Investing Strategy

  • 06 Jun
    The Truth No One Tells You: Low Risk = High Reward, High Risk = Low Reward

    The Truth No One Tells You: Low Risk = High Reward, High Risk = Low Reward

    • When you give fundamentals time, you really can reach high returns with low risk.
    • Look for earnings stability and earnings yield to calculate your future returns. The lower the price, the higher the earnings yield and the lower the risk.
    • If you’re happy with a 4% return in the next 30 years, the S&P 500 has almost no risk at all. If you want more, keep reading.

    Introduction

    Yesterday we discussed a bit how defensive investors should position themselves in today’s market. As promised, today I’ll debunk the idea that only high risk can lead to high returns. More →

  • 02 Jun
    Should You Follow What Hedge Fund Managers Are Doing?

    Should You Follow What Hedge Fund Managers Are Doing?

    • I’ll describe in detail how you can follow hedge fund managers.
    • It’s very important to understand the risk reward profile of the fund manager.
    • Following allows us to find great investment ideas, but there are also big traps.

    Introduction

    Every fund has to disclose its portfolio to the SEC quarterly in a 13F form which allows us to track hedge fund managers’ portfolios. It’s easy to track what George Soros, David Tepper, Seth Klarman, Dan Loeb, Carl Icahn, David Einhorn, Bill Ackman, Warren Buffett, and many, many other interesting investment stars have been doing. The data is usually disclosed 45 days after the end of the quarter, but nevertheless shows what these guys have been doing.

    When you see the research power all those funds use, you might think it’s an excellent free lunch. Well, it could be, but there are a few things to be careful of. More →

  • 23 May
    Portfolio Management & Trading – The Value Investing Way

    Portfolio Management & Trading – The Value Investing Way

    • A value investor should trade when a better bargain present itself.
    • Liquidity is a key component of an investment and of a portfolio.
    • Klarman’s advice is to stay in touch with the market to find opportunities, average down, and hold ten to fifteen stocks max for proper diversification.

    Introduction

    We’ll continue with the analysis of Seth Klarman’s book Margin of Safety. Today we’ll discuss chapter 13, Portfolio Management and Trading. More →

  • 17 May
    Hunting For Bargains? Look For These Special Situations

    Hunting For Bargains? Look For These Special Situations

    • Apart from finding bargain investments, understanding the catalysts that will unlock value is even more important.
    • Complex securities, risk arbitrage, liquidations, and spinoffs are bargain hunting territory for the value investor.

    Introduction

    Today, we’ll look at Chapter 10 of Seth Klarman’s seminal work on value investing, Margin of Safety. Chapter 10 digs deeper into value investing and discusses complex situations.

    We would all love to just run a screen, find a few cheap stocks to buy, and then wait a year or two to enjoy triple digit returns. However, as the book value of the S&P 500 is just a third of its market value, value investors are in a difficult position and therefore are forced to look for bargains in all kinds of places, dig deeper, and comprehend complex situations.

    Unfortunately, if a value investment is simple to analyze, it’s also an obvious thing for other investors which limits the discount and potential returns. This leads value investors to do research into areas such as corporate liquidations, complex securities, risk arbitrage, and spinoffs. More →

  • 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 →

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