Monday, 9 March 2009

The magic investment formula is called realism


"I am afraid to buy shares of any company at this moment" is a common reaction of investors in our days. Crashing stock markets are testing the nerves of local and international savers, who often prefer to hold cash rather than take any risks.

This is, in my view, a mistake. I believe that now is a good time to make financial commitments.
In my lifetime, I have never seen a greater opportunity to purchase shares of solid companies at such low prices.

Stories of financial collapse reported by the media seem to have succeeded in terrifying most people out of the stock market. You can hardly turn on the radio or open a newspaper without learning about one more company on the brink of bankruptcy.

My conviction is that, in investing, like in everything else, realism triumphs over magic formulas. Are gloomy reporters looking objectively at the facts? I don't think so. Are share-holders keeping a cool head when they liquidate their stocks at fire-sale prices? I very much doubt it.

The cause of the present financial panic lies in the generalized belief in the existence of a magic formula for successful investing. Since it has become obvious that the magic formula no longer works,
desperation ensues as a result.

The myth, in essence, is that s
ome people possess an uncanny ability to predict exactly when shares are going up or down. I hope that you will agree with me that the latest bankruptcies of investment banks with major stock trading operations have shown that such people do not exist.

A broken clock gives you the right time twice per day, but overall, it won't provide you accurate information. If you put your trust in a broken clock, you will mostly arrive too late or too soon for appointments.


Magic formulas are not a good way of making plans. Reason and realism constitute a superior approach to making investment decisions. For my personal finances, I have adopted the following four principles:

First, I remind myself everyday to have patience. "Forget about short-term volatility and look at the big picture," is my motto. Where is the world economy headed for in the next five years? I believe that many countries will emerge from the current turmoil without a scratch.

I try to move my focus beyond the next quarter and see what the whole year will look like. In this sense, I am considering adding
to my portfolio shares of DU PONT (NYSE: DD), a world-class chemical company. With a price-earnings ratio of about 8 and a yield of 8%, DU PONT looks to me like a good opportunity.

Second, I look for companies with a strong presence in Asia. Despite all gloom and doom, China and other Asian countries might continue to grow at good rates. Multi-national companies are expanding their activities in Asia. From those, I like GENERAL ELECTRIC (NYSE:GE) in particular. With a price-earnings ratio of about 5, I am willing to take the risk.

Third, I prefer enterprises that operate in stable markets. I like telephone companies, since people rarely stop using their cell phones in bad times. At this moment, I am considering purchasing shares of VERIZON (NYSE:VZ). If the current dividend level is maintained, the yield should come to about 6% this year. Not bad at all.

Fourth, I favour investing in companies with world-wide distribution for their products. Pharmaceutical multi-nationals are a good example. These companies often purchase rights to new drugs from small laboratories and universities in order to distribute those medicines internationally. I like the current price-earnings ratio of about 11 for BRISTOL MYERS (NYSE:BMY), one of the world-class companies in this field.

Do I feel confident that I am making the right investment decisions? Yes, I am of the opinion that these are good companies and that today, March 8th 2009, the price of their shares looks attractive.

Am I sure that it is not a mistake to invest in those companies? No way. Problems that I know nothing about might come up next week and make those shares go down. On the other hand, I consider realistic to expect those companies to do well.

Instead of worrying about the future, I have decided to make my investment decisions on the basis of reasonable expectations. A claim to infallibility is something I leave for those who believe in magic formulas.

[Text: http://johnvespasian.blogspot.com]

[Image by carulmare under Creative Commons Attribution License. See the license terms under http://creativecommons.org/licenses/by/3.0/us]

The magic investment formula is called realism


"I am afraid to buy shares of any company at this moment" is a common reaction of investors in our days. Crashing stock markets are testing the nerves of local and international savers, who often prefer to hold cash rather than take any risks.

This is, in my view, a mistake. I believe that now is a good time to make financial commitments.
In my lifetime, I have never seen a greater opportunity to purchase shares of solid companies at such low prices.

Stories of financial collapse reported by the media seem to have succeeded in terrifying most people out of the stock market. You can hardly turn on the radio or open a newspaper without learning about one more company on the brink of bankruptcy.

My conviction is that, in investing, like in everything else, realism triumphs over magic formulas. Are gloomy reporters looking objectively at the facts? I don't think so. Are share-holders keeping a cool head when they liquidate their stocks at fire-sale prices? I very much doubt it.

The cause of the present financial panic lies in the generalized belief in the existence of a magic formula for successful investing. Since it has become obvious that the magic formula no longer works,
desperation ensues as a result.

The myth, in essence, is that s
ome people possess an uncanny ability to predict exactly when shares are going up or down. I hope that you will agree with me that the latest bankruptcies of investment banks with major stock trading operations have shown that such people do not exist.

A broken clock gives you the right time twice per day, but overall, it won't provide you accurate information. If you put your trust in a broken clock, you will mostly arrive too late or too soon for appointments.


Magic formulas are not a good way of making plans. Reason and realism constitute a superior approach to making investment decisions. For my personal finances, I have adopted the following four principles:

First, I remind myself everyday to have patience. "Forget about short-term volatility and look at the big picture," is my motto. Where is the world economy headed for in the next five years? I believe that many countries will emerge from the current turmoil without a scratch.

I try to move my focus beyond the next quarter and see what the whole year will look like. In this sense, I am considering adding
to my portfolio shares of DU PONT (NYSE: DD), a world-class chemical company. With a price-earnings ratio of about 8 and a yield of 8%, DU PONT looks to me like a good opportunity.

Second, I look for companies with a strong presence in Asia. Despite all gloom and doom, China and other Asian countries might continue to grow at good rates. Multi-national companies are expanding their activities in Asia. From those, I like GENERAL ELECTRIC (NYSE:GE) in particular. With a price-earnings ratio of about 5, I am willing to take the risk.

Third, I prefer enterprises that operate in stable markets. I like telephone companies, since people rarely stop using their cell phones in bad times. At this moment, I am considering purchasing shares of VERIZON (NYSE:VZ). If the current dividend level is maintained, the yield should come to about 6% this year. Not bad at all.

Fourth, I favour investing in companies with world-wide distribution for their products. Pharmaceutical multi-nationals are a good example. These companies often purchase rights to new drugs from small laboratories and universities in order to distribute those medicines internationally. I like the current price-earnings ratio of about 11 for BRISTOL MYERS (NYSE:BMY), one of the world-class companies in this field.

Do I feel confident that I am making the right investment decisions? Yes, I am of the opinion that these are good companies and that today, March 8th 2009, the price of their shares looks attractive.

Am I sure that it is not a mistake to invest in those companies? No way. Problems that I know nothing about might come up next week and make those shares go down. On the other hand, I consider realistic to expect those companies to do well.

Instead of worrying about the future, I have decided to make my investment decisions on the basis of reasonable expectations. A claim to infallibility is something I leave for those who believe in magic formulas.

[Text: http://johnvespasian.blogspot.com]

[Image by carulmare under Creative Commons Attribution License. See the license terms under http://creativecommons.org/licenses/by/3.0/us]