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Author Archives: moneys7

Heuristics in investing

Heuristics in investing

I think a very powerful idea in investing is the use of heuristics:
By using certain heuristics you can completely wipe out entire categories of errors. As an example, let’s say “technical analysis” works in some instances. If we act as if technical analysis doesn’t work at all, our overall results will be better over time simply by wiping out the multiple errors that we can make by using it.
To start with, I want to tackle a concept that almost seems to make sense: the target price, defined as “A projected price level as stated by an investment analyst or advisor”.
If I were to model the price of a stock I think I couldn’t even use a statistical variable following a probability distribution, much less a specific price, so why hold on to this concept?
The way I value a stock is not by a specific number (although this is how it is trade in the stock market), and not even by a statistical distribution, but maybe by using a small set of rules.
As an example, let’s take business ‘A’. Let’s say that in 10 years from now the nature of the business will remain largely the same, it will retain pricing power, it won’t need large amounts of capital expenditure, it can expand to such and such countries, it has this kind of economics, etc… and it sells at 10 times earnings. Using a historical 15 times earnings in the US as a yardstick (admitedly belonging to a a bygone era of higher returns) this is probably a great investment. Thus we can decide to allocate a big portion of our portfolio on it. The key thing is to realise that this kind of situation not only happens frequently enough to guarantee a good investment record on the long run, but that you probably can’t be any more accurate than this.
As well as “target price” another notion of very little usefulness is calculating the DCF value.
Thus a very powerful heuristic in investing would be to altogether avoid attempting to calculate DFC valuation for a more robust track record over time.
Simple enough, but maybe not easy.

Countries that have lost AAA rating from S & P

Countries that have lost AAA rating from S & P

Lets try and learn from History. If rating downgrades don’t augur immediate crises, they tend to indicate trouble on the horizon. Of the 10 other countries that have been downgraded from AAA, eight experienced further downgrades and five have still never recovered their AAA rating. Deeper downgrades have been associated with interest rate spikes, and… Continue Reading

16 ways to find undervalued stocks

16 ways to find undervalued stocks

Introduction: You Got to Know How to Look  Where to look for underpriced stocks? In the information age the question seems overwhelming. Do I run a stock screen, open the Wall Street Journal, or log on to Stocktwits? The better question to be asking might not be where to look but how to look. The… Continue Reading

Floats and moats

Floats and moats

I am going to talk about two diferent ideas. Floats. And Moats.Over the last few months, I have been obsessed by these two ideas.I have spent a lot of time researching them and thinking about them and also about they might be related.It’s been a fascinating journey so far.This talk is the story of that… Continue Reading

ETF explanation: Part 3

ETF explanation: Part 3

If you’ve read part 1 of the ETF explanation, you’d know that mutual funds are of various kinds (fixed income funds, equity funds, money market funds, etc). Similarly, there are various kinds of ETFs, some of which we will cover in this part. Inverse ETFs: If you think that the market is going to fall,… Continue Reading

ETF explanation: Part 2

ETF explanation: Part 2

If you’ve read ‘The Little Book of Common Sense Investing’ by John Bogle (if you haven’t, you should.), you’ll know that most mutual funds don’t beat the market. This is because mutual funds require large costs. The managers might be able to generate a return higher than that offered by the market, but costs can… Continue Reading

ETF explanation: Part 1

ETF explanation: Part 1

A mutual fund is a company that invests people’s money for them. There are four categories of mutual funds, based on the types of securities they buy: Equity funds Fixed income funds Money market funds Balanced funds and asset allocation funds EQUITY FUNDS Equity funds buy and sell stocks. They make money in two ways:… Continue Reading

Warren Buffet’s opinion on Gold

Warren Buffet’s opinion on Gold

Gold is consistently overvalued, said Buffett. If one were to melt down all the gold and form it into a large cube, said Buffett, it would only be about 68 feet on each side — small enough, observes Buffett, to be nestled in the infield of a baseball stadium. And yet, the monetary value of… Continue Reading

The parable of the ox

The parable of the ox

In 1906, the great statistician Francis Galton observed a competition to guess the weight of an ox at a country fair. Eight hundred people entered. Galton, being the kind of man he was, ran statistical tests on the numbers. He discovered that the average guess (1,197lb) was extremely close to the actual weight (1,198lb) of… Continue Reading

Finance/Investing 001: some basics

Boiling down to basics, here are the ways that you put money to work: Strict “Investment” means purchasing a stream of future income. Classic examples are farmland, apartment buildings, drilling rights, bonds, private lending, corner stores, factories, intellectual property, anything that generates ongoing income. Speculation means buying something because you think that someone will pay more for… Continue Reading