Investing Strategy

  • 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 →

  • 16 Apr
    Sunday Edition: Would John Templeton Buy This Sector?

    Sunday Edition: Would John Templeton Buy This Sector?

    When a market is as overvalued as the S&P 500, it’s best to be defensive, rather than being 100% invested, trying to eek out every last drop of potential gain.

    I don’t care if the market moves another 10% or even 15% higher based on momentum.  When you compare the potential for another 5% to 15% upside against the risk of a 50% or greater crash, it seems like a foolish move to me.

    At the top of a business cycle (we are there now), the most successful investors will typically hold much larger than normal cash balances and only commit new money to sectors which are truly undervalued – and trading at a point of maximum pessimism with a nice margin of safety. More →

  • 14 Apr
    Debunking Bad Investment Advice: Don’t Buy That Wonderful Brand At Just Any Price

    Debunking Bad Investment Advice: Don’t Buy That Wonderful Brand At Just Any Price

    • As wonderful as a company may be, the price paid for it is the determining factor for investment returns.
    • Many companies with great brands have seen their stock prices appreciate while their fundamentals stagnate.
    • Buffett has mostly bought at wonderful prices. Keep that in mind when investing.

    Introduction

    It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

    Many asset managers and financial advisors have Buffett’s quote on their promotional materials and web pages. However, more arguments can be made against the above statement than for it. We’ll go through some examples to help prevent you from falling into the trap of paying what the market thinks is a fair price for companies that might not be that wonderful after all. More →

  • 12 Apr
    How To Prepare For Anything The Economy Throws At You

    How To Prepare For Anything The Economy Throws At You

    • All stocks will rise with a rising tide, therefore it’s wise to buy those stocks that won’t fall off a cliff in a recession.
    • The usual suspects—like consumer staples, utilities, and healthcare—are good ideas, but not at any price.
    • Bonds are close to becoming a win win situation.

    Introduction

    Yesterday we analyzed the FED’s latest meeting minutes, and saw how when the FED applies historical probability calculations to their own estimations, the result is that anything can happen.

    The FED itself stated that, in the next few years, economic growth could be anywhere between -0.5% and 4%, unemployment between 2% and 7%, and inflation between 1% and 3% with a 70% confidence interval. A 70% confidence interval means that there is a 30% chance economic indicators end up outside the above mentioned ranges. More →

  • 10 Apr
    Are You A Top Down Or Bottom Up Investor?

    Are You A Top Down Or Bottom Up Investor?

    • It’s best to use a bottom up and not a top down approach to investing if you want to lower your risk and increase your returns.
    • A value investor doesn’t like risk and invests with a huge margin of safety, is patient, happy to stay in cash if there are no bargains, constantly looks at balance sheets, and buys the present. Positive future developments in a business are just a bonus.

    Introduction

    We’ve covered more than half of Seth Klarman’s book Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor. I’ve received amazing feedback on the series and hope you will be satisfied with the summary and comment on the second half of the book. You can read the previous articles on the topic here. More →

  • 09 Apr
    Sunday Edition: How Bad IS the Worst-Case Scenario?

    Sunday Edition: How Bad IS the Worst-Case Scenario?

    If there is any single issue that generates more uncertainty, anxiety, and questions than any other about the Rebel Income system, I think it may be the perceived downside that comes with a stock assignment. Some of that uncertainty is a good thing, because it is true that selling put options (considered a naked transaction by brokers) without an understanding of the potential consequences leaves you more exposed to risk. However, I also believe that most of the fear that people tend to have about put selling is misinformed. More →

  • 06 Apr
    Read This Before Investing In The Next “Cool” Company

    Read This Before Investing In The Next “Cool” Company

    • The investment thesis behind investing in cool businesses is based on stellar growth. As no business can grow forever, sentiment often changes and stock prices plunge.
    • We’ll discuss, Tesla, Nike, Lululemon, Whole Foods, Under Armour, GoPro, Fitbit, and Microsoft to find the best way to invest in such businesses, because many of them are great businesses.
    • In the end, it all boils down to earnings. If you’re a long-term investor, focus on the business and its long-term health.

    Introduction

    I’m a value investor and as one, I always try to invest with a margin of safety. However, sometimes I get carried away and invest in companies that don’t really meet my investing criteria.

    The last investing mistake I made—where I invested in something because it was a cool brand, my wife loved shopping there, and it was growing fast—that perfectly relates to the topic of this article, was Whole Foods Market (NASDAQ: WFM). More →

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