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Profitable Investing Tips has been a member since April 20th 2008, and has created 293 posts from scratch.

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Worst Investing Mistakes

As more and more folks were forced to sit at home during the height of the pandemic, more and more took up online trading and investing. Unfortunately, along with more investors, we have seen more and more investing mistakes from the likes of naïve, new Robinhood investors. The sorts of mistakes made by many of these new investors are not new to the investment world. As such, we present our list of worst investing mistakes to help our readers from falling prey to habits that ruin otherwise successful investing.

Delaying the Start of Investing

The US stock market has been a money making machine for more than a century. Although some investors hit home runs with lucky stock choices the majority of investors make money a bit at a time over many years. Like putting money in the bank to gain interest, putting money in the stock market provides returns over the years. The difference is that stocks rise and fall on their way up and provide a better rate of return over the years than money in the bank. The exponential growth provided by stocks provides a higher rate of return and more rewards the longer you stay invested. Thus, delaying the start of investing is generally a mistake.

Investing Money You Will Need Right Away

Investing is meant to build a rainy day fund, money for retirement, or capital for investing in your own business. It is not meant to be invested and immediately taken out. In fact, it is absolutely possible to invest in an excellent stock and see it fall briefly because of conditions in the larger market. When you start investing, make sure to keep enough cash in the bank to cover expenses for three to six months so that you are not forced to sell a temporarily depressed stock at a loss due to a short term emergency.

Investing without Clear Goals

Why are you investing? What do you expect from your investments and how soon? How much risk are you willing to take while investing? Investors need to be able to answer these questions before they start putting money into the stock market either for individual stocks or into an ETF. Your investment choices will generally flow quite normally from your goals and without goals you will commonly not be successful to the same degree.

Following Bad Social Media Investment Tips

Tips can lead you to great stock investments or totally lead you astray when investing. As we have repeatedly written over the years, investors need to check out any tips before committing any money. Successful investors never put money into a stock until they understand how the company makes money and how that income stream will continue over the years. If your investments are going to be short term, you need to learn how to track market sentiment with market sentiment data. And, for longer term investing you need to understand and use tools like the CAPE ratio.
Worst Investing Mistakes

Chasing Market Trends

Chasing market trends can be worse that following tips. Stocks and the general market go up and down. New investors commonly jump in toward the end of a bull market, paying too much for overpriced stocks. The market falls and they wait until it is ready to bottom out before selling, thus losing most of their investment capital. Then, they stay away from the market until they are enticed in again by a bull market. Choose good stocks based on sound analysis and use dollar cost averaging to avoid chasing market trends.

Watching the Markets Constantly

Successful investors keep track of their investments. But, they do not constantly obsess over the market or individual stocks. Excellent stocks like Apple, Microsoft, and have gone up very nicely over the last decade and more. But, they have all fallen in price both with the larger economy and from simply day to day, week to week, and month to month fluctuations. If you worried about every time Microsoft lost a percent or so and sold your stock you would have lost out on an eight-fold increase in value not to mention routine dividend payments over the last ten years.

Not Investing with a Long Enough Investment Horizon

Someone once asked Warren Buffett what was his favorite holding period for a stock and he answered, “forever.” Successful investors like Buffet only invest when they understand how a company makes money and ideally how the company will continue to execute a successful business plan for the next decades or even century. Well-chosen stocks will perform well over the years but may have months or even a year or two when they are down. So long as you understand their fundamentals, you can generally trust them as long term investments and stick with them. Unsuccessful investors all too often dump good stocks because their time horizon is faulty.

Covid Persistence and Your Investments

As vaccines are administered to more and more people, the rates of Covid-19 have fallen across the USA, Canada, the UK, and continental Europe. China is slow with its vaccinations but strict control measures have helped considerably in the nation where Covid-19 started. However, new Covid-19 variants are causing spikes in cases in nations like India, South Africa, and much of South Asia and Africa as well as South America. Economic growth is expected to go as high as 6.8% in the USA and even higher in China. However, this optimism is largely based on the expectation of Covid-19 being controlled and going away. Covid-19 recovery on a global scale and even within largely-immunized nations may not come as fast as we had hoped. Thus our concern has to do with Covid persistence and your investments.

Herd Immunity Threshold and Your Investments

Vaccines do two things. They protect the person who is vaccinated from getting a disease or from getting a severe case of it. And, when enough people are vaccinated or have already had the disease, this halts the spread of contagious diseases. Thus, childhood vaccinations for measles, mumps, and chickenpox have been given for years to provide personal protection and have driven down the rates of these “childhood diseases” to the vanishing point, except in areas where vaccine hesitancy has caused parents to not get their kids vaccinated.

With Covid-19, you get protection from the virus which is important for older people and others who are at greater risk and who are more likely to get very sick, be hospitalized, or die. For the sake of the public, the economy, and your investments the hope is to get to herd immunity. The “enough people” percentage for Covid-19 has been pegged at 70% of the population based on the initial spread of the virus. However, the new delta variant is more contagious. As a reference point, the Mayo Clinic notes that the herd immunity threshold for measles (a very contagious disease) is 94%!

You get variants arising from a disease like Covid-19 when lots of people remain susceptible to the disease. As such, vaccine hesitancy in the USA, Canada, the UK, and continental Europe may be setting up for more and more aggressive strains of Covid where the herd immunity threshold may rise to 80%, 90%, or higher!

Thus, one needs to be concerned about how vaccine hesitancy affects your investments.

Covid Persistence and Your Investments - Herd Immunity

Economic Growth as Covid is Controlled

The numbers look good for a post-Covid recovery providing that there is not a huge resurgence. The World Bank predicts a strong but uneven recovery based on steady increases in vaccinations and making vaccines available across the nations of the world. The USA is expected to grow at 6.8% this year and China at 8.5%. However, global growth is likely to be 3.2% lower than predicted prior to the pandemic with many nations having shrinking economies. The longer term concern is that many nations have run out of cash and are running out of credit which has led to widespread demonstrations and even violence in countries like Colombia and South Africa. Skills sets have been diminished as workers have been sidelined and students have been unable to go to school. Never-the-less, things will improve everywhere, including with your investments, providing that vaccinations proceed and herd immunity is reached.

Economic Slowdown as Covid Persists

The fly in the ointment regarding any rosy predictions of strong economic recovery is the rise of new Covid-19 strains like the delta variant. Infectious disease experts have estimated that the herd immunity for the delta strain is likely closer to 85% than 70%. Thus, as more and more people refuse vaccination in the USA, UK, and continental Europe, we risk persistence of Covid-19 or even the worst case scenario of a repeat of last year if new strains are resistant to natural immunity from the initial strain and from vaccines. If that happens, all bets on a strong recover will be off.

Where to Invest as Covid-19 Persists

Pretty much everyone’s economic and investment projections have assumed that eventually Covid-19 will either burn itself out by having infected virtually everyone or that enough vaccine will have been put in enough arms to reach herd immunity. If this goal is not achieved or Covid-19 gets worse again, where do you invest? All of the investments in high tech that allowed businesses to continue during the lockdowns will probably do well and continue to grow. Hospitality, travel, and other sectors that were driven down during the height of the pandemic will likely be hurt. Biden’s infrastructure-related investments will likely prosper. And, companies that make Covid-19 vaccines and will make both boosters and “re-tooled” vaccines for new variants will turn into long-term investment opportunities as the world copes with Covid-19 for years to come.

Predictors of Stock Performance

When you invest in the American stock market, you are looking to make a profit, build up savings for retirement, avoid loss, and grow your wealth. Whether you are investing in individual stocks or an ETF that tracks the market, two values are important. What can you buy a stock for today and what will it be worth at a future date. Since the current stock or ETF price is readily available, what you need are predictors of stock performance going into the medium to distant future.

How Do You Predict if a Stock Will Go Up?

In regard to stock price performance, the first thing we have is past price action. Stocks and the market follow trends. So, trend following can work, at least for a while, in predicting that a stock will keep going up or keep going down. Unfortunately, stocks correct and crash when they have gone too high either due to internal factors in the company or problems in the overall economy. And, when stocks start to fall they usually don’t fall forever. Many successful long term investors pick up bargains by purchasing stocks at the bottom of a trough. How can they do this?

Intrinsic Stock Value Is One of Best Predictors of Stock Performance

While market sentiment data can be an excellent guide to short term price changes, accurate prediction of longer term stock prices comes from accurate predictions of future earnings. Intrinsic stock value is a predictor of the forward looking earnings of a company. It was first suggested in the days after the 1929 stock market crash and beginning days of the Great Depression. Benjamin Graham suggested this approach as an alternative to “playing the market.” Most famously, his protégé, Warren Buffet has used this approach for decades on the way to becoming on the richest people in the world.

Formula for Calculating Intrinsic Stock Value

Here is the formula that Graham provided in 1962.

  • V = EPS x (8.5 + 2g)
  • V is the intrinsic stock value
  • EPS is the trailing 12 months earnings per share
  • 8.5 was the P/E ratio at the time for a “zero-growth” stock
  • g is the company’s long term rate of growth

The solution to the formula, (V), is compared to the current market price of a stock. When V is less than one, the stock is overpriced and when (V) is more than one, it is underpriced. Nobody suggests that an investor blindly apply this formula but rather learn what a company does to earn money and how that plan will continue to work into the future. Then, using intrinsic value as a guide, long term investors can get out of overpriced stocks in the last days of a bull market and pick up bargains as a bear market bottoms out. The key to this approach is to be able to pick companies able to make money for decades instead of just for months or years.

Predictors of Stock Performance - Intrinsic Value
Intrinsic Value versus Current Stock Price over Time

P/E Ratio versus CAPE Ratio as Predictors of Stock Performance

A similar approach for assessing the value of a stock is to look at the price to earnings ratio (P/E ratio) when compared to other stocks in its market niche. The CAPE ratio is a variation of this approach what seeks to average out the P/E ratio over a decade. CAPE is an acronym for cyclically-adjusted P/E ratio and it acts like a long term moving average indicator by averaging out fluctuations in the P/E ratio over a decade.

Value Investing for Long Term Investment Success

The US stock market is a long-term money-making machine. However, to reliably profit one needs to stay invested for five to ten years after picking sound investments with tools like the P/E ratio, CAPE ratio, or intrinsic value calculation. The conclusion of successful long term investors like Buffett is that it is too difficult for the average investor to time the market with individual stocks and that buying shares of an ETF that tracks the S&P 500 is a better idea. Using a dollar cost averaging approach the investor avoids buying too much at high prices and buys for shares at low prices thus mimicking the intrinsic value approach.

Chairman Mao and Investing in China

We recently wrote about the political dangers of investment in China from the perspective of especially large tech companies that are being forced to follow the Chinese Communist Party line or be subjected to humiliation and worse. But not only could investments in China run afoul of the powers on high but also from discontented youth across the length and breadth of China. The New York Times writes about the words of Mao Zedong who asked “Who Are Our Enemies?” Chairman Mao is seeing a resurgence of popularity among the disaffected youth of China.

Long Hours and Low Pay for Chinese Workers

The picture that many in the West see regarding China is of shining new construction in huge cities, increasingly powerful businesses, and more and more aggressive foreign policy under the current leader, Mr. Xi. But, a closer look reveals tired and angry youth who hate their long hours at work (9am to 9pm), low pay and lack of affordable housing. These young people have taken to reading and quoting the first Communist leader of China, Chairman Mao. We suggest that investors pay attention to what is going on as Chairman Mao and investing in China are going to be related.

Angry Chinese Youth Question What They Are Getting from the Government

As noted in The Times, Mao’s call for violence and struggle is ringing true for disheartened young Chinese workers. The focus of this resurgence is not the chaos visited in China by its first Communist leader when millions died due to poor decision making and attempts to maintain power. Rather, it is that Mao’s works help justify the anger that these people feel about their situations as “struggling nobodies.” Workers view the prosperous business class in China much as 19th and early 20th century workers viewed rich capitalists in Europe and North America with similar calls for violence if things do not change.

Chairman Mao and Investing in China
The Little Red Book of Mao’s Sayings

The Consent of the Governed

Political philosophy says that governments are only legitimate and justified in using the power of the state if they govern by the consent of the people. This happens in democracies by free elections. When it happens in authoritarian countries like Communist China it is because the government is giving people much of what they want even though the people have no say in who runs the country or how. In China the Communist Party has kept people happy by creating a system in which there has been lots of employment and the ability to create wealth in their system of “managed capitalism.” The Party claimed credit for all success and tells the people they should be grateful. That sounds increasingly hollow to those working the traditional 9 am to 9 pm six day a week job in China with no prospect of moving out of such a trap.

As economic growth slows the ability of the Party to bribe its citizens with “things” is less than it used to be. With no labor protections, housing the young people cannot afford, and draconian work schedules the current Chairman, Mr. Xi, is turning to nationalism and tighter controls with finger pointing at tech companies which is the first political danger of investment in China that we wrote about.

But, as Mao found out, riling up the people and trying to use them as a weapon against your enemies can backfire or at least have unexpected consequences. The one that the Party fears the most is a general uprising against a non-elected government.

Chairman Mao and Investing in China - Mao's Chaos Could Visit China Again
Mao Used His Sayings to Exert Control Through Chaos

Chairman Mao and Investment in China

It would not take an all-out civil war to create havoc in China’s economy and cause damage of investments in China. The rise of a true “people’s movement” is what the Party fears and while they were able to take over Hong Kong and eradicate remaining liberties by portraying youth there as traitors to the mainland, the same approach will not work within mainland China. Back in the late 19th century in Europe and North America workers became so angry that there were bombings of government offices and assassinations. Move forward to China of today and you have just one more reason to follow the ABC (anywhere but China) approach to your investing.

Chairman Mao and Investing in China – Slideshare Version

Chairman Mao and Investing in China – DOC

Chairman Mao and Investing in China – PDF

Political Dangers of Investment in China

When you read this title you may think that we are going to revisit how the USA plans to go about decoupling of investment in China. While that is still a reality, there are more political dangers of investment in China and they come from the Chinese government run by Mr. Xi and the Chinese Communist Party. Chinese leadership has set the country on a course that they believe will result in Chinese dominance of the world’s economy, military hegemony, and absolute control of what goes on inside of China. Ever since the ascent of Mr. Xi as the leader of China’s government, many business leaders in China have avoided mixing business and politics but to little avail. The fallout for you is that political actions in China will affect your investments there.

China Crackdown on Businesses

For decades businesses and their owners in China have become rich. They have had a protected economy to grow in, access to offshore markets everywhere, low-interest loans largely sponsored by the government, and tons of foreign investment. Chinese companies have been able to negotiate deals in which they receive vital technical information and trade secrets in return to access to Chinese markets. And, the government generally let these folks grow without a lot of interference. That is no longer the case.

Didi New York IPO

The New York Times business section recently reported on this issue noting that staying out of politics is no longer an option for the business elite in China.

The ride-hailing giant Didi came under fire after its blockbuster initial public offering in New York. Chinese regulators ordered the company to stop signing up new users. They said Didi should also be pulled from Chinese app stores because of national security concerns and to protect the data of Chinese users.

At the same time they savaged the president of the company, Jean Liu, as well as her father, Liu Chuanzhi who founded Lenovo and is a revered figure in the Chinese business community as the first Chinese company to take over a major foreign business, IBM’s PC manufacturing arm. When Xi came to power in 2013 the father famously told other business owners in China that they should stick to business and stay out of politics. Despite his best efforts, he and his daughter and their companies have been dragged into the efforts of the Chinese Communist Party under Xi to fight the influence of the West, starting with the USA.

Political Dangers of Investment in China
Political Dangers of Investment in China = Xi

Chinese Tech Crackdown

The travails of the Liu family are only another chapter in the Chinese tech crackdown as China tries to build walls around its internal data, markets, and businesses. An attempted IPO by Ant Group run by tech billionaire and other Chinese business hero, Jack Ma, was shut down earlier this year. Basically, China does not want any of its businesses listed in the USA. They don’t want any sharing of data unless all of the storage and analysis happens inside of China.

On Tuesday, China punctuated the change by announcing that it would enhance rules on data security and cross-border data flows for Chinese companies seeking to sell shares abroad. The changes were designed to ensure that companies listed abroad take their responsibilities in information security seriously.

Add this to US efforts to curb US investment in and support for Chinese enterprises and you start getting the picture of political dangers of investments in China.

Investing Anywhere But China

ABC, anywhere but China, has been in the works for investors for some time now. But, China has built up its infrastructure with the help of Western technology and funding to the point where many of the other Asian options like Vietnam or Indonesia do not work for major projects. The Biden administration apparently recognizes this and is addressing related issues as part of its proposed investments in infrastructure. For American retail investors, this may be the best place to look to avoid the political dangers of investments in China.

Political Dangers of Investment in China – Slideshare Version

Political Dangers of Investment in China – DOC

Political Dangers of Investment in China – PDF

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