Dear Investiv Daily reader,
The last two years have been very exiting as I’ve been writing daily articles for Investiv Daily.
I would like to thanks Shane Rawlings—Investiv’s founder—for the opportunity given to me, and I would also like to thank the hundreds of thousands of readers who have enjoyed my articles.
As with everything in life, there comes a time to part with the old and dig into new adventures. However, keep reading Investiv Daily as Shane has already found an amazing replacement for me. His name is Thomas Moore, and he is a 25-year market veteran and investing expert. You can learn more about Thomas here.
For those interested in continuing to follow what I’m up to, you can find more information on my website, svencarlin.com.
Today, I wish to leave you with a summary of the most important investing thoughts for the current environment.
Look At The Businesses You Own & Their Earnings, Not The Stock
It is so easy and entertaining to look as stock prices go up and down. However, real investing is concerned with comparing the intrinsic value of the business and its earnings with what the stock market is offering.
When the stock market offers bargain prices, you buy. When the stock market offers exuberant prices, you sell. This is the main premise if you want to make investing easy.
For example, the current earnings yield of the S&P 500, which represents the top 500 quoted U.S. businesses, is 4.08%.
There will be ups and downs with corporate earnings, but if you are happy with a long term yearly return of around 4% and happy to own the best American businesses, you should invest in the S&P 500.
If you would like to own the best American businesses but expect at least a 6% return to mitigate the risk of owning stocks that can always drop 50% in a year, you should simply wait and be invested in Treasuries, possibly short-term Treasuries that give you a good return and security.
It’s as simple as that if you are happy with a normal average return. If you want better returns than 3% from Treasuries or 4% from stocks or even the 6% you could get if you wait for stocks to fall, then you have to think about the following things.
#1: Understand what you are doing, but again, it boils down to business execution.
If you seek higher returns, you have to have as much knowledge as possible about the matter. However, if you want to do it with the minimal risk possible, you have to again become a specialist in business analysis, not the stock market.
You might look at stocks, like Tencent, that are up 500% over the last 5-years and wish you had bought earlier.
However, TCEHY’s revenue has increased exactly 5.5 times since 2012 and earnings have increased 5.46 times. Therefore, the performance of a stock over the long term is determined by its business execution. When you learn how to estimate businesses, you will be great at investing if you keep in mind some other things.
#2: Invest with a margin of safety and think value.
Value investing has beaten growth investing 94% of the time when we look at 10-year investing returns. Therefore, always keep in mind that whatever happens on financial markets is usually temporary while only the real assets, cash production, and actual value stay and add value over the longer term. More about this topic here.
#3: Look beyond what others are doing – use common sense.
You don’t necessarily need to be a contrarian to be a great investor, but it sure helps to look where other people aren’t looking because sooner or later, it will become the focus, be it in a positive or negative light.
The key is to look at long term average returns for the industry and invest when they are satisfying to you. For example, if you see an apartment close to a good university that yields 5% after all expenses are paid and you are happy with the yield, invest in it.
Further, with inflation, both the rate you are charging will be increased year-over-year and the value of the apartment should appreciate which might increase the 5% return over time. But, don’t wait. Once everybody is crazy about student housing, the yield could drop to 3%.
The main message here is to use common sense and look at the return on investments. Forget about promises but keep your eyes open for grounded investments that provide a good return.
#4: Sometimes you should swing for the fences.
When you apply the above 4 principles to your investing portfolio, you will do well.
However, to keep things interesting, you should risk a set of yearly dividends on something that is risky to the degree that you can lose 100% if it doesn’t work out but gain 1,000% if it does.
Such a risk reward asymmetry is called positive risk reward and is often mis-priced by the market. The key here isn’t to get greedy and invest too much into trends. Don’t invest in the late part of the trend, find it before other people find it.
Just to give you a hint related to something not yet coming from Elon Musk but that might soon come into view is Vanadium. It’s used for batteries and excellent for utility energy storage, and the price has doubled in the last year but might explode just as cobalt and lithium have in the last two years as utility storage demand has picked up.
So, my message is that you can follow the crowd, but don’t expect above average returns and certainly don’t expect the 10% the S&P 500 has delivered over the last 8 years because it actually delivered only 3% over the past 20.
If you want higher returns, analyze businesses and learn about asymmetric risk reward investing.
That is all from me. I have enjoyed writing for you, and I hope I will find you again across today’s digital investing world.