Investing Strategy

  • 26 Mar
    Sunday Edition: How Cash Can Be Like A Call Option On The Market

    Sunday Edition: How Cash Can Be Like A Call Option On The Market

    When the market reaches extreme levels—to either the upside or the downside—it’s pretty normal to see conditions generally start to become more volatile. With the market at historical highs, investors start to become more and more nervous about whether staying in the market exposes them to more risk, or whether taking profits now would mean leaving money on the table when the market surges to yet another historical high. A similar kind of uncertainty happens at or near market bottoms, as speculation centers around whether the market has dropped enough for investors to start buying obvious bargains or whether there is still even more downside to be avoided. More →

  • 24 Mar
    Using Intrinsic Value To Measure Portfolio Performance

    Using Intrinsic Value To Measure Portfolio Performance

    • The market is irrational and can’t be used as the only measure of investment performance.
    • Imagine if all the businesses you own suddenly delisted, you’d look at their value in a different way.
    • Intrinsic value is based on the business owner perspective which is essential for reaching healthy long term returns.

    Introduction

    This past Tuesday was a bad day for stocks with both the Dow and the S&P 500 falling more than 1%. This isn’t very significant for now, apart from the fact that it broke the longest run the S&P 500 has ever seen without a 1% decline (64 days in comparison to 34 days in August 1995). However, it’s an excellent introduction to today’s topic on how we measure investment performance. More →

  • 23 Mar
    Do You Have A Static Or Dynamic View Of The Markets?

    Do You Have A Static Or Dynamic View Of The Markets?

    • A static view tells us stocks are cheap. A dynamic view tells us hell is about to break loose.
    • Vehicle loans have increased 57% since 2010. If interest rates increase, car sales and other credit related sales will falter and lead the economy into a recession.
    • However, as always, there are ways to make money in any environment. Today we’ll discuss an actionable idea and introduce you to a profitable long term investing philosophy.

    Introduction

    This market has lost all connections to economic reality.

    The FED’s rate hike lowered treasury yields instead of pushing them higher. This is at odds with history as since 1954, the correlation between the federal funds rate and the yield on 10-year treasuries has been nearly perfectly correlated with a correlation ratio of 0.91, 1 being perfectly correlated. More →

  • 17 Mar
    Do You Really Know What Risk Is & Can You Handle It?

    Do You Really Know What Risk Is & Can You Handle It?

    • Risk can’t be defined as volatility as it includes factors like your retirement, your children’s college tuitions, mortgage payments, unemployment, etc.
    • In life altering situations, nobody thinks about the highest expected utility hypothesis.
    • The personal side of risk is more important than any ratio, coefficient, or return potential.

    Introduction

    Defining investing risk is crucial for a healthy approach to investing. Some say risk is the chance that something goes wrong, some define it as volatility, others as the risk of permanent loss. However, 99.9% of the articles, news reports, and videos, don’t even mention risk, let alone define it or quantify it for the discussed investment. This is because 99.9% of people don’t like to face reality. It’s human nature to put our heads in the sand and postpone difficult decisions. More →

  • 15 Mar
    There’s Only One Reason The Markets Are Rising & Nothing Can Be Done About It

    There’s Only One Reason The Markets Are Rising & Nothing Can Be Done About It

    • Everybody knows the market is extremely overvalued and risky, but nobody cares as long as it goes up.
    • Funds keep flowing into U.S. equities despite the fundamentals. This will be very painful when the trend reverses.

    Introduction

    We all know that in the long run, our investment returns are perfectly correlated to the underlying performance of the businesses we own in relation to the price we pay for ownership. If the price is high, our returns will be weak. If what we buy is cheap in relation to underlying earnings, our returns will be great or even amazing. This is a universal truth. However, there are some issues with it.

    The first is that even if most agree on the strong correlation between earnings and stock returns, very few like to think about the long term and instead prefer to only think about the short term. In the short term, stock returns are driven by equity flows and there is nothing that we can do about it even if it has been statistically proven that long term returns are perfectly correlated to underlying earnings and the greatest investors, like Ray Dalio and Warren Buffett, keep reminding us of this fact. More →

  • 14 Mar
    The Market Is Overvalued – Look For Merger Arbitrage Opportunities

    The Market Is Overvalued – Look For Merger Arbitrage Opportunities

    • The arbitrage idea disclosed back in October has delivered 14% since then, but that isn’t the point.
    • The point is that merger arbitrage can deliver significant returns with less risk.
    • You can further improve your returns by not listening to the media, or even better, by listening but doing the opposite.

    Introduction

    There are essentially two low risk options to invest in in these expensive markets. It’s true that the S&P 500 can go higher in 2017 and 2018, but it’s what we don’t see coming that scares me at these valuations.

    The S&P 500 has a CAPE ratio of 29.14. This ratio has been higher only two times in history. You can read more about the CAPE ratio here. More →

  • 13 Mar
    Value Investing: The Importance of a Margin of Safety

    Value Investing: The Importance of a Margin of Safety

    • A margin of safety and value investing aren’t so attractive in rising markets, but become essential in declining markets.
    • The lower the price, the higher the margin of safety, no matter what the market thinks. Klarman usually buys more in such occasions.
    • Algorithms and numbers don’t make great investors. Discipline, patience, and judgement do.

    Introduction

    We have finally arrived at the core of Seth Klarman’s book Margin of Safety, i.e. Value Investing and the Margin of Safety.

    “Value investing is the discipline of buying securities at a significant discount from their current underlying values and holding them until more of their value is realized.” Klarman

    The essence of value investing is finding a bargain, i.e. buying a dollar for much less than one hundred pennies. When a bargain is found—and they can be very difficult to find, especially in a market like the one we’re in now—the next step is to determine the margin of safety, or the discount the price offers in relation to the undiscovered value. The bigger the discount, the better. More →

  • 10 Mar
    How The CAPE Ratio Can Give You An Investing Edge

    How The CAPE Ratio Can Give You An Investing Edge

    • The CAPE ratio shows when something is cheap or expensive and is much more precise than the PE ratio.
    • The S&P 500 is 74% overvalued and will result in negative 10-year returns according to the CAPE ratio and history.
    • However, there is plenty that can be done to improve your returns.

    Introduction

    Whether you’re a long-term investor or a trader, something that gives you a clue on the long-term trend around a security or sector is always very useful. Such a ratio was developed by Yale professor Robert Shiller and he didn’t get a Nobel prize for nothing, the CAPE ratio really works.

    Today, I’ll describe it, show how it can be used, and analyze its past performance. More →

  • 09 Mar
    What Is Your Investing Edge?

    What Is Your Investing Edge?

    • We’re all different, so investing can’t be one size fits all.
    • This article will discuss various investing edges that could fit your investment attitude.
    • Don’t worry about Wall Street and their billions spent on research. These days, almost all data is available online and only you can make the best decision for yourself.

    Introduction

    The market wants you to believe that you don’t have an investing edge. It’s simply not in the interest of the industry that you do your own investing because without fees, Wall Street would soon turn into something like the image above and with the bull long gone.

    However, we’re all different and you should find an investing edge that best suits you and your investing goals. The beauty of investing is that it isn’t one size fits all. More →

  • 07 Mar
    The Superinvestors Of Graham And Doddsville – Is Buffett A Hypocrite?

    The Superinvestors Of Graham And Doddsville – Is Buffett A Hypocrite?

    • According to Warren Buffet in 1984, investing and beating the market is simple: just use value investing and a margin of safety.
    • For this market, value investing is irrelevant. However if things change, value investing will become essential.
    • Spoiler alert: What I’ve written in this article you will either immediately like or totally disregard. Unfortunately, the latter will have a negative impact on your wealth.

    Introduction

    One short, 15-page article holds more investing insight than all the content published by the media in a year. It’s Warren Buffett’s article The Superinvestors of Graham and Doddsville.

    As the article was written in 1984, it gives you the real, non-political and unconstrained Buffett. Today’s Buffet is a hypocrite because he is forced to say index funds are a good investment even though stocks are at valuations he would never approve of. He has become so big that anything opposite to positive statements would lead to a possible market meltdown. Plus, don’t be confused by the fact that he recently bought $12 billion of stocks, as he bought into extremely cheap sectors, you can read more about that here.

    Today, I’ll summarize Buffett’s article and put it into today’s context. More →

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