Investing Strategy

  • 11 May
    Sven’s View On Options

    Sven’s View On Options

    • Options allow for outsized returns, but unlike most stocks, they can also lead to unlimited losses or a total loss of the investment in the best case negative scenario.
    • However, returns of 1,000% aren’t rare and options are a great way to increase your income or protect your returns.
    • As options have an expiration date and some carry unlimited risks, you should really only use them if you know what you are doing.

    Introduction

    An Investiv Daily subscriber recently asked me what I think about options as I never write about them.

    Options have become very attractive in this environment of low dividend yields and high price to earnings (P/E) ratios, especially for those who want to achieve extra income by writing options (writing an option involves opening an option position with the sale of a contract where the buyer gets the right to buy or sell a certain stock at a certain price for a period of time while the seller gets the option premium).

    Today we’ll discuss options, different types of options, how can they be used, and when and who should use them. More →

  • 09 May
    Investment Research: The Challenge of Finding Attractive Investments

    Investment Research: The Challenge of Finding Attractive Investments

    • Bargains can be found through book value, special situations, 52 week lows, merger arbitrages, bankruptcies, etc.
    • It’s necessary to be a contrarian to be a value investor, though it might be painful for a while.
    • With experience, it will take less and less time to assess a stock and whether it has the potential to be a good investment.

    Introduction

    Last week we discussed Klarman’s view on the best business valuation methods. You can find the article here. Today we’ll discuss his approach to investment research.

    Studying fairly priced securities won’t get you far because you’re competing with thousands of others who have researched those companies and, especially in the current market environment, if there is anything worth owning, it will probably be expensive. Therefore, to find bargain investments, an investor has to look where others aren’t looking or refuse to look. More →

  • 08 May
    Heuristic Simplification Makes Everyone Happier, But It’s Terrible For Investing

    Heuristic Simplification Makes Everyone Happier, But It’s Terrible For Investing

    • Irrational behavior leads to higher risks and lower returns. We’ll show how to avoid it.
    • We’ll describe how a cognitive bias can be extremely dangerous in the current market environment.

    Introduction

    Standard finance assumes that investors always behave rationally and therefore it ignores cognitive and emotional biases that might affect investor behavior. But such phycological biases don’t only affect the individual investor, but can also affect the majority of the investing population. When the majority of investors behave irrationally, the market becomes inefficient and extremely dangerous as risks increase and longer-term returns turn negative.

    Today, I’ll describe the most common psychological bias affecting investors and making them behave irrationally. More →

  • 07 May
    Sunday Edition: When AMD’s Chart Was A Crystal Ball

    Sunday Edition: When AMD’s Chart Was A Crystal Ball

    A few weeks ago I wrote an article for our sister publication Direction Alerts about a technical pattern I had spotted on semiconductor company AMD.

    What I had found at the time was a head and shoulders formation that I determined would see the stock price falling and giving investors an opportunity to buy this growth stock at a discount. More →

  • 02 May
    The Art Of Business Valuation – Three Valuable Valuation Methods

    The Art Of Business Valuation – Three Valuable Valuation Methods

    • Don’t expect precision from business valuation, but accuracy helps a lot.
    • Calculating net present values, liquidation values, and stock market values are the best methods to use according to Klarman.

    Introduction

    Today, we’re really digging into the essence of Seth Klarman’s book Margin of Safety.

    Some think the market, being efficient, will tell you the exact value of a business, but history has shown that in the short term it often happens that the market values businesses extremely irrationally, either on the upside or on the downside. Knowing how to properly value a business gives an investor the perfect investing edge as it allows them to disregard what the market thinks and turn that into their own advantage by exploiting market mispricings.

    Let’s see what Klarman has to say about business valuation by going through chapter 8 of his book. More →

  • 30 Apr
    Sunday Edition: When Buying Luxury Isn’t So Illogical

    Sunday Edition: When Buying Luxury Isn’t So Illogical

    Sven wrote an interesting article a couple of weeks ago on Ferrari (NYSE: RACE), and how investing in it is dangerous as doing so is investing purely in sentiment. If you didn’t have a chance to read it at the time, you’ll find the article here.

    I agree wholeheartedly with Sven on Ferrari. The brand is synonymous with exclusivity, and when a brand’s market is meant to remain small—Ferrari produces only about 8,000 vehicles per year—it’s hard to imagine how the company intends to grow sales, and if sales and revenue won’t grow significantly over time, I have to wonder what the real point is in investing in the company.

    Not only that, but the instant sentiment for the company changes or the market begins to decline, Ferrari’s stock price will undoubtedly fall significantly and any gains made will be wiped out.

    However, I also believe that there are ways to invest in luxury that do make sense. More →

  • 28 Apr
    Dollar Cost Average Your Way To Excellent Returns

    Dollar Cost Average Your Way To Excellent Returns

    • Dollar cost averaging brings higher returns on invested amounts with less risk.
    • It also offers less stress because if stocks go up, it’s fine, and if they fall, it’s even better as you can buy more.
    • The same strategy can be applied by the sophisticated investor around longer term market irrationalities.

    Introduction

    Dollar cost averaging might sound like a good thing for a novice investor, and it is, but don’t forget that the sophisticated investor can also use the strategy.

    Many novice and non-sophisticated investors don’t want to invest outside of the U.S. and when it comes to stocks, they just want to own a few of what they think are the best stocks. For those investors, the best strategy is to dollar cost average. More →

  • 27 Apr
    The S&P 500 Only Has Sentiment To Thank For The Gains In The Last 5 Years

    The S&P 500 Only Has Sentiment To Thank For The Gains In The Last 5 Years

    • Positive sentiment alone has added 950 points to the S&P 500 in the last 5 years.
    • The S&P 500 has returned 12% in the last 5 years, but only 4.5% in the last 10 years and just 2.7% in the last 17 years. Don’t let current positive sentiment lead you to such terrible long term returns.
    • The opportunity cost might be significant, but the long term picture of not following the herd looks much better.

    Introduction

    I know that if I buy a stock with a price to earnings (P/E) ratio of 10 and stable future business prospects, my very long-term return should be around 10%, plus inflation and eventual growth. If I buy a stock at a P/E ratio of 5, my returns will be around 20%, while if I buy a stock with a P/E ratio of 20, my returns will be around 5%. It’s as simple as that, in the long term. More →

  • 25 Apr
    Klarman’s View On Risk & Return

    Klarman’s View On Risk & Return

    • It’s essential to focus on risk, whether you are a trader, dividend investor, or value investor.
    • One of the biggest investment fallacies is that risk and return are positively correlated.
    • The market is inefficient because of extreme liquidity provided by central banks, passive investments, and share repurchases.
    • Volatility is low, but this doesn’t mean risks are low.
    • Klarman provides a simple and powerful definition of risk.
    • If you can’t tolerate price volatility, you shouldn’t invest in stocks. Own T-bills instead.
    • A declining stock price should increase your returns.

    Introduction

    Today I’ll continue summing up Klarman’s iconic investing book Margin of Safety.

    Every time I reread the book, I’m more astonished by the wisdom it contains. I hope to transfer as much value as possible to you as the book is extremely difficult to get (lowest price on Amazon is $1,000). Today’s topic is from Chapter 7, The Nature of Risk. More →

  • 17 Apr
    Forget About The Market & Focus On Absolute Performance

    Forget About The Market & Focus On Absolute Performance

    • Would you instantly sign up for a 15% yearly return for the next 10 years with inflation at 2%? The answer is probably yes.
    • Would you feel the same joy if the market could do 20% per year over the next ten years? Even if the answer is irrational, that is how we as humans are wired.
    • Chasing market performance is a self-reinforcing cycle that slowly builds up, but it takes less than two years for the house of cards to crash completely.

    Introduction

    Today I’ll continue with my analysis of the investing concepts discussed in Seth Klarman’s book Margin of Safety. Today’s topic is relative and absolute performance. More →

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