Investing with the Pros: Part Two of Three

By Eugene Yiga

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“An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.” – Laurence J. Peter

4. Timing and Price

When to purchase is crucial because good companies aren’t always good shares. Don’t buy during an IPO or bull market peak. From a technical analyst perspective, a good time is if shares are cheap and momentum goes from negative to positive. This is about taking a contrarian approach by being bullish when everyone’s a bear and bearish when everyone’s a bull. Ultimately, it’s like Robert Kiyosaki wrote in Rich Dad’s Guide to Investing: “True investors make money in up and down markets.”

What you pay is crucial too because the profit is made when you buy, not when you sell.
Never pay more for a share than its intrinsic value no matter how exciting the investment seems to be. In fact, choose shares that are trading at discount (relative to fair value or other shares) or that are neglected and cheap to rule out any further significant declines. Avoid buying shares at around 100% if long experience indicates that they can probably be bought for 70% or less in the next weak market.

5. Diversification

You only need around 20 different shares of opposing risks to get the full benefit of diversification. Build a well-diversified portfolio (concentrating mostly on large-cap shares) that includes both growth and value shares, as well as exposure to the broad local and international markets. In One Up On Wall Street, Peter Lynch identifies six main types:

• Asset Plays: These undervalued shares are balance sheet focused and have cash reserves or valuable real estate. Compare the share price to net asset value because it may be selling at discount.

• Turnarounds: These cheap shares have gone through a period of negative or low earnings, making the current valuation low. Ups and downs are least related to the general market and so they make up for lost ground quickly.

• Sluggards: These slow growers are large and aging companies such as utilities. They don’t make big or risky movies and are expected to grow slightly faster than GNP. They are good for regular and generous dividends, simply because they company can’t do any better with the money.

• Stalwarts: These big and diversified companies have stable earnings and rarely make big moves. Consider using them as protection during recessions and take profits early before repeating the process.

• Fast Growers: These are small, new, and aggressive companies that make big and risky moves. They are often ignored and may be hidden gems. However, they may run out of steam and rapidly devalue when they falter.

• Cyclical: These companies in industries such as resources, construction, and insurance, move in a regular and predictable manner (with the business cycle). Timing the cycle (admittedly quite difficult) is everything to ensure you get in on the upswing.

Recommended reading

Common Stocks and Uncommon Profits by Philip Fisher
You Can Be a Stock Market Genius by Joel Greenblatt
Rich Dad’s Increase Your Financial IQ by Robert Kiyosaki