Tag: investing

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Concentrated Stock Positions Are Risky

The worst-case scenario of holding a concentrated stock position is that the chosen company can bankrupt and the stock value drops to zero.

Concentrated stock positions occur when you as an investor own shares of one stock in a big percentage of your portfolio. So your capital is concentrated in a single position. How big is that percentage? It depends on the size of your portfolio and the volatility of the stock. But concentrated stock positions commonly occur when that stock represents 10% or more of your overall portfolio.

The modern theory says that it can be any position size that may hurt your investment plan. So, we won’t be wrong if we say that concentrated stock positions are any portion in one single stock in your portfolio that have a major influence on your overall portfolio no matter if it is 5% or 55%. Generally, it is a position size that can destroy your financial goals.

But nothing is so bad as it looks at first glance. Many people created their wealth by holding a single stock. So many families built a fortune in this way. The value of that stock grew heavily over time and the members of such a family inherit these concentrated stock positions, a large one that consists of just one stock.

Don’t matter how the concentrated stock positions are earned, they always represent an unbalanced allocation of investments. Since the holder of such a portfolio needs to reduce risk, it is essential to understand it and maintain it properly. There are several strategies very suitable for handling concentrated stock positions.

Strategies for handling concentrated stock positions

Have you ever heard a saying: “Concentrated wealth makes people wealthy, but diversified wealth keeps them wealthy.” It’s kind of credo among investors. Concentrated stock positions are challenging for managing. They have great risk potential included. So for that to be done, the investor needs a proper strategy.

One of the most common strategies is selling the part of these concentrated stock positions or the whole holding on it. To be honest, that is the simplest way to reduce the concentration on the stock.

But there are some that may occur, for example, the capital gains tax is connected with selling. In order to decrease the tax, you don’t need to sell the whole position. Sell it in the parts. For instance, you can define an amount and sell one by one quarterly. Of course, you can choose a different time frame but the goal will stay the same, to reduce the concentrated stock position since you would like to reduce the exposure also. Depending on the position’s value it may take a few years unless the whole process is done. Some experts claim that 3 to 5 years is the optimal time frame for that.

So you have two choices with this strategy: to sell the stock immediately or in portions over time.

Hedge the position – a strategy for handling concentrated stock positions

Those are actually two strategies but we’ll put them in one because they are connected. This is a bit of a complicated strategy but an effective one. Everyone wants to protect the owned stock against drops. You can do it by using options. So, think about the buying of put options as a kind of insurance against the potential losses in your stock. When you buy a protective put option, you’ll have the right to sell your stock, the whole or part of it, at a predetermined price. Don’t be worried if the stock price increases above the predetermined price. Your option will expire worthlessly and you’ll still hold your stock.

This strategy is quite good if you need short-term protection, so think twice are you willing to use it because over the long run this strategy may cost you a lot.

Also, you may sell covered call options. The strike price should be above the current market price. That will give you an extra income but the smallest protection against total loss if the stock price decreases significantly. Moreover, you’ll not benefit from price appreciation if you use covered call options as a strategy to handle concentrated stock positions.

Maybe you can use covered call options as a part of a well-organized selling process based on the market movements. Meanwhile, you get paid the premium.

Diversifying

It doesn’t mean you’ll make some small adjustments to your portfolios. Your main goal is to reduce the volatility that a concentrated position generates. And you cannot do that randomly, this diversification has to be exact.

As we said, you can sell this large position at once but there are some problems that may arise. The most important is that you can reduce the value of your overall portfolio by doing so. For example, if you sell the whole position at once that could cause the stock price to drop in value.

Sometimes such a decision can be emotionally difficult. So, a staged sale can be a way to avoid emotional reactions when selling a large position. You can do this if you determine the number of shares of the stock you want to sell by a particular date.

For example, you want to sell 21,000 shares of the stock over the next 21 months. And you decide to sell shares every quarter. There will be seven sales during this period, right? At the end of each quarter, you are selling 3,000 shares. This will not disturb you a lot, you have a schedule, your emotions will be under control, you don’t even have to think about the market fluctuation.

Use the exchange fund

This method is useful when you find other investors in the same situation with concentrated stock positions and who want to diversify as you do. What investors have to do? What are their options? They can join their shares into a partnership where each investor gets a proportional share of that exchange fund. Since the stocks are not the same, each shareholder will have a portfolio of different stocks. That will provide diversification. The additional advantage of this method is that it provides the deferral of taxes.

The straightforward approach to diversify the concentrated stock positions

It is rebalancing with a completion fund. We describe it above. It is simply selling smaller parts of your position over time. You can use the money you got to buy some other asset and have a more diversified portfolio. That’s how a completion fund operates. But as a difference from exchange funds, you are in control of your stock.

For example, you own $10 million worth stock, and you want to reduce the exposure to this stock. But you would rather sell part of your position because if you sell $10 million in one transaction the taxes you have to pay would be expensive. So, you prefer to sell 20% of the position every 6 months, and use that money to diversify into other assets. Over time you’ll have a fully diversified portfolio adjusted to your risk tolerance.

Bottom line

Some wealth transfer strategies could benefit you. For example, family gifting strategies, and charity gifting strategies such as direct gifts, foundation, or trusts.

The most important is to have peace of mind. Holding such a great but only one stock that generated money for many generations is a great responsibility. But that kind of portfolio is very volatile and risky. So you have to be smart and find the concentrated stock positions exit strategy suitable for your circumstances and goals. Your chosen strategy has to increase your overall wealth.

These strategies can reduce risks, reduce the tax of reducing the position. They are worth seeking. If you still are not sure which strategy to choose, find a professional financial advisor.

29th April 2020
The Danger of Diversification In Investing

Diversification has to be a well thought out step for investors. It can boost growth and lead you to wealth. But if doing improperly, it can cause costly failures.

Investors infrequently pay attention to the danger of diversification. All taught that the idea of diversification is to reduce the portfolio’s risk. And nothing is wrong with that. Some amount of diversification is important or investors will take too much risk that will never be neutralized for.
But sometimes too much can be very bad. It is the same with the diversification of the portfolio if it is too diversified. And we will explain to you the danger of diversification.

So, in the first place, the danger of diversification may come when the diversification is done improperly but also if the investment portfolio is over-diversified. But let’s go step by step through all examples of the danger of diversification because they can be very costly. They can ruin the whole investment and leave you with your empty hands.

The danger of diversification in investing

Portfolio without focus

No one will tell you that the danger of diversification is the reduced quality of your investments. In investing, one of the very important parts is to have a well-focused portfolio. That provides investors to have the best opportunities. To say this way, publicly listed companies are not all worthy to invest in. Also, what is maybe more important, you can find even fewer companies that are so-called safe investments. In order to have well-diversified portfolios, investors don’t pay enough attention when picking the stocks they could add many of them that don’t give a margin of safety to the portfolio. That will cause a reduction in the quality of investment. That would be the danger of diversification.

A complicated mixture of assets

The other danger may appear if investors add too many assets without truly understanding what they have. In other words, their portfolios are too complicated. The point with investing is to have control over your investments and know what they are. If you have too many assets from different classes you would be lost in attempting to follow them and to stay on top of them.

Portfolio volatility

It’s very important to understand that the more stocks you add to your portfolio, it will be more correlated to the market returns. There is some logic behind and you have to understand it because portfolio volatility can lower your portfolio performance. So, it can be too risky. Always keep in mind that the number of investors that ever reach average returns is under the average. The reason is the volatility caused by risk.

Having an index fund instead of a portfolio

Instead of buying too many stocks and adding too many assets, it’s better to buy some index funds. If you have too many assets, your portfolio will look like an index fund anyway. So indexing can be the danger of diversification. Indexing is good when the bull market, but if it is bear you could be faced with a lot of problems and danger.

Indexing, as well as over-diversification, represents the hidden danger of diversification. For example, if your portfolio may not have quality if you hold second-rate investments along with great investments. Sometimes, holding so-called inferior investments is the result of ef emotional buying, so avoid that. Pick stocks after you research them, never based on some emotions.

What can put us in danger of diversification?

The largest single danger is a surprise risk. Surprises are often part of our everyday life but when it comes to our investment it is a sign that we as investors are not cautious enough. Investors should be aware of risks and to predict them as much as possible. It is crucial in investing, due to safety, to quickly transfer our assets that show more risks than we expected or we can accept.

Also, forget you’re able to have an excellent and perfect plan for your future. Very often some unexpected events can arise. For example, this coronavirus pandemic that we have now. These events have a great impact on our investments so if we have over-diversified portfolios how could we manage all the investment? It’s almost impossible.

The perfect investment plan doesn’t exist. Every single investor made some mistakes. Just listen to what Warren Buffet has to say about his mistakes and wrong decisions. Yes, even him.

The belief that you are always right isn’t only a stupidity, it is a more dangerous practice. However, it demands to keep on learning in order to modify your behavior.

If you never change your behavior you’ll take too many risks and you’ll put yourself in one of the dangerous situations. Moreover, you’ll never grow as an investor and, also, your capital will not grow. Sometimes it is better to give up and admit we are wrong than stay with the wrong plan and make more mistakes.

Comfort from following others

We are all vulnerable and insecure at some level, whether we admit it or not. A great number of people seek help in instant solutions. The easiest way is to follow what other investors do. That’s a kind of psychological effect. If the majority is doing something, how can that be wrong? Remember, only a few investors know how to make money on the stock market. The others, the majority fail. The stats are cruel.

The winners represent a small part of all investors.

Investing is difficult but it can be very successful and profitable. All you have to do is to guess where the new gain capacity will come from. The tricky part is that you cannot do that without the knowledge and without comprehensive research. The best suggestion is: follow the standards, not the people.

The fake feeling of security can bring us to the danger of diversification

The truth is that many apparently diversified portfolios aren’t really diverse. For example, if your portfolio consists of stocks of 5 different companies and 5 different industries it might seem as a well-diversified one. But if all your portfolio consists of 100% stock in one market index and they are all based in the same country and have exposure to the same currency, you have a very dangerous diversification. In other words, your investment is at great risk.

You might think you made a great choice, but in reality, you are at risk to lose everything if some unfortunate event hit that country or currency.

Bottom line

Proper diversification is a matter of great importance. Smart investors allocate their money based on their own valuations, never on some prophecy or doubted predictions. Avoid over-diversification if you are invested in ETFs or mutual funds since it is a common mistake. When picking the stocks, seek the highest quality companies, to direct the chances of success in your favor.

The bright side of portfolio management is that you can avoid the danger of diversification if you manage your portfolio on your own. Diversification is an extremely crucial concept in portfolio management, but it has to be done properly. When building your portfolio keep in mind the danger of diversification in investing. That will help you to reach optimal diversification.

24th April 2020
Value Investing Tools That Every Investor Must Use

“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” – Benjamin Graham

To find accurate value investing tools you’ll need time, a lot of it to do your homework. Finding the right tools requires a lot of research. It is the same as finding a good value stock to invest in. It can be so complicated that many investors are scared of all that job.

But if you don’t like to do your own research, here are some tricks to help you.

By having the value investing tools to value a company and evaluate its prospects, you can eliminate unsuitable stocks. Also, you can do it more quickly and focus on the best picks. One of the most accurate among value investing tools is the P/E ratio.

P/E ratios as value investing tools

The price-earnings ratio or P/E ratio is classified as a primary tool to identify undervalued or cheap stock. It is a simple metric that is easy to calculate. All you have to do is to divide a stock’s price per share by its earnings per share. Earnings per share is shortly expressed as EPS. Value investors always have the P/E ratio in their value investing tools boxes and seek a low P/E ratio. A lower ratio means that they will pay less per each dollar of the company’s current earnings.

But this metric has some downsides. Of course, it is still a good start but if you rely on this one measure solely it is more likely your strategy will not be accurate and successful.

Investors are frequently attracted by low P/E ratio stocks. The problem is that they can be inaccurate and inflated numbers. Sometimes, companies report incorrectly high earnings sums or some forecasts show much higher earnings, so the low P/E ratio can be false. Everything becomes more clear after real earnings reports and the P/E ratio goes up and investors’ research result is false too.

So, if you use the P/E ratio alone you’ll end up trapped with the wrong decision.

Use PEG ratios as value investing tools

If the P/E ratio is flawed, what should you do to find true value stocks? Which one of the value investing tools you have to use? PEG ratio will help you to recognize if a company with earnings growth is trading below its intrinsic value. The price-to-earnings ratio or PEG ratio can help you to avoid some traps while searching for value stocks. To calculate the PEG ratio use this formula:

PEG Ratio = Price To Earnings Ratio / Earnings Growth Rate

If the PEG ratio is less than 1 it is supposed to be a sign of an undervalued stock and it is possible to buy such stock at discount. So, the PEG ratio of 1 means the company is correctly valued. Contrary, if the PEG ratio is above 1 it may indicate that a stock is too expensive. But the PEG ratio shouldn’t be used as an individual metric. The valuation puzzle requires using other value investing tools to have a comprehensive picture of the stock’s value.

For many investors, the PEG ratio is a favorite among value investing tools due to its ability to show the stock that is at discount. However, as with all of the value investing tools the PEG ratio is useful to recognize the stock that could deserve a closer look. You’ll need more research and tools to reveal the possibility that the stock is cheap for a reason, in which case it isn’t the right choice. Simply, you wouldn’t want such stock in your investment portfolios.

But keep in mind, for example, various industries will have different PEG ratios. So be careful when judging the company’s value.

The company’s cash flow

The company is worth only the amount of the future cash flows it can make from its operations. Keep this in mind. The value investors will always check the company’s cash flow before starting to invest.

As we noticed above, the P/E ratio is by no means a complete measure. The company’s net income is only an accounting entry and it is often influenced by numerous non-cash costs, for example, by depreciation. Also, companies use tricks to misrepresent their earnings. As a difference, cash flows measure the real money that the companies paid out or acquired over a given period.

Cash flows exclude the influence of non-cash accounting charges. They don’t include depreciation or amortization. So they are more objective value investing tools because they only admit the real cash that flows into or out of a company. Cash flows are a clear picture of the company’s real profitability. However, we have to repeat, it makes no sense to estimate cash flows as the only tool you use when seeking the value investment.

Enterprise value

It is important to compare operating cash flow to the company’s Enterprise Value if you want a clearer picture of the amount of cash the business is generating related to its total value.

To explain the enterprise value.

It is as a number that in theory outlines the full cost of a company if someone buys 100% of it. If the company is publicly-traded, this means buying up every single of the company’s shares.

To calculate it you have to sum up the company’s market capitalization, add debt, preferred stock together, and subtract out the company’s cash balance. The result will show how much money an investor or group of them would need to buy the whole company. So, it is an outstanding picture of the total value of the company.
When you divide a company’s operating cash flow by its enterprise value, you can easily calculate the company’s operating cash flow yield.

These measures are also the value investing tools. Especially cash flow yield because it presents the amount of cash that the company generates per year in comparison to the total value investors invested in the company.

Return-on-Equity – ROE is excellent for value investing tool

ROE is another excellent tool that can help you to find value stocks.

It is a profitability ratio and measures the ability of a company to generate profits from its shareholders’ investments. To put it simpler, the ROE shows how much profit generates each dollar of stockholders’ investment generates.
The ROE of 1 indicates that every dollar of stockholders’ investments generates 1 dollar of net income. This measure shows how efficiently a company uses investors’ equity to generate net income.

ROE is also an indicator of how efficient management is.

The formula is

ROE = Net Income / Shareholders’ equity

This measure is broadly used, and it is easy to find the ROE lists for publicly traded companies on almost all financial websites. When investors look for value investment opportunities, they are looking to find a stable or growing ROE of the company.

However, there are some cautions. For example, some companies can produce enormous ROE in one year, but the next one or more years later resulted in reduced profitability.

Also, the tricky part is the relationship between ROE and debt. For example, if the company is taking higher debt loads it is possible to use debt capital instead of equity capital. Such a company will have a higher ROE. These companies with exponential and fast growth can be favorable, but also, can ruin shareholder value. Investors prefer ROE at around the average of the S&P 500.

Bottom line

Sadly, there’s no fixed method that will provide investors a distinct way to reveal the best value stock for investing. Investors have to take into consideration the company’s sector and industry, also, if the company has an advantage over its peers. Look for the companies that are able to become brands, or have some unique product, the new technology, in other words, with a sustainable competitive advantage.

Remember, some companies operate in a cyclical market. For example, automakers. Such companies will have great growth and huge returns in periods of the rising economy but they will fail if the economy is in a slowdown. So think about the company’s profitability under all conditions.

These value investing tools will help you to uncover plenty of potential picks and to find a good stock to invest with trust.

23rd April 2020
Growth Stock Investing Strategy

Growth investing strategy can be a great way to get high returns, but the key is to understand what growth stocks are. Your time horizon and risk tolerance are major factors.

By Guy Avtalyon

This is all about the growth stock investing strategy. It is the art of science implemented in investing. Investing requires significant research. But to create the growth stock investing strategy you’ll need a really good understanding and knowledge about growth stocks and underlying business.

Why did we say it is the art of science?

Well, buying a stock is the art itself. Growth stocks are elite stocks because they are what could make a lot of money for you. So, you will need a great growth stock investing strategy to ensure the great gains they are able to provide. Growth stock’s value can be boosted and some careless traders could be faced with its decreased price with no warnings. To avoid losses you’ll need a stable growth stock investing strategy.

What is growth stock investing strategy?

Growth stocks are a popular investment. The reason is quite clear: If some investors can make money by investing in them, why shouldn’t you? But if you want that, you’ll need knowledge, system, growth stock investing strategy to know when and how to react when the right time comes.

To recognize the right time for investing in the growth stocks the essential part is to know when some company can grow. It could happen due to organic growth, expansion, and in case of an acquisition. But keep in mind, not all growth is a good one.

Let’s make clear all of these cases of growth.

When the company improves its operations and capabilities from year to year we can talk about organic growth. But organic growth can shift negative if circumstances change. So, since it is changeable it is still good but not the best growth.

The growth caused by the expansion of the company means the company is reinvesting. It is actually expanding its operations. For example, the company may invest in its equipment, facilities, new branches, etc. As a result, you’ll notice low or no EPS and a high debt ratio. Sometimes both are visible. Of course, you can ignore low EPS if it is caused due to the company’s development and you see the company is reinvesting.

We are talking about acquisition and growth caused by that when one company buys the other one. For example, two companies have had a problem with organic and expansionary growth for many years. To solve the problem they bought smaller companies to increase revenue and earnings. This type of growth is very good for dividend investors.

But is it good for growth stock investors? We are afraid it isn’t. Growth stock investors prefer expansionary growth. That may give them high returns. That is exactly happening, for example, with companies that started as small but with the potential to expand a big.

How to develop a growth stock investing strategy

Growth investing is an investment strategy directed on capital appreciation. Investors who implement this style are recognized as growth investors. But how to get in the race? How to know when is the right time? For that, you’ll need a growth stock investing strategy.

First of all, you have to be able to make a difference between the normal market and the situation when the market is not normal. The worst growth stock investing strategy is to jump into the market and make a mess and losses. You will need time to build knowledge when the market is normal. Hence, you’ll need the practice to know when the market is normal to be able to recognize when it isn’t.

Why is it so important to know when the market isn’t normal? What are you supposed to do in the markets that are not normal? This part may sound like nonsense but the periods when the markets are not normal are the best time to buy or sell stocks. That’s all wisdom.

So, you have to maintain your trading journal. That may include everything you read and learn about investing and trading. For example, you can follow economic data for determined periods. No matter if they are weeks or months. Also, your journal should include the market’s movements and investment decisions.

Do it effortlessly. You have to know what’s happening in the market, you need to watch how the stocks on your watchlists are performing.

That will arm you against the emotional risks of trading and making bad trades. Also, that will give you a chance to build an objective, repeatable trading strategy, so your portfolio will perform better.

You have to understand how the market movements are driven. For example, the market movements are handled by fundamental conditions which are long term, economics which is midterm but also the news which is short term. Economic and fundamental conditions are crucial for growth stocks. What do you mean, how the company can grow if the fundamental or economic conditions are against its progress? It’s impossible.

How to select stock for growth investing

Choosing stocks is not the way you may become rich. That is a mistake and don’t fall into that. You are not just picking a stock, you are choosing it after you estimate it well. In other words, you have to be familiar with stock. So, that to say, choosing stock is a very good way to obtain more education. When you get good knowledge about the market, you’ll be in harmony with the market.

Being in harmony with the market will provide you to know when is the right time to enter or exit the position. With this fine-tuned sense of market movements, you will know why the market is doing what it is doing, why it is better to buy or sell, why some stock is going up or dropping down.

While you are picking stocks, you are actually creating your watch list. Of course, you’ll add only the stocks you are interested in, meaning they meet your investment criteria.

Making a watch list can improve your growth stock investing strategy. Selected stocks are what you want to know more about, nothing else matters.

Of course, it is absolutely okay if you have more than one watch list. You can create it depending on types of stocks, investing style, etc. Also, you can find growth stocks in almost every industry or sector, so you can make a watch list for each sector, for instance, and update them after the earnings cycles end.

Indicators important for growth stock investing strategy

That to say, it is always better to follow the trend, not the other investors. Sometimes you’ll need to be patient with your watch list and pay attention constantly. You have to follow the prices’ changes, also the news, and to wait. Always keep in mind that growth stocks are impressive and exciting. Media makes a big noise sometimes about growth companies publishing good information and avoiding bad. That could lead to the stock’s price to rise because the fresh money is coming. But try to avoid following the masses. If you follow the crowd you will never get a favorable price.

Wait for the right time to pull the trigger. Sometimes the hardest part of growth stock investing is to recognize when it is the right time to buy. During hype, the prices will go up. But everything will be changed when bad news is on the scene. They will cause the stock price to go down.

The growth stocks are flying higher by optimism, desires, and exaltation. Well, investing isn’t based on current earnings. It is based on future earnings.

For a successful growth stock investing strategy is a more important report that suggests the changes in the future outlook. As a growth investor, you would like to see that the market can reset its expectations. If there is confirmation of such changes you’ll know that the price will drop, sometimes very quick and sharp. That’s the moment when you are going to buy the stock because the price is low. Oh, yes! The reward will come later.

Using indicators

Just use technical analysis. You have literally thousands of techniques to analyze the market by using technical analysis. The most important is the trend, support, and resistance levels. If these levels are not clear enough, check the trading volume. It is maybe the best indicator of the direction of a stock price.

When the volume is rising along with the increasing prices it represents the expanding demand and a high possibility the trend will remain to rise. The big secret of growth investing in comparison to the value investing is that growth will win each time.

Other indicators for growth stock investing are stochastic and MACD. MACD measures the momentum of a stock’s move by the convergence and divergence of two moving averages. Stochastics believe that daily price movement is random inside a general trend.

A drop in stock prices inside the uptrend that is supported by bullish signals in MACD and stochastic is one of the most powerful technical entry signals.

Is growth investing strategy hard?

It may seem difficult to create a growth stock investing strategy but it is quite simple. The goal is to discover and invest in growth stocks. Buying them is easy but selling can be the trickier part. Until you sell the stock you’ll not earn money. That’s a simple rule. At least it should be simple unless your emotions are involved. It can be hard to sell the stock that makes a profit. Don’t be greedy. Do it in the peaks. Never think you can do more because in most cases you never do.

Take profit when you can. Set the take profit point and stop-loss point.

At the end of the day, all that matters is profit.

Be patient with your growth stock Investing strategy. It is key. Never hunt the higher prices, you can lose money. When you enter a position, wait for prices to go higher. When you notice a selling opportunity, always take the possibility to profit.

14th April 2020
Time To Buy Stocks Is Right Now!

The advantage of buying stocks right now is that you can get more for your money. If you are young, the more you do with your money now, the more it will be able to grow throughout your lifetime.

By Guy Avtalyon

Yes, this is time to buy stocks. That would be a short answer but here is why this is a time to buy stocks.

Stock prices are changing violently because of the economic slowdown caused by a new coronavirus outbreak. So, the volatility makes it especially challenging to answer this question because it may vary on a daily basis. Maybe the most critical part of any investment decision is the stock valuation on which we base our decisions, should we buy or sell the stock. Moreover, that can tell us a lot about other investors’ feelings toward some particular stock. So, you need an explanation of our observation that this is time to buy stocks.

Here are some real examples but we have to go back in the old days.

The historical overview

It was the year 1974.

In the period of 1973-1974 bear market ultimately bottomed. It marked a 43% decline for the Dow Jones in a time frame of two years or even less. This bear market ended December 6, 1974, when the Dow Jones hit 577.60. The large sell-off caused a lot of damage to the U.S. market and it took approximately 20 years to entirely recover. But, at the same time, every investor who had guts to buy stocks then, had great returns later.

The second occasion was in 1982.

The Bear Market of 1982. The market had been falling for almost one year and two months, actually exactly 451 days. In just one day, it was February 22, the S&P 500 Index was down for almost 21%. Inflation in the US was at 13.58% but also, it was a rough year for the rest of the world. But some investors were smart and made their life-time investment by buying stocks.

The next was the stock market crash of 1987.

This market crash originally came from the US but had a great impact on the global economy. In October that year, DJIA fell by 22,6%. It was a well-known Black Monday. Until then, Dow Jones never had such a drop in one day. And as in previous cases, some investors made smart choices, and bought stocks rather than sell them and it was a very profitable decision for them.

Horrible 2008/09

The most recent event, before 2020, happened in 2008 and 2009. This bear market actually lasted from October 9, 2007, to March 9, 2009.

The S&P 500 Index lost about 50% of its value, and the DJIA fell 777.68 points in intraday trading. It was the largest drop point fall until this year’s market crash. Also, some were smarter than others and they bought the stocks instead of selling them. In other words, during the market’s crashes during history, the most successful investors were buying.

What do these events have in common?

They were all connected to some kind of crisis. And each market situation was characterized by capitulation.

The stock market capitulation means giving up. It is the point when investors are giving up on attempting to recover lost gains caused by falling stock prices. For example, a stock you own has dropped by 20%. You have two alternatives: to wait it out with hope the stock starts to appreciate again, and the other solution is to compensate for your loss by selling the stock. When most of the investors choose to wait it out, the stock price will probably continue almost stable. But if most of the investors choose to give up on the stock, the stock price will decrease further and sharply. When this event is relevant to the entire market, it is a market capitulation.

What else is in common for these market crashes? The most profitable investors were buying stocks. It looks like selling wasn’t the right option for them.

So, we can easily conclude that time to buy stocks is right now. This is an amazing chance to buy stocks because they are cheap now.

When is the right time to buy stocks?

The truth is that almost all investors are scared. The possibility of losing all capital is enormous and some of them are starting to get out of the market. Everyday volatility, stock prices changes in milliseconds, have a great influence on investors’ emotions.

The markets’ crashes, we mentioned above, weren’t quite severe as this one is. This bear market marked a 20% drop from the recent market highs. So, despite the fact that this drop is so sharp, it could be a good time to buy stocks.

Yes, we know that investing in this time may sound strange and nonsense for someone. But, at the same time, if you are seeking long-term investment it could be the best time. For example, you can buy some blue-chips at a very favorable price. Such are, for instance, Walt Disney, or Coca-Cola. Just follow the KIS rule and look at the most prominent. These companies and similar survived through previous market crashes and came out stronger providing great returns.

You can create real wealth in stocks now. Just don’t watch from the sideline. React and do it now.

Is this time good to buy stocks?

Stop dreaming and guessing. Listen to good advice only. Have an investing plan.
Start investing with an edge, that will give you an advantage over other investors. Buy the stocks that were the best players last year.

Watch what the world’s billionaires do, the path they made. Allow them to show you what stock to buy. They are strong enough to fight for their investments, but at the same time, they will increase the value of yours.

It isn’t time yet to estimate the accurate impact the coronavirus pandemic will have on the companies. The results will differ by company. Some will manage better than others, but that’s how things go. What we can do is to find the company built to last. Take a look at their revenues for the past several years or at least for the last one. Some did great. So buy its stock at a discount.

You have to know that this pandemic will have influence over the next several years. Just don’t panic. This is not the time for that. This is a time to buy stocks if you have some extra money that you’ll not need in the coming years. Just invest it in brands. This lesson came from history.

Investing is more available than ever. That means you don’t have to rely on some difficult strategy to start earning money. You can buy options, you have help from free trading platforms, apps to create an investment plan that matches your goals, and risk tolerance. You are investing for the long haul. Ignore the panic and understand why it is the right time to buy stocks. Set clear goals, and recognize your limits. Keep in mind, investing in stocks is one of the easiest ways to put your money to work.

12th April 2020
The Global Recession – How to Survive?

Are we deep in the global recession? Yes, we are, and if we are not yet, we will be in a short time. There is no doubt about that.

By Guy Avtalyon

It isn’t a question, the global recession is here without a doubt. But how long will it last? Will it be short-living or painful? Is there any chance of recovery by the end of the year? What will come in the aftermath of this recession? What will the world look like when the coronavirus outbreak ends? So many questions!

The COVID-19 pandemic is making changes to the global economy very quickly. Hence, giving any prediction is extremely challenging. One thing is so obvious, this is a shock with a great impact on the economy.

Some economists are expecting the global economy to decline by almost 2%. The GDP is down, unemployment is growing, inflation is rising almost all over the world. It looks like the whole world is on its knees.

The rapidity with which this COVID-19 pandemic is growing has required another cycle of huge cuts to any GDP predictions.

How can we know the global recession is here?

First of all, no one expected that the virus would spread this fast and only rare economists warned of the impact of the coronavirus outbreak on the global economy. Today, we can claim with the high level of certainty that we entered the global recession.

We have lockdowns across Europe, the US, parts of Asia, and many other countries. That has to be the baseline for any predictions. These lockdowns could degrade GDP across the EU and US, for example, by 7% to 8% this year, experts said.

Moreover, the global GDP for this year is equal to the planetary financial crisis. The direct stroke to enterprises and jobs in the first six months of this year will be much worse, stated economists.

The lockdown policies have prompt and dramatic effects on daily economic activity reducing them daily by about 20% from their regular levels. For example, the three-month crisis with a five-week lockdown period reduces GDP by 20% a day. That means a 7% to 8% drop in quarterly GDP.

Something is very wrong in the global economy right now

The coronavirus crisis has sent the global economy into a fall. So many industries have ground to a halt. For example, tourism, restaurants are closed, hotels, air travel. Also, many factories reduced production and fired their workers. Unemployment is rising almost everywhere. Everybody stays at home. Almost the whole world is producing less and we’re spending less.

The stock market suffered huge losses and enormous daily changes. The trading has been almost halted.

So, the global recession is here. But what are the full magnitudes of this? It is pretty obvious we cannot know that now and the question is will we be capable of estimating it soon? Some experts are trying to explain the situation in which the global economy is right now. Also, some of them warned before the coronavirus outbreak there is a possibility of the recession to come this year. Of course, no one could predict the coronavirus pandemic. That just gave speed to the downturn.

The economic consequences of the exponential spread of the virus is shocking financial markets all over the world. Market volatility exceeded its peak during the global crisis 2009 and equity markets and oil prices falling to their lowest lows.

Large drops in asset prices and high volatility will impact economic actions, for example, through credit and investment flows. Lower stock prices can grow the debt-to-equity ratio and restrict their access to credit. The logical end can be bankruptcies. Banks can reduce lending because companies’ and customers’ defaults of loans rise. The result in banks’ balance sheets will be worse. Do you understand that the global recession is already here?

How to survive the global recession?

Recession is defined as two consecutive quarters with negative economic growth. It can be caused by, for example, monetary panic. That caused the Great Recession, for instance. Also, the recession may come due to the rising oil price which is defined as an economic shock. One of the reasons behind the recession can be something that John Maynard Keynes described as “animal spirits.” We experienced it with the dot-com bubble. Also, the mixture of all three may cause a recession.

Today it is coronavirus and lockdowns caused by its outbreak and the focus on health protection due to it. The companies halt, workers are fired, demand and revenue fall. The only thing that increases is our concern on how to overcome the global recession we have now. But there are several ways to decrease the loss.

In the article “Roaring Out of Recession,” Ranjay Gulati, Nitin Nohria, and Franz Wohlgezogen noticed that through the recessions of 1980, 1990, and 2000, 17% of the 4,700 public companies they examined done terribly: some went private or went bankrupt, or were sold. Nevertheless, 9% of the companies did manage to recover in the next three years after a recession. They succeeded to exceed rivals by 10% or more in the meaning of sales and profits growth. Moreover, their earnings rose regularly and the companies remained to rise.

May the global recession last for a long time?

Almost the whole world is caught in the recession caused by the coronavirus pandemic. The fears are growing. As long as people’s physical communication is a possible danger, companies cannot move to regular conditions. And once, when this pandemic ends, maybe the regular condition before the pandemic will not be regular. What if people start to avoid shopping malls, cinemas, theatres, restaurants, crowded concert halls? Even after the virus is contained or the vaccine is available? The economic recovery may take years and years. The global economy is frozen, the global recession is on the scene. But life will bounce back. The coronavirus will be tamed and put under control, and people will come back to their factories, offices, and shopping malls, of course.

But even after that, the new world that will begin will be gagged with stress. And, when that will be? No one knows. Millions of people lost their jobs and that affects the societal costs. What if bankruptcies leave the industry in a vulnerable status, exhausted from investment and reforms?

The families may stay upset and risk-averse. What if this pandemic makes them tend to save? Some social distancing measures could remain indefinitely. If this situation endures and people continue to hesitate to spend, the whole world will have a big problem. Yes, life will bounce back, but psychology cannot just like that. It is more likely the recovery will be very slow and last for a long time.

Bottom line

Developing countries have severe consequences already. The money is running away, commodity prices are falling, oil for example. This scenario is visible in Chile, Mexico, and many other countries. China is a slowdown and that has a great impact on countries where the factories with components are. Europe is in recession, the US is still fighting with the coronavirus pandemic.

People are lonely now, but they will be starting to return to normal life. But if they had to spend all their savings, and if they destroyed the credit ratings or declared bankruptcy, then they will not be capable back to normal life.

No one can say with a hundred percent certainty how long the global recession will last. We are pretty much sure that the recession started in March in the US but we cannot say when it will end. Well, the recession in the US or the global recession isn’t officially declared nor it can be. We all hope it is a remarkably deep but short-lived recession.

If your days are too long try to short them, learn something new, for example. Read the “Two Fold Formula” book, it may give you some interesting ideas. But before you start to implement the new knowledge, test it by using the our preferred trading platform.

Stay safe! #StayHome

8th April 2020
Good Returns On investment – How To Know Where To Invest?

The long-term returns seem attractive, and it is easy to start investing. But you must have realistic expectations.

By Guy Avtalyon

Good returns on investment is what every single investor wants. But some have unreasonable expectations. Especially beginners. They are hunting stupid high returns on investments and lose money. No matter what asset class is, they are looking for high rates of return. Nothing is wrong with that, but a dose of reality is necessary for investing. Dreaming is okay, of course since it can motivate us to reach our goals but if our dreams are unrealistic it can deliver us the stress when we unveil that reality isn’t like our dreams.

So, everyone including beginners in the stock market must understand what are good returns on investment. We would all like to become rich overnight, that is a legit dream but the real-life is something different. One of the main problems is that beginners don’t understand the effect of compounding nor how it works. Most of them don’t know what good returns on investment means, how much it is.

First of all, temper your expectations.

Over almost the last 100 years, the stock market’s average return is about 10% per year. But returns are infrequently average. So, if you are one of the new investors you have to know several things about what good returns on investment is.

What are good returns on investment?

You have to know that historical data shows that the average stock market return is 10%. Are you surprised? What did you expect? Oh, we know! You heard the stocks are among the riskiest investments and the high risk may provide you a high potential reward, right? That’s true but it will not happen overnight. Let’s go back to average stock returns.

The S&P 500 Index is the benchmark measure for annual returns. When we said the average annual return is 10% it wasn’t quite true. The truth is that you have to reduce this 10% by inflation. For example, if you start to invest now you can expect to lose buying power of 2-3% per year which is caused by inflation.

The stock market is directed on long-term investments. That means you can invest your extra or saved money you will not need for the next five years or longer. If you don’t like this you may prefer a shorter investing period, for example, a year or two. Well, then the stock market isn’t for you. Choose one of the lower-risk alternatives. For instance, a savings account. Yes, you will have the lower returns, but you’ll be protected from stock’s volatility.

As we mentioned above, the average return per year is 10%, but it is actually far away from average. There were periods when it was dramatically lower but also the periods when the returns were much, much higher. That’s due to the stock’s volatility. We have to say and this may sound illogical for beginners, but even during the volatile market’s years, returns can be good.

Your expectations must be fair

Honestly, you have to learn this. Especially if you’re a new investor. You may think you can earn 25% on your stock investments over several decades. We have to tell you, your expectations are extremely big. It’s not going to happen. Maybe this is rude to say, but that’s insane. Yes, we know you found someone out there who promised you that high returns, but you have to understand cush lied to you. Such is counting on your lack of experience, and on your greed. Are you greedy? Go to the casino! Start gambling! Stock investing is a serious job, hard work, also connected with a lot of pleasure and passion with one single most important goal – to have good returns on investment and over time, to provide financial security for yourself. Well, and maybe, just maybe you’ll become rich.

So, your financial foundation should never be based on dangerous opinions and actions. Don’t be irresponsible. What you really need is your investment to provide you a nice retirement, you wouldn’t like to end up with less money than you expected.

The meaning of good returns on investment can be confusing for someone, particularly young investors because when you enter the stock market you might know only about a 10% annual return rate. But keep in mind, you don’t have guarantees that they are going to repeat themselves. The returns on investments never were a smooth or upward path. remember, markets are volatile and you may suffer great losses over time. But what is important and everyone should know that that’s the nature of the free-market. Over a long-time period, you’ll beat the market if you follow some rules.

How to calculate the rate of return

Let’s say you already have determined your investing goals. You clearly know what your target is. Also, you have to identify the amount of capital and time you have to invest. All information you need is in front of you. So, let’s see the magic of compounding.

For example, you have $2.000 to invest. Assume that the annual rate of return is 10%. After one year you’ll have $2.200, right? But what if you want to sell your whole investment after 2 years, for example, for $3.000. Super done! Your profit is $1.000 which is a 50% return. Amazing! Oh, wait! You have to pay capital gains taxes. Take away 15% from your gain. Well, your profit isn’t $1.000, it is $850. You’re left with $2.850. Well, you still have good returns on your investment after two years. It is 42,50% now. Did we have inflation? Of course, we did. So, you have to count inflation of 4% for 2 years.

Let’s do it.

$2,850×0.96×0.96=$2,626.56

That is 31.32% real return of your investment. This $2.626 amount still isn’t bad but it’s far away from your $3.000 and 50% where we started this calculation.

Look, the annual rate represents the profit you earn on your investment per year, or how much will you get in return for each dollar invested every year.

There is a simpler calculation. Just find a simple percentage. For example, you invested $1.000 and your gain is $300. What will your return be?

(300/1000)x100 = 0,3×100 = 30%

This approximative value. But if you want to know the exact you’ll need the first calculation we showed you. That is a well-known ROI, return on investment.

Can the stock market give you good returns on investment?

The stock market is unstable and unpredictable, so you’ll never have any guarantees there. But if you consider this 10% average return you’ll understand that investing in stocks may provide you financial security in the long run.

What are the good returns on investment today?

Well, the answer is pretty complex but to make it simpler, use this rule of thumb: If the recent returns were higher than average, the future returns will be lower.

That’s why it is much better to calculate, for example, 6% or 7% of the average annual of return when estimating your returns over time. Because, as you can see, this average return is rare. It is higher or lower. Also, there is some psychological effect, if you expect too high returns you’ll be disappointed if your investment never gives you that. Also, you’ll be glad if your investments beat your expectations.

The best approach in the stock market, if you want to make real money, is to buy stocks at good prices and sell them at a profit. What is a good price? To figure it out you’ll have to know how much money you want to get when you sell it.

Good returns on investment for an active investor is 15% per year. For this to reach you’ll need to be aggressive in looking for bargains. It isn’t hard to achieve. For example, your buying power can be doubled every 6 years if you have average annual returns of 12% after you pay all taxes, also, count the inflation for each year. This is one way to beat the stock market. The other is to become a trader but a smart one. The coronavirus is causing people from almost all parts of the globe to halt their activities. People are urged to stay home, schools are moving to online learning. Take this as an advantage and learn something useful, why not?

7th April 2020
How Long Will The Bear Market Last?

Stock markets over the world experienced great losses from the beginning of this year due to a massive sell-off caused by the COVID-19.

How long will the bear market last? We believe not forever. In fact, the bear markets are much shorter than bull markets. Especially when they are driven by some event. Coronavirus outbreak is such an event. like this one is. But if we take a look at historical data we may conclude that the question of how long will the bear market last, pretty naive. How is that? Well, this kind of bear market recovers very fast.

How can we be so sure?

Let us explain. If we want to put different types of a bear market into categories, we will see we can put them into 3 key categories based on the type of drivers.

The first type of bear market is caused by the business cycle. That is when growth leads to inflation, interest rates increase too fast, the yield curve inverts, demand decreases, loan activity decreases, etc. They are so-called cyclical bear markets.

The second type is caused by market bubbles, much more leverage, turbulences, and disruptions on the credit markets. In other words, this structural type of bear market occurs when we have structural asymmetries in the market or economy. So, we are pointing to another type of bear market, the so-called structural bear market. We already saw it in the 2008-2009 market downturn.

But also, we can recognize a bear market driven by some event which is this one, caused by a coronavirus outbreak and global pandemic. Of course, this kind of bear market can be triggered by some crises, wars, political instabilities, etc.

How long will the bear market last?

This month can be an important test for stock-market investors. Everyone is looking for hints that the worst of this stock market massacre is ended. But the coronavirus outbreak moves on and demands at least short-term economic distress. In the next several weeks we will be faced with more and more bad news as a pandemic is spreading. That may cause further sellings. Bad news has such an influence on the stock market. Also, a surge of business failures can occur.

The experts sound pretty sure that the stock market’s bounceback last week is a good sign even though all markets are volatile. The stock market was dropping with great speed into the bear market. But yet, there is a hope that March lows for main indexes may be kept from further declines. That is just our opinion, based on the reaction of central banks.

Well, this bear market isn’t easy for any investor. Even the most optimistic investors claim that further decline is possible before the stocks find the bottom. That is true especially if we know that sharp rebounds are possible before retesting new lows. But as we said, there is a logical chance that recent lows can be the last we saw and rebounds can be better than in former significant selloffs.

Predictions for the stock market

Robert J. Shiller, a Nobel laureate is exactly certain about the stock market in the long run. His concerns are about how long will the bear market last, where the stock market is heading.

He wrote for The New York Times:

“It is too simple to assume that with its steep decline, the market has already discounted epidemiologists’ forecasts for COVID-19. By this logic, the stock market would fall further only if the virus turns out to be worse than forecast.”

Yes, but we are dealing with an entirely unknown situation. We never have had before such a massive lockdown of everything companies, whole industries, millions of people, the numerous countries. This is a totally unique event.

But Robert J. Shiller added in his column:

“People are seeking reassurance from homespun investment advice, like the old nostrum that the percentage of stocks in your portfolio should be equal to 100 minus your age, come what may. If you are 60, for example, you should hold 40 percent stocks, under this rule.”

And also admitted that “this advice isn’t grounded in any scientific truth about financial markets.”

Well, this advice isn’t bad, it is good advice. It isn’t against common sense. While people are doing something, taking action they may feel better. That is from a psychological point of view. Also, it is a quite reasonable decision to risk less in such a market downturn but yet inspires you to take action.

Shiller advises further “buying just enough to restore the stock balance after market declines.”

Bear markets rule a short time

Maybe this is the answer to the question of how long will the bear market last. Bear markets rule for a short time. What we can expect is the market data will be weak in the weeks ahead. The problem is what are we expecting.

Stocks in March entered a bear market with record speed. After March 23 they were bouncing sharply. But DJIA has the biggest first-quarter decline of -1.68% on record with a 23.2% fall. The S&P 500 Index had a decline of -1.51% on a 20% first-quarter fall this year. It is the biggest since 2008. After March 23 both indexes had a rebound and for example, DJIA had its biggest three-day gain, which had been seen last time in 1931.

Let’s see how long this bear could market last?

As we said we can recognize three main types of bear markets: caused by the business cycle, caused by some event (like this one) and a structural bear market.

The most severe is the structural bear market because it is the result of problems in the financial system and capital markets.

A cyclical bear market is bad also but tends to fix itself over a short time and sufficient policy answers.

And last but not the least, the bear market caused by some event. According to historical data, this kind of bear market was shorter, less critical on the downside. Such a market took less time to recover. It is quite logical. Before the market was hit with a drastic event such as a coronavirus outbreak, the markets all over the world were in good condition. And you see, that’s why we think that it does not take as long for the economy to recover once the shock of this event disappears. It’s true that so many people lost jobs in the early stage of the pandemic, the companies are faced with shutdowns and limitations. But when this kind of problem disappears, everything can return in normal pretty quickly.

Bottom line

How long will the bear market last? There is no way to predict that, honestly. Who can predict when the market will bottom? From what we know, the bear market will end even before bad news stops coming up to us. For investors, the main point is to be ready for that first day of recovery, they have to adjust their positions for that to join the rebound when it happens. We believe it can happen sooner than many investors expect or predict.

In the meantime, we recommend investors wait for it calmly. Stay focused on long-term investments and don’t let your emotions take control of your decisions. Use this period to learn something new and expend your horizons.

5th April 2020
Stock Market Bottom And How To Recognize It

Nobody can with certainty predict a stock market bottom. Still, it’s worth at least thinking about different entry points to let your money work for you.

By Guy Avtalyon

The questions for the past several weeks mainly were all about the stock market bottom. Did the stock market hit the bottom? Will the stock prices stop dropping? Have stocks reached support levels? When will prices stop falling?

Stock traders have so many questions these days and weeks. But do they really know where to look?

Maybe one of the most terrifying jobs related to investing is about the stock market bottom and how to recognize it. The idea to predict when a given stock will hit the bottom is old as much as investing and trading. The point is to recognize the point where the stock will no longer drop. The rule of thumb is: buy low, sell high. The problem arises when we have some unpredictable events in the market such as this one, coronavirus pandemic. That has an influence on the global economy, almost all economic and political events, and decisions. So, with a high level of certainty, we can say finding the stock market bottom can be a discouraging job.

Well, this kind of question traders ask almost every day but are they looking in the right place to find the answer? For example, investors are looking at Dow Jones. Is it the right place? We are afraid that the value of DJIA isn’t able to alarm you when the stock market hits the bottom. Okay, it will tell you but after it happened.

So what to do?

How to recognize the stock market bottom?

If you want to find it, you’ll need some indicators. Indicators can tell you when is the stock market going to hit a bottom but also when it is going to recover. By using indicators you’ll not miss the beginning of the wave. When buying a stock you want to do so at the lowest possible price but you wouldn’t like to hold falling stocks. You would like them to start rising after you bought them, right? That’s why it is so important to recognize the stock market bottom. The point where the stock can find support.

That knowledge can give you huge profits and prevent huge losses. So, how can we know with certainty that a stock has touched a low point? To be honest, no one can do that with 100% certainty and consistency, but traders and investors have some tools, fundamental and technical trends, and indicators. They arise in stocks when they are about to tap the bottom.

The indicators of stock market bottoms

Some indicators can help us determine when the stock market is going to form a bottom. What we really need to have are indicators of the health of a global economy and what the main participants in the market are doing with their money. But keep in mind, there is no such thing as a magic indicator to identify a stock market bottom. We have to look at several indicators to have an idea of the economy’s and stock market’s health.

Second, we have to look at history because it will tell us that the average bear market persists about 17 months. Also, it corrects around 35% from the maximum. But keep in mind that you cannot find the two bear markets alike 100%. All we can do is to suppose that the next will be similar.

Further, we have to understand the valuation. For example, the S&P 500 has a P/E ratio and earnings. The P/E ratio will move up and down depending on the market period. It will be up when we have good earnings growth, all ratios including the P/E ratio will go up. But when the circumstances are changed, with rising pessimism the valuation is likely to go down.

For example, when the S&P Index was above 2.500 the P/E ratio was at 19.

Also, the higher the VIX is, the chances for the stock market to hit the bottom are growing. These first two days in April this year, VIX traded between 54 and 57. If we take a look at historical data we can see that in 2008, the VIX was somewhere between 70 and 95. During the March this year, VIX traded over 75.

Other indicators of the stock market bottom

The stock market fell over 25% in 3 weeks. This is the sharpest drop in history. The biggest decline occurred on March 12th, the biggest since the market crash in 1987. Many investors thought that a stock market hit a bottom.

If you want to recognize when the stock market bottom is, check out your emotions. Did you feel fear at that time? If yes, you were one of the millions with the same emotion. Fear was so obvious in the middle of March. To be honest, almost all were panicked.

But we have to try to be reasonable. Just take a look at the charts and the technical levels for those days. Can you notice the major pivot? Do you notice a bottoming tail and a huge volume?

Okay! A major pivot, bottoming tail, and a huge volume on the same day and combined with a market 3-weeks decline of 25%, are indicators there was some at least short-term bottom.

What to do when the stock market is near the bottom?

The most intelligent investors started to buy those days. Small chunks, nothing big. Smart investors are doing such a thing to accumulate their full positions. The point is to buy 25% or 30% even 50% of the total position. That will keep your potential stress down and provide you an all in all a better average. But remember, don’t buy some small-cap, go for the brands.

Where is the market bottom now?

That is the most frequently asked question since coronavirus appeared.

Market experts like to say that it’s impossible to time the market. Well, it isn’t the truth. If we can see the market tops, why shouldn’t we see the market bottoms? Institutional investors know that. Follow what they are doing. Their actions could be the key bottoming signal. Follow-through has been noticed at almost every stock market bottom. This signal is extremely important because it can provide you profits when the early stages of a new market uptrend is confirmed.

The quest for a stock market bottom

This signal works quite simply. When there is a sustained stock market downturn, the first rising day from the index low is most important. That could be the beginning of a rally attempt. No matter which index you are using S&P 500, Dow Jones or Nasdaq.

According to some experts, the gain expressed in percentages isn’t important at this point. Also, don’t pay attention to the trading volume. What you have to look at is a down session and the moment when the index bounces after a great drop and closes close to session highs. Some experts deem that closing in the top half of the day’s trading range is adequate also.

Further, find a bigger percentage gain in higher volume than the prior session several days in the rally attempt. This time period is making it possible for short covering to resolve and for a rally attempt to gain ground. The rally will be halted in place only if the index reaches a new low.

How will the market react after the pandemic?

It is good if the market supports the new buyings, but if it doesn’t, just be patient. Sometimes, breakouts are visible on the charts after a few weeks. This market crash caused by the coronavirus outbreak has a large supply of stocks making the new base. But a lot of them have yet to bottom.

If an index suffers a decline in higher volume shortly after the follow-through day, the signal will fail in most cases. If close below the low of the follow-through day, it is almost the same. It is more the sign to start selling the stocks you bought recently.

These signals don’t mean you should rashly jump into the market since they tend to fail after indexes have dropped clearly in a short time. That happened with the stock market correction in February. The more suitable is to buy a few stocks, maybe one or two, and test how they will work. If there is a real uptrend your stocks will rise.

Every investor wants to know when trends are going to make a significant change. Will they reach tops or bottoms. The truth is no one knows that for sure. Only the big volume spikes, and staying stick to the chosen sector, will give you some clue if the stock has reached the lowest level from which it will not decline more. We pointed just one of the numerous scenarios. There are many others.

3rd April 2020
How to Value a Company And Find The Best To Invest?

For investors, company valuation is a crucial part of determining the potential return on investment. Start by looking at the value of the company’s assets.

One of the most confusing questions for all beginners in the market is how to value a company. The worth of the companies is important for every investor. And the question of how to value a company has a sense for any investor, entrepreneur, employee, and for any size company. Thus, you have to find the best way to determine the worth of the company. Do you need to ask to see the company’s books or you can value a company based on the existing customers or news? How much time will it take to learn how to value a company? When you notice some interesting companies where to go first? Yes, you can ask in many ways how to value a company.

The first comes first.

For every investor, the value of a company is a crucial part of determining the potential returns on investment. Every investor should know if the company is fair valued, undervalued, or overvalued because it has a great impact on a company’s stock or stock options.

For example, a higher valuation might indicate the options will grow in value.

So, if you want to know how to value a company, be prepared to take into consideration a lot of the company’s attributes. This includes revenue and profitability growth, stage of growth, operating experience, technology, commodity, business plans. Yes, but the list isn’t full without market sentiment, growth rate, overall economic circumstances, etc.
To understand how to value a company in a simple way, you can take a few factors into account.

What metrics to use to value the companies?

Here is how to value a company and basic metrics you can use for that. You can use the P/B ratio and P/E ratio. These two metrics are important when you want to evaluate the company’s stock. These basic metrics you can apply to almost all types of companies. But it is important to know the other and often unique factors that can affect the process of how to value a company.

One of the variables in the valuation of a company’s health is debt. But a company’s debt is not continually easy to measure or define. So this metric can make the company’s value difficult to value.

When you want to value a company or stock, it is smart to use the market approach that includes a comparative analysis of precedent transactions and the discounted cash flow which is a form of intrinsic valuation since it is a detailed approach, and also uses an income approach.

How to value a company’s stock?

There are several methods that may give you insight into the value of companies’ stocks.

They are the market approach, the cost approach, and the income approach. The cost approach means that a buyer will buy a share of stock for no more than a stock of equal value. The market approach is based on the belief that in free markets, supply and demand will push the price of a stock to a point where the number of buyers and sellers match. The income approach defines value as the net current value of a company’s future free cash flows.

Market value as a method on how to value a company

The market value is simple. It represents the shares trade for but tells us nothing about stock’s intrinsic value. Thus, we have to know the stock’s true worth. This is a key part of value investing.
The stock value is shown in stock price. The P/E ratio is helpful to understand this value. To calculate the P/E ratio just divide the price of a stock by its earnings per share

When the P/E ratio is high it is a signal for higher earnings for investors. This ratio is helpful to use if you want to know how to value a company. The P/E ratio shows the company’s possible future growth rate. But you should be careful when using the P/E ratio to compare similar companies in the same sector.
Investors connect value to stocks with P/E ratios. If the average P/E ratio is, for example, 20 – 23 times any P/E ratio above 23 times earnings is classified as a company that investors keep in high

Investors and traders use the P/B ratio to compare the book value of a stock to stock’s market value. To calculate the P/B ratio use the most recent book value per share and divide the current closing price of a stock by it. If the P/B ratio is low you can be sure the company is undervalued. This metric is very useful if you want to have accurate data on the intrinsic value of the company.

But be aware, there are several P/E ratios and numerous variations, thus you have to know which one is in play. For more about this READ HERE

Cost approach or book value

Book value is the amount of all of a company’s tangible assets (for example equipment) after you deduct depreciation. So, when we are talking about the company’s “net capital value” it means the book value, estimated by the company’s book of net tangible assets over its book of liabilities. To calculate the book value you have to divide the net capital value by the number of outstanding shares. The result is a per-share value. The book value never takes into account the brand, keep that in mind.

Income as a method on how to value a company

Use the capitalized cash flow to calculate a company’s worth when future income is expected to stay the same as it was in the past. But if you expect the income is going to vary, use the discounted cash flow method.

Calculations are simple, divide the result from capitalized cash flow or discounted cash flow by the number of shares outstanding and the figure you get is the price per share.

Bottom line

By understanding how to value a company you’ll be able to understand the essence of making investment decisions. No matter if you want to sell, or buy, or hold the shares of stock in some company. Warren Buffett, for example, uses a discounted cash-flow analysis.
Sometimes, the company valuation is held as the market capitalization. So, to know the value of the company you have to multiply all shares outstanding by the price per share. For instance, a company’s price per share is $10 and the number of outstanding shares is 4 million. If we multiply the price per share by the number of shares outstanding we will find this company is 40 million worth.

To be honest, it isn’t too hard to value the public company. But when it comes to private companies it can be a bit harder. You can be faced with a lack of information. For example startups. They don’t have a financial track record and you have to value these companies based on the expectation of future growth. To value an early-stage company can be a great challenge.

Before you invest in any company, you’ll need to determine its value. This is important because you need to know if it is worth your time and money. Think about the company’s value as its selling price. Maybe it is the simplest way.

27th March 2020