Charlie Munger and Ben Graham Reveal the Secrets to Getting Rich

http://www.gurufocus.com/news/212440/charlie-munger-reveals-the-secrets-to-getting-rich/affid/81000

http://seekingalpha.com/article/1296131-benjamin-graham-s-4-commandments-of-defensive-dividend-investing

Valuation and earnings estimates

I just read another great article from Chuck Carnevale on Seeking Alpha. I highly recommend investors take the time to read Forecasting Future Earnings. A quick recap is that Chuck states that checking the analyst consensus earnings estimates is a starting point to determine future price action. Msnmoney.com could be used to do this quickly; just enter the ticker and click on Earnings in the left column.
For short term price action, traders use earnings 'misses' to buy on a short term dip. They then wait for the price to recover and then sell. 5% or more can be obtained doing this. Earnings 'surprises' are a short term driver of prices. For longer term buy and monitor investors, the 1,2 and 5 year estimates are a good place to start when looking at a business. This earnings guidance is obtained by the analysts from the management of the company among other places. It is good to keep in mind that 1.) the analysts get paid to do this and want to do their job well and 2.) the management giving the estimate information want people to buy their stock. If they overestimate and there is a subsequent miss on earnings, stock price goes down and people sell. Therefore management often underestimates earnings estimates-something for investors to keep in mind.

There are lots of other drivers of prices-lawsuits, natural events and disasters, politics, etc that have nothing to do with earnings or earnings estimates. Due diligence is performed by paying attention to these and other factors.

The article also states that near term estimates are generally more accurate than longer term estimates and that total accuracy of the estimate is not the point. If the estimate is a few pennies off this should not affect our thinking as long term investors. The main point is that earnings are increasing.

To summarize, this entry is about business results and really not about price volatility. Price and research firm recommendations like Reuters and Value Line are a separate issue. Using earnings growth estimates can be useful in determining which business to choose when investing. Read Chuck's article for more info.

Investment words from Motley Fool

The following from Motley Fool (www.fool.com) really sums up things well; the valuation text addresses something I never knew about the worth of a company and it's stock;


While luck can't be completely eliminated, you can follow a time-tested approach to reduce its impact and increase the chance that the money you earn from investing, you earn on purpose. This approach traces its roots to the heels of the Great Depression and Benjamin Graham, the father of Value Investing and the man who taught Warren Buffett how to invest.
The three parts to this Graham-inspired strategy are straightforward on their own, but they really gain their power when all three are used together. Those keys to investing success are:

• Dividends
• Valuation
• Diversification 

Here's why each matters, and how they work together.
Dividends
Dividends are cash payments made to investors to directly compensate them for the financial risks they're taking for owning stock. Not every company pays a dividend, but once a company starts paying a regular dividend, it represents not only cash in investors' pockets, but also an incredibly clear signal of the company's prospects.
Take General Electric (NYSE: GE  ) as a prime example. The company was once incredibly protective of the dividend that it had maintained for decades and increased annually for over 30 years. When its overexposure to subprime debts during the financial crisis tripped up its own operations, one of the earliest public signals of just how bad the damage was came from the company's dividend. After decades of clockwork annual raises, it held the dividend steady for six quarters, before finally cutting it.
Similarly, electric generating company Exelon (NYSE: EXC  ) tried to protect its at-risk dividend before finally succumbing to a cut. The saga unfolded in public over several months, as investor speculation and company statements hashed out whether the payment could be maintained, and under what circumstances.
Dividends may not be guaranteed payments, but in both of these cases, company management made it clear that they know investors watch their dividends and carefully analyze changes to policy. That both companies somewhat telegraphed their difficulties via their dividends shows how those payments can provide not only direct financial rewards but also powerful signals of what's really happening.
Valuation
One strategy Benjamin Graham favored was buying stocks trading below their net current asset values. His theory was that any surviving company should be worth at least that much, and any dying company should be convertible into somewhere in the neighborhood of that amount of cash when liquidated.
While that strategy worked well for him when he invented it, in these days of ultrafast computerized trading, the companies that trade at those levels generally do so for really good reasons. Take the giant banks Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) . Looking just at their market prices and tangible asset values, they appear to be incredible bargains:

Company	Market Capitalization	Net Tangible Asset Value
Bank of America	$129.7 billion	$161.6 billion
Citigroup	$132.8 billion	$154.9 billion

Source: Yahoo! Finance as of Feb. 16, 2013. 

Yet in the topsy-turvy world that is bank accounting, the largest asset on their books is other people's and business' debts: mortgage loans, business loans, credit card loans, etc. For those assets to really be worth their book values, the borrowers behind those debts need to reliably make their payments. It wasn't that long ago that both of these companies nearly imploded when more people than expected stopped paying on their mortgages, triggering the recent financial crisis.
Still, whether it's looking at tangible asset values or some other method of estimating a company's true worth, looking for legitimate value can reduce your risk of overpaying for the companies you buy.
Diversification
Since dividends aren't guaranteed and valuation methods can only protect you so far if a company falters, you need to diversify your holdings across industries in order to spread out those risks. Diversification doesn't eliminate the risk of a company going bad, but it does reduce the impact of any one failure on your overall portfolio. The upside of diversification is that protection, but the downside is that it also mutes the gain you get if any one of your companies dramatically exceeds your expectations.
Dividends and valuation are the tools that can help you find companies worth owning based on the real money they're generating and paying to shareholders. Diversification is the tool that protects you when something goes wrong. Use all three together, and you have a strategy centered on making money on purpose. Isn't that better than throwing your money at the market and hoping you get lucky?

February activity - valuation

I have no plans to trade in February. Current prices are not in a buy or sell range as far as I can tell (valuation based on pe, price and earnings history and payout ratio). I may issue a put or a call if I see the right numbers but I am content to watch the dividends come in at this point. ARNA is oversold now but it should be in the pharmacies this month which will generate a bump in price. F is hovering around 13. GLW would be a buy at 11.50 or 11. Stocks to watch - ARNA, F, GLW, COP.

January activity

I did the following transactions immediately before the fiscal cliff resolution; I already had a position in KMP and just added to it. I opened positions in LINE and PPL. I did not feel that any of my core positions were in the buy range or I would have added to them.KMP is now 87.25, PPL is 28.95 and LINE is 37.11. I also bought back a covered call I had sold on F which was just upgraded and doubled their dividend!

12/28/2012

YOU BOUGHT

KMP

KINDER MORGAN ENERGY PARTNERS L P

Cash

Shares: +10.000

Price: $78.38

Amount: -$791.75

Settlement Date: 01/03/2013

12/28/2012

YOU BOUGHT

LINE

LINN ENERGY LLC UNIT REPSTG LTD LIABILI

Cash

Shares: +50.000

Price: $35.41

Amount: -$1,778.45

Settlement Date: 01/03/2013

12/28/2012

YOU BOUGHT

PPL

PPL CORP

Cash

Shares: +120.000

Price: $28.38

Amount: -$3,413.55

Settlement Date: 01/03/2013

Year End Wrap-up, Rebalancing and Review

It is that time of year to step back and reflect on many things. One of the most predominant thoughts I have is how lucky I am to be in this situation in life-personal, family, health, career and financial is all good. This blog has allowed me to centralize and organize my financial and investing philosophies and methods. Here is an attempt to begin to record what those thoughts are.


I am 50 years old with a wife and 2 kids. I want to invest so that I receive income and growth in the portfolio. Growth will become less important and income will become more important as the years go by. I am still in the accumulation phase of investing but will transition to more of a distribution phase later. In order to measure the progress, I will be posting the portfolio holdings, current values and exact income produced soon. To use a baseball analogy, I am too old to really risk thousands 'swinging for the fences' and buying startups and penny stocks. I just would rather put my bat on the ball and just put the ball in play. A grounder to the infield will work! Hell, I would be satisfied with a foul tip. So I believe in getting small, steady, reliable gains in the form of dividends and also some low risk covered calls or puts. I do have one or two growth plays-these are the riskiest equities I own-ARNA, F, and in and out of GLW. To sum it up;

I want to invest in low risk companies with a track record of safe and growing dividends. Criteria that are required include:
1. PE ratio of 15 or less upon purchase
2. Minimum 3% dividend yield (unless it is a growth play)
3. Minimum 5% 5 yr dividend growth rate (unless it is a utility or a telecom)
4. At least 20% off its 52 week high
5. Market cap $500M minimum
6. Payout ratio 75% maximum

I receive approximately $1500 a year in dividends from my portfolio. My goal is to grow the income to at least $4k by the time I am 55. At 55 I would like to semi-retire. For a better description of my plans and interests, see my profile.


What else do I need to do? Learn. I desperately need to learn more valuation techniques and I need to seriously learn options. I am seriously considering starting an investing library. I read constantly but a methodical approach would work better than scattered reading. Time is the biggest constraint-there are not enough hours in the day to learn and produce all that is desired so choices have to be made.


That's it! Simple. The best it gets. Happy holidays, Merry Christmas and a profitable New Year to everyone. Oh yeah, health and happiness too!

Fiscal cliff approaching

With the fiscal cliff approaching, there appears to be 2 possibilities to think about.

1. No agreement is reached and we lose the Bush era tax cuts.
2. An agreement is reached that involves tax hikes and/or government spending cuts.

Both options have negative consequences for the stock market. In a downward headed market, generally we want to keep cash on hand and use covered calls on stocks we wouldn't mind selling anyway. Even in a major pullback, absolutely do not sell core dividend paying blue chips-ride it out. The tax consequences are not known yet but on small portfolios < 100k it won't make a huge difference. Stocks to watch-LINE, LNCO, GLW, F, COP, PSX, CVX, INTC, ARNA.