If you ask experienced long-term investors, they’ll tell you they regret not starting to invest earlier. There’s a valuable lesson to learn from that. You reap what you sow!
Category Archives: Investing
Investing Advice
Investor Stan Druckenmiller says one of his mentors taught him two crucial things:
• Never invest in the present; look 18 months out.
• The central bank moves the market, not earnings.
“If you invest in the present, you’re going to get run over!”
"To get a bargain price, you've got to look for where the public is most frightened and pessimistic." pic.twitter.com/AeyxQEcZpK
— LCTempleton (@LCTempleton) May 25, 2023
Compound interest – By saving $10, you are really saving $100 or $1,000 [because of the future compound growth of the $10], and this compounding growth requires a little wait and patience.
https://twitter.com/joincommonstock/status/1661902483147612160?s=61&t=8ACS6bcx2PFMgdLuBnL1JQ
Billionaire hedge fund manager Paul Tudor Jones II, Tudor Group’s Founder and Chief Investment Officer, is one of the pioneers of the modern-day hedge fund industry. He is known for his macro trades, particularly his bets on interest rates and currencies.
In 1980, he founded Tudor Investment Corporation, which now manages $13 billion in assets.
Between 1989 to 2014, he generated compounded annual returns of nearly 20% without a single down year.
Paul Tudor Jones is one of history's most prolific traders.
Between 1989 to 2014, he generated compounded annual returns of nearly 20% without a single down year.
Here are eleven of his most insightful comments and ideas. pic.twitter.com/RVNbeKK3Jo
— Commonstock (@JoinCommonstock) April 30, 2023
Tudor considers himself one of the most conservative investors in the world. He would describe himself as the “single most conservative investor on earth”, and he “absolutely hates losing money.” Once he commented that his grandfather told him at a very early age that “you are only worth what you can write a check for tomorrow.”
Thus, his investment philosophy is that he does not take a lot of risks, instead, he looks “for opportunities with tremendously skewed reward-risk opportunities.” Others describe his strategy as: ‘Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead”
Source: https://www.tudor.com/
Contrarian Investing
“The way to make money is to buy when blood is running in the streets.” ~ John D. Rockefeller
Contrarian investing believes that the worse things seem in the market, the better the investing opportunities are for profit.
Contrarians, as the name implies, try to do the opposite of the crowd. They get excited when an otherwise good company has a sharp but undeserved drop in share price. They swim against the current and assume the market is usually wrong at both its extreme lows and highs. The more prices swing, the more misguided they believe the rest of the market to be. (For more on this, read “Finding Profit In Troubled Stocks.”)
Bad Times Make for Good Buys
Contrarian investors have historically made their best investments during times of market turmoil. In the crash of 1987, the Dow dropped 22% in one day in the U.S. In the 1973-’74 bear market, the market lost 45% in about 22 months. The terrorist attacks of Sept. 11, 2001, also resulted in a major market drop. Those are times when contrarians found their best investments.
The 1973-’74 bear market gave Warren Buffett the opportunity to purchase a stake in the Washington Post Co. at a deep discount (the company could have “sold the [Post’s] assets for not less than $400 million.” Meanwhile, the Post had an $80 million market cap), an investment that has subsequently increased by more than 100 times the purchase price–that’s before dividends are included.
Sir John Templeton, founder of the Templeton Growth Fund, was also a serious contrarian investor, buying into countries and companies when, according to his principle, they hit the “point of maximum pessimism.”
As an example of this strategy, Templeton bought shares of every public European company at the outset of World War II in 1939, including many that were in bankruptcy. He did this with borrowed money. After four years, he sold the shares for a very large profit.
But there are risks to contrarian investing. While successful contrarian investors put big money on the line, swam against the current of common opinion and came out on top, they also did some serious research to ensure the investing herd was indeed wrong.
So, when a stock takes a nosedive, this doesn’t prompt a contrarian investor to put in an immediate buy order, but to find out what has driven the stock down and whether the drop in price is justified.
While successful contrarian investors have their own strategy for valuing potential investments, they all have the one strategy in common–they let the market bring the deals to them, rather than chasing after them.
References:
Long-Term Investors vs Day Traders
Billionaire “Old School” Investors:
1. Carl Icahn
2. Warren Buffett
3. Charlie Munger
4. Howard Marks
5. Nick Sleep
Billionaire Day Traders:
1.
2.
3.
4.
5.
The second list isn’t blank by accident.
For the purposes of this post:
- Day trading is buying and selling on small price movements in stocks throughout a trading day, often in intervals of seconds or minutes.
- Old School (Long-term) investing is buying or selling a company’s stock after long periods of holding an investment and being patient for the right price to intrinsic value proposition.
Billionaire "Old School" Investors:
1. Carl Icahn
2. Warren Buffett
3. Charlie Munger
4. Howard Marks
5. Nick SleepBillionaire Day Traders:
1.
2.
3.
4.
5.The second list isn't blank by accident.
— Casey Donaldson (@artofinvestmnt) January 21, 2023
Return on Invested Capital (ROIC)
Return on invested capital, or ROIC, is a valuable financial ratio. Understanding ROIC and using it to screen for high ROIC stocks is a good way to focus on the highest-quality businesses.
Put simply, return on invested capital (ROIC) is a financial ratio that shows a company’s ability to allocate capital.
A high return on invested capital (ROIC) means investors are realizing strong returns on their investment in a company.
The higher the ROIC, the better a company is investing it’s capital to generate future growth and shareholder value.
For example, let’s say a management team had $1 million dollars to invest, and they could either invest in a new product line, or enhancements to their existing product line. After thinking it over, the Company invests the $1 million in a new product line. One year later, the Company looks back at what they have earned on the new product line, only to find out that it’s a measly $100,000.
As it turns out, if they had invested in the enhancements to their existing product line, they would have earned $500,000 over the same period of time. What does this mean?
Well, there could be more factors at play, but based on this example, the Company’s management team made the wrong decision.
As an investor, you want your management teams making the right decisions and investing in the areas that will generate the highest returns for you as an investor.
The common formula to calculate ROIC is to divide a company’s after-tax net operating profit, by the sum of its debt and equity capital.
Once the ROIC is calculated, it is evaluated against a company’s weighted average cost of capital, commonly referred to as WACC. If a company’s WACC is not immediately available, it can be calculated by taking a weighted average of the cost of a company’s debt and equity.
Cost of debt is calculated by averaging the yield to maturity for a company’s outstanding debt. This is fairly easy to find, as a publicly-traded company must report its debt obligations.
Cost of equity is typically calculated by using the capital asset pricing model, otherwise known as CAPM.
Once the WACC is calculated, it can be compared with the ROIC.
Investors want to see a company’s ROIC exceed its WACC. This indicates the underlying business is successfully investing its capital to generate a profitable return. In this way, the company is creating economic value.
Generally, stocks generating the highest ROIC are doing the best job of allocating their investors’ capital.
By calculating a company’s return on invested capital, investors can get a better gauge of companies that do the best job investing their capital. Yet, ROIC is by no means the only metric that investors should use to buy stocks.
References:
Top Investing Rules
The number one rule of investing is: Don’t lose money. In other words, preservation of capital and management of risk are most important for investors than maximizing returns and income.
What follows are 10 proven rules of investing to make you a more successful — and hopefully to build wealth — investor.
Rule No. 1 – Never lose money
Legendary investor Warren Buffett stated that “Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.” The Oracle of Omaha’s advice stresses the importance of avoiding loss in your portfolio. When you have more money in your portfolio, you can make more money on it. So, a loss hurts your future earning power.
What Buffett’s rule essentially means is don’t become enchanted with an investment’s potential gains. Instead, focus on downside investment risks and preservation of capital. If you don’t get enough upside for the risks you’re taking, the investment may not be worth it. Focus on the downside risk first, counsels Buffett.
Rule No. 2 – Think like an owner
Think like an owner. Remember that you are buying fractional ownership of companies, not just stocks.
While many investors treat stocks like gambling, real businesses stand behind those stocks. Stocks are a fractional ownership interest in a business, and as the business performs well or poorly over time, the company’s stock is likely to follow the direction of its profitability.
Investing involves an analysis of fundamentals, valuation, and an opinion about how the business will perform and produce cash in the future.
Rule No. 3 – Stick to your process
The best investors develop a process that is consistent and successful over many market cycles. Be discipline and don’t deviate from your process because of short-term challenges and market volatility.
One of the best strategies for investors: a long-term buy-and-hold approach. You can buy stock funds regularly in a 401(k), for example, and then hold on for decades. But it can be easy when the market gets volatile to deviate from your plan because you’re temporarily losing money. Don’t do it.
Rule No. 4 – Buy when everyone is fearful
When the market is down, investors often sell or simply quit paying attention to it. But that’s when the bargains are out in droves. It’s true: the stock market is the only market where the goods go on sale and everyone is too afraid to buy. As Buffett has famously said, “Be fearful when others are greedy, and greedy when others are fearful.”
The good news if you’re a 401(k) investor is that once you set up your account you don’t have to do anything else to continue buying in. This structure keeps your emotions out of the game.
Rule No. 5 – Keep your investing discipline
It’s important that investors continue to save over time, in rough climates and good, even if they can put away only a little. By continuing to invest regularly, you’ll get in the habit of living below your means even as you build up a nest egg of assets in your portfolio over time.
The 401(k) is an ideal vehicle for this discipline, because it takes money from your paycheck automatically without you having to decide to do so. It’s also important to pick your investments skillfully – here’s how to select your 401(k) investments.
Rule No. 6 – Stay diversified
Keeping your portfolio diversified is important for reducing risk. Having your portfolio in only one or two stocks is unsafe, no matter how well they’ve performed for you. So experts advise spreading your investments around in a diversified portfolio.
“If I had to choose one strategy to keep in mind when investing, it would be diversification,” says Mindy Yu, former director of investments at Stash. “Diversification can help you better weather the stock market’s ups and downs.”
The good news: diversification can be easy to achieve. An investment in a Standard & Poor’s 500 Index fund, which holds hundreds of investments in America’s top companies, provides immediate diversification for a portfolio. If you want to diversify more, you can add a bond fund or other choices such as a real estate fund that may perform differently in various economic climates.
Rule No. 7 – Avoid timing the market
Experts routinely advise clients to avoid trying to time the market, that is, trying to buy or sell at the right time. “Time in the market is more important than timing the market.” The idea here is that you need to stay invested to get compounding returns and avoid jumping in and out of the market.
And that’s what Veronica Willis, an investment strategy analyst at Wells Fargo Investment Institute recommends: “The best and worst days are typically close together and occur when markets are at their most volatile, during a bear market or economic recession. An investor would need expert precision to be in the market one day, out of the market the next day and back in again the following day.”
Experts typically advise buying regularly to take advantage of dollar-cost averaging.
Rule No. 8 – Understand everything you invest in
“Don’t invest in a product you don’t understand and ensure the risks have been clearly disclosed to you before investing,” says Chris Rawley, founder and CEO at Harvest Returns, a fintech marketplace for investing in agriculture.
Whatever you’re investing in, you need to understand how it works. If you’re buying a stock, you need to know why it makes sense to do so and when the stock is likely to profit. If you’re buying a fund, you want to understand its track record and costs, among other things. If you’re buying an annuity, it’s vital to understand how the annuity works and what your rights are.
Rule No. 9 – Review your investing plan and goals regularly
While it can be a good idea to set up a solid investing plan and then only tinker with it, it’s advisable to review your plan regularly to see if it still fits your needs. You could do this whenever you check your accounts for tax purposes.
“Remember, though, your first financial plan won’t be your last,” says Kevin Driscoll, vice president of advisory services at Navy Federal Financial Group in the Pensacola area. “You can take a look at your plan and should review it at least annually – particularly when you reach milestones like starting a family, moving, or changing jobs.”
Rule No. 10 – Stay in the game, have an emergency fund
It’s absolutely vital that you have an emergency fund, not only to tide you over during tough times, but also so that you can stay invested long term.
“Keep 5 percent of your assets in cash, because challenges happen in life,” says Craig Kirsner, president of retirement planning services at Stuart Estate Planning Wealth Advisors in Pompano Beach, Florida. He adds: “It makes sense to have at least six months of expenses in your savings account.”
If you must sell some of your investments during a rough spot, it’s often likely to be when they are down. An emergency fund can help you stay in the investing game longer. Money that you might need in the short term (less than three years) needs to stay in cash.
Investing is effectively about doing the right things and about avoiding the wrong things. And, it’s important to manage your temperament (emotions) so that you’re focused and disciplined to do the right things even as they may feel risky, scary or unsafe.
References:
https://www.bankrate.com/investing/golden-rules-of-investing/
Lessons of Warren Buffett
An understanding of the investing lessons of Warren Buffett.
1. Value investing works. Buy bargains which involve buying assets at a price below the asset’s intrinsic value. Value investing takes time, focus, discipline and patient, and is a hard process to implement and follow. It requires a lot of work to determine the fair value of a particular business. If investors could predict the future directions of the stock market, they would certainly not choose to be value investors. But no one can accurately forecast future prices. Value investing is a safe and successful strategy in all investing environments. The biggest obstacle for a value investor is to remain disciplined and patient in every circumstance the market and life might throw at him. Most people quit value investing and long- term investing for this exact reason: because they lack the discipline and cannot sit through periods of poor performance.
2. Quality matters, in businesses and in people. Better quality businesses are more likely to grow and compound cash flow; low quality businesses often erode and even superior managers, who are difficult to identify, attract, and retain, may not be enough to save them. Always partner with highly capable managers whose interests are aligned with yours.
3. There is no need to overly diversify. Invest like you have a single, lifetime “punch card” with only 20 punches, so make each one count. Look broadly for opportunity, which can be found globally and in unexpected industries and structures.
4. Consistency, discipline and patience are crucial. Most investors are their own worst enemies. Endurance and long-term perspective enables compounding.
5. Risk is not the same as volatility; risk results from overpaying or overestimating a company’s prospects. Prices fluctuate more than value; price volatility can drive opportunity. Sacrifice some upside as necessary to protect on the downside.
6. Unprecedented events (or Black Swan events) occur with some regularity, so be prepared.
7. You can make some investment mistakes and still thrive.
8. Holding cash in the absence of opportunity makes sense.
9. Favor substance over form. It doesn’t matter if an investment is public or private, fractional or full ownership, or in debt, preferred shares, or common equity.
10. Candor is essential. It’s important to acknowledge mistakes, act decisively, and learn from them. Good writing clarifies your own thinking and that of your fellow shareholders.
11. To the extent possible, find and retain like-minded shareholders (and for investment managers, investors) to liberate yourself from short-term performance pressures.
12. Do what you love, and you’ll never work a day in your life.
13. “The first rule of investing is to not lose money, the second rule is to never forget the first one,” states Warren Buffett. Loss avoidance must be the cornerstone of your investment philosophy. Investors should not stick to bonds or avoid risks at all, but rather that “an investment portfolio should not be exposed to losses of principal capital over five to ten years”, according to Klarman. This, concentrating on avoiding big losses is the safest way to ensure a profitable investing outcome.
14. Ignore Market Price Fluctuations which are completely unrelated to the value of the investment or asset. When the stock’s market price goes down, the investment may be seen as riskier regardless of its fundamentals. But that’s not risk. Investors should expect prices to fluctuate and should not invest in securities if they cannot tolerate market volatility.
15. Avoid Leverage At All Costs.
References:
Margin of Safety
“A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world.” ~ Seth Klarman
Berkshire Hathaway CEO and Chairman, Warren Buffett, is known for his value investing approach, which involves finding companies that are undervalued by the market and investing in them for the long term. To invest like Warren Buffett, there are a few things you need to know.
- First, you need to have a clear understanding of what value investing is and how it works.
- Second, you need to be patient and be willing to hold onto your investments for the long term.
- Third, you need to have the discipline to stick to your investing strategy even when the market is going against you.
When deciding on how to invest in a company, the first step is to determine its worth or intrinsic value. According to Warren Buffett, the best companies to buy are those that are inexpensive to buy. His investment strategy is based on a few simple principles:
- Buy quality companies that have a competitive advantage (moat),
- Buy them at a reasonable price with a margin of safety, and
- Hold them for the long term.
These principles of margin of safety have helped Buffett generate incredible returns over his career. Margin of safety is a strategy that involves investing only in securities at a significantly lower intrinsic value than their market price.
The margin of safety (MOS) allows investors to avoid overpaying for an investment or asset, and it protects investors from the potential of loss if the market price of the asset falls. Buffett has said that the margin of safety is the key to his investing success.
The margin of safety is a measure of how much room there is between the price of the stock and its inherent value. The wider your margin of safety, the less likely it is that overly optimistic valuation inputs will harm your investment.
Value investing is the process of making investment decisions using margin of safety. It is critical for value investors to find a high-quality, easy-to-understand company with good management priced below its intrinsic value.
The purpose of using a margin of safety in buying is twofold.
- If your investment does not grow as quickly as you originally anticipated, you may be forced to make more conservative investments in your portfolio. If your estimates are correct, you will be able to achieve a better rate of return over time due.
- If you purchased the investment at an extremely low price.
Discounted cash flow (DCF) is a method of valuing a company or asset using the principles of time value of money.
The objective of DCF is to find the value of an investment today, given its expected cash flows in the future. One popular way to value a company is using the discounted cash flow (DCF) method. This approach discounts a company’s future expected cash flows back to the present day, using a required rate of return or “hurdle rate” as the discount rate. The idea is that a company is worth the sum of all its future cash flows, discounted back to the present.
The DCF formula is: Value of Investment = Sum of (Cash Flow in Year / (1 + Discount Rate)^Year)
The “discount rate” is the required rate of return that an investor demands for investing in a company. This rate is also known as the “hurdle rate.” There are two ways to calculate the discount rate.
There are two ways to calculate the discount rate.
The first is the weighted average cost of capital (WACC). This approach considers the cost of all the different types of capital that a company has, including debt and equity.
The second way to calculate the discount rate is the discount rate for equity. This approach only considers the cost of equity, which is the return that investors demand for investing in a company.
Once the discount rate is determined, the next step is to estimate the cash flows that a company is expected to generate in the future. These cash flows can come from a variety of sources, including operating income, investments, and financing activities. After the cash flows have been estimated, they need to be discounted back to the present using the discount rate.
The present value of the cash flows is then the sum of all the future cash flows, discounted back to the present.
“If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you’d need. If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it’s over the Grand Canyon, you may want a little larger margin of safety.” ~ Warren Buffett
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