A lot of investors dislike volatility. They reason that the up and down movement of the stock price makes it harder to predict. Higher uncertainty means higher risk, they say. Therefore, for the same reward, they prefer stocksthat has a lower volatility.

On the contrary, smart investors like Warren Buffett embraces volatility. He reasoned that if a stock A is trading at $ 50 and has a fair value of $ 60. Shouldn’t A be less risky if it plunges to say $ 20 or $ 15? That is a valid point. This of course assume that the fundamental that caused the drop has not changed.

I like volatility for several reasons. For entry and exit points, volatility increases our potential return. No, I do not advocate day trading. No, I do not recommend buying stock A at $ 30 and selling it at $ 31 just because it has risen in value. We should try to be investors with long term horizon of at least one year.

Another reason to like volatility is that it reduces uncertainty. Some of you might roll your eyes and think that this is nonsense. Let us explore this. What causes a stock to move? The stock price might move due to market sentiment. It also move when it release earnings or new products or news about incoming threat from competitors. In other word, the stock price moves due to the news concerning the company.

News are fact. Fact are certainty. Therefore, when the news is out, you get less uncertainty because the unknown has already been discovered. Be it bad or good, news always reduce uncertainty.

For example, when Merck & Co Inc. (MRK) announced the withdrawal of its painkiller drug, Vioxx, that reduces uncertainty. Sure, shareholders lost money as the stock price plunged and volatility increased. But, sooner or later, Vioxx will be pulled anyway. Not pulling Vioxx only make the liabilities worse. Now, potential investors can estimate Merck’s fair value based on the ‘bad’ news. While the news is bad, it reduces uncertainty which reduces risk. This is in a sense good news for investors.

It is hard to fathom. But we need to embrace volatility. Sooner or later, a company will announce news, which can be good or bad. Either way, the stock price will be volatile when the news is announced. Volatility is bound to happen. Otherwise, how can we investors profit from it? When a company’s stock price does not move much, you can’t profit much and vice versa. The trick is knowing when to buy and when to sell. That will determine your rate of return.

Get your free investing idea by visiting our commentary section at http://www.noviceinvesting.com

Tags: Annual Report, finance, investing, Portfolio, stockAnnual Report, finance, investing, Portfolio, stock

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Having just read Peter Lynch’s “One Up On Wall Street”, I must say that this is the one book that I wished I have read earlier. Not that I agree with the whole philosophy. But the book has many different elements that we as investors can learn a lot from. This article will exploit just one of the many things we can learn from Peter Lynch.

One of the very few things that Peter Lynch asks before investing in stocks is not the P/E ratio, dividend yield or the growth rate of a company. But rather, it is the: “Do I own a house?” question. Why a house? Peter Lynch beautifully elaborate that regular folks have an edge in investing in a house rather than a stock. Further, investing in houses have many merits that stocks do not have.

1. A house will be a money maker. That may not be obvious but the truth is, in 99 out of 100 cases, you will always make money in house. You won’t wake up one day and find that the house that you live in has declared bankruptcy or goes under. This kind of thing may happen with individual stocks.

2. A house is rigged in home owner’s favor. Home owners can put 20% down and enjoy the power of leverage. While some brokers will lend you that kind of money to invest in stocks, but if your stock price fell by 20%, you have to put more money into it. Not with a house. You are welcomed to take your time and pay off your mortgage even as your house value goes down in value. Lynch elaborates a wonderful illustration on how nobody will ask homeowners to “come up with twenty thousand dollars tomorrow or else you should sell off your two bedrooms”. When this happens to a stockowners, it is called margin call and it does happen a lot of time to leveraged stock investors.

3. Tax advantage. Your mortgage expense is tax deductible. Your stock purchase is not tax deductible. Only when you sell your stock at a loss, you can then a tax write off. Further in your later years, you can decide to sell your house and move into a bigger house, while avoiding tax on your profit. In stocks, what you sell at a gain, you can’t escape the taxman (unless illegally) and then when you make another good investment, you will be taxed later on your profit gain.

4. House Put a Roof Over Your Head. That won’t happen in stocks. You need to pay rent when you invest in stocks. When you bought a house, you can stay in it and avoid paying rents. Furthermore, you won’t likely to sell your house reading the headline: “Home Prices Take A Dive”. Also, the afternoon papers do not publish the daily closing price of your house in the classifieds and ten most active house in the neighborhood.

5. Everyone has an edge in house investing. It is handed down from your parents. You naturally knows how to poke around from the kitchen to the garage and ask the right question. You can drive around the neighborhood and see how many houses are being sold and what is being renovated. Further, before you make an offer of the house, you hire many many experts to search for termites, roof leakage, piping, wiring, cracks and others. Imagine that with investing in stocks. Some stock investors even spend more time clipping coupons for grocery than finding a good stock investment.

Novice Investing is the online investing guide for beginners. You can also post your own investing articles here

Tags: finance, investing, stockfinance, investing, stock

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Compounding is one of few wonders in the world. Albert Einstein said it himself. I tend to agree. It is so powerful that it doesn’t take much to accumulate vast amount of wealth. Yet, so many people complained that they did not have enough money to invest.

Quick questions. How much does it take to be a millionaire? That depends. If you are in your early 20s, all it take is $ 2 a day and 10.5 % annual return on your investment. Hey, stock market can gives you that. The stock market indices has given that to investors since world war II. When you are 30 years old and you expect to retire by the time you are seventies, you need to invest $ 5 per day with 10.5 % annual return. How about when you are forty? You need roughly $15 per day or $ 450 per month. This is a little heavy for some.

However, as you can see, time is your friend. If you just graduate from college, you can be a millionaire with a mere $ 2 a day. The minimum wage for most state is $ 7 per hour. You think you can set aside $ 2 each and every day? Sure, you can! But still, how many people has to depend on their family when they can’t work?

No matter how old you are, you can still add considerable amount of money by investing a dollar a day. If you are twenty years away from retirement, one dollar a day will give you an extra $ 22,000 when you retire. That is about six months in living expenses for normal folks!

Do you need ideas on how to raise $ 1 a day? Oh, come on. Don’t make me come and get you. Just take that $ 1 bill from your wallet and put it someplace away from you.

Get your free investing idea by visiting our commentary section at http://www.noviceinvesting.com

Tags: Annual Report, finance, investing, Sample Portfolio, stockAnnual Report, finance, investing, Sample Portfolio, stock

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