Buy And Hold Isn’t Dead, Just Misunderstood

best shares to invest in 2012
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Oct/11
Buy And Hold Isn’t Dead, Just Misunderstood
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Every once in a while, a bunch of doomsayers pop up proclaiming the demise of buy and hold. This tends to happen more often during times of heavy volatility and uncertainty in the market, such as over the past few months. Some of these folks like to follow up with testaments to the superiority of whizbang new investment strategies, with names like “buy and watch” or “buy and monitor.” The problem isn’t that they’re wrong – on the contrary, they’re absolutely right. The problem is that the concept of “buy and hold” that they’re attacking is nothing more than a strawman. It’s easy to win when you’re dueling a scarecrow, because straw doesn’t fight back.

Let’s look at some articles here on SA that have been published recently: Investors Should Not Be Complacent About Dividend Champions, by James Kostohryz, and Why Picking A Stock To Hold Forever Is Folly: The Apple/Cisco Case, by Roger Nusbaum. First, let me say that Mr. Kostohryz and Mr. Nusbaum are both excellent writers who provide many articles of value to the investment community. I read both of them regularly and will continue to do so. However, both of the articles cited above pick on a premise that was never true to begin with: that the buy-and-hold investment style encourages investors to hang on to their stocks ad infinitum after they’ve bought them, without paying any attention to how the underlying businesses are doing.

The first and most important rule of buy-and-hold is to know your investments. That includes knowing when to get out. It’s very possible for traditional buy-and-hold investors who follow the school of long-term value investing to dump a stock one quarter after they purchased it. Their investment thesis may have been wrong. The fundamentals of the company may have changed. Unforeseen challenges to the business may have materialized. Such an action doesn’t diminish the validity of their strategy.

The “hold” of buy-and-hold refers to intent, not a guaranteed outcome. In this way, buy-and-hold investing is kind of like marriage. When we marry, most of us intend and hope to stay hitched for good. When long term investors buy a stock, we hope that the company will continue to grow and remain competitive forever. We select the partner/companies that have the best chance of making that hope a reality.

Of course, a lot of the time it doesn’t turn out that way. When you find out that the person you married is not who you thought they were, sometimes the best thing to do is to walk away. When you find out that the business you bought is no longer as strong a competitor as it once was, it may be time to cash in your chips and move to another table.

A character in a great movie once said, “On a long enough timeline, the life expectancy of everyone drops to zero.” The same is true of businesses. Of the original Dow stocks, only General Electric (GE) remains, and the financial crisis was a pretty close call for GE. Competitive destruction is one of the ugliest, but most fundamental forces of free market capitalism. It doesn’t matter how good you are, eventually someone better is going to come along to pick a fight with you, and then it’s game over. Nothing immunizes a company from the omnipresent threat of competitive destruction. Not a fat dividend, not a wide moat, not a fortress balance sheet. Eventually, all companies must die.

Buy-and-hold investors understand this, which is why the first principle of buy-and-hold is what it is. The more intimately familiar you are with a company’s operations, prospects, and financial health, the more likely it is that you’ll recognize when it’s time to take your money off the table. No one who actively practices buy-and-hold investing is under the delusion that they must hold on to their stocks forever no matter what happens. Some investors do a portfolio check-up more often than others, but the only investment vehicles that you can just dump money into and then forget about are index funds.

The only reason this is true is because index funds aren’t really completely passive. Every stock in an index was added there by a person, and stocks get removed when they no longer fit the profile of the index. When you buy an index ETF like the SPDR S&P 500 (SPY) or the iShares MSCI EAFE (EFA), you’re not holding on to your investments forever either, because the indexes get reshuffled every so often: new companies get added in, faltering companies get taken out. Index investors can afford to be less vigilant because they have the company behind the index acting as their portfolio manager. Investors who choose to pick their own stocks benefit from no such proxy.

If you’re not the kind of investor who has the time to stay on top of his portfolio 24/7, there are a lot of companies out there that operate under safeguards that make it less necessary to keep tabs on them all the time. Alcoa (AA) plies its trade in a capital intensive industry that poses formidable barriers to entry. Cisco (CSCO) has a huge war chest stuffed with cash, which helps to buffer against economic assault (though a technology stock is never really a safe investment no matter its balance sheet). Ford (F) benefits from great leadership that steered it through a market downturn that swallowed up most of its competitors. The more capable your managers are, the less risk you assume with a hands off approach to ownership. Finally, Intel (INTC) offers an unrivaled dividend yield compared to its industry peers that continues to grow, which means that by the time cracks begin to appear in the company’s foundation, investors may have already made their money back and more through dividends alone.

These companies may have an edge over their competitors in terms of stability, but there’s no such thing as a safe investment, only safer. You can call it buy-and-hold, buy-and-watch, buy-and-monitor, or whatever new catchphrase the news streams serve up, but in the end, it amounts to the same thing: buying great companies at a reasonable price, and letting them go when they’re no longer great companies at a reasonable price.

Times may change, but the fundamental ideas of value investing, of buy-and-hold investing will continue to remain relevant so long as people in society continue to make money by selling their stuff to other people.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in F over the 2next 72 hours.

Top Oil Stocks 2011/2012 – Top Oil Stocks to Buy 2011/2012

Oil Stocks to Buy 2011/2012- 2011/2012 Oil Stocks

Below is a list of my latest oil stock picks for 2011/2012. These 2011/2012 Oil Stock Picks are my favor stocks to buy and some of the stocks I will be trading personally. Last year, one of my top oil stock picks was Brigham Exploration (BEXP). BEXP stock went from $15 to $27 from July to December of 2010 and was one of my biggest stock gainers of the year. I feel 2011 will be a good year for stocks and the overall stock market. Oil in 2011 should hit $110-$120 which would make the oil stocks rally even higher.

Key Areas of Oil Exploration in 2011 – Eagle Ford Shale – Niobrara Shale – Bakken Shale – Permian Basin – Oil Discoveries are still going on in these fields and in 2011, more Oil Discoveries will be made. Keep an eye on the Chainman Shale – Cabot Oil & Gas (COG) mentioned in late 2010 that they are drilling for oil in the Chainman Shale. We also have Venoco (VQ) drilling the Monterey Shale in California. With that, here is a list of my best oil stock picks for 2011

#1 Top Oil Stock Pick 2011/2012 – Oil Stocks – Hyperdynamics Corporation (HDY) – While Hyperdynamics (HDY) is my top stock pick of 2010, it is a risky one. The company has no revenues and does not make any money but could be sitting on a very large pool of oil off the coast of Africa. Drilling for oil is expected to begin in December 2011. Hyperdynamics was headed into a downward spiral over the past couple years but changed the management team in 2010 who vowed to take the company in a new direction. Hyperdynamics has a very large prospective leased area off the coast of the Republic of Guinea. In November 2010, Hyperdynamics raised $30 million in a private placement from financial giant Blackrock (BLK) which will help in preperation costs to drill for oil in late 2011. Hyperdynamics did a few surveys and believe they could be sitting on billions of barrels of oil.

As for HDY stock in 2011, It is my top stock to buy and my best trading idea. I have been trading HDY since the stock was $1.60 in August 2010 and gave it a price target of $4 – $6 for 2011. HDY hit a high of $3.63 in October 2010 and continues to trade around $3.00 as we head into 2011. If everything goes as planned and the company does infact sit on top of a large oil pool, we could be looking at a $8-$10 stock by year end 2011 in my opinion. I gave it a target of $4 – $6 when the stock was hitting $2.60 just to be on the conservative side. Of coarse, if Hyperdynamics announces any delays or lesser oil reserves, all bets are off. Pullbacks below $2.50 should be a great buy if you are looking for an entry point. I currently own HDY stock for the long term and will buy more stock on pullbacks. If you have any questions or feel like discussing HDY stock, visit my HDY message forum thread.

#2 Top Oil Stock Pick for 2011 - Kodiak Oil & Gas (KOG) – Kodiak Oil & Gas was another huge stock gainer for me at the end of 2010. I bought KOG stock at $4.30 in mid November 2010 and sold between $5.00-$5.70 a month later. KOG went on to hit $6.69 a few weeks later. Kodiak Oil in Gas recently aquired additional acreage in the Bakken Shale. This acreage is in some of the best zones in the Bakken which includes the Three Forks Oil zone. When I originally bought KOG at $4.30, I placed a personal target of $8-$10 on it for 2011. I am sticking with this and feel the stock could even hit $12. A lot will depend on what oil does but ultimately the stock is going a lot higher. While I don’t own KOG right now, I plan to buy the stock on any major correction.

FIFO LIFO Inventory Valuation Methods

March 27th, 2011 by Jae Jun

Print PDF Aggressive and Conservative Accounting SeriesFor previous articles in the series, click on the links below.

Aggressive and Conservative Accounting PoliciesHow to Detect Aggressive Revenue Recognition PolicyInventory Valuation Methods in AccountingInventory can make up a large amount of the assets on the balance sheet and so knowing how to analyze the inventory, and the method used by management is crucial.

To put it in the most basic form, inventory is what you have in stock. If you expand on this definition to look at what is involved on the other side of the scale to get the ending inventory amount, the equation for inventory is

Beginning Inventory + Net Purchases – Cost of Goods Sold = Ending Inventory

In words, your beginning inventory along with your purchases and then subtracting what you have sold, results in ending inventory.

But this is where it gets tricky with GAAP rules. Depending on the inventory valuation  method used by the company, the COGS can vary considerably which ultimately affects the ending inventory.

Sadly, it is not as easy as counting what is left on the shelf at the end of the day to get the ending inventory value.

Three inventory valuation methods are used in the US.

1. Average cost method

2. First In First Out (FIFO) method

3. Last in First Out (LIFO) method

Average Cost MethodTo put it real bluntly, the average cost method is rarely used. This method does not offer any real convenience or added accuracy.

The equation for average cost method is as follows.

Average Cost = (Total Quantity of Inventory Units) / (Total Quantity of Units)

where

Cost of Goods Sold = (Average Unit Cost) x (Number of Units Sold)

For example if 1,000 toys are produced on Monday at a cost of $1 and then on Tuesday another 1,000 toys are manufactured at a price of $1.05, the average cost method would value the inventory at $1.025 a piece.

FIFO MethodAs mentioned previously on aggressive and conservative accounting policies, the FIFO method of valuing inventory is considered to be the aggressive method.

FIFO works like how you maintain your fridge at home. After you have bought some groceries, you tend to place what you just bought at the back of the fridge in order to finish off the older food before it spoils.

In other words, under FIFO, the oldest goods are sold first and the newest goods are sold last.

As a formula it would look like this

Unit Cost per batch = (Cost/Quantity) for each batch

where

Cost of Goods Sold = (Unit Cost x Quantity) for each batch

Using the toy example above, if 1,000 toys were then sold on Wednesday, the COGS would be $1 per unit. The remaining inventory on the balance sheet would then be worth $1.05 each.

LIFO MethodLIFO is the opposite of FIFO. Instead of the oldest inventory being considered as sold first, the newest product is sold first. While the factory analogy works for the FIFO, consider a bakery. By lunch or evening, the bread baked from the morning will not sell as well as the fresh ones from the afternoon batch.

This means that cost of the latest inventory now becomes the COGS with the cost of the oldest inventory being assigned to the inventory value on the balance sheet.

The equation is essentially the same as FIFO since both are calculated based on batches of unit sold.

Unit Cost per batch = (Cost/Quantity) for each batch

where

Cost of Goods Sold = (Unit Cost x Quantity) for each batch

Using the toy example, the 1,000 units sold on Wednesday would have a COGS of $1.05 per unit, with the remaining 1,000 toys being valued at $1 each.

How Inventory Valuation Affects Profits and AssetsAs you can see from above, despite ending with the same 1,000 toys, FIFO assigns the inventory value to be $1,050 compared to the LIFO $1,000.

But another point is that the method of inventory valuation does not just affect the balance sheet. Gross profit also varies considerably. How?

Gross Profit = Sales – COGS

COGS differ under FIFO and LIFO, and if your COGS is low, then that means gross profit will increase.

The table below sums up how each of the three inventory valuations vary.

Things to Think About Regarding InventoryAssuming that the world is in a vacuum, the table above illustrates that FIFO results in the biggest gross profit as well as the highest ending inventory value. This is a reason why FIFO is the method of choice for most companies.

Should a company change its accounting policies to switch from LIFO to FIFO, watch out, as management is more focused on trying to increase earnings instead of improving their operations.

If the toy manufacturer above was using the LIFO method and reported $350 in gross profit but then decided to change to FIFO resulting in a restated $500 gross profit, the accounting change alone has increased gross profit by 42.8%!

Also consider this. FIFO increases net income which would in turn increase taxes, but as I stated previously, most public companies are more concerned with showing an increase in earnings.

On the other hand, LIFO is not a good indicator of ending inventory as the remaining inventory could be extremely old and is likely to understate the inventory at today’s prices.

In the end, valuation is more art than science and you can probably see that after following this.

The best way to decide whether a company is being aggressive with inventory valuation is to use common sense and to check out the competitors in the industry. If everyone else is using the LIFO method and company X is the only one using FIFO, then you know you have found a red flag.

For such a simple component of the financial statement, there is quite a lot to think about.

You can also learn more about inventory analysis for investors by following the link.

Aggressive Growth Stock: Caliper Life Sciences

Caliper Life Sciences (CALP: 6.36 0.00 0.00%) recently announced preliminary financial results that breathed some life into the stock. Estimates are moving higher as a result.

CALP currently has a Zacks #1 Rank (Strong Buy) and continues to expand into new markets.

Company Description

Caliper Life Sciences develops advanced instruments and outsourcing services for pharmaceutical, biotech and other research institutions and companies.

Positive Announcement

On Jan 13 Caliper released preliminary fourth-quarter results that made investors quite happy. Revenue came in at $36 million, which brings the full-year mark to $124 million. That is a 10% organic growth rate.

Caliper's gross margin expanded by over 800 bps, allowing them to surpass goals for 2010. The company raised its 2011 guidance and is now expecting the top line to improve 12-20%.

Estimates Move Higher

Both analysts polled by Zacks raised their full-year estimates for this year on the news. Caliper is expected to break even this year; up from a 9-cent loss they were expecting 3 months ago.

Next year's forecasts are averaging 3 cents, up from a 2-cent loss. While the earnings figures are not impressive on the surface, the upward momentum is encouraging. In 2009 Caliper lose 12 cents.

M&A Activity

On Dec 21 Caliper said it completed a previously announce deal to acquire Cambridge Research & Instrumentation, Inc for $20 million in cash, assumed debt and common stock. The move will help Caliper break into the tissue imaging and digital pathology market.

The Chart

The recent news and raised guidance gave shares of CALP a jolt. There is a level of resistance here, but given the upward estimate revisions there is a good chance that we see a new high soon.

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