Notes from Bull’s Eye Investing

I recently read The Little Book of Bull’s Eye Investing by John Mauldin, a shortened version of the big book. It was about 120 pages if I recall correctly and was an easy quick read. Some highlights from the book:

A secular bear market is traditionally and loosely defined as flat or falling stock prices over the course of years or even decades. Examples include Japan since 1990 or the U.S. market from 1966 – 1982. The generally accepted range is from 8 to 17 years on average, the author prefers 13 to 20 years.

Last century in the U.S., bear markets have been about 17 years consistently. Looking back, year 2000.2 (feb), tech bubble pop, Dow was at 11,500; Subtract 17.6 years takes you back to June 1982, Dow was at 900. That marked the beginning of the greatest bull market in history. Subtract another 17.6 years and you’re back at the beginning of 1965, Dow was at 900. Yep, the same thing it was 17.6 years later! It went up and down in that period, but trended the same. Subtract 17.6 years and you’re in the middle of 1947, the Dow was at 220 and another bull market was starting. Subtract 17.6 years, early 1929 the Dow was at 380 and about to be a lean cycle. So appears to be another bear cycle until 2000.2 + 17.6 years or roughly 2017.8. During bear markets, best to be in cash, difficult to time the ups and downs and things always trend the same during that cycle. Key is to get back into investments before the bull takes off.

The bull market is over when investors begin worrying about future losses instead of future gains.

Traditional mutual funds have a really hard time beating index funds because index funds add fast-growing companies and toss out the laggards.

Check out First Case, a division of Thomson Financial, it compiles analysts estimates from many sources and gives projections for a company’s long-term growth. Best advice is to cut that in half and you’ll be a genius.

Formula as important as anything else, real returns = Dy + G + Delta(P/E) or the real return on an equity investment is equal to the Dividend Yield + the Dividend Growth + the Change in Valuation (in terms of P/E).

Graham’s number is what a company is really worth at liquidation.
Graham’s number = current assets – all liabilities – preferred stock
Value based winners – if the market cap of a company (outstanding # of shares * stock price) 5%). If those guys show up on the list, it’s worth investigation.

So you have done research and found good value stocks, what are the basic common sense tenants you want to live by.
1. Cut your losers and let the winners ride, put in a real stop-loss order and stick to it
2. Capture the winners by putting in a target price and sticking to it
3. Be patient and let the research and valuations you predict come to
4. Don’t time stocks, you’re investing, not trading
5. Don’t fall in love with stocks, don’t be emotional
6. Diversify, anything unexpected can happen to any stock, don’t be fooled

1980’s and 1990’s, the Fed fought inflation. At first, they were dismayed as interest rates rose and bond prices fell. But after rates peaked in early 80’s, rates began falling for another 20 years. Therefore, bond prices soared. Now in 2012, rates are as low as they can go. Before the rates rise and bond prices fall again, you want to be in something else. Bonds won’t be attractive.

Current environment:
– U.S. economy in a muddle through state
– much of world is trying to cope with too much debt and deleveraging in private and public sectors
– stock market is trading at valuations that are higher than trend
– interest rates have nowhere to go but up
– twin deficits of trade imbalance and government debt stares us in the face

Change is a freight train, either catch a ride into the future or get run over!

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