Investing 301
KNOW – On investment knowledge
When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. - Warren Buffett (228) Knowledge of investment is a life-time learning process (229) Negligence is bad for investment (230) Open mindset creates opportunity for improving returns (more than you know) (231) Why you should ask and understand downside for every investment you make |
MARKET – On securities market
Anything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen, that you’re still around to play the next day. - Warren Buffett (232) Market order is often better than limit order when buying or selling stocks (233) Assume the future of the market will always come with surprises (234) Risk of the market is what you do not know instead of what you know (235) Knowledge of the market is not about its fundamentals; rather what other investors are doing (236) Emotional actions of investors contribute to the market price more than the fundamentals (237) Today's market news is good for media attraction; it should not be matter to your long-term investment plan |
TREND – On market trend
Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. - Sir John Templeton (238) Trend of any market price movement will continue until a new directional force or valuation changes (239) Reversal of trend could be predicted early by tracking smart money movements (240) Events with material impact drive the change of trend (241) Noise removal is the key to understand trend (242) Detection of a new trend is possible by thoroughly studying the consequence of material events |
CRISIS – On market crisis
When written in Chinese, the word ''crisis'' is composed of two characters (危机) - one represents danger, and the other represents opportunity. - John F. Kennedy (243) Crisis happens when an “unexpected” and “bad” event occurs (244) Risk consequences from a crisis are initially not clear (245) Investors’ panic selling due to crisis could last beyond a few days until “bad” consequences were fully exposed (246) Selling based on emotion is never a good strategy (247) Investment opportunities are often accompanied by a market crisis (248) Strategic asset allocation can reduce “unexpected” crisis impact |
TECHNICAL – On investing using technical analysis
A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting. - Warren Buffett (249) Technical analysis is based on probability (250) Emotional bias is the number one enemy of trading; experiences may help (251) Cost of your investment is not a factor of buy or sell (252) High risk must create higher return, otherwise why do you do it (253) New high or new low are good signal of the trend continuation (254) Indicators are always delayed and market is the only leading indicator (255) Contrarian trading may work for the market but not for individual stocks (256) Asset allocation is still important in trading (257) Limit orders reduce the winning probability |
PREDICT – On investment prediction
Stop trying to predict the direction of the stock market, the economy, interest rates, or elections. - Warren Buffett (258) Prediction is only done by those who do not know how to predict, those who do not know why cannot predict, or those who are forced to predict (259) Research can only help understand the past but not predict the future. (260) Emotional reaction on newsletter prediction is very risky (261) Direction of the market is driven by unpredictable events and investor psychology (262) Investment strategy should be designed based on needs, not based on prediction (263) Correction and crash of stock market will come sooner or later as always, but no body knows when (264) Time spent on prediction is mostly wasted because future events are unpredictable |
PERFORMANCE – On investment performance
The dumbest reason in the world to buy a stock is because it’s going up. - Warren Buffett (265) Performance is Pair wise comparison (apple and orange are not the same) (266) Performance is E/P ratio, not P/E ratio (267) Performance is Rating the future, not the past (268) Performance is Future evaluation, not the cost you pay (269) Performance is Opportunity risk reduction (270) Performance is Ranking the priority, not react to less important matters (271) Performance is Making money at the defined target term, not short-term (272) Performance is Acting on analysis (“rumors”), not reacting on news (273) Performance is Never stop investing (cash is not king except during short-term crisis that is simply not predictable) (274) Performance is Calculating risks, not reacting to risks (275) Performance is Evaluating downside with any entry point, not standard deviation |
RATING – On investment evaluation
The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price. - Warren Buffett (276) Rating an investment is always after the fact (277) Absolute value of ratings doesn’t matter, what matters is the trend (278) Top-rated investment could have higher risks (279) Indicators used for ratings are mostly lagging except the market itself (280) News on rating changes could be good contrarian indicators (281) General obligation bonds vs. other bonds ratings must be understood |
TIGER – On investment management
In the business world, the rear-view mirror is always clearer than the windshield. - Warren Buffett (282) Time (do you have time to take care of your financial health) (283) Interest (do you have strong interest to manage your money) (284) Goal (do you set up your financial goals) (285) Emotion (do you know how to avoid emotional mistakes) (286) Research (do you have resources to do your own research) |
SUITABLE – On investment suitability
If your facts and reasoning are right, you don’t have to worry about anybody else. - Warren Buffett (287) Security and safety concerns define risk tolerance (288) Ultimate goal defines the time of investment (289) Income defines short-term financial situation (290) Tax status defines the investment choices (291) Age defines the financial needs (292) Balanced overall asset situation defines the asset allocation (293) Liquidity needs define what and how do you invest (294) Experiences define the portfolio complexity for optimization |
PLAN – On investing planning
Do not save what is left after spending, but spend what is left after saving. - Warren Buffett (295) Planning is a necessary step before selecting any investment (296) Long-term return is much more important than short-term volatility (297) Allocate asset into different investments to meet short-term and long-term needs (298) Net worth, spending budget, and earning power today are three fundamental inputs in developing a successful long-term financial plan |
ADVICE – On investing advice
It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction. - Warren Buffett (299) Asset custody is the first factor when selecting an adviser to prevent fraud (300) Dissociate any group promoting investments that are too good to be true (301) Validate the value of advice by using appropriate benchmark comparison (302) Investigate the background disclosure of your adviser carefully (303) Complex advice should be avoided unless you can understand it (304) Evaluate advisor quality without emotion, not by any single factor such as trade frequency, individual, referral, or past performance |
TRUST – On trusted adviser relationship
We will only do with your money what we would do with our own. - Warren Buffett (305) Trust must be based on due diligence checkup, not by past experiences or referrals only (306) Return of past performance alone is not sufficient to compare different adviser choices (307) Understanding of advisory investment strategy and its added-value and suitability to your situation are the more important factors when using an adviser (308) Selecting a good adviser by avoiding conflict of interest and higher fees always pay off over the long-term (309) Too good to be true is a warning sign when evaluating an adviser or any investment opportunity |
PONZI – On how to avoid PONZI schemes
Only when the tide goes out do you discover who’s been swimming naked. - Warren Buffett (310) Ponzi and Pyramid schemes are fraudulent investment operations (311) Opportunity of getting rich through multi-level marketing is generally false (312) Network marketing is often more a dream than a reality (313) Zero cost of multi-level marketing is misleading (314) Investing in multi-level marketing product must be based on real and scientific proven product |
FRAUD – On how to recognize investment fraud
Only two things are infinite, the universe and human stupidity, and I'm not sure about the former. - Albert Einstein (315) False sense of urgency by claiming limited supply could be fraudulent sales practice (316) Return of a small favor to you in exchange for a big favor from you raises a red flag of possible fraud (317) Assured terms such as “guarantee” in investment returns are likely signs of fraud (318) Using credibility only to sell a product is probably a fraudulent tactic (319) Depending on others’ actions is not always reliable and could be taken advantages by fraudsters |
EMPOWER – On portfolio building process
You only have to do a very few things right in your life so long as you don’t do too many things wrong. - Warren Buffett (320) Emotion discipline by not timing (321) Manage short/intermediate/long term needs (322) Prioritize spending, asset, and liability needs (323) Optimize the choices of investment vehicles to achieve long-term growth with less volatility (324) Weight each asset in overall allocation based on short/intermediate/long term needs (325) Enhance returns with alternative investments in international, income, real assets, and consumer growth (326) Risk manage the portfolio with income assets and/or dollar cost averaging |
FEE – On investing expense
Never invest in a business you cannot understand. - Warren Buffett (327) Fixed fee structure is normally better than variable expenses to avoid conflict of interest and non-disciplined investment style (328) Expense should always be minimized for any given category of investment choices, and if you pay more, make sure it has value added. (329) Expect higher return if you choose higher expense products and services, otherwise why pay more |
CONFLICT – On conflict of interest
Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway. - Warren Buffett (330) Complex products are better for the industry and most likely not good for investors due to unpredictable risks and higher fees (331) Own money of your broker are mostly not invested the same way as you are advised to do so (332) Net invested asset makes a big difference to the services you receive and your brokers never like smaller amount (333) Flow of money matters the most to your broker, your returns do not matter much (334) Liquidity is good for investors but not good for your broker (335) Index funds are better than most of the managers who are highly paid without much value added (336) Compensation of your broker is not proportional to your benefits and creates conflict of interest that is not easily visible to investors (337) Trading cost is often a small fee you see; other hidden costs could be much more, especially when trading bonds, mutual funds, annuities, structured products, private REITs, and hedge funds |
FIDUCIARY – On fiduciary standards
Many forms of conduct permissible in a workaday world for those acting at arm's length are forbidden to those bound by fiduciary ties. - Judge Benjamin Cardozo (338) Fiduciary duty is a legal obligation of one party to act in the best interest of another (339) Independent fee-only advisors can play a fiduciary role with a cost (340) Due diligence should always be conducted by an independent party (341) Understanding the differences between suitability and fiduciary, and why your advisor is not legally required to act in your best interest (342) Conflict of interest in financial industry makes fiduciary duty difficult to follow (343) Investors should always look for an advisor acting on fiduciary guidelines (344) Advisors may not always act in your best interest (345) Required disclosure of fees is the first and most important document for any investors to request and understand before making investment (346) Your interest is always better protected with more knowledge |
ESTATE – On estate planning
I want to leave my children enough that they feel they can do anything, but not so much that they do nothing. - Warren Buffet (347) Establishing a will for the needed guardian and the executor of the estate is very important (348) Specify beneficiaries for all retirement accounts and keep them up to date (349) Trust can be set up to avoid probate and keep estate distribution private (350) Asset transfer during your lifetime can reduce taxes (351) Tax exemption limit of estate allows most of estate inherited tax-free (352) Establishing health care directives and durable power of attorney is part of estate planning |
GIFTS – On charity and gifting
We make a living by what we get, but we make a life by what we give. - Winston Churchill (353) Gifting is transfer of asset and should be done during lifetime (354) Income tax return does not need to report any gift made under annual exclusion (355) Future tax liability is transferred to the gift recipient (356) Tax deduction must be planned ahead for charitable gifting (357) Selecting the right type of charitable gifts can maximize tax savings |
Three “S”s – On investing for life
I don’t measure my life by the money I’ve made. Other people might, but certainly don’t. - Warren Buffett (358) Simple (Consolidate to make life easier, multiple accounts in different firms do not help diversification) (359) Safer (reduce risks, down is not equal to up and understand the time to recover) (360) Satisfy (with a long-term plan in place to build income for life) |
HAPPY – On happy investing
I really like my life. I’ve arranged my life so that I can do what I want. - Warren Buffett (361) Happy investing and balance your life style and making money (362) Acquire your knowledge and habit of life-time learning for happiness (363) Protect your investment from unethical financial industry sales practice (364) Protect your asset from tax consideration (365) Years in investing is more important than today’s volatility and market noise; and your today’s happiness is more important than your years of accumulated asset |