Posts Tagged ‘warren buffett’
Thursday, January 5th, 2012
When studying fundamental analysis, investors can use either the top-down approach or bottom-up approach. Both approaches help investors search for the best stocks to invest in.
1) Top-down approach – This approach involves looking at the “big picture” in the economy and then breaking it down into details. Fundamental analysts study both international and national economic indicators, such as the GDP rate, energy prices, inflation rate, and interest rate. After considering all the economic factors and looking at the “big picture,” different sectors are analyzed to identify the industry that generates the best returns. Then, investors look at individual companies within the selected industry to determine the best company in that industry, adding that company’s stock to their portfolio. A disadvantage to this approach is that investors may miss good companies that are performing strong just because they are in a depressed sector.
2) Bottom-up approach – This approach involves starting with specific companies rather than on the industry in which the companies operate. Unlike the top-down approach where the investor looks at the big picture, here the investor focuses his analysis on individual stocks. This approach assumes that a company can do perform well even if the industry it is in is not. Investors who use this approach simply look for companies with strong prospects, regardless of industry conditions or economic factors. A disadvantage is that investors will have different opinions on what a “strong prospect” is. For example, some investors may look at earnings growth while others may look at P/E ratios.
Many investors prefer the top-down approach and recommend others to examine both the economic and industry factors before deciding on which stock to purchase, which the bottom-up approach neglects to do. However, legendary investors Benjamin Graham, Warren Buffett, and Peter Lynch favor the bottom-up approach, saying that macroeconomics is a major distraction, as the projection might turn out to be incorrect. They believe that investors should concentrate their efforts on studying the quality of the individual companies.
The top-down and bottom-up approach are two distinct approaches to investing. However, some investors choose to combine the two approaches to select their stocks.
Tags: benjamin graham, bottom up approach, fundamental analysis, peter lynch, top down approach, warren buffett
Posted in Daily Stock Picks | Comments Off
Wednesday, January 4th, 2012
Want to know the method some of our legendary investors use? Benjamin Graham and Warren Buffett both use fundamental analysis and value-investing techniques. Unlike technical analysis, fundamental analysis focuses on studying a company’s financial statements and earnings. By looking at the financial aspects of a company, such as its revenues, expenses, assets, and liabilities, fundamental analysts can use this information to predict future price movements of a company’s stock. However, fundamental analysis has a larger selection of indicators than technical analysis and appears in many different forms, such as studying economic indicators and reports released by the Federal Reserve.
One advantage of studying fundamental analysis is its objectivity, supported by mathematical and statistical methods. Fundamental analysis helps to identify the intrinsic value of a security by studying economic, financial, and other qualitative and quantitative factors. By using fundamental analysis and studying a considerable amount of research, an investor can better understand the company’s business and key factors that drive their revenue. Another advantage is that fundamental analysis identifies long-term investment opportunities based on long-term trends.
However, fundamental analysis does have its disadvantages. One disadvantage is that since fundamental analysis requires a lot of research, it is labor intensive and time-consuming. Some of us who work daily are too busy to go through a million news reports and economic data. Those people can consider using technical analysis, which focuses on price action. Technical analysis seems to be the preferred method for short-term traders.
Another disadvantage of fundamental analysis is that the analysis ignores much of what is happening in the stock market. They may miss out on short term opportunities that price patterns may bring.
In the end, you should consider using both technical analysis and fundamental analysis. A mix of technical and fundamental analysis can help you better predict a company’s future performance.
Tags: benjamin graham, fundamental analysis, Technical Analysis, warren buffett
Posted in Learn The Stock Market | Comments Off
Wednesday, June 24th, 2009
Learn The Stock Market Lesson – Options Trading – What are Options?
Just like a stock or a bond, an option is a security. Options are derivatives, deriving their value from another underlying asset. If you are unaware of what a derivative is, you should take a look at my earlier post on financial derivatives.
If you own an option, you basically have the option to buy or sell a block of shares of a specific stock at a specific price, within a specific time frame. Notice how the word specific occurs in the previous sentence 3 times. This shows why options are risky—because you have to be right about 3 things. You must choose the right stock, predict the degree of its move, and the time it will take to get there. You must make 3 right choices, otherwise, if you are wrong on just one, you’ll lose your money.
Still confused? Well, basically when you buy an option, there is a contract with set terms, giving you an option to buy or sell a specific stock, index, or future at a specific price on or before a specific date, but it is not an obligation. You don’t actually own the stock, nor do you ever have to buy the stock to profit or lose money on options.
Options allow traders to make money fast if they’re right, but when the market reverses, they can walk away and owe nothing! There is an expression, “your loss is limited to what you paid for an option” but note that can also mean you can lose 100%!
There are 2 main reasons why investors use options: to speculate and to hedge.
Options can be extremely volatile and risky investments. Option trading is not suitable for everyone because of its high risk. You definitely need to have a clear idea of what you are doing and understand all the terminology that is associated with the options market. This is what Warren Buffett has been warning investors about for years: the unregulated and growing use of derivatives.
However, options aren’t inherently bad. They also provide a hedge to protect investors from losses in particular stocks.
There are 2 types of options: puts and calls.
1) Call Option- gives you the right to buy an asset at a specific price within a set period of time. You buy call options if you expect the price of the underlying stock to rise before the option expires. If the stock price rises, you would make a profit because you previously bought the stock for less and now you can resell it for more. Call options are similar to having a long position on a stock.
2) Put Option- gives you the right to sell an asset at a specific price within a set period of time. You buy put options if you expect the price of the underlying stock to decline before the option expires. If the stock price declines, you would make a profit because you can now sell at a higher price. Put options are similar to having a short position on a stock.
There are 4 types of participants in the options market:
1) Buyers of puts
2) Sellers of puts
3) Buyers of calls
4) Sellers of calls
Buyers of options are called holders and sellers of options are called writers.
It’s okay if you don’t understand options because it is considered very confusing and is often avoided by beginners to the stock market. But depending on the type of trader that you are, you might enjoy options trading so you can look more into that later.
Tags: buyers of calls, buyers of puts, call option, derivatives, hedge, options derivatives, options trading, put option, puts and calls, risky, risky investments, security, sellers of calls, sellers of puts, speculate, volatile, warren buffett, what are options
Posted in Learn The Stock Market | Comments Off
Monday, June 15th, 2009
Learn The Stock Market Lesson - The Debate About Derivatives
The only thing we learn from history is that we learn nothing from history.
- Friedrich Hegel
In my previous post, I began an introduction on derivatives. If you are unaware about what they are, take a look at my Financial Derivatives’s post to get a better understanding about this post.
If derivatives are so risky, why haven’t we outlawed them?
There have been many arguments between the pros and cons of derivatives. The world’s smartest investor, billionaire Warren Buffett once called derivatives, “financial weapons of mass destruction.” That was in 2002 when he issued his annual letter to the shareholders of Berkshire Hathaway. He continued to say that the derivatives carried danger and, although it was latent at the time, that they are potentially lethal. Few people paid attention to Buffett’s warning and, in fact, many important financial players quickly dismissed his words.
Later that same year, Alan Greenspan, the Chairman of the Federal Reserve at the time, among a few others sent a letter to a couple of U.S. senators, declaring that financial derivatives were not a danger but, rather, they “have been a major contributor to our economy’s ability to respond to the stresses and challenges of the last two years.” They continued to declare that a Senate proposal to regulate derivatives could increase “the vulnerability of our economy to potential future stresses.”
In 2003, Alan Greenspan again defended derivatives, saying that,
“Businesses, financial institutions, and investors throughout the economy rely upon derivatives to protect themselves from market volatility triggered by unexpected economic events. This ability to manage risks makes the economy more resilient, and its importance cannot be underestimated. In our judgment, the ability of private counterparty surveillance to effectively regulate these markets can be undermined by inappropriate extensions of government regulation.”
That’s the good side of the spectrum. Let’s see the bad side: The Enron mess created clear warning signs about the danger of derivatives yet they still contributed to the collapse of Bear Stearns, Lehman Brothers, along with other financial companies. The lack of oversight on derivatives spawned a financial crisis, to which taxpayer money was then used to bail out these financial companies. Don’t forget that the corporate bosses who run these companies are often the same ones who are helping themselves to a multimillion-dollar pay and bonus. Is all of this happening due to our refusal to learn from the past?
Tags: AIG, alan greenspan, bear stearns, berkshire hathaway, chairman of federal reserve, derivatives finance, enron, federal reserve, financial derivatives, financial weapons of mass destruction, friedrich hegel, hedge, hedging, lehman brothers, warren buffett
Posted in Learn The Stock Market | Comments Off
Thursday, April 9th, 2009
When I googled images Warren Buffett, I came across this comic, which I found pretty amusing:
Speaking of Buffett, just yesterday, his company Berkshire Hathaway had its top-level Aaa credit rating cut by Moody’s Investors Service down two levels to Aa2. Ouch.
2008 was the worst year for Berkshire Hathaway since Buffet had taken over in 1965.
Shares are currently trading at around 90 thousand dollars. If you look at Berkshire Hathaway’s stock chart for the course of 2008-2009 year, on September 19, 2008, shares were actually trading at a high of 147 thousand dollars…And this was after the big September 13-14 weekend after the collapse of Lehman Brothers and Merrill Lynch.
However, Buffett has admitted that he has made some “dumb” mistakes in 2008.
Tags: berkshire hathaway, current news, moody's, warren buffett
Posted in News Analysis | Comments Off
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