Risk

  • 18 Oct
    On The 30th Anniversary Of 1987’s Black Monday, Today’s Market Looks Eerily Similar. Should You Prepare For A Crash?

    On The 30th Anniversary Of 1987’s Black Monday, Today’s Market Looks Eerily Similar. Should You Prepare For A Crash?

    • The data indicates that the likelihood of a crash similar to October 1987 is the same today as it was then.
    • This doesn’t mean the stock market will crash tomorrow.
    • It only means that you should know yourself extremely well and relate your investments to your risk reward appetite. Only this can prevent you from the biggest mistake investors usually make, i.e. sell at the bottom of a bear market in total panic and capitulation.



    Introduction

    On Monday October 19, 1987, the stock market crashed a whopping 22.6% in one day. Is it possible that the same could happen tomorrow? Well, let’s compare the current market and to the one back then. More →

  • 21 Sep
    Here’s Why You Need To Think About The Current Market Risks

    Here’s Why You Need To Think About The Current Market Risks

    • Evolution hasn’t created us to look at risks in investing, which is something that can be very costly.
    • I’ll discuss in a simple, but straightforward way what the current market risks are to be aware of.
    • If you’re careful, you can earn up to $500k in 20 years on a $100k portfolio.

    Introduction

    Investing is a very delicate thing and few understand that we aren’t wired for success in it. Part of our brain, the amygdala, through millions of years of evolution, has taught us to fight when we might be wrong, to prove our dominance and our convictions in order to prevail and spread our genetics. More →

  • 17 Aug
    Worried About The Current Environment? Here’s Why You Should Be.

    Worried About The Current Environment? Here’s Why You Should Be.

    • We’ll discuss the most obvious risks to the current financial environment.
    • For example, higher interest rates are already negatively affecting the U.S. economy and inflation.
    • However, the most dangerous risks are the hidden ones.

    Introduction

    Yesterday we discussed the main factor behind the current bull market, i.e. central bank asset purchases, and I described three potential scenarios, one where things continue as expected, one where central banks increase stimulus, and one where inflation messes things up for everyone.

    Nevertheless, nothing that was discussed in yesterday’s article was a new finding. Such fears have been circulating the financial environment since 2009, and as we have witnessed, nothing much has changed since then while the global financial system seems stable as a rock. Even Japan’s economic activity has surprised on the upside with growth of 4% for Q2 2017. More →

  • 15 Aug
    Is It Possible To Find A Wonderful Business At a Fair Price In Today’s Environment?

    Is It Possible To Find A Wonderful Business At a Fair Price In Today’s Environment?

    • We’ll first define what a wonderful business should be and what a fair price would be in relation to general stock market risk.
    • We’ll look at price earnings differences among sectors and countries to find places to look for great investments.
    • A list of S&P 500 companies with low P/E ratios shows that it isn’t easy to find wonderful businesses at a fair price.

    Introduction

    Warren Buffett’s main advice to investors is to find a wonderful business at a fair price. Now with the S&P 500 price to earnings (P/E) ratio of 24.34, that implies an earnings yield of just 4.1% which makes me ask myself, is it possible to find a wonderful business at a fair price today?

    I’ll first describe what a wonderful business is, look at what would be a fair price for it, and then look to see if there are any such businesses around. More →

  • 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 →

  • 22 Mar
    Here’s What You Need To Know If You’re Counting On Dividend Income

    Here’s What You Need To Know If You’re Counting On Dividend Income

    • I’ll analyze the dividend environment by describing the risk reward scenario for dividend income investors.
    • The ‘monthly dividend company’ will still remain so, but you’ll be able to buy it at a 30% off, or even cheaper.
    • Whatever you’re doing, just don’t chase yields as that is the fastest way to lose a lot of money in this market.

    Introduction

    What dividend investors don’t like is uncertainty, especially uncertainty related to their dividend income. Nevertheless, uncertainty is exactly the feeling many investors have in this environment, not because of the market as the indexes are constantly breaking records, but because there is a certain feeling in the air that things might soon change and nobody knows how the financial world will look afterward. 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 →

  • 03 Feb
    Debunking Rebalancing Myths

    Debunking Rebalancing Myths

    • The standard 60% stocks, 40% bonds allocation is extremely dangerous as bonds and stocks move together more often than not.
    • If something is overvalued, it doesn’t mean you should immediately invest in something that looks undervalued as it might just be less overvalued. If you think as a business owner  would, it’s easy to know whether an asset is over or under valued.
    • Yearly rebalancing has the same effect as quarterly rebalancing, therefore it’s more time effective.

    The Usual Stocks, Bonds 60/40 Rebalancing

    I hate when I see fixed rules in how a person should approach a portfolio, and find the 60/40 rule—that says you should hold 60% of your portfolio in stocks and 40% in bonds—the dumbest of all because there is no causality between stock and bond prices.

    The investing 101 theory says that stocks do well in economic booms while bonds do well in recessions. However, the correlation between stocks and bonds has been very variegated in the past. More →

  • 25 Jan
    Is Your Concept Of Risk Wrong?

    Is Your Concept Of Risk Wrong?

    • Risk is an elusive concept. I’ll describe the various characteristics of it.
    • I firmly believe that low risk is related to high returns and high risk to low returns, just add an often-disregarded factor in investing – price.
    • We’ll conclude with investing options that lower your risk and increase returns.

    Introduction

    In order to be good investors, through economic cycles and stock market booms and busts, we should first focus on risk and only then on potential rewards because it is much easier to create long lasting positive returns if you can avoid losing money.

    At the moment, the majority of market participants look at the stock market as if it is destined to only go up because stocks have historically had the best returns and the pain from the last financial crisis has been quickly forgotten. More →