Investing Strategy

  • 21 Dec
    Here’s How To Hedge For 2018

    Here’s How To Hedge For 2018

    • Everything looks good with the FED raising rates, but a look under the hood says otherwise.
    • There is a possibility that we won’t see three interest rate hikes in 2018.
    • When things look so good that they can’t get any better, it’s time to leave the party.


    On Monday, we discussed what the main global risks are. Today I want to dig deeper into how to start thinking about portfolio positioning around these risks.

    The FED has started with its tightening policy which creates two investing opportunities. One depends on if the FED manages to increase rates three times in 2018 as planned, inflation rises to 2%, and the economy keeps growing at current rates while unemployment remains low. In such a scenario, everything that has worked well in the last 8 years will work well in 2018. More →

  • 15 Dec
    Is Your Investing Strategy Sustainable?

    Is Your Investing Strategy Sustainable?

    • You might be invested in growth stocks or defensive stocks, but which are best?
    • The key for long term investing is knowing what your goals are and how to get there.
    • An investing strategy that gives you an 80% chance of reaching your retirement goal can lead you to misery.


    We all have financial goals. Some of us know exactly what we want, some are more vague on it.

    Apart from knowing what you want, it’s also important to know how to get there. The vagueness around how to get there only increases when you’re not totally sure what you want. Nevertheless, I really believe that knowing what you want and developing a strategy that will get you there is much more important than what stocks to buy now or what sector to invest in. More →

  • 14 Dec
    This Strategy Could Help You Retire 6 Years Early

    This Strategy Could Help You Retire 6 Years Early

    • If you’re under 40, you should definitely read this.
    • We’ll discuss a retirement investing strategy created by Yale academics.
    • The common retirement investing strategy is terrible in any case.


    Retiring early is something a lot of us would love to do.

    There’s a way to do it that includes investing and leverage, but not the greedy kind of leverage where people bet the farm on a specific investment and lose everything. More →

  • 12 Dec
    Invested In Index Funds? Your Future Self Will Thank You For Reading This

    Invested In Index Funds? Your Future Self Will Thank You For Reading This

    • I’ll discuss 5 things everyone who’s thinking about investing or has invested in index funds should know.
    • There’s only one way to properly invest in index funds, but few investors are able to stick to the strategy for a long time.
    • Index investing isn’t the cure-all, and proper portfolio allocation should be always applied.


    The predominant investing strategy right now is to invest in index funds which means that you own an index like the S&P 500, which is a basket of the 500 biggest businesses traded in the U.S.

    Owning part of the 500 biggest businesses in the U.S. isn’t a bad thing, but there are a few things you should know before allocating your hard-earned money to index funds. More →

  • 11 Dec
    Don’t Underestimate Market Sentiment

    Don’t Underestimate Market Sentiment

    • Sentiment is perhaps the strongest market driver. We’ll discuss the current situation.
    • It certainly doesn’t pay to be a fundamental market arbitrageur.
    • Should you follow the trend or is there a way to be smart about it?


    I’ve always preferred fundamental analysis, value investing, and looking for a margin of safety. That is still my main focus when analyzing and investing in a company, but I’ve learned that there is something no fundamental investor can disregard, market sentiment. More →

  • 08 Dec
    A Random Walk Down Wall Street

    A Random Walk Down Wall Street

    • According to Burton Malkiel, both technical and fundamental analysis are futile.
    • You might agree or disagree, but there are extremely valuable investing gems in his book.
    • There is something more important than trying to beat the market.


    “Obsessing over stock charts puts holes in investors’ shoes and yachts in brokers’ docks.”

    One of the best books about stocks is Burton Malkiel’s A Random Walk Down Wall Street. It’s a book you should definitely read, if you haven’t already, as it gives a great representation of how Wall Street works over the long term and describes many stock market bubbles, stock valuations through time, the firm foundation theory and the castle in the air theory, and it dismantles technical analysis and fundamental analysis.

    Malkiel is strongly in favor of diversification, index funds, proper asset allocation, risk and long term investing, but the biggest value you can get from reading his book is the common sense related to personal investing and how the risk of investing is related to your personal financial situation and financial goals, not so much the stock market if you avoid doing stupid things.

    Let’s dig into some interesting concepts Malkiel shares and see how they apply to the current market environment.

    Is The Stock Market A Random Walk?

    The main point of the random walk theory is that short term stock price movements can’t be predicted by looking at past price movements as there is no correlation between what has happened in the past and what will happen in the future.

    The concept of a random walk is extremely difficult to grasp because it is in our human nature to attach a pattern and simplify the environment we operate in, a concept called statistical illusion. If we take a look at the S&P 500, we can definitely spot some trends and patterns.

    Figure 1: S&P 500 in the last 10 years. Source: Macro Trends.

    However, there aren’t any. The more historical data you use, the more you will see that there is no way of predicting what will happen next. Malkiel uses the following figure to show how a random walk can look.

    Figure 2: A pattern created by a coin toss. Source: Malkiel.

    The pattern of the S&P 500 isn’t much different than the pattern derived from a coin toss. So whenever you think you might be onto something, remember that a reversal is always around the corner and one short but strong bear market can erase gains that took a decade to build.

    After dismissing technical analysis, let’s see what Malkiel has to say about fundamental analysis.

    Malkiel and Cragg conducted a survey of Wall Street’s top analysts and found that they simply fail at accurately predicting earnings in every single industry both in the one-year and five-year periods. Other researchers like Sandretto and Milkrishnamurthi have reached similar conclusions.

    The book also includes a lengthy discussion about how trying to beat the market is futile. I could argue on that with value investing as it has proven profitable in the very long term. However, even value investing is on shaky grounds given the current accommodative monetary policies which are again a random walk as it was impossible to predict such a scenario 10 years ago. Malkiel argues that value investing did underperform in the 1990s and therefore it is again impossible to know whether past outperformance will replicate itself into the future. You may agree or disagree with Malkiel, but there is some extremely valuable information in his book.

    The Value Of Common Sense Shared By Malkiel

    I find the biggest value in Malkiel’s book is the common sense, which is extremely important in our investing life-cycle. I’ll share a few examples here. Let’s start with inflation.

    Most investors focus on the inflation rate measured by the consumer price index, but that rate has little meaning for an individual and you should think about how to protect your wealth from inflation even if it doesn’t seem important now when inflation is below 2%. The following figure will show how different items are differently impacted by inflation, so it all depends on what you want to buy in the future. If you want to retire on Hershey bars, you should worry.

    Figure 3: Inflation is different and, again, personal. Source: Malkiel.

    Another important factor is proper asset allocation which starts with proper diversification. Malkiel shows how important it is to be well diversified internationally and to rebalance accordingly through time. A portfolio of 20 well diversified international stocks (including U.S. stocks) leads to the same returns with lower risk.

    Figure 4: International diversification leads to lower risk. Source: Malkiel.

    The third Malkiel concept I want to touch on here is risk and age. A young person that has the best earning years ahead of them can afford to take higher risks as the increased future salaries can cover for eventual portfolio declines and even take advantage of lower prices and consequently higher dividend yields. A person close to or in retirement can’t take the risk of a lost stock market decade or any kind of potential portfolio decline.


    Reading Malkiel’s book leads to an intriguing discussion with oneself, especially if you try to beat the market with a certain technique. However, I believe A Random Walk Down Wall Street is an essential read for anyone who owns any kind of investment vehicle.

    I might not totally agree with what Malkiel is saying, but I’m still young and can take a lot of risk as he would say. Nevertheless, where I agree with Malkiel is that investing is and always will be a personal issue.

    I would build on Malkiel’s work by saying that beating the market is irrelevant. What is relevant is that your investments, their risk and reward, are related to your personal financial life cycle goals. Malkiel’s book is an essential read for determining the relation between the risk reward of your investment strategies and your life goals.

    © 2017 Investiv

  • 07 Dec
    The Delta Of The Delta – A Practical Approach To Growth Stocks

    The Delta Of The Delta – A Practical Approach To Growth Stocks

    • This market is all about growth stocks, so we should know what drives and how it impacts growth stocks.
    • With one example, I’ll show how the change in growth impacts a stock’s price.
    • It’s important to look at real growth possibilities as the market often gets extremely exuberant when looking at a few quarters with increasing growth rates.


    The current stock market is all about growth, and valuations don’t matter that much anymore. The question now is how to analyze growth stocks and what metrics to take into consideration when creating a risk reward model for any given growth stock. More →

  • 06 Dec
    This Is Why You Need To Think About Dividends

    This Is Why You Need To Think About Dividends

    • Dividends and inflation have accounted for 99.7% of returns from 1929.
    • A global look at the dividend environment shows that there are excellent opportunities for dividend growth.
    • The dividend environment has also been distorted by the accommodative central bank policies as yields are very different now, while the companies paying them aren’t that different.


    Back in October, I wrote an article that discussed 8 charts that show how the stock market doesn’t always go up.

    Aside from these charts, I discussed the research of Professor Emeritus Edward F. McQuarrie, from the Leavey School of Business at Santa Clara University. What’s interesting from his research is that he found that dividends and inflation contributed to 99.7% of investing returns since 1929, which is a mind-blowing number. More →

  • 05 Dec
    What You Can Learn From How The Market Reacts To News

    What You Can Learn From How The Market Reacts To News

    • I’ll analyze a few scientific studies on how news impacts stock prices and also a couple of interesting case studies.
    • There are some rules that can be applied to news and stocks.
    • It’s interesting how Wall Street always weighs the short term much more heavily than the long term.


    I’m sure you often see abrupt price moves with the stocks you follow or own. Those abrupt moves—which can go to 10% or even 20% in a day for a relatively stable business, 20% to 50% for a mining company, and even more than 50% for a pharmaceutical—are due to some kind of news coming from the company or related to the company that makes investors take action and sell or buy.

    Today, we’re going to discuss how stocks usually react to news, the information asymmetry, the stock price drift, and how to take advantage of the sharp price moves. More →

  • 04 Dec
    Are You A Skilled Or Lucky Investor? Take This Test

    Are You A Skilled Or Lucky Investor? Take This Test

    • Scientific research shows that there is skill in financial markets.
    • There’s a way you can test to see whether you’re just lucky or really skilled.
    • I’ll perhaps surprise you at the end, but neither luck nor skill matter.


    One topic I find interesting to discuss is whether investing returns are more a matter of luck or skill. Some things go up in price and make you feel like a genius when you were really just plain lucky, while other investments end badly but were a smart thing to invest in at the time.

    In a bull market of 8 years, many start thinking that the possibility of losing money is remote thanks to the skills they’ve developed over the last few years only to be met with a very cold shower when the luck of the bull market ends. More →

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