Adapt To A Bear Market

Witnessing a bear market for stocks doesn't have to be about suffering and loss, even though some cash losses may be unavoidable.

Instead, investors should always try to see what is presented to them as an opportunity - a chance to learn about how markets respond to the events surrounding a bear market or any other extended period of dull returns.

Read on to learn about how to weather a downturn:

https://www.investopedia.com/articles/younginvestors/08/bear-market.asp

Factors to Consider When Evaluating Company Management

Most investors realize that it's important for a company to have a good management team. 

The problem is that evaluating management is difficult. So many aspects of the job are intangible. 

It's clear that investors can't always be sure of a company by only poring over financial statements.

Read more at:
https://www.investopedia.com/articles/02/062602.asp

Calculating Risk and Reward

Are you a risk taker? When you're an individual trader in the stock market, one of the few safety devices you have is the risk/reward calculation.

Sadly, retail investors might end up losing a lot of money when they try to invest their own money. 

There are many reasons for this, but one of those comes from the inability of individual investors to manage risk.

Read more at:
https://www.investopedia.com/articles/stocks/11/calculating-risk-reward.asp

How does the dividend discount method (DDM) work?

The DDM is very similar to the discounted cash flow (DCF) valuation method; the difference is that DDM focuses on dividends. 

Just like the DCF method, future dividends are worth less because of the time value of money. Investors can use the DDM to price stocks based on the sum of future income flows by the risk-adjusted required rate of return.

Read more at:
https://www.investopedia.com/ask/answers/042415/when-can-i-use-dividend-discount-method-ddm-value-stock.asp

How can an investor determine the efficiency of a company's working capital management?

There are a number of tools that determine how efficiently a company is managing its working capital, principally by looking at measures of inventory and cash flow.

Analysts and investors look at a company's working capital to determine its overall efficiency and financial health. Working capital is essentially the money necessary for a company to maintain its operations on a day-to-day basis. It is composed of a number of components, the three most important being:

• Accounts payable
• Accounts receivable
• Inventory levels

Read more at:

https://www.investopedia.com/ask/answers/041015/how-can-investor-determine-efficiency-companys-working-capital-management.asp

8 Ways Companies Cook the Books

Every company manipulates its numbers to a certain extent to make sure budgets balance, executives score bonuses, and investors continue to offer up funding. Such creative accounting is nothing new. 

However, factors such as greed, desperation, immorality, and bad judgment can cause some executives to cross the line into outright corporate fraud.

... investors should ... know how to recognize the basic warning signs of falsified statements. While the details are typically hidden, even from accountants, there are red flags in financial statements that can point to the use of manipulating methods.

Read more at:
https://www.investopedia.com/articles/analyst/071502.asp

How to make a winning long-term stock pick

Many investors are confused when it comes to the stock market; they have trouble figuring out which stocks are good long term buys and which ones aren't. 

To invest for the long-term, not only do you have to look at certain indicators, you also have to remain focused on your long-term goals, be disciplined and understand your overall investment objectives.

Read more at:

https://www.investopedia.com/articles/fundamental-analysis/09/long-term-stock-pick.asp

How to Evaluate a Company's Balance Sheet

For stock investors, the balance sheet is an important financial statement that should be interpreted when considering an investment in a company. 

The balance sheet is a reflection of the assets and the liabilities owned by the company at a certain point in time. 

The strength of a company's balance sheet can be evaluated by three broad categories of investment-quality measurements: working capital adequacy, asset performance and capitalisation structure.

Read more at:
https://www.investopedia.com/articles/basics/06/assetperformance.asp

7 Simple Strategies for Growing Your Portfolio

"Growth is usually defined more specifically in the investment arena as capital appreciation, where the price or value of the investment increases over time.

Growth can take place over both the short and long term, but substantial growth in the short term generally carries a much higher degree of risk. 

There are several ways to make a portfolio grow in value. Some take more time or have more risk than others, but the following is a list of tried-and-true methods that investors of all stripes have used to grow their money."

Read more at:
https://www.investopedia.com/articles/basics/13/portfolio-growth-strategies.asp

Factors to Consider When Evaluating Company Management

Most investors realize that it's important for a company to have a good management team. The problem is that evaluating management is difficult. 

So many aspects of the job are intangible. It's clear that investors can't always be sure of a company by only poring over financial statements.

There is no magic formula for evaluating management, but there are factors to which you should pay attention. In this article, we'll discuss some of these signs.

Read more at:
https://www.investopedia.com/articles/02/062602.asp

Why Understanding Asset Allocation Is Key

Most investors are extremely diligent in determining what investments should be a part of their portfolios. Certainly, you want to make sure that any specific security or fund is serving a purpose and is chosen because it has the potential to meet your needs and goals.

However, what investors often overlook or neglect is their specific asset allocation. The truth is that the combination of investments in your portfolio can actually be more important to achieving your goals than the specific investments selected.

Read more at:
https://www.investopedia.com/advisor-network/articles/why-understanding-asset-allocation-key/

Key Financial Ratios to Analyze Healthcare Stocks

The Healthcare Sector is one of the largest market sectors, encompassing a variety of industries such as hospitals, medical equipment and the pharmaceutical industry. The sector is popular among investors for two very different reasons.

First, it is viewed by many investors as containing stable industries that offer a good defensive play to help weather general economic or market turn-downs. Regardless of the state of the economy, individuals continually need healthcare. 

Read more at:

https://www.investopedia.com/articles/active-trading/082015/key-financial-ratios-analyze-healthcare-industry.asp

Warren Buffett: How He Does It

Buffett follows the Benjamin Graham school of value investing. Value investors look for securities with prices that are unjustifiably low based on their intrinsic worth.

There isn't a universally accepted way to determine intrinsic worth, but it's most often estimated by analyzing a company's fundamentals. 

Like bargain hunters, the value investor searches for stocks that they believe are undervalued by the market, or stocks that are valuable but not recognized by the majority of other buyers.

Read more at:
https://www.investopedia.com/articles/01/071801.asp

The Walter Schloss Approach to Investing

Walter Schloss was one of the most successful investors of all time, but outside a small portion of the value investing community, no one knows the name. Mr. Schloss studied under Benjamin Graham at Columbia University and eventually went to work for Graham at the Graham Newman Partnership.

In 1955, Schloss struck out on his own and compiled one of the best track records in the history of investing. Over a 50-year span, he earned gross returns averaging 20% annually. His method emphasized buying cheap stocks with solid financials and holding them until they were considered overvalued. Mr. Schloss emphasized price-to-book value (P/BV) as the best measure of a corporation's value and preferred buying stocks that traded below book value.

In 1994, Walter Schloss sat down and outlined his thoughts on making money in markets to serve as a guide to newer investors or those without in-depth knowledge of the value investing process. The result was one typed page listing the 16 factors needed to make money in the stock market.

Read about the 16 factors here.

Training your Mind in Volatile Markets

Volatility in the stock market can be counter-intuitive. Bull markets aren’t typically filled with huge up days. Instead, rising markets tend to experience a slow and methodical rise higher. 

The best up days are usually seen in the same market environments as the worst down days, which occur during down-trending, volatile markets.

...loss aversion is a big reason why investors tend to make more emotionally-charged decisions when stocks are falling, which causes both panic selling and panic buying during a market downtrend.

Read more at:
https://www.investopedia.com/news/training-your-mind-volatile-markets/

Divergences Need Price Confirmation

Divergences visible on technical indicators often provide useful advance information of corrections or rallies. Usually, indications are more reliable when divergences occur inside overbought or oversold zones of indicators.

A negative divergence occurs when an index or stock touches a higher top while a technical indicator touches a lower top. That itself may not be an immediate sell signal.

A sell signal occurs when a technical indicator corrects from its overbought zone. A better sell signal occurs when the indicator drops below its neutral zone (viz. '0' line for MACD/ROC and 50% level for RSI/Stochastic). 

A positive divergence occurs when an index or stock touches a lower bottom while a technical indicator touches a higher bottom. That may not be an immediate buy signal.

A buy signal occurs when an indicator emerges from its oversold zone. A better buy signal occurs when the indicator moves above its neutral zone.

Divergence confirmation from several technical indicators are preferable. Investors should also await price/volume confirmation before taking any buy/sell decision.

Technical indicators of global stock indices showed positive divergences last week. Pullback rallies have followed.

Read more here.  

3 Early Warning Signs That You Should Exit a Trade

Profits in the financial markets require multiple skills that can locate appropriate risk vehicles, enter positions at the right time, and manage them with wisdom and a strong stomach before finally taking an exit when opportunity cost turns adverse. 

Many investors, market timers and traders can perform the first three tasks admirably but fail miserably when it comes time to exit positions.

Getting out at the right time isn't difficult, but it does require close observation of price action looking for clues that may predict a large-scale reversal or trend change. 

This is an easier chore for short-term traders than long-term investors who have been programmed to open positions and walk away – holding firm through long cycles of buying and selling pressure.

Read more at:
https://www.investopedia.com/articles/markets/010816/3-early-warning-signs-you-can-use-exit-positions.asp

The Raging Bull Market Is Over: So, What's Next?

The stock market is in the midst of several major shifts, and investors should begin to reposition their portfolios appropriately, according to a recent report from the U.S. equity and quantitative strategy team at Bank of America Merrill Lynch (BofAML). 

"The 20-year long risky stock premium has finally been wiped out," is how their report leads off, continuing, "investors should pay for safety and be compensated for risk, but the opposite has been the case for 20 [years]." 

Given their observation that "the gap has finally closed," this has major ramifications for investors going forward. The table below summarizes five big market trends that BofAML sees as being underway right now.

Read more at:
https://www.investopedia.com/news/raging-bull-market-over-so-whats-next/

A Beginner's Guide to Growth Investing

"People have many different styles and tastes when it comes to money, but making your money grow is typically considered the most fundamental investment objective.

The best way to accomplish this goal will vary according to factors such as the investor's risk tolerance and time horizon.

However, there are some key principles and techniques that are applicable for many different types of investors and growth strategies."

Read more at:
https://www.investopedia.com/articles/basics/13/introduction-to-growth-investing.asp

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"There's Never Just One Cockroach in the Kitchen" - Warren Buffett

Buffett had made that comment in an interview following an accounting scandal in Wells Fargo. He may as well have made that comment about corruption in ICICI Bank and misreporting of NPAs by Axis Bank.

Yes Bank was the third 'cockroach'. (PSU banks are not being discussed here because collectively they are a massive 'anaconda' that is threatening to swallow India's financial system as a whole!)

The latest 'vermin' is IL&FS, whose MD has quit on his own. (The MD of ICICI Bank remains in suspended animation - for reasons best known to her. RBI has shown the door to the MDs of Axis Bank and Yes Bank, but is powerless to do likewise with the MDs of PSU banks.)

Moody's recently said that rising liquidity worries at IL&FS are credit negative for banks and debt market. The stock market reacted by indiscriminately pummeling the stocks of banks, NBFCs and housing finance companies.

It is interesting to note that despite a hurriedly-called concall with denials about any near-term liquidity problems, DHFL's stock failed to recover much from its lows on Friday (Sep 21). Which is the next 'cockroach'? 

There will be more than one. The business model of banks, NBFCs and HFCs requires borrowing short-term to lend long-term. If short-term liquidity dries up (or, gets costlier due to rising interest rates) the proverbial you-know-what will hit the fan - as it seems to be doing now. 

One market expert tried to reassure investors by stating that Friday's huge selloff was due to 'technical reasons'. One presumes he meant that fundamentally everything is hunky-dory in the financial system. Really?!

Talking about 'technical reasons', the market made a 'panic bottom' - with a sharp surge in transaction volumes - before bouncing up on short covering and some value buying. 

Typically, such a 'panic bottom' occurs during the second leg of a bear phase. 
However, the fact that it has occurred at an early stage of a corrective move is a clear warning to perma-bulls. 

Remember the stock market adage: Panic bottoms seldom hold. That means the market is headed lower than Friday's low. By how much? Likely support levels will be discussed in tomorrow's post on Sensex and Nifty.

Related Post
How to tackle a ‘panic bottom’