Stocks and Exchange E-Book

Ladis Konecny

• Herausgeber: Books on Demand
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2013

Seitenzahl: 669

Beschreibung

The book "Stocks and Exchange - the only Book you need" is intended for the general public from 11 to 85 years. Although the book is easily understandable, it describes in detail the parameters, which are ideal for safe and profitable investments in stocks or companies - whether short term or long term. When to sell or buy? This is technical and fundamental analysis at its finest. Which stocks can finance your pension with dividend payments? This book is the result of many years of practice and study of relevant literature. The book describes the strategies of the most famous investors and also my own experiences with stocks. Investment funds and pension insurance are discussed. The book contains a little information on business economics for investors and a lot of important information about the business on the stock exchange. The courses of three economic crises and crashes are investigated. The small lexicon explains 195 technical terms. There are some case studies about investors, companies and their stocks. Also described is the investment in gold, commodities and derivatives. Because the state expects ever more personal responsibility for your retirement arrangements, this book is also a very meaningful gift for your younger family members. Unfortunately there are only very few profound and above all honest books on shares thereby making this one all the more valuable.

Leseprobe

Contents

1. Foreword

Investing in shares is a very lucrative and, if done right, less risky way to generate the capital you need for your own home and much faster than with a home loan and a savings contract. It makes more sense to invest in stocks than in various supplementary insurances to supplement or even double the old-age pension. You are creating a solid income with the dividends and you may even be able to quit your job by age 50 or 55. Also your descendants will enjoy the dividends, since they will inherit your stocks. But they will receive nothing of your statutory pension.

This book is dedicated to the beginning and the advanced investors from 11 to 85 years. It was published in four languages. This book will be the only one you need for successful investing in stocks. It is written simply and formulated clearly with the avoidance of foreign words. It is sufficient to have a reason, intelligence and the skills in mathematics of an 11-year-old child and to have this book, if you want to have success with the investment in stocks. Many books on the investor Warren Buffett do not contain any information about the valuation multiples of those stocks, in which he invested. Therefore, you cannot understand, why they had such an interesting grow potential for him. The required ratios: P/E, P/B, P/S, ROE, earnings growth, the company's debt and the corresponding explanations will be found exclusively in the Mary Buffett's book “Buffettology” and here in my book.

This book explains, which stocks to keep only a few years and sell at a profit and which stocks to keep a lifetime as your pension from dividends. This book describes: the great stock crash of 1930 and 2001, as well as the financial crisis of 2008. Stock funds, bonds, insurance, gold, commodities, Forex and derivatives are explained and how to invest in them. A little lesson in economics is included too. The strategies of Peter Lynch, John Templeton, Ken Fisher, Philip Fisher and Andre Kostolany are described in the chapter ”Experts”. The strategies of Warren Buffett and Benjamin Graham are described in their own chapters. The chapter “Fundamental Analysis” is a description of the stock parameters and the characteristics of companies that have to be considered for a risk-free and profitable investment.

The chapter “Technical Analysis” deals with the short-term trading of stocks and explains the determination of the buy-signals and sale-signals from the charts. Everything useful for trading is here. I turned the falsehoods into truths and incorporated my own experiences.

The chapter “Wisdoms” is a large collection of sayings, wisdoms, ideas and quotations of famous investors, politicians, philosophers and not least of mine, based on the topics: stocks, stock exchange, money and wealth.

The best ideas from Warren Buffett, Benjamin Graham, Ken Fisher, Philip Fischer, Peter Lynch, John Templeton and André Kostolany are merged in this book. The lexicon of the 195 most important terms of the stock market and the economy is at the end of this book. I was gathering the texts for this book since 2004. Everything was updated in 2021. This book contains all mine gained practical experiences in value-oriented equity investment during 20 years.

Which stocks you should buy for only one year and which stocks you should keep for their dividends forever? Check in the magazines and on websites the parameters of the stocks of Dow Jones, DAX, EuroStoxx 50 and Stoxx 50, or simply look at my website! My website has the address nr1a.com/STOCKS since 2002. I show constantly the stocks with growth potential in the current year on my website nr1a.com

The best websites with fundamental dates of enterprises and stocks:

www.morningstar.com , finance.yahoo.com

The picture on the cover is a chart of MAN SE share from the index DAX or MDAX at the stock exchange Xetra, with the indicator SMA 200. Source: www.comdirect.de

If my book doesn't say anything new to you, then it is suitable as a gift for your son, father or brother for Christmas or a birthday.

I wish you good entertainment and a successful hand for your stock investment. This “know-how” will help you to the success with stocks your entire life long.

If you will find in this book a false statement or a typing error, please write me! It will be corrected in the next issue of my book. Thank you!

Please, allow me to write 100 thousand dollars as 100.000 USD instead of $ 100,000!

E-mail: [email protected]

Ladis Konecny, 12th August 2021

2. Stocks and exchange

2.1 Why invest in stocks?

Imagine that beginning 1990, you invested 10.000 dollars in a savings account, in the insurance or bonds, or in a certificate on the German index DAX, at the lowest level of 1990, or you would buy the American technology stocks: EMC Corp., Dell Computer Inc., Cisco Systems Inc., at the lowest price of 1990. You would have 12.000 dollars from your 10.000 dollars with the savings account after 10 years, 15.000 dollars with the insurance or bonds, 60.400 dollars with a certificate on the index DAX. Or 14 million dollars with shares of EMC, on the top price of 2000, 12 million dollars with shares of Dell and 11 million dollars with shares of Cisco. And your profit with stocks would be tax free in some countries after some years.

Investment in stocks has two important reasons:

1) To obtain the necessary capital, if you want to buy a flat. 2) To double the pension at 65 years, or to enjoy your pension earlier. You can practise both of these goals and hold some stocks for one year to four years and other stocks hold forever only for dividends.

2.2 The share

The share or stock is a security. The individual share of a company represents a fractional part of the company value. The share is an equity paper, which certifies and confirms that you are a proportional co-owner of a company.

The shareholder has the right to a portion of the earnings generated by the company in the form of dividends. In addition, he has the right to vote at the annual general meeting of the company and he has the right to a reduction on the issuance of new shares. If the company will be dissolved, the shareholder has the right to receive a part of the company assets. You can get the dividend in cash, or in new shares, or in the company's products in the amount of dividends. The shareholder cannot sell his shares back to the company, but he can sell them on the stock exchange to another man. An exception arises, when the company is dissolved. Then the shareholder gets back the money from the company for his shares, but for another price than he paid.

In recent years, there are nearly no more stocks in the paper form, the stocks are only virtually listed in stock accounts. The statement of your bank account confirms you as the shareholder. Some few companies make the exception: they issue paper stocks in small quantities and the shareholder frame them and hang them on the wall. Stocks are no longer so easily counterfeited, since they don't exist in paper form.

Stock exchange

Stocks are traded on stock exchanges. The stock market is a space, where the stockbrokers sit at computers and they trade from there electronically and worldwide with the stocks from your account, if you order them to do so. The trading of stocks on the stock exchange is cheaper online, from your home computer. The order by telephone is slightly more expensive. The most expensive fee for an order is, if you authorize bank employees personally at the bank counter. Stocks are then either purchased from another stockholder or acquired from the book of a stockbroker. Don't let a stockbroker suggest, which stocks you should buy or sell! These brokers generally have not the necessary knowledge, to advise you on one or the other. They lack the knowledge of the fundamental analysis of stocks. They only handle the processing of sales or purchases of stocks.

The stock market exists since about 1420 before Christ and has its origins in old Egypt. Later, there was also a stock exchange in ancient Rome. We should note the year 1409 after Christ as the initial establishment of the stock exchange, when the stock exchange was founded in Belgian Brugge. The stock exchange in neighboring Antwerp was created in the year 1460. At that time, the stock market took place under the open sky. Since the year of 1531, there has been the first exchange in a building in Antwerp.

Stock company, Corporation (Corp.), Incorporated (Inc.)

The stock company has two birthdays: 1) when it was founded and 2) when it issued shares. The company has only once a profit from the shares: when it sold its shares at the issue. In the later stock trading, only the shareholders have their profit from the shares. About half of the newly founded companies go bankrupt within five years. Only half of the new stocks grow in the first year. Often, it may be worthwhile, if the investor buys only stocks, which were traded on the stock exchange at least five years.

The foreign names of a company are: Aktiengesellschaft (AG), Sociedad Anonima (S.A.), Societas Europaea (SE).

Companies work for a single reason: profit making. The profit (earnings) is the money, which remains as profit from sales, if all bills were paid. Companies with a poor management don't achieve a satisfactory profit. The stock price of such a company is going down, when the company's profit goes down. Shareholders are not happy about it and if they own common shares and no preferred shares, at the annual general meeting, they can force the management to make the company more profitable, or they can force the management to resign and choose a new management for the company.

Where are stocks stored or deposited?

There is a central depository or a collecting bank for securities. Stocks are listed exclusively electronically today. The central depository for stocks in Europe is the Clearstream International S.A., with headquarters in Frankfurt and Luxembourg. In the case of insolvency (bankruptcy) of your bank or of your broker, you will not lose your stocks, because they are not owned by your bank or broker. Your stocks are listed in the central depository. You will lose your stocks only, if your company is bankrupt like Enron and you didn't sell your stocks soon enough and stock prices fell to zero.

2.3 How is it with books?

Before your first stock purchase in your life, it would be good to read four books about the investment in stocks:

"Stocks and Exchange" by Ladis Konecny

"Buffettology" by Mary Buffett and David Clark

"Value Investing made easy – Benjamin Graham's classic Investment Strategy explained for everyone" by Janet Lowe

"The five Rules for successful Stock Investing" by Pat Dorsey

It is also sufficient, if you will read only my book. So you can alone already assess, which stocks would like today these reasonable investors: Warren Buffett, Benjamin Graham, Peter Lynch, John Templeton or Phil Fisher. You will select and buy six to ten of these stocks from the United States and Europe. But don't buy the same stocks, which Warren Buffett bought right now, because he has often other reasons than to buy cheap and sell expensive. Also an investor from Europe should invest about 66% of his money in stocks from Europe and only the remaining 33% in stocks from the United States.

To invest money, it can be a risky enterprise. But the more you know about it, the risk of loss will be lower and you will more enjoy the investing. If you own your stocks at least one year and they grow slowly but surely, you will have more pleasure, than if you sell them early with a small profit.

Don't lose any time with books on trading! And avoid also stupid books about investing! Who is influenced by stupid books for the long-term investment, can hold stocks in the red for 30 years or sell them at a loss after a few years. Anyone who trades stocks like in the trading books, can expect to close half of his investments at a loss.

In the year 2000, many stupid books on stocks were published. There was for example to read: “If you like Mercedes, Coca Cola and Hamburger, buy the stocks of Daimler, Coca Cola and McDonald's!” “If a share has a P/E 50, it earns probably this valuation. A popular share can be valuated with P/E 50.” “If is the P/E ratio too complicated for you, ignore it!” “Buy stocks that Warren Buffett buys!" Such nonsensical advices brought great losses to 2000–2002-beginning investors. People would buy on the basis of such stupid books stocks of Nokia and Ericsson, with P/E 50 in the year 2000 and American computer stocks with P/E 100 and they would be in the red for 30 years, or sell their stocks at a loss after a few years. Authors of such stupid books thought in 2000 that a fair assessment with P/E 15 is no more important.

Value investors buy cheap stocks to keep them a few years, never sell at a loss, but sell with a profit of hundred or several hundred percent later. So they deserve patiently and calmly millions after 50 years, don't need to write books, nor sell seminars.

There are also such individuals, who already write their own book after two years of practice in trading. They just copy the lies from foreign books, without having tried it. To write a reasonable and true book, you need a practice and an experience in investing at least 10 years. You should also read all wise books about stocks in these ten years.

2.4 Save money and invest!

If you save and invest money in stocks, so that your capital will grow with the stock prices and dividends, then you will get the grade 1, because you are profiting from your money and your money works for you.

If you spend your entire salary for things, then you will get the grade 3, because your money doesn't bring anything to you, but also doesn't harm you.

If you buy an apartment, car and other things on credit and your bank takes you the interest on the loan, then you will get the worst assessment with the grade 5, because the borrowed capital costs you interest and the money works against you.

Invest in stocks only the money of savings that you don't need quickly to have in the next days or years! So you will not need to sell your stocks, when they are down because of a correction. Don't lose interest on your stocks, if you are in the red with them for 3 years! After 2 to 3 years of falling prices, will follow usually 4 to 6 years with rising prices, if you bought undervalued stocks and the company increases its profit, because the competition doesn't harm. Therefore, the purchases of stocks like General Motors, Nokia, airlines, manufacturers of microchips and electronics are out of the question, these companies cannot reach good earnings growth because of the competition. Also earnings reports for the quarters are often disappointing, they often affect prices catastrophically. With a savings account, you will be never in the red, but the inflation will completely eat up your 2% capital growth annually.

Who works in a factory or as a taxi driver and invests a good part of his wages in cheap and good stocks, will see that his capital reliably grows and in the course of time, is comparable with the capital of a company's chief or minister, who cannot save and spends his money on expensive cars, expensive pictures, expensive holidays and eat in expensive restaurants.

Investment in stocks is the only way to become rich without worries and rivalries. Who buys fundamentally undervalued stocks of companies without a competition from the indices Dow Jones, DAX, EuroStoxx 50 and Stoxx 50 and hold them for one to seven years, doesn't need to have fear, when during a correction the prices fall to 3/ 4. That makes no sense to control daily the stock charts and sell quickly at declining prices without any gain. There is no point in reacting to news in the media. You will sell only the stocks intended for sale at a profit, if they become fundamentally expensive. You should never sell stocks for your pension of dividends, although these can fall to 1/2 or to 1/3 in average decades. They will be namely back to their highs after about 4 years, then will continue to grow, about 160% during 10 years and they are the most profitable pension insurance that you can think.

My suggestion is to keep some blue chip stocks from the United States and Western Europe for some years and then sell them at a profit. And some stocks from the United States, Western Europe, Canada and Japan should never be sold, they should be kept also in the retirement age because of dividends.

2.5 How to start with stocks?

The best way is to find a large bank, offering a free account, where the online orders of stocks on the NYSE New York and XETRA Frankfurt cost up to 10 USD or 10 EUR. It can be for the British and American investors the Interactive Brokers – www.interactivebrokers.com.

For the European investors, it can be the Deutsche Kreditbank – www.dkb.de.

Interactive Brokers charged 2010 an annual base fee 120 USD and the order for the NYSE cost only 1 USD. The order for XETRA cost 5 USD. But the first orders in the year were free 2010.

The DKB Bank offers the accounts free of charge, the order for XETRA costs 10 EUR and order for NYSE costs 17 EUR. But we buy all American stocks in Frankfurt.

An account is opened in the bank personally with a passport or identity card, or you you must send a copy of the documents to the bank. Today, you can open an account online and identify yourself with your passport in the camera of your computer.

If the account is set up, you first put there some thousand dollars or euros.

You should order each one share for at least 1.000 USD or EUR, so that the purchase fee 10 USD or 10 EUR doesn't exceed 1 % of the purchase price.

In the first year on the stock exchange, some beginners buy the stocks or funds that achieved the highest price gains in the 3 last years, preferably those that grew over 100 %. These stocks or funds have the highest “relative strength” RS. Also dumb books and magazines recommend to buy stocks with the highest “relative strength”, the stocks with the best performance in recent months, regardless of how expensive the stocks are actually. The article authors in investor magazines are often young people, who didn't learn anything from the great crash of 2000. There are also writers, who studied theology and because they didn't earn enough with books about all saints in heaven, they write books about investing. So they come easily to the nonsense that you should buy stocks with the best “relative strength”. Beginners can be easily lured with the beautiful charts of the last year. Experienced investors ignore completely the “relative strength” of stocks, they also invest in stocks with a negative relative strength. The indicator “relative strength” expresses just something about the past. The same nonsense is the “momentum”, which will be subject later in the chapter “Technical analysis”. It is only important that a share is fundamentally undervalued and the company expects an increase of earnings and sales. Then the share has a growth potential for the next 12 months.

If you are looking for a good investment fund, you should select only a fund based on the strategy of value investing.

The investment portfolio can easily consist of 30 % of stocks. The portfolio doesn't need to be secured by government bonds and gold. The negative development of the stocks will not be moderated with bonds and in good times, when the stocks rise, the growth of the portfolio value will not be slowed with bonds. The best hedge against a price decline and a loss of value of your portfolio is, if each individual share will be sold at an overpricing. The second protection is that the share is sold, if the company expects no more a profit growth. We cannot not apply this of course for the stocks, from which we want to obtain dividends for our pension; we will never sell them, if no bankruptcy threatens the company.

We also don't need to worry about the beta, correlation and volatility. We can forget the diversification of portfolio by Mr. Markowitz. Only the financial advisors and fund managers come with such proposals. In reality, the mind and mathematics of an 11 year old child are sufficient for the success with stocks. It may be that we invest 35 % of our capital in American stocks and 65 % in stocks from Britain, Germany, Canada, France and Japan.

2.6 Stock picking

We avoid the risk with falling prices, if the stocks have a potential or a reasons to grow. Stocks with prices under one dollar are not necessarily cheap. You must look for the low valuation ratios P/E, P/B, P/S and P/C. It is equally important that the company expects a profit increase of more than 20 % in the coming 12 months. Without the company's profit growth, the share can remain also 60 years at the same level, as for example the share of General Motors. The GM share had 2008 the same price like 60 years ago, although the stock price was never splitted. The General Motors company had a strong competition from Germany and Japan and could not increase the sales and earnings. Finally General Motors had to be rescued in 2009 with a state intervention before the bankruptcy.

The English ratios P/E, P/B, P/S and P/C are in German KGV, KBV, KUV and KCV. The optimal values for these ratios are described in the chapters “Stocks short term”, “Stocks long term” and “Fundamental analysis”.

In the long term, approximately in 50 years, stock indices can grow by an annual average of 8%. If we receive also the dividends of 3 % from the stock prices, we will achieve a capital growth of 11 % with a certificate on the stock index with attributed dividends. If we buy only the stocks with a 2-year-growth-potential of 50 %, we sell all overvalued stocks and hold no stocks during the great crash, we can achieve a twofold increase of the capital, an average of 22 % per year.

Traders watch charts, formations and indicators and draw the support and resistance lines. However, they should worry whether a share is undervalued and whether the company expect a profit growth. So they don't need to react with stock sales on falling prices. If a company doesn't expect a profit growth, its share can drop 20 % in a single day because of the bad message about the profit in the last quarter, as it was the case several times at Nokia and it is a large company. The trader would quickly sell his stocks with the stop-loss order in this case. But the sensible value investor buys only undervalued stocks of companies that expect profit growths more than 20 % in the next 12 months. He doesn't use stop-loss orders and for him is sufficient to see his portfolio performance once annually, on the first of January. The reasonable value investor buys only stocks that have the two-years-potential of 50 %.

It would be good, if one share costs at least 5,00 USD. You should not buy stocks with a price under 1,00 USD, they are very risky. These penny stocks can grow 30 % in one day or also 30 % drop in one day. These stocks are not cheap, even if we can buy some thousand pieces for 1.000 USD. Often they are worthless and empty coats of former stocks.

It is recommended, if we search in the data table of German magazines “Focus Money”, “Börse Online” and in the weekly newspapers “Euro am Sonntag” for large companies from Western Europe and from the United States that expect a good profit growth and are undervalued. In short: We look for the stocks with a two-years-potential of 50%. We control the identified ratios and values also on the websites: www.morningstar.com , finance.yahoo.com and www.onvista.de.

You cannot rely on a single information, you should make inquiries about each company on five different websites and in magazines.

It is favorable for investors, when companies invest in the construction of new company buildings, to increase revenues and earnings, or if a company invests in the acquisition of companies with a similar product or service. It is also very beneficial to ensure, whether a company buys its own shares on the stock exchange and then liquidates them. This raises the value of the remaining, outstanding shares. A company should be able constantly to improve quality, to reduce its prices for customers and save money.

You should buy only stocks with a dividend yield of at least 3%. Stocks without dividend, also the shares of the popular company Berkshire Hathaway, serve mainly to the enrichment of the company's chief. If your stocks are some years in the red, alone the dividend gives rise to joy, especially when the dividend is paid in parts quarterly, like dividends from the United States, Great Britain and Canada. The German and French companies pay only once in the year the whole dividend.

Unfavorable factors for companies are:

very high manager salary

bonus payments for the managers

stock options for managers receiving shares paid by the company

drastic increase of manager salaries

luxurious office equipment, private jets and luxury cars

payments of millions for prematurely dismissed managers

excessive priced purchase of other companies

purchase of companies that make losses

purchase of companies that offer other products and services

lack of competitiveness over the competitors in the market

However, a high debt of a company doesn't need to be harmful, if the borrowed capital contributes to the increase of profits. The debt should not be more than twice as large as the equity.

2.7 Stock purchase

On the website of our bank or our broker, we register us with our user name and password to get access to our account. To order the stock purchase online with computer, it is much cheaper than an order by phone or personally at the bank. The stock exchange XETRA in Frankfurt allows us to buy stocks from all over the world. The exchange NYSE in New York sells many foreign stocks only as certificates ADR. If you buy shares of a Spanish company from a German account on the stock exchange Madrid, the fee can be twice higher, than if you would buy the Spanish shares on the XETRA. A European can buy all American stocks on the XETRA stock exchange and doesn't need the NYSE nor NASDAQ in New York.

You will buy your shares at any price very quickly, if you choose “market order” or “billigst” on the bank's website. You have your shares often in a few seconds in your depot. By clicking on the limit and then writing a certain limit for the stock price, often you will not buy shares all day long. Because the stock prices, free displayed are 15 minutes old and the share can be all day long more expensive, than the price that you chose as your limit. There is no point to pay for the notification of current “real time prices”, if you want to keep your shares one year or longer.

You will sell shares at any price very quickly, if you choose “market order” or “bestens” on the bank's web page. You will sell your shares often in a few seconds.

The NYSE, New York Stock Exchange is open from Monday to Friday from 9.30 to 16.00 o'clock New York time.

The stock exchange XETRA is open from Monday to Friday from 9.00 to 18.00 central European time. The Frankfurt Stock Exchange is open between 8.00 and 20.00.

It suffices for the reasonable investor, if the chart of a share gives him the impression that the share is no longer falling, but rises. He doesn't need to worry, if his share goes down next days. A few months later, he can buy more of these shares. A trader searched carefully for a good “buy signal” and he will be in the next few days also in the red.

2.8 The intelligent investor and shareholder

A stock expert from Europe will buy mainly stocks from Western Europe and a few stocks from the United States. He doesn't need stocks from Asia. He ignores the analyst ratings. Traders, computerized purchasing systems and high frequency trading are no competition for him because he wants to keep his stocks in the long run. He buys cheaply and sells expensively.

The success in the stock market depends to a great extent on the investor taking advantage of the stupidity of traders. Young investors behave in general less reasonably, because they sell stocks often too early, when these just start to rise, or they sell stocks at a loss. They believe the analysts, journalists and discussion forums and they act too often. They are interested in stocks first, when these grow already a long time and are already overpriced. Sometimes, they lose their patience first, if the stocks are already deep in the red and then sell at a significant loss, although they should really buy more of the stocks below. Amateurs change 70 % of their stocks in portfolio in one year, but also the fund managers. This is not clever! Also the computerized trading systems don't behave reasonably and react like living people, panic with falling prices and sell stocks often with a loss.

In Europe, there is a keen interest in certificates on stock indices, especially with the hedged risk. But investors lose money with the fees and sometimes lose the dividends that were generated with the stocks. In the United States, investors are mainly interested in individual stocks and less for certificates or funds. Certificates have also the risk, you will lose your money, if the issuer of the certificate goes bankrupt.

The share is the best workplace for our money. The risk is limited, if you distribute your money regularly on stocks from different sectors and countries and have the patience to hold your stocks at least a few years. The shares of a company are so much worth, how much the company will earn in the future. If the future prospects of a company deteriorate, the stock price also usually falls.

The intelligent shareholder ignores for his successful investment the terms like: "beta factor, volatility, risk and correlation". He is not interested in the ratings of analysts and the estimated price targets. His portfolio is not restructured every year and no modern theories of portfolio interest him. Clever investors are only successful because on the stock exchange are always many stupid, short term trading people, trading machines and market participants, who react to the technical analysis, news, tips from journalists, tips from stock brokers and the analyst ratings.

Some investors don't tolerate a 1 % decline of their capital. They are interested only in the total return funds that promise positive results for each year. But the bad year 2008 showed that also the total return fund can lose 20 % in one year. Before we will come to a 100 % growth with a share, the share can first 30 % fall, in May or September. Who wants a positive yield of capital annually, he can invest in a savings account or in bonds. Then he earns sure 2 % annually, but the inflation will take it.

Invest in funds or in certificates only when included stocks are really cheap and sell them, when stocks are expensive! But restrict yourself to the funds and stocks from the USA and Western Europe! Avoid stocks from other continents! Even if in a year the stocks from Russia, Brazil, Peru, India or China would strongly grow, stick to a fund with stocks from the USA and Western Europe! It is good to know, which stocks from the Dow Jones, DAX, EuroStoxx 50 have you in your fund. If you have no access to the fundamental data of the stocks and the company at any time, you cannot know their growth potential or whether the stocks are already overpriced. It is often very difficult if not impossible for an American or European, to obtain this important information for the exotic stocks from distant countries. If you come to the conclusion that half of the enterprises from the fund you don't like, you should keep your hands off this fund.

Who is buying from each stock a few pieces, has no portfolio but a stock zoo. In 1986, the portfolio of Warren Buffett's Berkshire Hathaway was holding 93 % of its capital in three different stock positions: Capital Cities / ABC, GEICO and Washington Post. From 1989 to 1993, only 9 stock positions were in the portfolio and 4 stocks made 76 % of portfolio: Capital Cities / ABC, GEICO, Coca-Cola and Gillette. Warren Buffett thinks that investors allocate their capital on many stocks, to invest surely, because they don't learn sufficiently about the companies, in which they invest. But a broadly diversified portfolio is bad. Inform you well about few companies and invest in them, avoid the wide diversification as the Dow Jones or DAX has! You should find for each of the companies selected for your portfolio the fundamental data and news on websites and in magazines at any time. This of course is not the case, if you want to invest in stocks from Brazil and India. Therefore: keep your hands off these stocks! A manager of an Indian or Brazilian stock fund knows only a little bit more, than you can know. The holders of Russian and Chinese stocks can be expropriated, or be forced to sell stocks at very poor prices. It can happen quite in all socialist states.

Stock billionaires earned in this way: they bought undervalued stocks for 100.000 USD and kept the stocks several years until their overvaluation. Then, they sold them and bought for the free capital new cheap stocks. They never sold at a loss. They would deserve no billions, if they would operate for 40 years with the day trading or speculate with a leverage of 1:30 with stock indices, commodities or currency pairs. Millions can be quickly earned with such a leverage, with a little own capital, but also quickly lose. Managers of large American hedge funds make the exception: they conduct their business with criminal price manipulation, false news and great sayings and charge the annual fee 20 % of the profit from the investor's capital.

Warren Buffett, Carlos Slim Helu and Bill Gates earned the most money with longterm investment. Warren Buffett became so rich because in 1970, he gave only 70 % of the Berkshire Hathaway shares on the stock exchange and he kept the remaining 30 % of the shares on his account until today. 2008, these 30 % of shares had a value of 62 billion USD. Also Bill Gates retained a large part of the shares from Microsoft since the initial public offering for many years. Carlos Slim Helu from Mexico invested in undervalued Mexican stocks and won billions often through the sale of these stocks. All three men were at least once on the Forbes list as the richest men in the world. The richest American in 1937 was John Davison Rockefeller, 1957 Jean Paul Getty, 1993 Warren Buffett and later Bill Gates and Carlos Slim Helu.

What signify netto, brutto, tara?

Netto, brutto, tara, are Italian words. Netto means pure. Brutto means rough.

A full amateur

A highly respected doctor comes to the bank counter and would like to invest in a stock fund 100.000 USD for six months, because he read that this fund grew 120 % in the last year. His expectation was: The fund can increase by 60 % in the next half year and will bring him 60.000 USD.

The rule 72

You determine the number of years, in which a stock price can theoretically double, by dividing the number 72 with the annual earnings growth. This applies only, if you could guess the annual profit growth and if the ratio P/E is assumed as a constant. The stock price or dividend can double with an annual earnings growth of 10 % after 7,2 years and quadruple after 15 years.

2.9 Value investing, investing in undervalued stocks

Twelve steps to the wealth. A free image of the Bobst value investment

1. Knowledge. Invest with mind and directed of real knowledges

2. Value investing. Invest in real values

3. Have a margin of safety

4. Valuation. Check the right valuation of stocks

Growth of earnings, G > 15 % in the year, better more than 20 %

P/E/G (price / earnings / growth ratio) < 1, better below 0.5

8. Debt to equity. Check the low debts of the company

9. To build a portfolio of various stocks

10. Buy and hold for a long time

11. Patience. Wait one year to four years

12. Reach wealth and prosperity

The way to the wealth or to the first million in the stock market

The fundamental knowledge is that the value investing is the best way to invest your money profitably. The fundamental principle of value investing is to find undervalued stocks and to invest in them for a long time. You can create a high level of security in the investment and minimize the risk. The valuation of stocks plays the central role. You don't need to rack your brain over the “intrinsic stock value'”, the low valuation ratios P/E, P/B, P/ S and P/C suffice. But an undervalued share has no chance to grow yet, if the company fails to increase its profits. Any serious analysis should make sure that the company expects a profit growth of at least 20 % in the year. Companies should not be heavily in debt and the free cash flow should be positive. Build yourself a portfolio of 6 to 10 undervalued stocks from different sectors and countries! Then, the basic strategy “Buy and hold” will always work, also when the year 2008 was an exception due to the financial crisis. Ignore the capital market dynamics and the daily news! No matter, how deep your stocks go in the red, never sell at a loss! Have the patience to hold your stocks at least one to four years, until they are dangerously overvalued or the company will expect a profit growth only by 5%! An overvaluation can be the case, when a non-technological share reaches the ratios P/E 25, P/B 6, or P/S 4. You can sell the stocks with this valuation and buy other cheap stocks. After some decades, you can be rich or earn your first million. You need only the patience to follow the principle of value investing – that is all.

What is value investing? Undervaluation and overvaluation.

You can see on the picture that a share can vary between the undervaluation and the overvaluation within a certain time. You have to buy the share, if it is undervalued and the price is outside of the “margin of safety”, in the “undervalued” area. If the price remains within the “margin of safety”, you don't need to be afraid to sell with a loss later. The share has its right price on the curve “intrinsic value”. If the price rises over the curve “intrinsic value” and is in the area “overvalued”, this is for you the signal to think about the sale, before the share will go down.

If the front pages of general newspapers write, how much money was made on the stock exchange, the cleaning ladies and taxi drivers learn it too and buy the stocks with the highest increases in the past year. But the stocks are already in the “overvalued” area and it is high time for you to sell. The next big crash of overvalued stocks is no more far and can last two to three years. As I said, you don't need to engage in the “intrinsic value”, you can sell at high P/E, P/B or P/S ratios.

When someone asks you, what do you think about a certain share, tell him, he should inform himself about the ratios P/E, P/B, P/S, G, debt and dividend in magazines and websites! You can assess a share only, if you are actually informed about these ratios.

If you are a long-term oriented investor, you are not suffering, if one of your stocks has fallen 30 %, for example in May, because you look at your annual performance only the first January. Also a trader doesn't suffer with falling prices, because he sells his stocks generally after a decline of 10 % or 15 %, mainly over the stop-loss order.

Magazines, websites and television

Young people say on television, in magazines and on many dumb websites that stocks didn't bring income since the overvaluation in the year 2000 to the undervaluation of 2010. It is advertised to invest in an insurance that will bring you only 2% annually and only the insurer profits. You find in a large bookstore on the shelf with stock market books 30 % of books about the financial crisis and 30 % about the trading. The magazines don't confine on the publishing of “rating buy” and “rating sell” that are intended to represent the potential of a share, but they deceive the readers with recommendations to buy, although a share with a P/E 50 or P/S 6 is already far too expensive, or the company expects a lower profit. They continually advise readers to follow their stop-loss-order and sell such overpriced stocks at a price decline of 15%. The chief editor of the magazine “Börse Online” got annoyed with me, when I told him, he should confine on the potential of stocks in his articles, what can be logically determined from the ratios. These purchase recommendations for stocks can mean that the journalists are paid by the stock companies. Of course he contested my criticism and that's why I was right. Readers of magazines sold several times overvalued stocks with a loss of 15%, because of such tips and they will fear stocks after a year. That's why the interest in stocks in Germany is low. These magazines consider Warren Buffett to be a reasonable investor and the editors should learn something from him and never give advice on buying overpriced stocks that are then sold at a stop loss order at a loss. Warren Buffett is not dependent on the stop loss orders, he knows his companies and their enterprises well and almost never sells at a loss.

To fire the interest in stocks again in Germany, the magazines only should derive potentials of companies and their stocks from the ratios like P/E, P/B, P/S and PEG. The recommendation of a stop-loss order should belong to the past. If the magazines so appreciate Warren Buffett, they should also promote the idea of value investing.

There are some crash prophets and comedians in the financial industry, who have fun, to manipulate the public and stock prices or commodity prices.

Crash prophets, who provide falling stock prices: Robert Prechter, Marc Faber, Nouriel Roubini, Joseph Stiglitz, Paul Krugman, Roland Leuschel, Günter Hannich.

Cabaret artists, who only make silly jokes: Jim Rogers, Jim Cramer, George Soros, Alan Greenspan, Ben Bernanke, Nassim Taleb.

These famous American economists, fund managers, bankers of the Federal Reserve System FED, pessimists and crash prophets have a large debt on the financial crisis 2007-2009. What leads these sad comedians to their absurd statements about the crisis and the crash? Some were certainly paid for their dumb comments by the hedge fund managers, who speculated with a great leverage on 1% change in stock indices, dollar and exchange rate, gold and oil prices. Some direct their own fund. Others with their nonsense make advertisements for their new funny book about the last or the next crisis and crash. If the websites and newspapers were not paid by the hedge funds nor by these crash prophets and cabaret artists, they should not publish their comments and not participate in this stock price manipulation. The majority of investors, namely want that the stock prices rise.

The average P/E ratio of stocks in the Dow Jones 1920–2004. Image with permission from Robert J. Shiller, Yale University

3. Stocks short-term, for a few days, 1 year to 4 years

The investment in stocks is the most rewarding form to get money for a home purchase or to become rich without a great risk and effort. Instead of a building loan agreement, you should prefer to earn the resources for your home purchase with stocks in 10 to 20 years. You could find for this purpose the best stocks inside of the American Dow Jones index and the German DAX index. This also applies to American, British and Spanish investors. You must buy such stocks at the time of their undervaluation and sell in an overvaluation. You also sell stocks, when the company doesn't wait growing earnings this year or only a growth by 5%. In the mentioned German index can be found mostly cyclical stocks and these are the most profitable for us. It is especially worthwhile to buy these stocks, if is the PEG ratio lower than 0,5. The stock dividend yield should be at least 3%, then it is not so tragic to have a share one year in the red.

It is wise to save and invest the saved money in stocks, so that your capital will grow with the stock price and with the dividends, until you will have enough money to buy an apartment. It is not wise to buy an apartment, car and other things on credit. In the first case, we make money with our capital, in the second case, we lose money with our capital, because we must pay interest on borrowed capital. Although you get a flat with a loan immediately and don't need to pay a rent anymore, you must pay regularly monthly for 20–50 years a great part of salary for your credit. If you lose your work and can no longer make the payments, the bank will confiscate your apartment and will sell it for the half of your credit. The other half of your credit you still owe to the bank and have to pay this, although you have no more any flat. If you can earn in 10 to 20 years with stocks to buy your flat, you will take the money from your salary for the stock purchase only irregularly and only then, if you can afford it. At any time, you can afford a foreign holiday. After 10 or 20 years, you will buy your apartment for cash more expensive, but without risk and without big savings every month and every year. Somewhere is the price of an apartment equal after 10 years. If you will lose your work or will have an expensive foreign holiday, you don't need to buy any stocks for a period of time. And if you have stocks with growing dividends, you will have such a high income after a few years that you will pay the rent for your apartment with dividends, before you will earn on your own apartment with stocks.

3.1 Trading and short-term speculation

Be sure to try to trade stocks in the short term for two or three years, buy and sell within a day or a week, as the signals from technical analysis suggest! You probably won't find it funny after a few years, if you often had to sell stocks at a loss.

Experienced traders or speculators recommend to protect all stocks with stop-loss orders because a sudden price decline may occur even after a good buy signal and stocks should be sold with 7% in the red, at the latest with 15% in the red. Here you can ask rather normal, sensible people, who have no idea of the trading, like your mother, father, son, daughter or friend. They will tell you, whether you should sell stocks for 8.500 $ that you bought for 10.000 $. They will consider you as stupid and insane, if you're trading like the experienced trader.