Monthly Archives: December 2013

5 Steps To Grow Your Savings

5 Steps to Grow Your Savings

Discover These 5 Steps to Growing Your Wealth and You’ll Have Something to Celebrate Too…

Having “5 Steps to Grow Your Savings” makes increasing your wealth very easy. And for most people, there isn’t too much magic to growing your savings. You just have to follow these five savings steps. But keep in mind…

Even though these 5 steps to grow your savings are time tested and will definitely help increase your net worth – they are pretty simple. And while they are systematic steps you can take to consistently and incrementally grow your savings, you are not going to get rich overnight using this approach. Got that?

The cold hard truth is that growing your savings requires dedication and commitment. But the sooner you start the sooner you’ll be able to retire. So, here are…

5 Steps to Grow Your Savings:

1) Earn Money: This might sound facetious. But I’m being serious. The simple fact is that you can’t grow your savings if you don’t have any money to save. And before you can save money you need to earn an income. While earned income is not going to get you rich, it is a good place to start growing your savings. Consider your earned income your operating cash flow. And you need to find ways to generate cash flow in the first place before you can ever grow your savings or make it rich living off your investments. This is the first step to growing your savings. Cool?

2) Save Money: Of course step two of growing your savings is all about saving! Makes sense, right? I’m sorry if these tips aren’t groundbreaking enough for you. But it’s surprising how many people want to make it rich investing, and they haven’t even saved any money. So if you want to grow your savings in 5 easy steps, make sure you listen to step 2 and pay down any debts and then save your money in the first place. This isn’t complicated. But commit to putting 10, 15 or 20% of your personal earnings into index funds or mutual funds. There’s no other way around it. You need to save if you want to grow your savings.

3) Dollar Cost Average: For most people, investigating specific stock ideas and trying to time the markets is a waste of time. If you want to grow your savings, and you are already regularly earning money and putting some aside, then congratulations! The next step to help your savings grow is dollar cost averaging. While this term sounds a little fancy, it just means commit to buying mutual funds, index funds or stocks every month. By regularly investing in stocks each and every month you are probably going to have a good average cost basis and don’t need to worry too much about the specific price you pay each month. That means you won’t have to worry about timing the markets because you are consistently putting your earnings to work. This is a key step to growing your savings. And luckily, learning to buy mutual funds and stocks online is easy. So once you get started, just stick with it!

4) Re-Balance: Even if you are not actively managing your own investments, rebalancing is a tactic that you should pay attention to because it can really help you grow your savings. You probably only need to rebalance once or twice a year. The key thing to remember about re-balancing is that if you have some huge gains you might want to lock some of them in. It’s okay to take some profits if you have large capital gains – just be aware of the tax implications and make sure you put your money back to work immediately by reinvesting it in another asset or fund.

5) Learn, Learn, Learn: The fifth and final step to help you grow your savings is about learning. And if you stay focused on learning more strategies, tactics and tips for how to grow your savings then you’re setting yourself up for a rich future. By constantly seeking out knowledge (like this article on 5 steps to grow your savings), you are soaking up wealth-building information that can help you get more out of your stock ideas. It won’t happen overnight. But little by little you’ll discover more and more ways you can grow your savings.

So there you have it. I hope you found these 5 steps to growing your savings useful. Of course you could add more steps to help you grow your savings, but after giving it much thought these are the 5 steps that I think are most important for the average person to grow their savings.

On the other hand…

If you’re already growing your savings quite effectively and you want to learn more about how to earn a better rate of return from the stock market, then I encourage you to read some stock investing books, or sign up by entering your email in the form below to get more exclusive analysis and ideas to improve your stock picking….

Trade Ideas For Stock Investing

Trade ideas for stock investing

See Why Trade Ideas for Stock Investing Can Be Very Straight Forward…

Trade Ideas for Stock Investing can help you regularly make money in the stock market. That’s because, without trading ideas your stock investing will stagnate. On the other hand, having an appreciation for trading your stock investments can help you compound your return and reduce volatility. Sounds pretty good, right?

But you might be wondering…

Are trade ideas for your stock investing really necessary? Can’t you just buy and hold your way to the bank? And isn’t short term trading expensive? Well, in this short blog post we’ll explore these questions and look at why having some trade ideas for your stock investing can pay off…

Trade Ideas for Core Stock Investments:

If you’ve been a long term buy-and-hold stock investor then you might not be interested in any trade ideas. You might even think that trading stocks is really expensive and erodes your returns. But when you learn to trade stocks online the commission costs of trading are so low that having trading ideas for your stock investing can really improve your returns, (even if you are only trading around a few core long-term positions).

And actually…

I have a long term outlook in all of my stock investing. I primarily buy stocks because of their fundamental valuation and growth outlook. And then it usually takes anywhere from 6 months to 3 years for my stock investing thesis to play out – so there is actually very little turnover in my portfolio… BUT… while my main thesis ideas might take a long time to play out, there is usually lots of volatility in the interim that I try to take advantage of by applying trade ideas to my long term stock investing.

Even though I’m a fundamental investor, I realize the value of technical analysis and I appreciate it can make sense to have trading ideas for your core stock investments.

So if you are also a fundamental investor who picks stock ideas based on your investment theses, then I encourage you to also open your mind to the possibility of short term trading ideas. You don’t need to go crazy day trading stocks every day, but if you accept that the market is inefficient in the short term then you can use stock trading techniques to improve your return and reduce your volatility. So how does that look in practice?

Trade Ideas for Value-Based Stock Investing:

Trade ideas for value-based stock investing might sound like an oxymoron at first. But I assure you this approach to trading stock ideas makes lots of sense. Now I’m assuming that if you’re a value investor then you are concerned with the intrinsic value of the business and how it relates to share price… So…

By creating a simple trading plan you can use very basic technical analysis to help you take profits and reduce or add to your stock position when the short term price action gets out of step with the intrinsic value. Often you will see stocks spike up in price by 5-10% in a single day without any news. In these cases I often take a little bit of profit, just to be safe. Then when the stock sells off to a support level without any news (or change to the intrinsic value of the company) I put the money back to work by re-buying the stock lower than where I bought it.

Keep in mind that I’m still long the stock and always maintain a “core position” since it’s unlikely I will time every uptick and downtick perfectly. But even if you are only semi-proficient at this kind of short term trading you can really pad your long-term returns and improve your capital gains. By the way, this is the basic system outlined in the book, The Best Trading System by Chris Beanie.

Swing Trade Ideas for Stock Investing:

If you’re a more active trader then you might consider learning more about swing trade ideas to improve your stock investing. While most swing traders use only technical analysis to make their stock trading decisions, I find you can use fundamental analysis with swing trading quite well. If you have a long list of fundamental stock ideas you like you can use swing trading techniques to really help you actively manage your investments. If you’re unfamiliar with swing trading but curious to learn more about how it can help you make more money from your stock ideas I encourage you to follow ChessnWine.

Just keep in mind…

To some extent your ability to find trade ideas for stock investing will come down to how much time you have to watch the market during the day and how much planning you can do each evening after the stock market closes. To be sure, it takes dedication and practice. But using trade ideas to improve your stock investing can be a very profitable approach to managing your own portfolio.

And By The Way: If you’re interested in learning more techniques to improve your returns and help you make more money in the stock market then sign up below for email-only analysis and investment ideas.

The Art of Value Investing (Book Review)

The Art of Value Investing Book Review

Find out why The Art of Value Investing is a must-read…

The Art of Value Investing by Whitney Tilson and John Heins is “How the World’s Best Investors Beat The Market.”

The Art of Value Investing is a book I picked up after seeing an interview on value investing by the author Whitney Tilson. Tilson is also the editor and publisher of the value Investing newsletter, “Value Investing Insight”. So you know Tilson is well-positioned to write about the art of value investing.

So in this short book review of The Art of Value Investing I’ll share with you what I liked about this book and why it’s worth reading. If you have any interest in value investing then I highly recommend you read The Art of Value Investing – here’s why…

Why You Must Read The Art of Value Investing:

The Art of Value Investing is a very good book for any longer-term or fundamental investors. The book is very easy to read and organized in a really interesting format. The Art of Value Investing is similar to Market Wizards because it takes the answer to interview questions from expert value investors.

But there’s one difference…

Instead of interviewing one trader at a time, each chapter of The Art of Value Investing features a bunch of investors weighing in on key aspects of value investing, like portfolio diversification, valuation methods and of course what to look for in a value stock. The Art of Value Investing gets a comprehensive view of all of the most important aspects of value investing and is definitely worth a read.

The Art of Value Investing is also very easy to read because of the Q&A format.  You can just read a few interview questions at a time whenever you have a minute. While the book does assume some prior knowledge, this concise format makes The Art of Value Investing easier to absorb.

But here’s my favourite part about this book…

The Best Part About The Art of Value Investing Is:

The best part of The Art of Value Investing is how seriously the book looks at fundamental investing in a contemporary way. The structure makes the book feel like a high level discussion on value investing. So when you read The Art of Value Investing it’s like sitting down for coffee with some of history’s best value investors. For example…

The Art of Value Investing features investors such as Seth Klarman, Warren Buffett and Howard Marks. And at key points in each chapter the authors add commentary and perspective, making the advice in the book that much more applicable. The Art of Value Investing gives a contemporary post-financial-crisis look at how high-level value investors think about the market I haven’t seen anywhere else.

But while I enjoyed The Art of Value Investing, the book may not be for everyone.

What The Art of Value Investing Omits:

The Art of Value Investing is a really comprehensive high-level discussion about fundamental capital allocation strategy. But since the book is only about 300 pages, the focus on strategy necessarily omits some discussion of tactics. This isn’t to say the book isn’t applicable to everyday value investors: you will just need to study it a little bit closer to find the metrics, tactics and tips the value managers in the book suggest.

On the other hand, if you’re looking for basic value investing knowledge and framework, you might be better off reading something a little more applicable like The Intelligent Investor. And if you’re looking for outright fundamental trading strategies you might want to try Jim Cramer’s Real Money instead. The Art of Value Investing only talks about technical analysis in passing (although some value investors pay attention to it).

So while The Art of Value Investing isn’t for everyone, it provides great insight for value investors. And if you’re looking for a current discussion of time-tested value strategies then this book might be for you…

The Art of Value Investing – Final Word:

The Art of Value Investing is a book unlike any other I have recently read. That’s because it features a wide array of perspectives from the best value investors in the world. That’s why I recommend you buy The Art of Value Investing on Amazon. It’s a great book that you can come back to again and again for investing advice.

The Art of Value Investing is like having access to some of the world’s best value investors talking about the most important value investing topics.

The Art of Value Investing Video Book Review:

Other Books You Might Enjoy:

Millionaire Teacher Book Review

millionaire aeacher book review

Find out why I recommend Millionaire Teacher to all my friends

Millionaire Teacher by Andrew Hallam explains “The 9 Rules of Wealth You Should Have Learned in School.”

Millionaire Teacher is a great personal finance book, especially for Canadians. It is about a regular teacher who diligently but quickly built up a million dollar stock portfolio. The cool thing is…

Millionaire Teacher is a very practical book. The book really shows you how financial freedom is available to the average person. And all you need are a few adjustments to your habits. So:

In this book review I’ll tell you everything you need to know about Millionaire Teacher to decide if it’s the personal finance book for you.

Who Will Benefit From Reading Millionaire Teacher:

Millionaire Teacher is a great personal finance book. If you are just getting started in the workforce and are starting to accumulate some savings, then Millionaire Teacher is definitely the book for you. Millionaire Teacher assumes no prior knowledge, and is a great introductory book for any Canadian who is starting to gather up some savings. More specifically…

If you’re wondering whether you should invest in a TFSA, RRSP or tackle that lingering student deb, then Millionaire Teacher is definitely a book for you. It will give you a no-nonsense approach to personal money management. And learning these habits early will not only make them easier to achieve but allow you to compound their benefits for your entire professional life. Sounds pretty good, right?

On the other hand, if you’re very experienced with personal finance and are already actively investing in the markets then you’re probably going to find this book a bit introductory. Millionaire Teacher doesn’t have any groundbreaking stock picking techniques or test stock trading systems.

My Favourite Part of Millionaire Teacher:

Millionaire Teacher has a lot of great aspects. But my favourite part of Millionaire Teacher is the first section of the book. That’s because the book starts out as the personal financial biography of the author, Andrew Hallam. And the most interesting thing is that (as the title of the book implies) he is a regular teacher.

So Millionaire Teacher inspires some confidence and “believability” because the book features a regular guy who just uses personal finance best practice to really change his life. It makes you feel like you can do the same thing, which is something that’s missing from a lot of personal finance books today. It’s clear in this case that the author doesn’t start out with a silver spoon in his mouth, and he overcomes a lot of the challenges that you are probably facing today.

There are only a couple of esoteric tips that the average person realistically wouldn’t pursue. And I get the feeling they are added to inspire creativity But for the most part Millionaire Teacher is entirely realistic and totally feasible.

Millionaire Teacher – Canadian Investing Tips:

Millionaire Teacher is exclusively focused for Canadians. While there are certainly nuggets of wisdom that are applicable to be Americans, our friends south of the border would be better off to check out something like I Will Teach You To Be Rich by Ramit Sethi.

On the other hand, the Millionaire Teacher’s advice for Canadians interested in investing is right on the money. The book gives you an overview of your specific investing options as a Canadian. And since it assumes no prior personal finance knowledge it really starts you at the basics and proceeds in a very simple to understand manner. Millionaire Teacher does not leave much to the imagination and tells you exactly how you can take your personal asset management into your own hands. The book goes into as much detail as telling you exactly what mutual funds to buy at exactly which banks.

Even if you aren’t that interested in Finance this book is worth reading. It’s quite short and easy to read and the lessons inside are not only easy to implement, but they’ll serve you well for the rest of your life. Sound good?

Millionaire Teacher – The Final Word:

Millionaire Teacher is a fresh take on a classic and timeless issue – that of personal financial management. The book is focused exclusively on Canadians and should address almost all of your investing questions very well.

For that reason I’m happy to recommend you buy Millionaire Teacher on Amazon and discover these time tested rules of wealth for yourself. You may not be a teacher but you can certainly make it as a millionaire!

Millionaire Teacher is

Millionaire Teacher Video Book Review

Books You Might Also Like:

Trading Stock Market Pullbacks

Trading Stock Market Pullbacks

Trading Stock Market Pullbacks can feel like jumping off a cliff…

Trading Stock Market Pullbacks isn’t easy. But understanding how to navigate pullbacks in the stock market, as well as in your favourite stocks, is important to your trading success. And given yesterday’s stock market pullback it’s worth discussing this critical concept a little more. Why?

Trading stock market pullbacks is one of the most volatile and emotionally difficult aspects of investing. How do you know when you should double down and invest more, or cut your losses and move on? In this blog post we’ll look at some of the easiest ways to trade through a stock market pullback.

And the first thing you should know is that not all pullbacks are created equal…

Trading Low Volume Stock Market Pullbacks:

When you’re trading stock market pullbacks one of the most important things to keep an eye on is trading volume. That’s because trading volume can give you insight into the nature of the pullback. For example…

A light (or low-volume) stock market pullback happens when the selling volume on the pullback is significantly lower than the buying volume was on the way up. You can easily see this on any stock chart. And a low volume stock market pullback might indicate the stock is just consolidating recent gains. Ideally you would like to see a shallow pullback with a tighter trading range before making your next trade.

On the other hand:

A vicious high volume pullback might indicate a changing of sentiment about your stock of choice or the stock market as a whole. So you should be especially careful if the price advance was on low volume and the pullback in your stock is happening at very high volume. This indicates that a lot of people are selling the stock. At this point, you would probably want to wait until your stock pulls back to a recent support level and wait for it to find stability before buying more.

Erring on the side of caution in trading a stock market pullback can go a long way to protecting your capital and keeping you out of trouble so you can live to trade another day. One more trick you can use to improve the way you trade stock market pullbacks is to look at how the stock market as a whole is trading…

Trading “Top Down” Stock Market Pullbacks:

Trading stock market pullbacks can be difficult because you never know for sure if your stock is in a mild consolidation or a nasty multiple compression. One way you can get some more context on the character of your stock pullback is to consider how your stocks are trading relative to the rest of the market.

Jesse Livermore’s book How to Trade in Stocks first introduced me to the idea of “top down trading.” The basic premise is that the market moves in a convoy and you can improve your chances of success by following the trend of the majority. If the majority of stocks are pulling back you may want to be careful. But if similar stocks are improving maybe the stars have aligned and your pullback presents a low-risk entry opportunity.

As an example:

If you’re trading a local bank stock that is pulling back, you want to look at what the other banks are doing to gauge the nature of the pullback in your stock. You can look at the regional bank ETF (KRE) to get an idea of how the sector is doing. Then you can look at the financial ETF (XLF) to see how all the financial services industry as a whole are doing. And finally you can look at the S&P-500 to see how it’s acting. When you use these other stocks and markets as indicators you can get insight into the nature of the pullback and whether or not you should buy more stocks.

And while these volume and breadth indicators are useful, trading stock market pullbacks isn’t just about technical analysis

Fundamentals of Trading Stock Market Pullbacks:

Trading stock market pullbacks is not only about technical analysis. Especially in the case of high volume stock market pullbacks it’s important for you to re-check the fundamental thesis of your stock idea

Checking the fundamentals of your stock during a market pullback is easy to do and can save you a lot of pain. Just pull up a quote of your stock on Google Finance, Stocktwits, Seeking Alpha and even the Yahoo Finance message boards to see if any news has been published that might materially change the fundamentals of a company. For example…

Maybe the company has announced a cut to the dividend, an unexpected loss from operations or an expensive write-off that investors weren’t expecting. In any case, it pays to know if their is any fundamental reason for the stock pullback.

And to be honest:

If you’re focused on buying strong companies with great financial statements then most of the time your stock market pullbacks are just minor hiccups on the way to higher prices. But it’s important to take a quick second and make sure you don’t buy the pullback in the stock if there is a material fundamental change. Make sense?

At the end of the day, trading stock market pullbacks can present you with great opportunities for profit. Just make sure you do a little due diligence before doubling down. Using technical and fundamental analysis can help you understand the nature of the stock market pullback and whether it is an early warning sign or an opportunity to re-enter your stock idea at lower prices.

And By The Way: If you’re looking for more tactics and techniques for improving your stock market performance, I encourage you to sign up for email updates below to get exclusive stock analysis and trading ideas…

How to Use The Graham Number to Invest

How to Use The Graham Number to Invest

Learning how to use the Graham Number to Invest is easy…

How to Use the Graham Number to Invest: Investing using the Graham Number is a great way to improve your profitability. That’s because when you learn how to use the Graham Number to invest, you get a an easy to use tool for valuing stocks.

Not only does learning how to use the Graham Number to invest give you an idea of what your company is worth, it also gives value investors a target sell price. When a lot of investors are starting out they have trouble understanding when they should sell a stock. Investing with the Graham Number can thus provide very valuable.

So in this short blog post I’ll explain in detail what the Graham Number is, how you can calculate the Graham Number, and how you can use the Graham Number to improve your own analysis and stock picks. Does that sound okay?

How to Use the Graham Number to Invest – the Basics:

Before you can learn how to use the Graham Number to invest, you need to understand what the Graham Number is, and how to calculate it. Luckily, this is all quite simple. The Graham Number is a great investing tool because it explains “the maximum amount a conservative investor would pay for a stock.” That means…

When you’re using the Graham Number to invest, it gives you a conservative measure of what the company you’re analyzing for investment is worth. Does that make sense?

If you look for stocks that are trading 30% or more below their Graham Number, then you know they are very conservatively valued and might make a good value investment. The Graham Number gives you an excellent inside look at how much the company is worth and thus gives you a quick and dirty calculation to discover your upside reward. So let’s go a step further and actually learn how to calculate the Graham Number ourselves for analyzing investments…

How To Use The Graham Number to Invest – Calculating The Graham Number:

Calculating the Graham Number is very easy to do. All you need is a simple calculator. So here is how you calculate the Graham Number so that you can use it to help your stock market investing:

  1. Find a stock that you are fundamentally interested in. If you need stock ideas sign up for email or try out some free stock screens.
  2. Look up the book value per share of your stock, and look up the earnings per share (EPS) of your stock. Ideally you would take the average EPS of the last three years (just to ensure the current earnings are not an anomaly). But if the trailing twelve month EPS is all you have that’s okay.
  3. Multiple the EPS value by the book value per share and multiply the total by 22.5
  4. Square root the answer from  step #3.
  5. You have now calculated the Graham Number!

As you can see, calculating the Graham Number is very easy! Of course the Graham Number is not the only thing you should consider when you’re learning to invest. But it’s an important metric that value investors can use to understand what the earnings and assets of a company are worth.

And that’s why I like to use the Graham Number to invest – because it takes into account both earnings and assets which are two important factors in valuing a company. Plus, since using the Graham Number to invest is so fast and easy it is a good way to quickly eliminate stock ideas, or isolate those investment possibilities that may merit further research. And to be honest…

Buying stocks trading at 30% or more discount to their Graham Number and then selling them when they revert to the Graham Number has been a very profitable investment strategy for me over the last few years.

So I hope this blog post has helped you understand how to use the Graham Number to invest. I really encourage you to use the Graham Number yourself, especially if you’re unsure whether or not a stock is undervalued. And if you have any questions about how to use the Graham number to invest please drop me a note in the comments below!

And By The Way: If you’re still hungry for more quick tips and tools to analyze the value of stocks, then I encourage you to sign up in the form below to get exclusive email-only analysis and investing ideas.

Seth Klarman Margin of Safety (PDF Download & Notes)

Seth Klarman Margin of Safety PDF Download

Check out these Seth Klarman Margin of Safety PDF Downloads…

Seth Klarman’s Margin of Safety provides “Risk-Averse Value Investing Strategies for the Thoughtful Investor.

While Margin of Safety is sure to cost you thousands of dollars if you buy it online, there are tons of Margin of Safety PDF Downloads and notes available free on the internet. Below are some of my favourite excerpts from Margin of Safety, and related Seth Klarman investing material.

And by the way, if you’re not entirely sure why you should care about these PDF downloads and notes from Seth Klarman’s “Margin of Safety” book, just remember that his Baupost Group is the 11th largest hedge fund and focuses strictly on value investing.  And in this short blog post I’ll share with you a few of Seth Klarman’s Margin Of Safety PDF Downloads and notes. So here they are…

The Best Seth Klarman Margin of Safety PDF Downloads and Notes:

30 Big Ideas From Margin of Safety (PDF Download): The author of this presentation claims to have read Margin of Safety 4 times. And to his credit, this Margin of Safety PDF Download is the 30 biggest ideas extracted from Klarman’s Margin of Safety. The thing I love about this Margin of Safety PDF download is how easy it is to read, yet it encapsulates all of the main points of Margin of Safety. This is one of those PDF downloads that I bookmark and keep coming back to. If you invest with a Margin of Safety approach, I encourage you to do the same.

Chapter-By-Chapter Review of Margin of Safety: Barel Karsan provides a great chapter-by-chapter review of Margin of Safety. The lessons learned are consistent with what you would expect of a Benjamin-Graham-style value investor. But they are presented in an easy-to-read way and provide a very in-depth look at what Seth Klarman’s Margin of Safety is really about. I encourage you to check out this blog as it’s a great value investing resource.

Margin of Safety PDF Notes: These notes, prepared by Robert Redfield in 1991 offer a chronological summary of Seth Klarman’s Margin of Safety. And these free PDF notes do a great isolating the actionable suggestions from Margin of Safety so that you can start to internalize and apply the value investing principals and methodology that Margin of Safety recommends. What more could you as for in terms of free PDF notes on Klarman’s Margin of Safety.

Klarman on Charlie Rose interview:

Charlie Rose asks some great questions about Margin of Safety (like where there isn’t another edition!) Rose also compares Karlman to Buffett and provides a lot of other interesting insight to would-be value investors. I spent the whole video scribbling down notes on Margin of Safety and I think if you watch the video above, you’ll be doing the same!

Klarman at Harvard:

Despite the cult following Margin of Safety (and the assorted PDF downloads) have attained, Seth Klarman keeps a relatively low profile. Even though he manages a massive hedge fund with almost $25B in assets under management, he flies low on the radar. So enjoy these Margin of Safety presentations and PDF downloads. I hope they help give you your fill of Seth Klarman until you make enough money to buy Margin of Safety.

If you’re looking for more value investing information Seth Klarman would approve of then I recommend you check out The Intelligent Investor and (if you’re feeling ambitious) Security Analysis (for which he wrote an introduction).Of course, anything about Warren Buffett’s Investment Strategy is fair game too.

And By The Way: If you’re still hungry for more value investing information and analysis, sign up using the form below to get exclusive-email-only value investing ideas and analysis…

Warren Buffett Investing Advice on The Office

Warren Buffet was on The Office giving out investment advice. I love Warren Buffett, and I love The Office. So when I saw Warren Buffett on The Office I was pretty excited, and since he was giving out investing advice in this clip, I wanted to share it with you here…

So Check Out Warren Buffett’s Investing Advice On The Office:

Watch Warren Buffett’s investing advice in this cameo on season 7, episode 25 of The Office. In the scene, he is interviewing for the new “branch manager” position after Michael leaves. It’s a short clip, but worth checking out…

I’m sure Warren Buffett would have a plethora of investing advice were he to be a regular on The Office. And even in this short clip it’s amazing to see how he’s frugal and laser focused on the bottom line. Even in a fictionalized show, Warren Buffett’s true to his investing advice.

If you’re looking for more of Warren Buffett’s investing advice for reading at your own office, check out these links:

So now tell me, what’s your favourite Warren Buffett investing advice? And if you’re looking for more time-tested investing advice sign up for exclusive email-only advice below.

What’s The Ideal Number of Stocks In a Portfolio?

What's the Ideal Number of Stocks in a Portfolio

What’s the Ideal Number of Stocks in a Trading or Investment Portfolio?

The Ideal Number of Stocks in a Portfolio is the key to a profitable investment strategy. And (no surprise) there are lots of conflicting schools of thought on what the ideal number of stocks to own in your portfolio is… so…

After years of stock trading and investing I have some very concrete thoughts on what the ideal number of stocks is to have in your portfolio.

What’s The Ideal Number of Stocks in a Portfolio to Diversify:

When it comes to the ideal number of stocks in a portfolio, there is a lot of conflicting advice. Traditional wisdom has it that diversity in your stock portfolio is critical. But while Ben Graham advocated owning small positions in hundreds of stocks, Warren Buffett is almost famous for the way he concentrates his stock picks to get the most return out of his best investment ideas. And we haven’t even talked about the colloquial saying that “there is safety in numberers.”

So who should you believe about the ideal number of stocks in your investment portfolio?

The best advice I have read about “the ideal number of stocks to have in a portfolio” comes from Joel Greenblatt in his legendary investing book You Can Be A Stock Market Genius. Greenblatt really cuts to the chase with his advice on portfolio diversity and the ideal number of stocks.

Here’s what you need to know…

A diverse portfolio of stocks does not protect you from market risk.  And here’s what I mean by that: Even if you own every stock in the S&P-500 you are going to have some days where the market goes up and some days where the market goes down. Right?

Think about it…

You cannot diversify away the portion of portfolio risk that comes from the day-to-day movements of the stock market. And given the interconnectivity of global financial markets and major economies, diversifying away from market risk is not something that is easily done. And I don’t know what your stock portfolio looks like or many how many stocks you own in it. But I’m wiling to bet most days your stocks are either mostly up or mostly down, correct?

On the other hand, having a diverse portfolio of many stocks does help you diversify away from non-market risk. Non-market risk is the risk of losing money in your stock idea because of something within the company (rather than the stock market at large). Non-market risk has more to do with the operation of your specific portfolio companies, like if a new product launch fails (think Blackberry), your oil well explodes (think BP) or your main factory burns down in a freak accident.

So you must be wondering…

What’s the Ideal Number of Stocks in a Portfolio to Avoid Non-Market Risk?

When you drill down into diversification strategy, and the ideal number of stocks in a portfolio, the math is actually quite surprising. Again, I’m drawing from Greenblatt’s book but I think you’ll find these insights into portfolio diversification very interesting. And you might even realize…

“The strategy of putting all your eggs in one basket and then watching that basket is less risky than you might think.”

For Example:

  • Owning just two (2!) stocks cuts your non-market portfolio risk by 46%!
  • 4 stocks in your portfolio cut this non-market risk by 72%…
  • 8 stocks in your portfolio cut this non-market risk by 81%…
  • 16 stocks in your portfolio cut this non-market risk by 93%…
  • If you have 50-500 stocks in your portfolio, there is a 2/3rd chance you will get a return of -8% to +28% on any given year
  • If you have only 5 stocks the range expands (a little) to -11% to +31% on any given year.

Those numbers are pretty alarming right?

It goes to show that having a lot of stocks in your portfolio doesn’t offer you much protection. You just need a couple of different stock ideas to eliminate non market risk from your portfolio. And by the way…

There’s one other factor that invalidates the folk wisdom about the ideal number of stocks in a portfolio…

Big Money Inflates the Ideal Number of Stocks in a Portfolio:

The truth of the matter is, mutual fund managers and big institutional investors have more stringent investment criteria than you or I. They also have a lot more money. And trying to allocate all of this capital is the biggest headwind to smart stock picking by big banks and pension funds.

Let me tell you what I mean…

When you have hundreds of millions (or billions) of dollars to allocate, you simply have to diversify your portfolio because of the amount of money you have. You can’t focus your entire portfolio on 4 or 5 companies because you would literally have to own the entire company to use up all your money.

So that’s the main reason why these massive money managers are so over-diverified – they simply have no where else to put their money! 

Now I know there isn’t a black and white answer to the question of how many stocks you should have in your portfolio. But hopefully this blog post provided some insight for you, and challenged the typical assumptions about portfolio diversification. And as for me?

I usually have 4-8 main positions based on my best stock ideas, and then a couple of small “leftovers” (where I have sold the main core position but want to keep a small number of shares just to keep tabs on the company). I also have some cash on hand and about 25% of my assets in index funds as a hedge against myself. This used to be a higher % but has diminished as I have raised more capital and gotten more confident with my stock picking.

The above approach to investing in stocks works well for me and I hope you’ve learned something. But now that I’ve shared my strategies for how many stocks I put in my investment portfolio let me ask you, what’s the ideal number of stocks in your investment portfolio? And if you’re still not 100% confident in the stocks in your portfolio sign up below in the form below for exclusive e-mail only analysis and stock ideas.

Standards For Evaluating Portfolio Performance

Standards For Evaluating Portfolio Performance

Learn to evaluate how your portfolio performance measures up.

Standards for Evaluating Portfolio Performance are critical. Even if you don’t want to be a portfolio manager yourself, it’s important to understand the standards for evaluating portfolio performance so you can hold your financial advisor or stock broker accountable. That’s why…

In this short blog post you’ll learn some of the most common standards for evaluating portfolio performance. And don’t worry:

While there’re a couple of different ways you can evaluate the performance of your stock portfolio they are all simple to grasp. So let’s dive into the most common standards for evaluating portfolio performance…

Absolute Standards for Evaluating Portfolio Performance:

The most basic standard for evaluating portfolio performance is absolute returns. And this performance measurement is also the easiest to use. Absolute portfolio performance just means “the percentage value that your stock portfolio went up or down.” It is your percentage return on the money in your brokerage or investment account. That’s simple enough, right?

And by the way, you can measure your absolute portfolio performance over a period of years, months or even weeks (depending on your investment timeline). To calculate the absolute performance of your equity portfolio simply subtract your current account balance from your starting account balance and divide by your starting account balance. So if you have 100K in your account and now you have 110K after a year of trading, you would just do (110K-100K)/100K = 10% absolute return this year… Make sense? Good.

But wait! Although the absolute return is easy to calculate, it doesn’t always give you the full picture in terms of evaluating portfolio performance. Which brings us to the next common method to evaluate portfolio performance…

Relative Standards for Evaluating Portfolio Performance:

Another common standard for evaluating portfolio performance is relative return. While relative return requires an extra step of calculation, it gives you a much more in-depth method to evaluate portfolio performance. So how do relative returns work when you’re evaluating your portfolio performance?

Basically, you evaluate your portfolio’s absolute performance and then compare it to the absolute performance of an appropriate benchmark, over the same time period. The most common benchmark is the S&P-500. So basically you are just saying “how did I do relative to an index of stocks?” Subtract your absolute return from the benchmark index to get the relative return.

If your relative return is negative then your portfolio is under-performing. And conversely if your relative return is positive then you are outperforming the benchmark. So with that in mind hopefully you can see that relative returns are a great standard for evaluating portfolio performance.

But there’s one other standard for evaluating portfolio performance that’s worth mentioning…

Risk-Adjusted Standards For Evaluating Portfolio Performance:

One other standard for evaluating portfolio performance is Risk Adjusted Return on Capital (RAROC). This method of evaluating portfolio performance gives you a look at your return relative to the risk you took to get that return. This standard for evaluating portfolio performance is therefore of high interest to conservative investors. So how do you calculate your risk adjusted return on capital to evaluate your portfolio performance?

The easiest way to account for risk when evaluating your portfolio performance is using the Sharpe Ratio. The ex-post Sharpe Ratio gives an indication of how the investor is compensated for the amount of risk taken to realize portfolio returns. Basically you take the realized return of your risky asset,  subtract the realized risk free-rate of return (e.g. short dated US T-Bill) and divide by the standard deviation of the risky asset. Voila!

That’s how you get a risk-adjusted standard for evaluating portfolio performance. And if you think Sharpe Ratio might be the best standard for evaluating your portfolio performance I recommend you read this article explaining how to use the Sharpe Ratio in detail. The Sharpe Ratio is easy to calculate. But it’s worth running through a few examples in order to get comfortable with this risk adjusted standard for evaluating portfolio performance.

What’s  Your Favourite Standard For Evaluating Portfolio Performance?

So there you have it! And now that you are familiar with the common standards for evaluating portfolio performance, you can be aware of the best ways to measure the performance of your own portfolio.

You’ll also be aware of how other people use these performance standards to present their own returns – so you won’t be deceived by sneaking portfolio managers looking to drum up assets under management. Sound good?

And Hey: If you’re looking for more information on how to get superior portfolio performance I encourage you to sign up using the form below. You’ll get exclusive e-mail only stock ideas and investment analysis on the regular. So what are you waiting for? Sign up below…