DURING PRE RECESSION: -expensive stocks underperforms, to avoid
-Investors also seem to prefer stocks with strong balance sheets during the Pre-Recession regime. The high-low spread for Financial Strength more than doubles the 1964–2015 average (from 5.3 percent to 11.5 percent). Though high dividend yield is not one of the stronger factors preceding a recession, the avoidance of low dividend yield seems to be important (-10.0 percent excess).
factor selection: cheap stocks + High Momentum stocks do well in these environments / factor quality: financial strength
DURING RECESSION:
-investors continue to shun expensive stocks
-pairing Momentum-based strategies with other themes like Value or Quality to increase Momentum’s effectiveness = excess returns
factor selection: shareholder + dividend yield / factor quality: financial strength
POST RECESSION:
-These are among the stronger periods for absolute return
-Yield and Value again dominate the other themes in these environments
-High Financial Strength falls to the back of the pack, delivering marginally negative excess return, as investors likely de-emphasize high balance sheet quality and appropriate leverage in the early stages of a recovery.
factor selection: shareholder yield + value / factor quality: earning quaity
PURE EXPANSION: (which lies in between Post-Recession recovery and Pre-Recession late-stage expansion)
most common period
-In periods when market returns are on average negative or the future is uncertain, the ability to generate positive return is predicated on an investor’s skill of choosing wisely. For example, the average market return in recessions is -4.7 percent.
High Shareholder Yield delivers excess of 7.0 percent, which translates to a positive absolute return of 2.3 percent
-differentiation is less important because investors can generate double digit positive return with simple passive beta exposure to the market
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Recognize the impact of software and technology: Acknowledge the significance of advancements in software and technology in introducing innovative risk management techniques. Understand that these advancements have the potential to transform the investment landscape.
Embrace dynamic software innovations: Differentiate the modern era from the past by understanding that today's software innovations are dynamic, meaning they can evolve and unlock new capabilities over time. This continuous evolution presents opportunities for value investors to leverage software tools that can adapt and provide additional value.
Emphasize the adoption of new software tools: Be open to adopting new software tools for managing risk. While there may be initial hesitancy and inertia surrounding new innovations, the text suggests that eventually, embracing these tools can lead to long-term success. The example of the Mercantile Agency adopting typewriters and evolving into Dun & Bradstreet showcases the potential benefits of being an early adopter of new technologies.
Leverage data commoditization: Recognize that data has become more commoditized, implying its increased availability and accessibility. Use this understanding to your advantage by harnessing software for data analysis and developing risk management tools. This can provide you with a competitive advantage in your value investing approach.
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determining inflation regimes: 1.1 = low
2.2 = 2
3.1 = 3
4.3 = 4
8.5 = high
excess returns of quality factors:
We find that stocks with strong Earnings Quality perform well in both low and high inflation regimes. Earnings Growth follows a similar, though less-clear, pattern. Stocks with strong Financial Strength tend to outperform as inflation increases.
inflationary regimes, excess returns and themes:
-Shareholder Yield outperforms: The passage states that Shareholder Yield consistently outperforms across all market regimes, with a particular emphasis on higher inflation environments. This implies that the Shareholder Yield strategy has historically delivered superior returns compared to other themes, especially during periods of higher inflation.
-It mentions that while Shareholder Yield and Momentum perform well, Value struggles. The text suggests that this discrepancy could be attributed to historical observations from the 1920s and 1930s when cheap Utility stocks, which are typically associated with the Value factor, performed poorly.
high inflation regimes tend to result in lower equity market returns
during periods of high inflation, investors tend to perceive equities as riskier investments due to the negative impact of inflation on corporate earnings and the purchasing power of currency.
This perception of increased risk leads to a decrease in the valuation multiples (such as the PE ratio), which in turn reduces equity market returns.
The goldilocks environment in regimes 4 and 5 corresponds to an inflation rate of roughly 2%, give or take; it is when equities perform the best, however equity really struggle in high inflation periods and a little bit less but still in low infation periods (negative to 2 percents)
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you cannot predict innovations, they are unvaluable do when innovations occurs, value investing underperform
a broad conclusion is that across the entire 92-year time frame, Value investing has been an effective investment strategy generating higher returns than Growth stocks. But by including the earliest time frame back to 1926, we discovered another period where Value investing struggled as badly as it has today: a second Growth Regime from July of 1926 through 1941.
For the Growth portfolios, Manufacturing stocks from 1926-1941 were primarily in the Growth portfolio, as were Technology stocks from 2007-2018. For the Value portfolios, Utilities3 were primarily in the Value portfolio for the earliest Growth regime, while Financials were clustered in Value in the most recent portfolio.
those are the 2 periods where value investing strategy struggled, //////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
Price-to-book has been off to a strong start in 2016 and is outperforming other valuation factors, particularly in small cap stocks
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time is your friend, invest for the long term and keep investing for a long time, also if you dont have the time to study work and think before you buy stocks, just go for an index fund until you again have the schedule to individually investing stick with investing into little cap companies if you buy individual stocks because you want them to have a room to grow, mega caps always has the house full
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High Beta Stocks: High beta stocks have a beta coefficient greater than 1, indicating that they are more volatile than the overall market. These stocks tend to experience larger price swings in relation to market movements. They can generate higher returns during bullish market conditions but also carry a higher level of risk, as they are more susceptible to market downturns.
Low Beta Stocks: Low beta stocks have a beta coefficient less than 1, suggesting that they are less volatile than the overall market. These stocks tend to be more stable during market downturns and exhibit smaller price fluctuations. While they may offer lower potential returns during bullish periods, they also come with lower risk and can provide more stability to an investment portfolio.
The formula to calculate the beta of a stock over a period of time is as follows:
β = Covariance (R_stock, R_market) / Variance (R_market)
where:
β is the beta coefficient of the stock
Covariance (R_stock, R_market) is the covariance between the stock's returns and the market returns over the specified period
Variance (R_market) is the variance of the market returns over the same period
To calculate the beta coefficient, you'll need historical data for both the stock and the market returns over the desired time frame. The returns can be calculated using the closing prices of the stock and market index at regular intervals (e.g., daily, monthly, etc.).
Calculate the returns for the stock by taking the percentage change in its price over the specified period.
R_stock = (P_end - P_start) / P_start
Calculate the returns for the market index in the same manner.
Calculate the covariance between the stock returns and the market returns using the following formula:
Covariance (R_stock, R_market) = Σ[(R_stock - R_stock_avg) * (R_market - R_market_avg)] / n
R_stock_avg is the average of the stock returns
R_market_avg is the average of the market returns
n is the number of data points
Calculate the variance of the market returns using the formula:
Variance (R_market) = Σ[(R_market - R_market_avg)^2] / n
Finally, divide the covariance by the variance to obtain the beta coefficient:
β = Covariance (R_stock, R_market) / Variance (R_market)
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fast growers favorites of peter lynch: -Strong Revenue Growth: Lynch focused on companies that demonstrated consistently high revenue growth rates. Rapidly growing sales indicated increasing demand for the company's products or services.
-Consistent Earnings Growth
-Reasonable Valuation: Lynch emphasized the importance of investing in companies with reasonable valuations. He looked for stocks that were not excessively priced relative to their growth prospects or industry peers.
-Low Debt Levels: Lynch preferred companies with manageable debt levels. Excessive debt could hinder a company's ability to grow or pose financial risks during economic downturns.
-Competitive Advantage: Lynch sought companies with a competitive edge over their rivals. This advantage could be in the form of a unique product, a superior business model, or strong brand recognition, allowing the company to outperform its competitors.
-Simple Business Models: Lynch favored companies with easily understandable business models. He believed that a straightforward and transparent approach to generating profits was essential for long-term success.
-Industry Leadership: Lynch looked for companies that held a leading position in their respective industries. Being an industry leader often indicated strong market share, pricing power, and the ability to shape industry trends.
-Growth Catalysts: Lynch sought companies with identifiable growth catalysts. This could include new product launches, expansion into new markets, technological advancements, or favorable industry trends that would propel the company's growth.
-Positive Cash Flow: Lynch preferred companies that generated positive cash flows consistently. Strong cash flow indicated a healthy and sustainable business operation, providing the company with the resources needed for further growth and investment.
-Management Competence: Lynch valued competent and shareholder-friendly management teams. He believed that strong leadership played a crucial role in executing growth strategies and creating long-term shareholder value.
-Dont get the attention of wall street
-Small cap
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-Start with Top-Down Analysis: Begin by analyzing macroeconomic factors, market trends, and sector performance.
Assess the overall economic outlook, interest rates, inflation, and geopolitical factors that may impact different sectors. Identify sectors or industries that are expected to outperform based on your analysis.
-Select Promising Sectors: Once you have identified attractive sectors through top-down analysis, narrow down your focus to a few sectors that align with your investment goals and risk tolerance. Consider factors such as growth prospects, competitive dynamics, regulatory environment, and emerging trends within those sectors.
-Conduct Bottom-Up Analysis: Once you have identified promising sectors, shift your focus to individual stock analysis. Conduct in-depth research on companies within the selected sectors.
Evaluate their financial statements, earnings growth, competitive advantages, management competence, and overall business fundamentals.
Look for companies that have a strong competitive position, sustainable growth potential, and attractive valuation.
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spend more time thinking about the competitive position and long-term prospects of the business before worrying about whether the stock price happens to be cheap at the moment. /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
Sometime in the next month, year, or three years, the market will decline sharply
Market declines are great opportunities to buy stocks in companies you like. Corrections—Wall Street’s definition of going down a lot—push outstanding companies to bargain prices
Trying to predict the direction of the market over one year, or even two years, is impossible
To come out ahead you don’t have to be right all the time, or even a majority of the time
The biggest winners are surprises to me, and takeovers are even more surprising. It takes years, not months, to produce big results
Different categories of stocks have different risks and rewards
You can make serious money by compounding a series of 20–30 percent gains in stalwarts
Stock prices often move in opposite directions from the fundamentals but long term, the direction and sustainability of profits will prevail
Just because a company is doing poorly doesn’t mean it can’t do worse
Just because the price goes up doesn’t mean you’re right
Just because the price goes down doesn’t mean you’re wrong
Stalwarts with heavy institutional ownership and lots of Wall Street coverage that have outperformed the market and are overpriced are due for a rest or a decline
Buying a company with mediocre prospects just because the stock is cheap is a losing technique
Selling an outstanding fast grower because its stock seems slightly overpriced is a losing technique
Companies don’t grow for no reason, nor do fast growers stay that way forever
You don’t lose anything by not owning a successful stock, even if it’s a tenbagger
A stock does not know that you own it
Don’t become so attached to a winner that complacency sets in and you stop monitoring the story
If a stock goes to zero, you lose just as much money whether you bought it at $50, $25, $5, or $2—everything you invested
By careful pruning and rotation based on fundamentals, you can improve your results
When stocks are out of line with reality and better alternatives exist, sell them and switch into something else
When favorable cards turn up, add to your bet, and vice versa
You won’t improve results by pulling out the flowers and watering the weeds
If you don’t think you can beat the market, then buy a mutual fund and save yourself a lot of extra work and money
There is always something to worry about
Keep an open mind to new ideas
You don’t have to “kiss all the girls.” I’ve missed my share of tenbaggers and it hasn’t kept me from beating the market
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Value works when it's real--i.e., when stocks priced cheaply relative to their current earnings sustain and grow those earnings over the long-term. Value fails when it's fake--i.e., when stocks priced cheaply relative to their current earnings suffer declines in those earnings that never get recovered.
The results for investors play out accordingly. //////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
It provides a powerful demonstration of the importance of future earnings outcomes in the generation of the value premium. It clarifies the basic challenge that value investors face: that of finding cheap stocks whose earnings are going to grow.
future growth outcomes is more powerful and more valuable when investing in cheap stocks than when investing in the market more generally
stocks can looks like bargains but once the balance sheet and income statement analysed, you quickly realise that its not what it seem to be, often you find things that are not showed in the earnings metrics,
making the stock look undervalued instead of fairly priced A more practical solution, then, is to build a composite measure of valuation that averages the inputs of different valuation metrics together.
Then, if a company wrongly appears cheap on one particular metric, as $BRK-B did, it won't get drawn into the portfolio, because it will have registered as not being cheap on the others.
At OSAM, we measure valuation using a composite index that takes inputs from the P/E ratio, the enterprise-value-to-ebitda ratio, the enterprise-value-to-free-cash-flow ratio and the price-to-sales ratio.
In testing, we've found that this approach generates excess returns that are smoother and more consistent than the metrics in isolation.
Measuring valuation using a composite index refers to the practice of combining multiple financial ratios or indicators into a single index or score to assess the overall valuation of a company or investment opportunity
The composite index provides a comprehensive and synthesized view of the company's valuation by taking into account multiple factors simultaneously.
Strategy example:
Define the Weighting Scheme:
Let's assign equal weights to each ratio for simplicity. Each ratio will have a weight of 25% in the composite index.
(For example, if you believe that the P/E ratio is a critical measure for evaluating a company's valuation, you may assign a higher weight to the P/E ratio compared to the other ratios in the composite index. Conversely, if you consider the enterprise-value-to-EBITDA ratio as a more reliable indicator, you may assign a higher weight to that particular ratio.
The weights assigned to each ratio can be expressed as percentages or decimals and should add up to 100% or 1, respectively, to ensure a proper weighting distribution.
Ultimately, the weighting scheme is a subjective decision based on your investment approach, methodology, and analysis. It reflects your assessment of the relative importance of each ratio in capturing the overall valuation picture of a company.)
Normalize the Ratios:
Normalize each ratio to a common scale, such as a range of 0 to 1. This can be done by using min-max normalization. Calculate the normalized value for each ratio using the following formula:
Normalized Value = (Actual Value - Minimum Value) / (Maximum Value - Minimum Value)
Standardize the Ratios:
Standardize the normalized ratios by converting them to z-scores. Calculate the z-score for each normalized ratio using the following formula:
Z-Score = (Normalized Value - Mean) / Standard Deviation
Weighted Average Calculation:
Multiply each standardized ratio by its corresponding weight and calculate the weighted average. For example, if the z-scores for the four ratios are P/E: 0.8, EV/EBITDA: -0.5, EV/FCF: 1.2, and P/S: -0.3, the weighted average can be calculated as follows:
Composite Index = (0.25 * 0.8) + (0.25 * -0.5) + (0.25 * 1.2) + (0.25 * -0.3)
Interpretation:
Analyze the composite index value to assess the overall valuation. A higher composite index value indicates a relatively lower valuation, while a lower value suggests a relatively higher valuation. Compare the composite index values across different stocks or market segments to identify potentially attractive investment opportunities.
Regular Monitoring:
Update the input ratios regularly based on the latest financial information and recalculate the composite index to reflect changing market conditions and company-specific factors.
Monitor the composite index values over time to track changes in valuation and identify potential shifts in investment opportunities.
you can also use metrics such as: Price-to-Book Ratio (P/B) / Dividend Yield / Return on Equity (ROE) / Earnings Growth Rate / Price-to-earnings growth ratio (PEG) / Free Cash Flow Yield / Price-to-Operating Cash Flow (P/OCF) / Debt-to-Equity Ratio / Sustainable Growth Rate
a) Benchmark Comparaison:
Assume you have a benchmark composite index for the industry or market sector in which Company ABC operates. If the benchmark composite index value is, for example, 0.9, and your calculated composite index for Company ABC is 0.775,
it suggests that Company ABC may be relatively undervalued compared to the benchmark. This could indicate a potential investment opportunity.
b) Historical Comparison:
If you have historical values of the composite index for Company ABC, you can compare the current composite index value (0.775) to the historical values. For instance, if the historical average of the composite index for Company ABC is 0.85, and the current value is 0.775, it may suggest that the company is currently undervalued relative to its historical average.
Conversely, if the current value is higher than the historical average, it may indicate a relatively higher valuation.
In the value investing process, the second step involves identifying and removing companies that are statistically likely to experience future fundamental weakness.
These companies are referred to as "value traps," indicating that they may not be as attractive for investment as initially perceived. To identify these value traps, four simplified indices are used to score companies in the investment universe.
Momentum: This index measures the trailing total return of a company, with higher values indicating better performance in the recent past.
Growth: The growth index assesses the trailing change in earnings of a company. Higher values indicate stronger earnings growth over the specified period.
Earnings Quality: This index measures the level of accruals within a company's financial statements. Lower values suggest higher earnings quality, indicating a smaller reliance on non-cash accounting adjustments.
Financial Strength: The financial strength index evaluates the leverage or debt levels of a company. Lower values indicate lower levels of leverage, which is generally considered more favorable.
To ensure the removal of companies with potential weakness, a rule is applied: any company that scores in the bottom 10th percentile of the market on any of these four indices is eliminated from consideration. By setting a low percentile as the cutoff point, the aim is to retain a maximum number of stocks in the factor, thus maximizing the statistical reliability of the investment strategy.
Step 3: Selecting the Best of What Remains
The third step in the process is to select the highest ranking value stocks out of what remains once the value traps have been removed. To do this, we average the index scores of each company together to form a composite score. We then select the top half of the remaining stocks based on that composite score. We refer to those stocks as "value leaders" and make equal-weighted investments in them to form the final portfolio.
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Strategy of “Veiled Value” stocks with a return of 16.8 against 11.6 for the sp500 beating the index in a 25 years average , which are companies that rank in the most expensive 33% by price-to-book but the Cheapest 33% by other valuation metrics
they are companies that look expensive through the lens of price-to-book but are actually great values in disguise. In summary, "veiled value" stocks are those that appear expensive based on the P/B ratio but are considered undervalued or possess hidden value when assessed using other valuation metrics.
Investors interested in veiled value stocks look for such opportunities, believing that the market has not fully recognized or priced in the true value of these companies.
If you could correctly price intangible assets, long term assets, and adjust for buybacks you would create an unbiased book value of equity and a much clearer picture of which stocks are great values
how to adjust:
Balance sheets prepared under generally accepted accounting principles (GAAP) are doing an increasingly poor job of reflecting the value of shareholders equity. Recent trends have tended to bias assets well below market value which has led to the increased frequency of negative equity and Veiled Value stocks. Those tend to fall into three main categories, that we will cover in detail:
1) Understated Intangible Assets: brand names, human capital, advertising, and research and development (R&D) are rarely represented on the balance sheet
2) Understated Long Term Assets: assets are often depreciated faster than their useful lives
3) Buybacks and Dividends: when buybacks and dividends exceed net income, they create a decrease in equity which can accelerate distortions
R&D expenses are not operating expenses and the value of brands increase with advertising. You can offset these missing intangible assets by creating a capitalized value for each on the balance sheet. We will call these the research asset and the brand asset. We will add these assets to reported book values as the first step in correcting the biases on the balance sheet. We will call this adjusted metric “Enhanced Book Value”.
Intangible assets are not the only reason that total assets are increasingly becoming undervalued on balance sheets. Long term assets are often held well below market value as well and real estate is one of the better examples
Corporate real estate is the next adjustment we make in the process of building our Enhanced Book Value, to offset the biases caused by the undervalued real estate of REITS and other real estate heavy companies we can estimate the net asset value (i.e. market value) of their real estate assets instead of using their book value.
We can increase our Enhanced Book Value calculation for any difference in NAV and book value of real estate assets to get a more accurate picture of equity value.
Buybacks and dividends can also distort book value but in a different way, they do not undervalue total assets in the way aggressive depreciation and failing to capitalize intangible assets would, but they can exaggerate and speed up the problem
When a company has a price-to-book ratio that is above 1 then any buyback or dividend will decrease book value of equity by a larger percentage than it will decrease market value.
Adjusting for shareholder yield will be our final adjustment to “Enhanced Book Value.” For this adjustment we will use a multifactor approach and composite shareholder yield with the book value that is already adjusted for the research asset, brand asset and real estate NAV.
To summarize the adjustments to create this version of Enhanced Book Value:
1) Create a Research Asset
a) We will capitalize all R&D expenses and depreciate them over a 10-year productive life (straight line)
2) Create a Brand Asset
a) This is meant to capture what goodwill does not, the brand grown organically and internally through advertising expense
b) We will capitalize advertising expenses and depreciate them over a 10-year productive life
3) Adjust Real Estate Values to Get Closer to Market Value
a) Where net asset value data is available we will add the difference of NAV and book value of real estate to the balance sheet
b) If NAV is not available and real estate assets data is we will add back in accumulated depreciation on corporate real estate.
c) On average this will still understate the value of most real estate assets, but it is closer to market value than the reported book value of these assets
4) Buybacks and Dividends
a) We will use a factor that combines dividends and buybacks called shareholder yield
b) Shareholder yield will be used in combination with the adjusted book value from steps one through three to create a multifactor score ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
Here are his 10 Market Rules to Remember
1. Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.
2. Excesses in one direction will lead to an opposite excess in the other direction
Think of the market baseline as attached to a rubber string. Any action to far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.
3. There are no new eras — excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past 6 years, only to get cut in half.
As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it — Human Nature — never is different.
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction — eventually. comes.
5. The public buys the most at the top and the least at the bottom
That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing.
Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors survey.
6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism,” says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
Hence, why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks (“Nifty 50” stocks).
8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
I would suggest that as of August 2008, we are on our third reflexive rebound — the Januuary rate cuts, the Bear Stearns low in March, and now the Fannie/Freddie rescue lows of July.
Even with these sporadic rallies end, we have yet to see the long drawn out fundamental portion of the Bear Market.
9. When all the experts and forecasts agree — something else is going to happen
As Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”
Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.
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buy high quality business, early, aka small cap with good foward earnings when the market bottom, news are still bad, it bottom randomly when market go down, focus on the things that you can control, salary, professional life....etc... and keep buying little shares of small high quality companies, diversify a lot, then cut the losers
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when bonds go up, stock go down because investors are getting their money out of equity for bonds when bonds get more attractive and vice versa so its good for us when bonds are highly bought, it mean that the overall stock market is underated /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
when you are holding a company's stock, every quartier, when they give the balance sheet Financial Statements new updates, analyse it and ask yourself, are these good news, infos, is that what you want to see ? are these news affecting my fundamental long term predictions about the company ? ////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
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Soros suggests that the inherent nature of financial markets makes them prone to these cycles of booms and busts. The initial self-reinforcing phase can create an illusion of stability and success, but in the long run, it becomes unsustainable and gives rise to its own downfall.
From this simple exercise, we learn the following:
Concentration and equal-weighting lead to portfolios that have better average excess returns and higher active shares.
The equal-weighted portfolios (Version 1 sorts all stocks in the S&P 500 on each date by valuation and builds portfolios from 50 to 500 stocks (so the 50-stock version would be the 50 cheapest stocks on that date, and so on). Positions are equally-weighted (e.g., two percent each in the 50-stock portfolio or one percent each in the 100-stock portfolio).) outperform cap-weighted and cap-adjusted value portfolios by an average of 1.8 percent and 2.0 percent per year, respectively—a wide margin in the U.S. large cap market.
More concentrated portfolios have a much better valuation edge: stocks in the portfolio have much cheaper average value percentile scores. the weight of a stock in a portfolio should be determined by its cheapness or value, as these factors should matter more to an investor focused on value strategies.
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In conclusion, the text suggests that for investors seeking alpha, equal-weighting and a willingness to hold fewer stocks in the portfolio would be more advantageous
when a factor investing measure becomes a target, it is usually observed to ceases to be a good measure
Saturated strategies, those that have attracted substantial assets, should be avoided. The text advises being wary of popularity, scalability, and newly accepted measures of a strategy or idea. It suggests that popular measures can become targets and lose their original meaning and effectiveness over time.
look for alphas over betas, Factor Alpha has won for investors in the past and we believe will continue to win in the future. Factors refer to specific characteristics or attributes of stocks that have historically been associated with higher returns. Examples of such factors mentioned in the text include bigger discounts or higher shareholder yields.
Stocks exhibiting these favorable factor profiles have historically resulted in better excess returns. Consequently, the text suggests that portfolios should prioritize stocks with attractive factor profiles to enhance the potential for alpha generation.
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The text argues that more diversification does not always lead to better results in factor investing, as it often dilutes the exposure to desired factors. Factors tend to work most reliably at their extremes, so diversification may move the portfolio away from its edge and towards market returns.
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BUYBACKS
In essence, the text highlights the importance of companies conducting share buybacks in a manner that is in the best interest of shareholders. By repurchasing shares at a price below their intrinsic value, the company is making a prudent use of its capital. Conversely, if the buyback price exceeds the intrinsic value, it is deemed a wasteful allocation of resources.
In each case, companies that have made the largest share repurchases over the prior year have gone on to significantly outperform the market in the following year, and have done so with fairly low volatility. Even more important for investors, these high conviction buyback stocks have outperformed the market consistently through time. (the higher conviction group has repurchased between five and ten percent of their shares, and the highest conviction group has repurchased more than ten percent of their shares)
high conviction buyback programs, on average, are conducted at cheaper relative prices, they occures when their stock is cheap high convictions buybacks stocks average returns are 15.9 so +4 percents excess returns compared to the average and their constistency do quite well Despite its compelling historical performance, we believe that high shareholder yield is best used in combination with other factors. Specifically, cheaper valuations and higher quality should be favored over more expensive valuations and lower quality
combine it with high buybacks Whereas peaking buybacks may or may not spell trouble for the market, high conviction buybacks—coupled with quality and attractive valuations—have historically signaled an opportunity.
BUT value is a crucial component to any strategy that favors large buybacks. Investors should avoid buying stocks trading at very expensive multiples, no matter how significant their buyback programs. always insist on good quality earnings + buybacks because then the return will be disappointing anyways
MORE ABOUT BUYBACKS
Buying back shares—like any other capital allocation decision—only makes sense if the value you’re getting exceeds the price you’re paying. Overpaying for anything—including your own company’s shares—will lead to value destruction
Buybacks can be expected to continue at high rates so long as interest rates continue to be lower than the earnings yields of companies and will continue to garner accusations that CEOs are manipulating earnings and stock prices to line their own pockets.
But the data offers stronger support for the claims that buyback programs on average generate long-term excess returns for shareholders, driven by the earnings of the companies.
It does not mean every buyback program is done for the same reason—and surely that some managers are repurchasing shares to try and manipulate earnings while thinking about their options—but the majority of the repurchase programs are beneficial to investors. In order to utilize buybacks as an investment signal, use the old President Reagan maxim of “Trust, but verify.” Use buybacks in combination with value to confirm management’s reasons for the repurchase and to ensure that management is repurchasing at a discount. Use accruals to make sure that management isn’t manipulating earnings through the numerator, which could indicate their motives for the denominator as well. Use earnings growth to ensure there is organic growth on top of the EPS consolidation. When used collectively, these can give a comprehensive look into a company and allow investors to use stock buybacks as a signal for wise investments. carefull
1. Companies like to repurchase shares when their stock is cheap, and a big buyback program often sends a message to investors that a company’s management believes its stock is trading below intrinsic value. As we shall see, this first motivation is the only one we are interested in following as investors. Companies that repurchase shares when they are expensive destroy value for shareholders.
2. Shares are sometimes bought back to offset the dilution that happens when shares are granted to employees. This isn’t a signal that the stock is cheap; rather it is just a means to maintain total shares outstanding after paying executives. One way to control for this is to focus on “net” buybacks, which we will do below.
3. Share repurchases can be used to “manage” or “boost” earnings per share (EPS)—a metric that remains extremely important to investors and to corporate executives, some of whom are paid for hitting EPS targets. By controlling the number of shares (the denominator in EPS), managers can control EPS to some degree.4
Investors using buybacks as a factor to select stocks should ensure that companies are buying back stock for the first reason, and not for the second two. After controlling for nefarious or misguided motivations, a strategy based on both dividends and buybacks has delivered outsized returns since 1982.
Further qualifying the strategy by insisting on attractive valuations and high-quality earnings creates a strategy that has been formidable in what arguably should be the most efficient area of the global stock market. Warren Buffett believes that when a company's market value is below its business value, management's decision to repurchase shares demonstrates their focus on enhancing shareholder wealth rather than expanding their own control without benefiting shareholders. so its good news
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economy and stock market: we believe that the most rational approach to facing tough portfolio allocation decisions is to look for similar periods of economic malaise and see if they were opportune or inopportune times to invest in the stock market. Fortunately, we have a very long economic data set, with unemployment and GDP numbers since 1900 and tax rates since 1913.
By comparing unemployment levels, GDP growth rates, and marginal tax rates in the past with subsequent equity returns
Historical research spanning 110 years suggests that economic indicators such as GDP growth, unemployment, taxes, and consumer sentiment have weak and even contrarian relationships with future equity returns. Instead, the text advocates focusing on predictive metrics such as P/E ratios, which currently remain attractive
The results from the 1975 recession are particularly interesting because the economic situation looked as bad as—or in some cases worse than—it does today. GDP was contracting, unemployment was 9 percent, and top tax rates were 70 percent. These weak numbers were reflected in one of the worst consumer confidence readings in history. And yet over the next five years, the All Stocks universe was up 21.7 percent per year
bonds are shit ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
when a particular asset pricing style is popular among investors, returns for that style exhibit greater skewness, it can provide useful information for making investment decisions and potentially achieving better returns. Here is how:
Skewness is related to the asymmetry of returns, and greater skewness implies the potential for extreme positive or negative returns. By understanding the skewness of a particular investment style,
an investor can better assess and manage the associated risks. If a style exhibits positive skewness,
it suggests the possibility of larger positive returns, but also the potential for extreme losses. Conversely, if a style exhibits negative skewness, it implies higher potential for extreme gains but also the risk of larger losses. Investors can adjust their risk tolerance and portfolio allocation accordingly.
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Funny anecdote: My eldest son is somewhat of an entrepreneur, and he came to me in late 2019 and said, “Dad, I’ve got a quarter million I want to invest.
Where should I invest it?” I answered, “You’re in tech, so don’t invest it in tech. You’ll want to diversify. Your revenues all come from the US, so you want international diversification; invest outside the US. I’d recommend emerging markets value, but more broadly, I’d recommend diversification.”
value says to buy anti momentum stocks because momentum never woork indefinitly but thats what we are seeking in value //////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
The Traits Of Successful Dividend Investing:
1) Stay frugal and live within your means
2) Invest savings at a high rate of return for a long period of time
3) Invest in companies with durable competitive advantages with a long runway
4) Stay patiently invested for decades, without selling
5) Keep reinvesting those dividends along the way
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old companies that are losing value due to their maturity, can reinvent themselves with great concepts, great ideas, keeping a nice growth rate, be aware of things like that (ex: amazon)
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Beating the market:
Investing Edge For The Masses
There are a couple of edges that maybe – just maybe – available to private investors.
Size / Liquidity
You’ll often hear a claim that as a private investor you can invest in smaller, less liquid stocks than institutional investors. And that this can be an edge.
You’ll mostly hear this from people promoting those very same mico-crap (no, that’s not a typo) companies.
I’m not entirely convinced.
After all, if the company was any good, it’d have a higher market cap, right?
Risk
Now this one is interesting. You can just about construct an argument that this edge is available to you.
Maybe you’re prepared to take risks that others aren’t?
This is part of Roaring Kitty’s edge (that is, the r/WallStreetBets guy).
No sane person puts a decent fraction of their net worth in short-dated, far out-of-the-money call options in a near-bankrupt retailer.
But you can. If you want to.
Subtler than just taking more risk, you also choose to take different risks to professional investors.
ESG is a great example. Maybe the woke portfolio manager at Blackrock can’t take the career risk of stuffing her fund full of tobacco, oil, and slave labor garment manufacturing companies?
But you can.
Time
As a professional investor, you can only underperform the market for so long before they take the money away and give it to someone else.
As a private investor, it’s your money. You don’t have to explain yourself to anyone.
In theory this can be a powerful edge.
In practice it’s very psychologically difficult to stick with a losing strategy through very long, deep, drawdowns.
Inevitably you give up just before it starts working anyway.
Edge Your Bets
As a private investor you’ll rarely have an edge. So if you find yourself with a (legal) one, make the most of it!
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-If I were only able to analyze a single metric before investing in a company it would be ROIC
-A company that produces a lower ROIC than its WACC actually destroys capital, Your money is going up in smoke, both literally and figuratively. The only constituents who are happy in this scenario are your investment bankers
reminder on how to calculate roic:
( ROIC = EBIT / Invested Capital X 100%
Invested Capital = total assets – current liabilities + short term borrowings
and
EBIT = earnings before interest and tax ) ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
when analysis the accounting of a company, be carefull, because maybe the company hold more cash than before but it doesnt mean that its bearish, because maybe the company is also getting bigger so the cash holdings arent growing that much, thats why checking ratios is important ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
there are people who think that predicting the economy accurately will lead to superior investment results, but it's absolutly false, that's why you must not worry about what peoples says about the economy in crisis, Is the Market Being Rational?
So when the markets move, I think we have to look by sector, and by stock, to see what they're expecting. It makes no sense to look at the index itself.
during crisis: One thing is for sure. You really don't want to go chase pandemix proof stocks, the worst time to buy stocks is when everyone piles into them for the same reason (I wouldn't short them either!)
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invest consistently for a long time, and you will be successful, dont be greedy but be steedy and consistent in your returns, over time you will make it /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
SAVING = INCOMES - EGO the stock market is the only place where peoples run out of the store during a sale
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A good business must have these two characteristics: 1. an ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume. 2. an ability to accomodate large dollar volume increases in business with only minor additional investment of capital.
Ability to increase prices without fear of significant loss:
a. Differentiation and Unique Value Proposition: A business must offer a product or service that stands out from competitors, providing a unique value proposition. This could be achieved through factors such as superior quality, innovative features, enhanced functionality, exceptional customer service, or exclusive branding. By offering something distinctive, the business can create a perceived superiority and justify higher prices.
b. Branding and Reputation: Building a strong brand and reputation is crucial in establishing customer loyalty and trust. A reputable brand commands a premium and can mitigate the negative impact of price increases. Customers who have a positive perception of the brand are more likely to accept higher prices as they associate them with superior quality or prestige.
c. Market Power and Limited Competition: A business operating in a market with limited competition or a niche segment can exercise more pricing power. When customers have few alternatives or the business has a monopoly-like position, they are less price-sensitive. This enables the business to increase prices without facing significant customer attrition.
d. Inelastic Demand: If the product or service is characterized by inelastic demand, price increases have a limited impact on the quantity demanded. This could be due to the product's necessity, addictive nature, or lack of close substitutes. When demand remains relatively stable even with price increases, the business can raise prices without experiencing a significant decline in market share or unit volume.
Ability to accommodate large dollar volume increases with minor additional capital investment:
a. Scalability and Operational Efficiency: A business should be structured and operated in a way that allows it to handle increasing volumes without requiring substantial capital investments. This can be achieved through scalable business models, efficient processes, and optimized supply chains. Automation, advanced technologies, and streamlined operations minimize the need for additional capital expenditure while efficiently managing higher volumes.
b. Outsourcing and Partnerships: Leveraging external resources, such as outsourcing certain functions or partnering with suppliers, can help accommodate increased volume without significant capital investments. By relying on the expertise and infrastructure of specialized third-party providers, the business can scale up operations without the need for substantial capital expenditure.
c. Digital Transformation: Embracing digital technologies is crucial for managing larger volumes without significant capital investment. E-commerce platforms, cloud computing, data analytics, and automated systems improve operational efficiency and reduce costs. Digital transformation enables businesses to scale rapidly, adapt to changing customer demands, and accommodate larger volumes with minor additional capital expenditure.
d. Economies of Scale: As the business grows and production volume increases, it can benefit from economies of scale. This refers to the reduction in unit costs as production volume expands. By spreading fixed costs over a larger output, the business can handle increased volume without proportionally increasing capital investment.
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Chris Davis - looks for companies with good management, high ROC, strong BS, low cost operators, dominant market shares, successfu international operations and high quality
earnings. If we have to get out to year 8 or 10 before we cross the line of the RFR its a worry Very few businesses have LT growth rates greater than 12-14%pa. The reason the S&P50 hard to beat is that it never sells its winners. If you are in a great company, run by a great manager you can't imagine how far it will go.
Warren Lambert - everyone you talk to re a company is biased.
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first case of covid in the us: 15 january 2020
stock market 3 months free fall start date: 15 january 2020
and since multinational corporations like Apple, Microsoft, and Coca-Cola generate a significant portion of their revenues from international markets, they werent protected from the global crisis
we can analyze the revenue breakdown of each company. Let's say an investor is concerned about their portfolio's exposure to China. By examining the geographic revenue data, they may discover that some companies within the portfolio generate a significant portion of their sales from China, indicating a higher exposure to the Chinese market
if china is ongoing political protests, economic uncertainty, and potential regulatory changes; it is a riskier investment always check the geographical exposure via geographic revenue data; for example high significant sales percentage in india market (emerging market) can be a really good point /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
IMPORTANT IMPORTANT we have to prioritize our focus on the most important thing, which is 1. finding the higher amount of very good companies that peoples will be attracted to (find unpopular, low seen, underlooked business)
2. calculate their value
3. do a selection of the greatest business and where you come to a point where they all look similar in term of future performance, select only the ones that are the most undervalued, do a top (7 companies if possible) and place a higher amount of ur portofolio money in percent for the top 1 (ex: 20 percents) , just a little bit less for the top 2 (ex: 18 percents), top 3 (ex: 16 percents) etc....
what is amazing about diversification is that you dont have to bet on only one thing to have good returns, you can bet on multiples things and thus minimiaze your risk without damaging your returns
hold them until they become overpriced at a obvious state
ALWAYS PUT 100 percents of your investing money (money that you save that you dont need in cash) in these stocks, re-invest dividends aswell IMPORTANT
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dont do what buffet do, do what he say, you are not the same investor type -Buffett talks about See’s as the most attractive type of business in this example, and certainly a business that produces steadily rising cash flow on a very low capital base is a great business. But a business that has the ability to retain and reinvest a large portion of its cash flow at high rates of return is also a great business in my view.
the key of a great cash flow machine is to combine great high return on capital with a long runway to put lots of capital to work (it was able to maintain these returns while growing from 500 stores to over 2000), and you have a formula for a compounding machine of great proportions. (avoid business like airlines)
Buffett himself described this type of business in an earlier letter (1992) when he said:
“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.”
So we might think two categories of great businesses:
-Those that can retain and reinvest most/all of its earnings at high rates of returns, The next best business (and depending on the rate of return maybe even a better business) is one that can reinvest lots of capital at very high rates. This is where the compounding machine kicks into gear. ( example of CMG in the previous post mentioned above. The company had incredible attractive restaurant-level economics: it could set up a new location for around $800,000 and in the first year that restaurant would generate over $2 million in sales and $600,000 in cash flow, or a 75% return on capital. )
-Those that don’t have any reinvestment ability within the business but can still grow earning power with little to no incremental capital, High ROIC Businesses with Low Capital Requirements business (via pricing power for example, and very low competition) ROIC=return on invested capital
when you find a company with a great competitive advantage ( Look for businesses that have unique qualities or assets that set them apart from competitors: brand recognition, patents, proprietary technology, economies of scale, or a dominant market position, AND dont forget to Evaluate the durability of the competitive advantage: Seek businesses with moats that are difficult to replicate or diminish over time, "is it going to endure in the face of a evolving future" ?? what is very good in a company is HIGH HUMAN CAPITAL in the meaning that employees are smart and developing in a healthy respectable environment. -Now, more than ever, I think evaluating a competitive advantage needs to start with the value that the company’s customer is receiving. A company that produces significant profits at the expense of its customer will likely see its earning power eroded over time. Conversely, companies that are focused first and foremost on customers (even before competitors) have one of the necessary ingredients to a lasting competitive advantage
IMPORTANT: focus only on high quality company if you are focusing on long term, because phisolophically time is the friend of the greats business overtime, and they are safer
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SAAS
Anything related to software-as-a-service (SaaS) is deemed a future winner, while anything related to the physical world is toast
Many companies will become big winners in software, but the stocks might not be great investments simply because they already reflect that future
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the key is to be smarter than 80 percents of investors in a investing decision, ask yourself, did you make this kind of reflection performance ? why ? what was your edge (
if you have one, and have a good reason to believe that you deserve better returns then dont diversify, go for a high percentage investment on it, because you know
if you know nothing spectacular, the buffet "know nothing investor" just diversify by buying the sp500 because you have no reason to not do so
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2 great investment takeaways FOR LONG TERM INVESTMENTS COMPANIES:
-Focus on the quality businesses (he lived through the stock market crash of 1987, where the market tumbled over 20% in one day, and he wanted to ensure that if that ever happened again, he would feel comfortable with the businesses he owned)
the market is never protected from unlucky events so in order to be prepared, we need companies that can handle the shock, high qualities companies The stock market goes up over time because businesses get bigger and earn more money over time.
so try to get short term (due to an event for example, cheap priced companies) that are high quality companies that will grow in the long term
-Position Sizing: If it’s not worth putting 5% of your portfolio in the stock, then it’s probably either too risky, outside your circle of competence, or doesn’t have enough upside
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dont fall for outsourced thinking, independent thought is extremely rare, which makes it very valuable, Regardless of how convincing the facts are, we are just more comfortable if we can mold our opinion around the opinion of others.
put truth in front of comfort, do your own reflection, your own intellectual work and get an edge on others Use a part of your portofolio, maybe 2 / 3 stocks for oversea investments:
1. US may no longer be setting the pace in global markets. For example, you could explore investment opportunities in emerging markets that are showing signs of resilience and economic growth. Conduct research on countries like India or Brazil, evaluate their economic indicators, and consider allocating a portion of your portfolio to these markets.
1,5. it's also easier to invest in india because peoples has less knowledge than you in general, meaning less competition
2. Evaluate monetary policy impacts: Consider the implications of monetary policies in different regions. For instance, if you believe that certain countries' monetary policies will result in higher inflation, you might consider investing in inflation-protected securities, commodities, or sectors that historically perform well in inflationary environments, such as real estate or natural resources.
3. keep an eye on central bank announcements, economic data releases, and geopolitical events. If you anticipate a significant policy shift or an economic indicator that contradicts the insights in the text, you might adjust your investment strategy accordingly
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-understand the boundaries of your circle of competence and have the discipline to avoid crossing those boundaries is one of the most important attributes for an investor. just say no
-avoid companies that bet agaisnt the best /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
MY EDGES: -The Edge Gained From Thinking Long-Term: pros dont care, dont want / patience / fundmentals investing passion
-Time: do your own work, get more knowledge than others -Age: My age, start early, be patient
-Size: small cap because of growth potential and unseen, not looked by big funds
-knowledge ? for now it's not enough so dont use this edge
-Money: i have more money than other 20's young adults
-Intelligence: so use it, do fundamentals, philosophical analyses, dont stuck on technical or poor intelligence needs reflexions
-Fully use opportunities like luck, natural edges that come / came to you to make better investments choices ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
Each panic and recession are unique. But there are also a few common denominators that seem to exist in each one:
-Every time markets plummet, people bring up the 1930’s and worry that stock prices could fall 80%
-Every bear market and every recession have unique aspects to them that make people think the current situation is going to be much worse than anything before
-People sell during these panics because they think prices are going lower
-Experts advise to “wait for more clarity”
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capital preservation is more important than making big swings with the bat and knocking the ball out of the ground. I don't know what is going to happen next, and I don't profess to, and my portfolio reflects that
leverage borrowed money limit: if you have $100,000 of capital, you could limit your leverage to $32,600. This means that your total exposure to investments would be $132,600, with $100,000 of your own capital and $32,600 obtained through leverage. make sure to manadge risk and ensure the annualized standard deviation of returns that does not exceed 25% Don’t use CAPE to predict the markets but a low CAPE of below 15 in countries was always followed by greater returns than a high CAPE
ABOUT FEES:
while performance is uncertain, fees are certain. And the simplest way to improve your performance is to reduce your fees.
We really are bad at forecasting markets:
none of our predictions comes close in the long run to forecasting the actual return of equity markets
we may get the diretions right most of the time,
Instead of trying to develop return forecasts for different asset classes, investors should use robust optimisation methods that either don’t use any explicit return forecasts or are designed to incorporate forecasting errors.
The simplest way to do this is to go for equal-weight portfolios, but minimum variance portfolios or more sophisticated methods like resampled efficient frontiers will work as well. What does not work is trying to forecast long-term returns for asset classes and market that's why u should buy now for long term and not think about it
growth stocks performances:
Growth as defined by practitioners outperforms growth as defined by academics
-Growth as defined by practitioners: stocks with high past or future sales, cash flow, or earnings growth. The notion of growth stocks there comes from discounted cash flow models where the growth of future cash flows is a key driver of valuations.
-Growth as defined by academics: defined as the opposite of value investing, i.e. stocks that show expensive valuation metrics, stocks with high P/B-ratios or high P/E-ratios
this is ridiculous to hope that they will become even more expensive than they already are
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The disposition effect famously describes the tendency of investors to sell winners too early and hold on to losers for too long, Think about it. If you sell a winner and lock in the gains, it makes you feel good about your investment decisions and you can start boring all your friends
so you make the dumb choice of selling a winning stock, individuals tend to sell their winning investments too early and hold on to their losing investments for an extended period
The reason that could justify you selling the stock shouldnt because you made better than average profit but only if after making research about this, you find out that the returns arent explained rationally and are obviously delusionals
its not because it underperform by a lot the sp500 that its bad, its bad if the mean of all of your returns underperform it, compare how close you are to the sp500 only after calculating the mean
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on days when the sun is shining, stock markets tend to perform better than on days when it is overcast
if you have a winner, evaluate the reason on your note book, if it's narrow because it was luck, reconsider your bet, the strategy won because of luck, not because it's good
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will a business still do great for a very long time ? the answer to that question has to be found through analyzing the strength of those more permanent attributes that don’t change with the cyclical economic tides
like: Operating Costs and timeless values -A companie's value in 2032 has little to do with the comps it faces in 2023, It has a lot to do with the durability of its network, the economies of scale, the distribution advantages, the culture of operational excellence
you dont buy a stock for long term hoping that it will rise this year, but you invest for a 5-10 year time horizons. So because of that a lot of long term stocks get undervalued after quartier annoucement and create opportunity for investors -A mismatch of time horizons lead some investors to more heavily weight the short-term and deemphasize these sources of “enduring business success”.
-Focus on the Advantages that will Matter in a Decade, focus on long term advantages for a long term buy, like competitive advantages, low cost business model, cost counscious, long term sustainability, dont let urself be blinded by short term little problems, value the importances, value what really matter
food, beverage and tobacco industries have the greatest biodiversity risk but the correlation between share prices and the media reports on biodiversity risks is only of 0.1, which is very low, But correlations may increase over time ?? visit biodiversityrisk.org before considering using biodiversiy filters in your investment decisions //////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
take final investment decision only when you are motivated to work on it and free, dont take important decisions on panicked moments when you get to a big amount of money that you cannot risk at all cost, your portofolio should look like 80% US small cap equities
20% Short-Term Treasury Bonds /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
I also think that many investors think they have found information in small-caps that others don’t have. One of the advantages of writing a blog is I hear from a lot of readers, and in the past when I have mentioned small cap stocks, I’m amazed at how many people have already researched the company I’m looking at, and have found the same information I found. There might be 100 analysts on Wall Street following Apple, but there are probably 500 or more small investors following every small-cap stock, which as a percentage of the market cap and trading volume probably equals or exceeds the coverage of the average large cap.
In other words, I’m skeptical when someone claims to have found information that the market doesn’t already have.
My answer to “what is your edge” with XYZ large cap stock is not some hidden piece of information, but it’s simply my willingness to view the business through a different lens than the majority of investors
If you want to beat the average, you have to not do like the average, think differently, but ask yourself if the reason of your different thinking is rational and smarter than the average buy Large Caps in pessimist times because they tend to Get Mispriced and more volatile than everything else so it's good foor long terms projections because the short term doesnt affect you
Again, I don’t want to imply that it’s not worth looking at small caps. I just think the gap between small-caps and large-caps in terms of publicly available information is much smaller than many realize.
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have no idea where the general market is going. Over time, it will go up. Over the next few years, I really don’t know. Nor do I really care much, as long as I’m able to find a few investment ideas that offer compelling value.
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On the other hand, opportunities identified through ESG analysis are reflected as higher long-term growth rates. This suggests that companies with favorable ESG factors may be expected to experience higher growth rates over the long term.
just like this investment positive point, esg score performant, make a list of all the investment points of your stock, do that for all stocks, and keep the companies which when you addition all their metrics by their importance on the future returns, have the best scores for example esg is not that important, just as biodiversity factor, positive points but of pretty low worth in the calculation of the companies future returns value /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
when choosing an index, choose the lowest possible fees index funds
you cant predict the market
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After a really bad year in the stock market you can basically expect one of two things to happen:
(1) Very good returns since bear markets don’t last forever and downturns make for wonderful buying opportunities.
(2) A continuation of the bad returns if things turn into a full-blown crisis situation.
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“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves
What the market’s going to do in one or two years, you don’t know. Time is on your side in the stock market.
I don’t remember anybody predicting the market right more than once, and they predict a lot
This means I should actually hope for sustained periods of below average stock performance. It would be a chance to buy stocks at lower prices and higher dividend yields which will only increase my future performance and compounding capabilities.
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-make good decisions ahead of time to avoid trying to nit-pick every move in the markets
-All of us would be better investors if we just made fewer decisions
The performance numbers show the small cap overperformance was strong over this 35 year period, but it didn’t happen like clockwork.
One asset class shows significant outperformance, investors end up chasing those high returns even higher, which causes an overshoot that makes them too expensive, thus leading to future underperformance.
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“If you can’t explain it simply, you don’t understand it well enough.”
In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace
Strategies that outperform are usually discovered by investors right as they are about flip the switch to underperformance because investors don’t get excited about an investment strategy until it has shown periods of solid performance.
By the time you hear about a winning strategy, it has probably run its course.
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Keep a diversified portfolio of index funds for the remaining 90% of your portfolio to keep you honest. By limiting your tactical investments to only 10% of your overall portfolio you minimize the risk of a total loss of capital. Stocks can and will go to zero, but an entire market of stocks will not.
all times high is the stock market are perfectly all rights
dont rely on 1 year performance numbers
analyze the index returns of each country and do stock piking in the winners countries ? //////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
The key is to find a strategy that you can live with; something that meshes with your investing DNA. Jumping from strategy to strategy is guaranteed to lead to poor returns
move accordingly to your edge stats (if you have a edge or not and how big it is (are you young warren buffet ?)) you precentage of portofolio in different asset classes
if you have a edge, and know more, maximize the percentage of risky asset if you have an edge, but its thin, you are afterall not an expert, moderate the percentage of risky asset
...the more you diversify, the less edge you should have, but lways diversify because even warret buffet cannot predict the future For any long-term investor in the stock market, there are two very basic ways to improve your returns:
(1) Buy low after there’s been a market crash.
(2) Increase your holding period. ////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
Remember this feeling when the market has a meaningful correction, because one of these days it will happen. It’s what markets do.
market always correct after a bubble of investing overvaluation and wrong overall feelings
The problem with trying to predict how the stock market will react to any economic variable is we simply don’t know what’s been priced in or how much investors will over- or under-react to certain pieces of data.
Keeping your profits is more important than making them
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add in your stock picking strategy IN STOCKS = focus on companies in the second-highest quintile of dividend yields within large caps. A quintile is a division of a dataset into five equal parts, with the second-highest quintile representing the range of companies with dividend yields higher than the lowest 40% but lower than the highest 20% within the index.
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price determine most of the success that you are going to have, rather than prefict what is going to haooen with the company
we try to price it correctly wuth a big significant margin of safety
once we dermine what a cheap price is, the next step is to look at the investment and the underlying company and stress test it to determine all the was this business can go wrong, the environment can go wrong, the balance sheet can go wrong we try to kill the company, and if we cant keep the company, and we are buying at a price that reflects near death we may be on something very good The next step in the process, is to search for catalysts, to understand how the environment, the ecosystem is going to change overtime and how thats going to affect the company to getting closer and closer to a more normal return on investment or on return on capital employed we want to see: priced for death, tremendous value, franchise intact, earnings power (foggy because of a recent event and the time that its going to be needed to resolve the legacy issues from it)
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risk is not volatility, its a chance to risk permanently capital
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International Diversification is worth it, but no that much (maybe place 80 percent on us stocks and 20 percents on international stocks)
And it’s also important to prepare for upside in the stock market because most of the time it goes up.
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invest in french small cap ?? invest in small indian cap ?? Tech stocks don’t need lower rates to go up
Low rates certainly helped long-duration assets, but really doesnt have that much of an impact on tech stocks But low rates alone didn’t cause Apple to increase sales from $170 billion to nearly $400 billion in 10 years. Low rates have nothing to do with the AI speculation currently taking place with NVIDIA shares.
On average, the stock market has much better returns in a year when inflation is lower than when it’s higher.
it has an slight impact, but it doesnt garantee anything and shouldnt prevent you from getting a bargain //////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
(1) Size is often the enemy of outperformance. It’s much harder to meaningfully outperform once you become one of the biggest stocks. The top 10 essentially becomes the market once they reach the peak.
(2) You want to own the stocks that will eventually make it into the top 10. I just don’t know how to pick them ahead of time.
Here is a quick summary about INDEX SP 500 stats:
Almost 6 out of every 10 years on the stock market has seen gains in excess of 10%.
A little more than 1 out of every 3 years has been a return of 20% or more.
Nearly 1 out of every 5 years was a 30% up year or better.
Less than 1 out of every 10 years has seen a calendar year-end with gains in the 5% to 10% range.
Around 1 of every 4 years has finished the year down.
Roughly 1 out of every 8 years has been a double-digit down year.
-positive returns:
63% of the time on a monthly basis
75% of the time on a yearly basis
-one out of every 6 years or so, on average, the stock market has fallen by a big percentage -there have been just 13 bear markets since World War II
sp500 ? sp500 growth ?
or sp500 value ? do an analysis of it of value vs growth returns and risk over time before choosing most individual stocks underperform cash (T-bills) over the long haul
and the market
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to measure Risk-Adjusted Return, look at both Sortino and Calmar together
Certainly! Here's a rewritten example with the formulas included for the risk-free rate in step 2 and all the necessary formulas for step 7:
Assume you have historical monthly returns for an investment fund over a 3-year period (36 months). Here are the monthly returns:
Month 1: 2%
Month 2: 1%
Month 3: -3%
...
Month 36: 4%
Step 1: Calculate the average annualized return.
To calculate the average annualized return, first, calculate the total return over the 36 months:
Total Return = (1 + Month 1 Return) * (1 + Month 2 Return) * ... * (1 + Month 36 Return) - 1
Next, calculate the average monthly return:
Average Monthly Return = (1 + Total Return)^(1/36) - 1
Finally, convert the average monthly return to an annualized return:
Average Annualized Return = (1 + Average Monthly Return)^12 - 1
Step 2: Determine the risk-free rate (RFR).
Let's assume the risk-free rate is 3%.
Step 3: Calculate the excess return.
Excess Return = Average Annualized Return - RFR
Step 4: Identify negative returns.
In this example, let's assume the negative returns are -3% and -2%.
Step 5: Calculate the downside deviation.
First, square the negative returns:
(-3%)^2 = 9%
(-2%)^2 = 4%
Next, calculate the average of squared negative returns:
Average of Squared Negative Returns = (9% + 4%) / 2 = 6.5%
Finally, take the square root of the average of squared negative returns to get the downside deviation:
Downside Deviation = √6.5% ≈ 25.5%
Now, we can calculate the Sortino ratio:
Sortino Ratio = Excess Return / Downside Deviation
Step 6: Calculate the maximum drawdown.
Identify the peak and trough values from the historical returns and calculate the percentage decline between them. Let's assume the maximum drawdown is 10%.
Step 7: Calculate the Calmar ratio.
To calculate the Calmar ratio, divide the Average Annualized Return by the Maximum Drawdown:
Calmar Ratio = Average Annualized Return / Maximum Drawdown
By following these steps and using the formulas provided, you can obtain the Sortino and Calmar ratios, which provide a comprehensive assessment of the investment's risk-adjusted performance.
Then tcompare the results to others results (the higher the better)
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momemtum factor The simple idea is that stocks that have been going up recently tend to keep going up for a short time, and stocks that have been going down recently tend to keep going down for a short period. A stock is considered to have positive momentum if its prior 12-month average of returns is positive.
but:
-chasing the Momentum factor invariably involves short-term market timing
-the Momentum factor is constantly inversely correlated with the Value factor
its pretty much to ignore since its not compatible with factors valuation model, its pretty unique and unfounded there is no magical alphas in dividend growth stocks, forget that //////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////
FACTOR INVESTING (insert the factor correlation graph pict)
Factor diversification is highly effective because the average correlation between the five constituents is virtually zero. … It is hard not to conclude that smart investors should include cost-effectively sourced dynamic factor premia into long-term portfolio allocations.
Our result which favors a portfolio of factor premia overlay remains unchanged. As previously suggested, the benefit of factor premia is not in their mean returns, but rather in their ability to mitigate adverse conditions
Overall Factor Performance:
-we find that differentiation based on valuation is most attractive during times of maximum pessimism.
-Momentum tends not to work well at inflection points in the cycle but it does seem to work exceptionally well in high return and trending markets.
-we believe dividend yield is most effective when paired with Value and Quality to smooth the gyrations over time
-The Quality themes of Financial Strength, Earnings Quality, and Earnings Growth tend to offer lower excess return in the high deciles
factor selection: Value, Momentum, and Shareholder Yield / factor quality: earnings quality
how to use ff5 factor strategy:
Step 1: Factor Selection
Identify stocks that demonstrate characteristics aligned with the five factors in the FF5 model: market risk, size, value, profitability, and investment. Analyze financial data and ratios to assess how stocks align with these factors.
Step 2: Factor Weighting
Assign weights to each factor based on their expected impact and relevance to your investment goals. Take into account the historical performance and strength of each factor. It's crucial to ensure well-diversified weights across factors to avoid excessive concentration in any single factor.
Step 3: Stock Selection within Factors
Within each factor, carefully select a diversified range of individual stocks that score favorably based on the specific factor's criteria. Choose stocks from different industries and sectors to enhance portfolio diversification. Conduct comprehensive fundamental analysis to identify stocks exhibiting desirable characteristics within each factor.
Step 4: Portfolio Construction
Allocate a portion of your portfolio to each stock, considering both the factor weights and individual stock weights. Strive for a well-balanced allocation across stocks and factors to benefit from diversification. Adjust the allocation based on the assigned weights to each factor and the attractiveness of individual stocks within their respective factors.
Step 5: Monitoring and Rebalancing
Regularly monitor the performance of the portfolio and the individual stocks within each factor. Periodically rebalance the portfolio, typically on an annual or semi-annual basis, to maintain the desired factor weights and account for any changes in the characteristics of selected stocks or factors. Additionally, consider rebalancing if any factor becomes overweight or underweight due to market movements.
Step 6: Risk Management
Implement risk management techniques, such as prudent position sizing, setting stop-loss orders, and diversifying the portfolio beyond factors. Assess the portfolio's risk exposures and ensure that no single factor dominates the overall risk profile. Effective risk management is crucial to safeguard against unexpected market events.
---HISTORICAL FACTOR INVESTING---
negative premiums occur from time to time. While the odds of realizing a positive premium are never guaranteed, they are decidedly in your favor and increase the longer you stay invested
-DURING PRE RECESSION: -expensive stocks underperforms, to avoid
-Investors also seem to prefer stocks with strong balance sheets during the Pre-Recession regime. The high-low spread for Financial Strength more than doubles the 1964–2015 average (from 5.3 percent to 11.5 percent). Though high dividend yield is not one of the stronger factors preceding a recession, the avoidance of low dividend yield seems to be important (-10.0 percent excess).
factor selection: cheap stocks + High Momentum stocks do well in these environments / factor quality: financial strength
-DURING RECESSION:
-investors continue to shun expensive stocks
-pairing Momentum-based strategies with other themes like Value or Quality to increase Momentum’s effectiveness = excess returns
factor selection: shareholder + dividend yield / factor quality: financial strength
-POST RECESSION:
-These are among the stronger periods for absolute return
-Yield and Value again dominate the other themes in these environments
-High Financial Strength falls to the back of the pack, delivering marginally negative excess return, as investors likely de-emphasize high balance sheet quality and appropriate leverage in the early stages of a recovery.
factor selection: shareholder yield + value / factor quality: earning quaity
-PURE EXPANSION: (which lies in between Post-Recession recovery and Pre-Recession late-stage expansion)
most common period
factor selection: momentum + value / factor quality: earning quality
-Momentum—a trend-following factor—rises to the top of the pack based on excess return and high-low spread.
-In periods when market returns are on average negative or the future is uncertain, the ability to generate positive return is predicated on an investor’s skill of choosing wisely. For example, the average market return in recessions is -4.7 percent.
High Shareholder Yield delivers excess of 7.0 percent, which translates to a positive absolute return of 2.3 percent
-differentiation is less important because investors can generate double digit positive return with simple passive beta exposure to the market
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The GARP strategy attempts to combine the strengths of both growth and value investing, seeking companies with growth potential that are trading at reasonable valuations.
By considering both growth prospects and valuation metrics, GARP investors aim to find stocks that offer a balance between potential upside and risk mitigation.
One potential advantage of the GARP strategy is its ability to adapt to different market environments. During periods of market volatility or economic uncertainty, GARP investors may prioritize value characteristics to mitigate risk.
In more favorable market conditions, they may emphasize growth potential. This flexibility allows GARP investors to potentially navigate various market cycles.
However, the effectiveness of the GARP strategy ultimately depends on the investor's ability to accurately identify companies with sustainable growth prospects and reasonable valuations. It requires thorough fundamental analysis and a deep understanding of the company's competitive position, industry dynamics, and market trends.
It's worth noting that the effectiveness of any investment strategy can be influenced by factors such as individual stock selection, portfolio diversification, risk management, and the investor's own goals and risk tolerance.
It's always important for investors to conduct their own research, consider their investment objectives, and consult with financial professionals before making investment decisions.
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value investing struggling period occured in the 2 turning point periods; a stabilization of value investing might be upcoming ex turning point of 1929/1941:
Think of the Installation phase as the long process of establishing the technologies that make a car work, as well as the process of building and financing them at a price point for mass consumption, and the Deployment phase as the refinement and mass adoption and maturation of the industry.
The “Turning Points” is between these two phases, where the growth is the highest because the trend is just beginning, and the eventual winners from the industry are established. This is when Value underperformed Growth for a prolonged period.