not depends on the way that they have managed their risk. What is an exciting, but perhaps bumpy, ride for one could be a nerve-wrecking slide for someone else. For many private investors risk management is easier said than done. If you lack the discipline to put risk management in place and act on it when called for it easily lead to an unpleasant situation. A serious drop in market value could have an immediate effect on the buying power of your portfolio. And if you've used margin, for instance by shorting uncovered stocks, that leverage could quickly start working against you. In that case you'll probably need a bit more that just a little control over your emotions.

Nerves of steel could help you sleep better in a situation like this but when push comes to shove it won't pick up the check. It is good to the extent where it keeps you from becoming too jumpy and making decisions driven by fear. It can be very bad when it makes you become cocky, thinking your cool will save you when markets continue to fall. It won't. Nor will it stop a margin call from your brokerage firm. It's great if you don't panic when the markets don't do exactly what you, or everyone else, expected. Much money can be made if you can keep your act together in a situation like that. But it's even greater if you've got your risk management in place so that your nerves aren't put to the test when things take an unexpected turn.

Tuesday, January 1, 2008

Eight Steps to Building a Solid Stock Portfolio

Are you an investor looking to build a brand new stock portfolio? Or maybe, you have managed investments or a retirement plan and you are now looking to maximize your investment portfolio? This report will help you build your stock portfolio to generate "real" wealth.

Easy access to investing information and the availability of online trading has made life much more enjoyable and less costly for do-it-yourself investors. The Internet has brought the "trading" desk to millions of households and it is now possible to buy and sell shares, options, warrants, interest rate securities and managed funds from your own home. All you need is a computer and an internet connection. In addition, you can do your own research on a particular company or fund manager as well as finding out what some stock brokers are recommending to their clients. Much of this information is free or available at a reasonable cost and you can save yourself hundreds, or even thousands of dollars in fees and commissions every year via the internet. Rather than go through a full service stockbroker or investment advisor, why not give it a try?

When building your own stock portfolio, here are some pitfalls you need to avoid!

While you can find a plethora of good information on stocks, you can also find very poor information. Each website claims to have the latest hot picks or the "top ten" stock buys and often they contradict each other. Who do you believe and what about the scams?

You will undoubtedly come across websites and chat rooms that give investment advice or tips about investments, but many of these are not qualified to do so. The information may be wrong or misleading and some websites even repeat incorrect rumors.

There is overwhelming evidence that you will not become rich by listening to the advice of others. As an investor you need raw information, not recommendations. You would not buy a car just by looking at it...nor should you buy a company's stock without doing significant research. There is no point trying to take control of your finances if you are going to rely solely on a "tip" from a newspaper or a broker or an internet chat room. It is true that someone may know more about a particular company or stock than you, but they could easily be wrong - so do your own homework!

You need to be certain that you have sound reasons for investing in a particular company. Does the company have an instantly recognizable name? Do you understand what the company does? Do the products or services of the company stand a good chance of being in high demand in a 10, 20 or 30 year time frame? Does it have a management team that moves with the times and is innovative, yet keeps a firm grip on the company's finances? Most of this information is available in a company's Annual Report, but make sure that you read it with a degree of skepticism...most reports are written to promote the company.

In the Annual Report, the financial statements, the balance sheet, the profit & loss statement and the cash flow statements are very important. They are important because they will help you assess if the company is providing value for your money. You are going to be buying stocks at a certain price and you will want to make sure that you are not paying an excessive amount. The financial numbers give you a snapshot of the financial structure, strength and growth rate of the company. This type of analysis is often called fundamental analysis, and also includes analysis of the economy and industries related to the company.

Keep in-mind that the historical and present prices of a stock hold clues to the future price. In practice, most analysts use fundamental analysis for short and long term buy/sell decisions and use technical analysis to confirm the decision.

Internet websites are a great place to collect information about companies. Naturally, a company owned website will attempt to portray the company in the most sympathetic light. Depending on how serious you want to be about investing, it is advisable to either visit or subscribe to investment research websites. Research websites are valuable tools for any investor and provide company reviews, give general investing information, market updates, stock pickers, stock ratings, watch-lists, portfolio managers, charts, share indexes, newsletters, alerts and model portfolios.

So, how can you structure a stock portfolio to maximize your wealth, ensure your peace of mind, give you total control of your investments, be easy to manage and give satisfaction? Here is a recommended strategy that has worked well for many do-it-yourself investors:

1. Subscribe to a well respected investment research website dedicated to analyzing financial information for investors. They are independent from companies they list, do not receive commissions or brokerage and rely solely on investor subscriptions for income. They have to give their subscribers quality information to maintain subscriber confidence.

2. Look for the model portfolios they have developed and study the methodology they have used to create and maintain each portfolio.

3. Read the research reports supplied for each stock and study the graphs supplied for price movements and trading volumes. Get a good feel for both the long term and the short term trends of the stock.

4. Test each portfolio within a designated test period i.e., one month, one quarter, one year etc. Depending on the website, you can set up each of the model portfolios in a free portfolio manager provided on the website with unlimited stocks. Set a starting date for a test period where you "buy" stocks listed in the model portfolio at the closing price for that day. Make sure you include brokerage as it is part of the cost base for the stock. The website should either maintain up-to-date or 20 minute delayed stock prices, so a running balance can be maintained for the profit/loss for each stock over the designated period.

5. Compare each portfolio's published results with the results that you have achieved in the portfolio manager. They should agree with each other when the same stocks are compared over the same time period. Your testing should develop a level of confidence in the model portfolio.

6. Determine the best model portfolio for you to use. You can do this using the last the last three months of stock price history or perform a trial evaluation for the next three months of future prices. You can use one of the existing model portfolios or create your own from the stocks selected.

7. Subscribe to an online share broker website and begin trading.

8. Monitor stocks daily and review the performance of your actual portfolio against the model quarterly.

You should take care to evaluate the methodology used by the research website to develop the model portfolios. These portfolios are designed by research firms to provide sensible medium-term portfolios that make it easy for investors and financial planners to replicate. You need to understand the research methodology and develop a level of confidence in it rather than just blindly accepting the published results of each portfolio. You do not need to become an expert in methodologies.

Building a share portfolio that meets your investment objectives will substantially build your wealth over a period of time. You can also save money in commissions and fees, have peace of mind, total control over your investment and gain a real sense of satisfaction.

As a final word of caution...nothing is for certain in this world except for death and taxes. This also applies to the stock market. Be prepared for some ups and downs and be ready to sell stocks to cut losses. If the core of your portfolio is made up of stocks that have strong capital growth and a reasonable dividend you will do well overall. Have "at it" and good investing!

Be A Winner Everytime

Just imagine placing a bet with the knowledge in advance that there is a 100% certainty of being a winner.

Visualize all that lovely money pouring into your bank account.

Pipe dream? No! Just guaranteed profit time after time.

You can make risk-free profits simply by carefully monitoring and reacting quickly to the differing odds offered by online bookmakers and betting exchanges.

Financial transactions that make profits without incurring any risks are known as 'arbitrages' and have been used for some time in the world of finance.

Sportsbooks ideally like to have a balanced book. This means that if the odds on offer were converted to percentages and then added together, the total would amount to more than 100%. Therefore, there is a built-in percentage favoring the sportsbook. The higher this percentage is, the more advantageous it is for the sportsbook.

For the punter to make a guaranteed profit, he needs to have the percentages in his favor. If the total book percentages totaled 80%, then a guaranteed profit of 20% would be available to him whatever the result.

Unfortunately, no sportsbook is going to allow their percentages to add up to less than 100%.
The good news is that the outcome of an event is a matter of opinion and different sportsbooks sometimes have differing views.

For example, say a tennis match where Player 'A' is given odds of 1.50 by one sportsbook and Player 'B' is given the same odds by another. The odds of 1.50 = 40%, so both odds totaled give 80% which results in an arbitrage of 20%. By staking $400 on Player A at the odds of 1.50 and $400 on Player B at the same odds, there is a risk-free guaranteed profit of $200.
The workings of this arbitrage are:

Player 'A' - Stake $400 @ 1.50 = Potential return of $1000
Player 'B' - Stake $400 @ 1.50 = Potential return of $1000
Whichever player wins - Profit = $1000 minus Stakes $800 = $200.

$200 profit without any risk whatsoever and the good thing about arbitrage trading is that you can go on doing it day after day.

Arbitrage trading may be risk-free, but it is not work-free. Before you can trade, you have to first find an arbitrage opportunity.

This involves careful scanning of sportsbooks searching for odds that afford an arbitrage trade. The internet, with its ever-increasing number of sportsbook sites, makes this task much easier.
Events to look at are those with two or three possible winning outcomes. Some examples of these are: tennis, golf, American football, soccer, snooker, boxing, basketball, baseball, ice hockey and politics.

It's best to have a minimum favorable percentage of 5%. If odds from betting exchanges are being used, do not forget to include the exchange's percentage commission when calculating.
Comparing all the odds on offer for numerous events across the vast number of sportsbook sites in operation can be very time consuming. In addition, favorable odds need to be located quickly or the arbitrage opportunity will disappear. To make this task easier and much, much quicker, there are various software programs available that can be employed.

If making guaranteed profits without any risk is appealing, then arbitrage trading could be the business to be in. This is risk-free, guaranteed profits at their very best.