Wednesday, January 11, 2017

Why Sell Coca-Cola $KO? And will Warren Buffett Agree?

AN investment firm (Goldman Sachs) recently said that it is time to sell shares of Coca-Cola. Do I agree and would Buffett sell some of his shares in Coke? Here is my view:

The PE multiple of $KO stands at 25. That is at the high end of its historical PE ratio. Does that mean that the stock price will go down? Not necessarily. The price is on an uptrend and by that alone it can continue to go up because people are making money. But be wary about the growth in earnings. Actually, earnings has slid from the height of 9 billion dollars in 2012 to just above 7 billion in 2016. Declining sales is not good. It could be because of a confluence of near-term market saturation, of people being conscious about sugars in their drinks. Prices are still on an uptrend because there is no disastrous news that can drastically lower earnings and so the traders/investors has no reason to panic and sell shares. But there is also no fundamental catalyst for the stock price to go up. Personally, I like a meal with Coca-Cola but my concern as a consumer is its effect on my health. I am swayed by reports that sugar is not so good for me and so I stay away from Coke and opt for healthier substitute. And so I think the catalyst that we should watch out for that could push the stock price much much higher is the healthy substitute for sugar while preserving the taste of Coke. If this is very near reality then the drinkers and former drinkers of Coke can be coaxed again to buy Coke and that would increase sales. Higher sales may mean higher earnings and the expectation of higher sales will push the stock price up. And that would be a fundamentally justified rally.

Coca-Cola is a great company but at the moment I believe that there are stocks with a more growth oriented narratives than coke.

As a believer in fundamentals, I'd like to see a catalyst. For believers in technical analysis what is important is that the price is on an uptrend. Both are perfect arguments to buy a stock. Totally, depends on what works for you.

Will Buffett sell his shares of Coke?
Buffett bought a big chunk of Coca-Cola in 1987 at around $2.5 per share. If he had bought in the later years at higher prices, when you sell a a stock there is no distinction that you can only sell the shares you bought at let's say $30 and say that I want to keep the shares I bought at $2.50. Buffett is in under no pressure to sell any of his Coca-Cola shares. The world is big and Coke has lots of places to expand to. So to Buffett, he maybe thinking, that the full potential of Coke is not yet reached. Plus he gets dividend from his large holding of Coca-Cola shares.

But if you have bought your KO shares at $40 and expect the price to go up significantly in a short period of time then you may have the wrong expectation especially without a catalyst. Try looking for undervalued or fairly valued stocks with good growth prospects. But then again investing depends on your own style. I like growth stocks.

More on investment insights: Follow me on Twitter Jayson_CF


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Disclaimer: The materials presented here are for educational purposes only. They do not in any way constitute any professional advice for any particular person or persons. Offer of the contents herein comes with an understanding that the author does not render professional advice. The reader has the sole responsibility for his or her actions. The author in no way guarantee any result that may be obtained from using the contents herein. The author specifically disclaims any and all liabilities, losses, direct or indirect that result from the application or use of any of the content of this book.  The author makes no warranties or representation on the completeness or accuracy of the contents herein and specifically disclaims all warranties, including but not limited to warranties of suitability for a specific purpose. The author assumes no responsibility for any contrary or differing interpretation of the topics presented herein. Any semblance of any person or organization is purely coincidental and totally unintentional.

Under no circumstances should any material found herein be construed as an offering of securities or of investment advice. Should the reader require investment advice, he or she should seek a professional investment advisor.

Friday, November 18, 2016

Why Buffett Bought Airlines: An Overlooked Theory

Buffett bought airline stocks as hedge against their oil bet:
Looking at the financial statements and valuation of American Airlines (AAL), the company is undervalued. The PE ratio is almost half its 5-year average. That may signal a bargain. But companies who have been losing money will also see low PE multiples. In fact American Airlines had negative income (lost money) of almost 2 billion dollars each year from 2011 to 2013. During these years the price of oil is around 90 to 100 dollars a barrel. One of the biggest expenses of airlines is fuel. At 90 to 100  dollars a barrel, it is eating into their profits. But they returned to profit in 2014, during which the first half of the year oil is around 90 a barrel but for the rest of the year oil prices plummets to 48 a barrel. That fall in oil may have helped to make the airline profitable. As the price of oil remain depressed for 2015 and 2016, the earnings of AAL has remained positive and on an uptrend.

Therefore, the PE suggest that AAL is a bargain and that the financial statements show evidence (not just hope) of a turnaround in earnings. That is a good buy especially with the expectation of oil prices remaining depressed.

Buffett also bought a lot of oil-related companies in 2015 when oil prices are depressed, maybe predicting a recovery in oil. He continued buying oil-related companies in early 2016. My theory is that they bought airline companies, in particular AAL, to hedge their bet on oil-related companies. They may not want to sell their oil-related stocks instead because of the current weakness in oil, which may push prices lower and they may not want a headline saying Buffett or Berkshire dumps oil stocks because that may cause others to sell as well and bring prices even lower, unless they have already exited their whole position. They have a big position in oil.

They bought oil-related companies in the first place because they are anticipating a rebound in oil prices. If they are wrong about an oil rebound then airlines are beneficiaries and that may cause stock prices of airlines to rise and that will offset some of the losses they may incur from their position in oil-related companies.

This is the nature of valuation. If their story is that oil will rebound and as time passes and if the story unfolds as their narrative tells it, then they should not be worried. But they maybe recognizing that the story of oil is not unfolding as they have thought it would, that is why they need to take corrective actions or maybe in this case counter-actions which is to buy airline stocks as a hedge for their oil related stocks.

That is my theory.




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Disclaimer: The materials presented here are for educational purposes only. They do not in any way constitute any professional advice for any particular person or persons. Offer of the contents herein comes with an understanding that the author does not render professional advice. The reader has the sole responsibility for his or her actions. The author in no way guarantee any result that may be obtained from using the contents herein. The author specifically disclaims any and all liabilities, losses, direct or indirect that result from the application or use of any of the content of this book.  The author makes no warranties or representation on the completeness or accuracy of the contents herein and specifically disclaims all warranties, including but not limited to warranties of suitability for a specific purpose. The author assumes no responsibility for any contrary or differing interpretation of the topics presented herein. Any semblance of any person or organization is purely coincidental and totally unintentional.

Under no circumstances should any material found herein be construed as an offering of securities or of investment advice. Should the reader require investment advice, he or she should seek a professional investment advisor.

Friday, September 21, 2012

How NOT to Lose Money in the Stock Market: Mistakes People Make

This post was updated on August 19, 2016

Let's say 90% of traders in the stock market lose money.  This may sound as bad news to many but it should not be.  A vast majority fail to recognize that there is the remaining 10% who make tons of money in the stock market. Because money from the 90% losers is transferred to the 10% winners!

In the stock market you lose money when you are stressed! When prices are marching up and you already have a stock position, you are not stressed because you are making money. But when the value of your holdings is falling, now you feel the stress.  You now feel the pressure to sell your holdings at lower prices, which translates to losing money.  This pressure to sell is very difficult to ignore.  

You always fear that you will lose all your money.  And following that, your mind goes into overdrive, it now entertains several thoughts like "my retirement money is lost", or "how can we pay for all this new stuff", or that "was suppose to be for my son's college expenses", or "how can we pay for the house mortgage"...The pressure, the stress, I'm telling you, will be unbearable.  You will likely have emotional selling at low prices.  Because these thoughts will not let you have a good night sleep.

So how do you avoid this Emotional Selling and NOT lose money in the stock market?Again, you lose money when you are stressed. Solution?-- Avoid stress altogether.This is done by investing ONLY what you can afford to set aside for 5 years or more.  This means you should first have a BUFFER FUND or some call it an EMERGENCY FUND, before you do any investing in the stock market. You do not put in all your savings or your college fund for your son, if he is going to college next year or worst borrowed money. 

So, if for example, the stock you bought did not appreciate in price as you anticipated and its price even dipped, you do not feel that pressured to sell at low prices (and lose money), because you have available cash or liquid assets on hand.  And as you know prices in the stock market eventually go up. In the long term you will make money in the stock market.

The common mistake of a vast majority of people entering the stock market is that they want to make money fast.  This mind set will do the opposite!

Therefore, it is a good idea to buy stocks with the mindset that you are ready to hold it for many years. A better idea is that you should know if the stock you you are looking to buy is cheap, because cheap stocks become expensive eventually. And there you will make a lot of money.

Want to learn more about how NOT to lose money in the stock market and build wealth by identifying cheap stocks? This book can help.

More on investment insights: Follow me on Twitter Jayson_CF

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Disclaimer: The materials presented here are for educational purposes only. They do not in any way constitute any professional advice for any particular person or persons. Offer of the contents herein comes with an understanding that the author does not render professional advice. The reader has the sole responsibility for his or her actions. The author in no way guarantee any result that may be obtained from using the contents herein. The author specifically disclaims any and all liabilities, losses, direct or indirect that result from the application or use of any of the content of this book.  The author makes no warranties or representation on the completeness or accuracy of the contents herein and specifically disclaims all warranties, including but not limited to warranties of suitability for a specific purpose. The author assumes no responsibility for any contrary or differing interpretation of the topics presented herein. Any semblance of any person or organization is purely coincidental and totally unintentional.

Under no circumstances should any material found herein be construed as an offering of securities or of investment advice. Should the reader require investment advice, he or she should seek a professional investment advisor.

Thursday, September 20, 2012

How to make Money in the Stock Market According to Warren Buffett

Updated on August 19, 2016



Undoubtedly, one of the most successful stock investor in the world today is Warren Buffett. 

Warren Buffett is right when he said that sound investing can make you very rich, if you are not in too much of a hurry, and it does not make you poor either which, even better. Why is it that the stock market can make you very rich? Well, because it is probably the biggest gold mine in the world. Billions of money change hands everyday! Let's say 90% of the traders in the stock market lose money. And guess where that mountain of money go? Yup, to the remaining 10%. You can be with that 10% and build your wealth just like Buffett.

How can you be with the 10% that actually make money (not lose money)?  I think Warren Buffett gave us the answer. Buffett said rule no. 1 never lose money, rule no. 2. never forget rule number 1. To me that means to buy low and sell high, and you don't sell on declining prices! But I'm losing money! You might say. No you are not! Those are unrealized losses, paper losses, as we call them. You will only lose money if you SELL.

Then how can I make money in the stock market? 
The stock market is full of opposites. I know, the reason why you are in the stock market is because you are optimistic and want to make money, fast. But the trick is, as Warren Buffett said, never attempt to make money in the stock market. Buffett buys on the assumption that the market will close the next day and not open for the next 5 years. This is a very good advice. Read on. I'll explain this irony.

Imagine if you are in the stock market to make money, and you bought a stock, then its price falls. Let's say you are down 5% two days after you bought the stock.. you might feel a bit concerned because in your mind you are in the stock market to make money, and with the 5 percent decline you feel you are slowly  losing your hard earned money. Let's say you decide to hold on with a bit of optimism. But the price kept falling... now you are down 15% then 20%..25% you kept holding on until you decide you cannot take the pain anymore and you would rather save 70% of your starting money and sell after a 30% decline. Only to find out that 6-10 months after you've sold at a loss, the stock surged and you would have made a 50% gain. If only you have not sold. 

Buying stocks with making money in mind will make you lose money, ironic as it sounds. Because you will experience stress and pain in seeing your stock holding go down in value on possibly a temporary decline and you will have emotional selling at low prices. 

The stock market does not go up in a straight line. 
If the stock price, after you bought the stock, steadily and gradually marches up to a 50% gain, without a day of decline, I know you would not sell. Because you won't be experiencing pain. But with a temporary decline before the same 50% gain, you would have sold at a loss. Let's say, you bought a stock for $10 per share, then the price went down to %7 per share, before going up to $15 per share. When the price dips to $7, you're likely to be confused and pain, maybe even panicking. And you are likely to sell at a loss. Instead of a 50% gain (had you not sold), you had a 30% loss. This is how the stock market works. It is deceiving most of the time. The stock market tends to fool the mind and make you lose money. The stock market transfers money from the fearful and impatient to the courageous and patient.  But once you move from being an impatient trader to a patient investor, the stock market will suddenly be your greatest friend as it will make you very rich!

Read on to know more.
Becoming successful in the stock market, as Warren Buffett puts it in a quote, requires only ordinary intelligence, what you need is to control your urges or emotions that get you in trouble.

Just like when you can't control your urge to sell because you see prices falling, fearing you will lose all your money. That also means control your urge to BUY HIGH and SELL LOW, because it should be buy low and sell high. The crowd is attracted to rising prices (often at the top). 

That, means also to not sell too early on a meager gain, because you fear that prices may go down, and you will lose your meager profit. If you give in to this, you will never be truly rich. As Jesse Livermore (a stock operator) puts it: you don't become poor by taking profits (meager) but you don't become rich either.

Buffett recommends to buy and hold. It's up to you of course if you want to buy and hold for a year, 2, 3, 4, 5 years. There is a good chance that many years (5 years or greater)  after you bought a good quality stock at the right price, that it will be trading at a much higher prices. 
  
A big weakness of would be investors, as I would call it, is Financial Impatience. I believe that Buffett has eliminated this human nature from himself. He even said "as to how long we'll wait, we will wait indefinitely". Waiting is always hard...very hard (for any average human)! But if you conquer this like Buffett, you may be rewarded with millions and even billions. I know, millions doesn't sound so bad either.

If you want to know more how you can be a successful stock investor please check out my book
More on investment insights: Follow me on Twitter Jayson_CF


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Disclaimer: The materials presented here are for educational purposes only. They do not in any way constitute any professional advice for any particular person or persons. Offer of the contents herein comes with an understanding that the author does not render professional advice. The reader has the sole responsibility for his or her actions. The author in no way guarantee any result that may be obtained from using the contents herein. The author specifically disclaims any and all liabilities, losses, direct or indirect that result from the application or use of any of the content of this book.  The author makes no warranties or representation on the completeness or accuracy of the contents herein and specifically disclaims all warranties, including but not limited to warranties of suitability for a specific purpose. The author assumes no responsibility for any contrary or differing interpretation of the topics presented herein. Any semblance of any person or organization is purely coincidental and totally unintentional.

Under no circumstances should any material found herein be construed as an offering of securities or of investment advice. Should the reader require investment advice, he or she should seek a professional investment advisor.