1) Focus on dividends. Buy companies that have a history of raising dividends each and every year. A company that raises its dividend signals confidence for the following year.
2) Don’t overpay. Buy companies that are trading at a Price Earnings ratio (P/E) which is less than the P/E of the overall market. Currently, the S&P 500 is trading at about 14 times next year’s expected earnings. Try to find good quality companies that are being valued at 14 times or less and have discipline to sell or trim these companies when their P/E ratio rises significantly above the overall market P/E multiple.
3) Don’t forget about ROE. Return on equity (ROE) is a helpful indicator of a company’s profitability. Good value1 can be found with companies whose P/E ratios are at a discount to their ROE’s.
4) Limit your exposure to commodities. Commodity based companies can be overly volatile. They tend not to create long-term value for investors.
5) When it comes to indexing, don’t set it and forget it. Buying an index fund is like getting onto a boat without a Captain; the ship will move to and fro with the tide, but at some point it will crash into an iceberg. You must pay attention to your holdings.
6) Don’t listen to the market, listen to value. Most of your profits (or losses) will come from a few trading days each year. No one really knows what the market will do tomorrow, so thinking about market timing is simply a waste of time. Instead, make investing decisions based on valuation of individual companies
7) Be indifferent toward assets classes. There is no need to buy stocks when good quality bonds are paying you a decent yield. Currently, bond yields are pathetic. So be sure to have stocks.
8) Be patient. Value will always be recognized by the market. As long as you are getting paid a dividend, rest assured that you can sit and wait until the market comes to its senses.
9) Know that headlines are your enemy. It is always easier for the media to create a story out of a negative event than a positive one.
10) Know that nobody has a crystal ball. Never invest with someone who tells you that they know what will happen next. Remember all the so-called-experts who wrongly told you to sell stocks because Greece will go bankrupt, because a recession will happen, etc., etc.
11) Read about investing. You must be read all of your company’s financial statements, follow its competitors, read analyst research, etc. If you put in the time, you will reap the rewards. If you can’t devote hours a day toward your investments, then hire a professional.
12) Buy what people use everyday. Forget trying to pick the next winning technology, latest fashion or miracle drug. Stick to companies that sell products or services that you use every day regardless of any economic environment.
13) Diversify, yet concentrate. You should not own more than 25 different equities. Have conviction in your investments to own enough of a position that it will make a difference in your portfolio if it does well.
All the best for a happy, healthy and prosperous 2013.
|1Value||When you sell a stock at a loss, you’re not able to claim the capital loss if you or a family member re-purchase the same stock within 30 days, which is called a “superficial loss”. Instead, the loss that would have been claimed on the old shares is added to the cost basis of the new shares, resulting in a lower capital gain when (if) the new shares are eventually sold at a profit. Taking advantage of this rule deliberately can allow for moving capital losses from one person to another.|