Intrinsic value: what you think a stock is really worth as opposed to the value at which it is being traded in the marketplace.
Although there are many different methods of finding the intrinsic value, the premise behind all the strategies is the same: a company is worth the sum of its discounted cash flows. In plain English, this means that a company is worth all of its future profits added together. And these future profits must be discounted to account for the time value of money, that is, the force by which the $1 you receive in a year's time is worth less than $1 you receive today.
The idea behind intrinsic value equaling future profits makes sense if you think about how a business provides value for its owner(s). If you have a small business, its worth is the money you can take from the company year after year (not the growth of the stock). And you can take something out of the company only if you have something left over after you pay for supplies and salaries, reinvest in new equipment, and so on. A business is all about profits, plain old revenue minus expenses - the basis of intrinsic value.
Greater Fool Theory
One of the assumptions of the discounted cash flow theory is that people are rational, that nobody would buy a business for more than its future discounted cash flows. Since a stock represents ownership in a company, this assumption applies to the stock market. But why, then, do stocks exhibit such volatile movements? It doesn't make sense for a stock's price to fluctuate so much when the intrinsic value isn't changing by the minute.
The fact is that many people do not view stocks as a representation of discounted cash flows, but as trading vehicles. Who cares what the cash flows are if you can sell the stock to somebody else for more than what you paid for it? Cynics of this approach have labeled it the greater fool theory, since the profit on a trade is not determined by a company's value, but about speculating whether you can sell to some other investor (the fool). On the other hand, a trader would say that investors relying solely on fundamentals are leaving themselves at the mercy of the market instead of observing its trends and tendencies.
This debate demonstrates the general difference between a technical and fundamental investor. A follower of technical analysis is guided not by value, but by the trends in the market often represented in charts. So, which is better: fundamental or technical? The answer is neither. As we mentioned in the introduction, every strategy has its own merits. In general, fundamental is thought of as a long-term strategy, while technical is used more for short-term strategies. (We'll talk more about technical analysis and how it works in a later section.)
Income from stocks + Income from real estate + Other incomes - Living expenses = Net income
Net income => stable stock reserve (60%) + small cap stock reserve (40%)
We should acquire real estate when it is suitable to sell stock.
Unused income should be divided into two pots. Pot A is for stock. Pot B is for Real Estate or bonds. Pot B is for something that can provide income on a regular basis such as rental apartments, commercial building for small businesses (dental office, insurance agents, restaurant, etc), land or houses that has possibility to appreciate in value. Pot B should be something tangible.
Half of pot A will be invested in stocks for income, the other half will be invested for capital appriciation.
Income from both pot A and pot B are all go together into one checking account, and we will decide on which pot to invest in when we see the opportunity.
How much to put into each pot is totally irrelevant, depending on the condition of the economy, and the opportunities available. The general idea is the more tangible materials that you have, the safer you will be.
When stock takes a dive, it is time to borrow money from the bank to buy additional stocks (probably more of the ones that you already own). If the stocks rebound, great, you can sell the stocks and pay the bank, or you can hold on to the stock and take income from pot B to pay the bank. Never sell properties from pot B just to buy stocks.
Have software that do:
1. Whenever stock price is more than double what you paid for, alert you.
2. Whenever stock price drop/increase significantly within a period of one week (say by 3%), alert you.
Entertainment:
Disney
Household products:
Johnson & Johnson
Retails:
Walmart
Cosco
Albertson
Subways
Safeway
Target
Kmart
Frys Electronics / Outpost
Best Buys
Amazon.com
Clothing/Fashion
DKNY
Fast food:
McDonald
KFC
Taco bell
Soft drink:
Cocacola
Pepsi
Shoe maker:
Nike
Rebook
Athletic wear:
Nike
Polo
Adidas
Online technologies:
Google
Yahoo
Webex
Salesforce
Cisco Network
Microsoft
Sun Microsystem
Intel
IBM
HP
A9
Shipping:
Fedex
UPS
Car manufacturer:
Chrysler
Toyota
Honda
Hyndai
Ford
Subaru
Lexus
Infinity
S&P500 Index Russel 2000 Index
What is Mutual Fund?
What is stock?
What are the advantages and disadvantages of mutual fund? Why would someone want to (or not) invest in mutual fund?
Finding out who you are when it comes to investing. What is your investment strategy?
Are you investing for dividends?
Are you investing for gain?
What are the tax consequence?
How to choose mutual fund?
Fund manager
PE ratio
and other key statistics
Recent track record is everything.
Once you sell, you are not obligated to buy anything right away. It is always a good idea to have some cash available, so that when you spot something good you have money to buy it.
