Download how to profit when investors are scared buy low sell high

ALLAN SMALL
HOW TO PROFIT
WHEN INVESTORS
ARE SCARED
BUY LOW
SELL HIGH
Everyone knows
the philosophy, but how
many are doing it?
How to Profit.indd 3
2014-04-10 5:13 PM
Copyright © 2014 Allan Small,
All rights reserved under International and Pan-American Copyright Conventions.
No part of this book may be reproduced in any form or by any electronic or
mechanical means, including information storage and retrieval systems, without
permission in writing from the author. The right of Allan Small to be identified
as the author of this work has been asserted.
This book was prepared solely by Allan Small, who is a registered representative
of HollisWealth™ (a trade name and division of Scotia Capital Inc., a member of the
Canadian Investor Protection Fund and the Investment Regulatory Organization
of Canada). The views and opinions, including any recommendations, expressed
in this book are those of Allan Small alone and not those of HollisWealth.
The Allan Small Financial Group is a personal trade name of Allan Small.
Contact Allan Small at:
email: [email protected]
website: www.allansmall.com
Cover & Book Design by Angel [email protected]
Printed in Canada
Library and Archives Canada Cataloguing in Publication
Small, Allan, 1972-, author
How to profit when investors are scared : buy low, sell high / Allan Small.
Includes index.
ISBN 978-0-9937169-0-4 (pbk.)
1. Investments. 2. Rate of return. I. Title.
HG4521.S568 2014 332.6 C2014-901323-X
How to Profit.indd 4
2014-04-10 5:13 PM
This book is dedicated to my best friend — my wife — and my children. Without your support and understanding I could not go to
work each and every day. I have said many times that what I do for
a living is not a job, it’s a lifestyle. Without the support of my family, being the investment advisor I want to be and writing this book
would not have been possible. Thank you. To all the other people
who have influenced my life and the creation of this book, I thank
you as well. I couldn’t have done it without you.
How to Profit.indd 5
2014-04-10 5:13 PM
Contents
Preface9
Introduction 11
1 “Buy Low, Sell High” — What Does It Mean? 13
2 Simple Rules of Investing 21
3 Styles and Methods of Investing 28
4 Six Common Mistakes Investors Make 35
5 Stock Market Events That Investors Can’t Control 43
6 Volatility: How It Affects Investors’ Decisions 51
7 How to Grow Your Portfolio in Volatile Times 59
8 The Effects of Interest Rate Changes 66
9 Diversification: The Best Way to Protect Your Money 74
10 Investment Choices 83
Conclusion 93
About the Author 94
How to Profit.indd 7
2014-04-10 5:13 PM
Preface
My investment philosophy is based on providing sound
advice and great service to my clients. In my world, investing is not gambling. From a numbers perspective, a
sensible strategy is always available.
I am a bottom-up value investment advisor. I buy investments if I think they represent good value and are good value. I use fundamental and technical analysis to locate and
invest in good-quality companies. I hold an investment until my desired target price is reached and then I begin selling
to realize the profits. I am a very patient investor, with my
finger on the pulse of the market at all times!
I have access to many products and no bias towards
any of them. I create every portfolio from the beginning, with the investor’s objectives, risk tolerance, and
time horizon in mind. All recommendations are customer specific — I refuse to categorize investors into
groups that all get the same portfolio.
I monitor the markets very closely, as I believe it is
very important to spot trends quickly in order to advise
my clients accordingly and in a timely manner.
When an investor works with me, they are always
dealing with the final decision-maker on their portfolio. I believe in not only recommending investments to
my clients but also educating them as to what they have
and why they own it. And I make sure to provide full
transparency with regard to fees and any other matters
at all times.
— Allan Small
9
How to Profit.indd 9
2014-04-10 5:13 PM
Introduction
Most investors are familiar with the phrase “Buy low
and sell high.” However, how many of them actually
do it? For many people, buying when the market is at
a low point is very hard to do. It takes an iron stomach
to purchase equity investments when many are predicting that the doom and gloom in the stock market will
persist. It is a lonely feeling to be buying when many
individuals are exiting their investments.
At the same time, exiting an investment when everyone is euphoric can be just as difficult. When everyone
around you, from your next-door neighbour to your
best friend, is buying into an investment, it becomes
very hard for you to imagine selling it. You fear that the
investment will continue to go higher and you will miss
out on further gains.
Thus, most investors end up doing the opposite of
buying low and selling high. Many individuals buy
when an investment has already gone up significantly,
based on the hype surrounding it, only to sell when the
value falls, after everyone else has taken their profits.
Thus they are actually buying high and selling low!
This book discusses the reasons why many investors
fall into the trap of buying high and selling low. It talks
about what influences people to buy at the wrong time
and to sell after it is too late. I go over the signs and economic data that investors should be looking for so they
can recognize a good time to buy an equity investment.
11
How to Profit.indd 11
2014-04-10 5:13 PM
The book also discusses the different types of investments that individuals can buy, describing important
concepts and methods of investing — including when
buying high can make sense.
Many of the ideas communicated in this book come
from real-life conversations with my clients. My insights into how people think have come from many
discussions over the past 15 years in my dealings with
investors who represent a wide range of portfolio sizes
and risk tolerance. My hope is that all the people who
read this book will take away from it at least one useful
idea that they can relate to their own investment experience and benefit in some way from it.
12
How to Profit.indd 12
2014-04-10 5:13 PM
Chapter 1
“Buy Low, Sell High” — What Does It Mean?
Investors who buy low and sell high could be called
contrarians. They buy when prices are low — which
usually means the investment they are buying is out of
favour or being sold by investors — and they sell when
an investment has had a great run and is still loved by
many. This is contrary to what seems natural for many
investors.
We know that timing the market is difficult because
investment decisions are often clouded by media hype
and other emotional influences. Contrary to what people may believe, the point of maximum financial risk
is when everyone is euphoric about an investment or
the stock market in general. And the point of maximum
financial opportunity is after capitulation, or when everyone has “thrown in the towel.” The motto “Buy low
and sell high” encompasses this idea.
The mindset of consumers is totally different when it
comes to investments that are on sale versus buying, for
example, an item of clothing. For some reason, investments are possibly the only thing that people don’t like
to buy when they are on sale. If the price was reduced
for a good-quality sweater at your favourite clothing
store, would you buy it? Or would you question why it
13
How to Profit.indd 13
2014-04-10 5:13 PM
Allan Small
was on sale and cheaper than similar items in the store,
and simply walk away? A wise shopper would probably
check out the sweater to make sure it’s in good condition, with no flaws, and then purchase it, especially if it
is high quality. Why should an investment be any different? If investors discover a good-quality investment on
sale for 25 or 30 percent, they should treat it like a beautiful item of clothing. They should examine its quality
to make sure there is nothing wrong with it and then
move ahead with the purchase. Smart investors wait
for good-quality investments to go on sale so they can
buy in at bargain low prices, then eventually sell them
at higher levels.
Many investors like to see an investment move higher before they will consider making an effort to own it.
They tend to choose the hot investment of the week,
month, or year instead of the best up-and-coming investment. By nature, people look for confirmation
when buying an investment: they want to see that it is
moving higher in value before they buy in, confirming
that it’s the right thing to do before taking that leap of
faith. How silly does it sound to wait for an investment
to move higher before deciding to own it? That’s like
closing the barn door after all the animals have left.
Contrarians act in the opposite fashion.
Contrarians tend to call themselves “value investors,”
which means that they will not take a position in an
investment unless they believe it represents good value.
Value investors know that they are buying an invest14
How to Profit.indd 14
2014-04-10 5:13 PM
HOW TO PROFIT WHEN INVESTORS ARE SCARED
ment at a low point and at good valuation by analyzing
the economic data about that investment. The standard
most often used to measure whether an investment represents good value is the PE ratio — P stands for the
price of the shares and E represents the earnings of the
company. The PE ratio is used most often when comparing stock prices of various companies. By comparing
the price the shares trade at versus the earnings of the
company, you can see if the shares represent good value.
You can also compare PE ratios of stocks in the same
sector, between peers and competitors.
Historically, PEs of 10 or less have usually attracted
the interest of investors. However, if many stocks in the
same sector are trading at a price-to-earnings ratio of
10 or less, this may mean that the entire sector is cheap,
or possibly struggling. To truly determine if a stock is
cheap by using the PE ratio as a measuring stick, you
must either compare the PEs of different companies or
compare the companies with a benchmark.
Some analysts take the PE ratio one step further and
add a growth component to it. They look at the price of
the stock versus its earnings versus its growth — this is
referred to as the PEG ratio. A stock with a PEG ratio of
less than 1 is usually considered to be good value.
All investors want to know that the investment they
are buying is cheap and a good value to buy, so they use
tools such as the PE or PEG ratio to help them make
their decisions. However, there are times when an investment may look good but you find yourself buying
15
How to Profit.indd 15
2014-04-10 5:13 PM
Allan Small
into a value trap! The share prices of some of the largest
and most famous companies have at times seemed really cheap, only to become even cheaper over time. I have
seen many companies appear to represent good value,
only to find out shortly afterwards that they are trading at those depressed levels for a negative reason. Thus,
buying an investment at a low is not quite as simple as
comparing PEs between two companies and purchasing
the lower one. You should dig deeper into the fundamentals to find out whether the company truly should
be trading at those lowered levels. Perhaps the fundamentals won’t look so good, or the company is in a sector that has fallen out of favour for valid reasons. These
“value investments” would be anything but good value.
Contrarians and value investors, whose strategy is to
buy at low prices and sell when something becomes fully valued or reaches a high price, do not believe in the
passive method of investing — the “buy and hold” style
that we’ve heard so much about for the past thirty years.
Good active management tends to outperform passive
management in volatile or difficult markets. When
markets are performing well, everything tends to move
higher — as the saying goes, a rising tide lifts all boats.
Thus, in a good market, active investing can sometimes
underperform the indices. However, investing passively in an index does not afford the opportunity to buy
when times are tough and prices are low, or to sell when
prices move higher. You own the index, in which the
investments are already chosen for you, and very rarely
16
How to Profit.indd 16
2014-04-10 5:13 PM
HOW TO PROFIT WHEN INVESTORS ARE SCARED
does the index change its makeup. Thus the strategy of
buying at low points and selling higher is made difficult
by this passive approach to investing.
The buy-and-hold strategy, which was made famous
by the likes of Warren Buffett, has come under attack
over the past decade. Today more than ever before, as
volatility becomes more prevalent, investors have noticed that simply holding an investment and hoping it
will move higher over time is not really a valid strategy.
How many times during difficult markets have people
been told to hold on to their investments and eventually they will make back the loss or go higher? Unfortunately, it doesn’t always work that way. It may take
years before an investment moves significantly higher,
and in the meantime you’re just sitting around waiting.
Sometimes it is better to sell an investment at a loss and
reinvest the proceeds in something else if the new one
will move higher more quickly than the previous one.
Most investors don’t like selling at a loss, but it can make
more sense than waiting a long time for the investment
to make its way back to break-even.
Over the ten years between 2003 and 2013, the
Dow Jones (the major US index) passed through the
10,000-point mark — both upwards and downwards
— more than six times. Most of those times occurred
between 2008 and 2010. Someone who remained invested in the Dow index throughout that time would
have made virtually no money, as any gains were quickly followed by losses (and losses quickly turned into
17
How to Profit.indd 17
2014-04-10 5:13 PM
Allan Small
gains). However, for investors who took a more active
approach, it would have been possible to make money
by buying good-quality investments and then setting
price targets to determine when to sell. If investors don’t
at some point sell their winners and realize their gains,
they run the risk of those investments falling back
once again and losing out on their gains.
Buy How To Profit When Investors Are Scared Today
either soft copy book or ebook at the following booksellers click on the logos to go to their stores
18
How to Profit.indd 18
2014-04-10 5:13 PM
ALLAN SMALL is Senior Investment Advisor of the Allan
Small Financial Group with HollisWealth. He holds the professional designations FMA (Financial Management Advisor) and FCSI (Fellow of the Canadian Securities Institute)
and has completed accreditation courses in Professional Financial Planning (PFP) and Wealth Management Techniques
(WMT). Previously a financial advisor with Royal Trust and
an investment advisor with Edward Jones, he has been an
investment advisor with HollisWealth (formerly DundeeWealth) since 2002.Allan has extensive media experience as
a guest speaker on financial matters, with appearances on the
Business News Network (BNN), CP24, CTV News Channel,
680 News Radio, City News, and Sun TV. He was formerly a
weekly columnist for the Metro newspaper online edition.
Allan Small can be reached by email at: [email protected]
Or visit his website at: www.allansmall.com
94
How to Profit.indd 94
2014-04-10 5:13 PM