Three Investing Patterns That You Should Know
behavioralvalueinvestor.substack.com
behavioralvalueinvestor.substack.com
Don't try to be smart about your investments from the point of view of share pricing, P/E ratios, EBITDA, etc, etc. The legions of Harvard and MIT quants working on Wall Street are going to be better than you at figuring out what the stock price should be.
Instead, get smart about how the tax code works. Figure out the difference between long-term and short-term capital gains. Figure out how to do tax loss harvesting. Figure out what a back-door IRA is. Figure out how to take out a loan on your 401(k). The benefits from those investigations are going to be much more reliably beneficial than trying to be smart about pricing and timing the market.
This is not completely true. Legions of Harvard quants most likely do not possess your circle of competence, whatever it may be.
E.g. as a customer of various cloud services I am much better positioned than any quant at understanding cloud vendor's product and business, because I'm a user and customer so I can understand how some offerings are just better than others and I can safely predict winners in long term. You could likely predict AWS meteoric rise as a sysadmin in 2010.
E.g.2 people following the semiconductor market in depth knew from years that Intel was on its way down since the blatant issue of the 10nm node appeared in 2015+ and had many years to act on it. As a MBP Pro user yourself you could quickly see that the boiling hot trackpad burning your fingers combined with Apple's declared intention of moving to in house socs, combined with the comeback of AMD in data center market combined with cloud vendors working on their own socs put Intel more and more in the corner. And what did quants do? Kept buying Intel because they looked at balance sheets, not products.
Everyone has its circle of competence and can combine it with learning balance sheets and do their math. Point is almost no one does and does not go through the analysis part to value and price a business.
Finance moreover changed. 30%+ of stocks out there are held by passive funds. Even investment managers which are consistently pressured to stay in a delta from the benchmarks.
Investment opportunities are out there, what is needed is to practice continuous due diligence, stay in own's circle of competence and be patient. You can't be right consistently for the reasons you listed, but you only need to get it right few times.
this and Intel you mentioned are pretty unique and rare insights, maybe like a one-off windfall, not a consistent way to make money. I've been in tech for decades now and I'm still having a hard time reliably telling who will flop and who won't. Only in a very few cases it's so convincing to me that I would be willing to bet money on it.
Who said it was?
As per my last sentence my conclusion was that you only need to be right few times over your life time to buy a very good company that is mispriced for whatever reason and that retail investors hold often deep understandings of key industries that professional analysts don't.
If you're willing to do due diligence (and learn to do so which is far from trivial) and act you can definitely see good long term returns on a good number of picks.
Point is, stock markets only beat bonds in the long term, if you are in the stock market to do + some % in a short time it's gambling.
I'm not convinced any of those things is "smart". For example, if LT cap gains is your lowest-rate taxable income, why would you want to offset it? I make sure when I have a cap loss for the year, I have no LT cap gains and keep it to around $3K (which offsets higher-tax-rate ordinary income). Loans against 401(k)s are rarely a good idea, you shouldn't put in money in the first place if you need it before retirement. And I've always thought that (assuming I have any pre-tax Trad IRA money, which would be the case if a ever leaving a job and rolling over the old 401k), it's more effective to use my annual $6K after tax money to pay tax on a larger Roth conversion than to simply go though extra steps to get the $6K into the Roth (greater leverage).
Re: 401(k), you are assuming knowledge of the future that nobody has.
Re: extra steps to do a Roth conversion, it's something that can be done in literally under 5 minutes, at $0 cost, if you have no other money in traditional IRA accounts, so I have no idea what you're talking about.
No, it's not. It is to recognize both taxable cap gains and deductible cap losses in the same year, to net the tax to zero. Nothing is deferred with tax loss harvesting. My point was, why waste a cap loss offsetting low-tax-rate LT cap gains, when instead with planning it can be used to offset higher-rate ordinary income.
>Re: 401(k), you are assuming knowledge of the future that nobody has.
No. The context was, "beat the tax man". Using 401k loans for tax planning is near the bottom of the list. Using 401k loans for an unexpected emergency is something else entirely.
>extra steps to do a Roth conversion
The "extra steps" again was not my point. My point was, if you have $6K aftyer tax money to invest, would you rather get $6K into your Roth, or more like $20K into your Roth by paying the tax on a conversion of pre-tax Trad IRA (which presumably you have accumulated after earnings in your first decade or two of work).
To see why, consider a really simple case: you can buy a contract to receive C cash at some time T in the future. Call X how much you'd pay today to enter that contract. You can borrow X today and agree to repay it using the payout from your contract. If you can borrow at a fixed, continuously compounded rate R, then the amount you repay is X exp(RT). So your breakeven (or "fair") price would have X exp(RT) = C, i.e. X = C exp(-RT). NB, the rate you use to discount a future value to know its present value to you is R, which is _your_ rate to borrow that much money for that length of time.
There are various models that aim to recover R from other values, but ultimately it's determined by market activity. Lenders either will or will not loan you X for T time at a rate of R.
What kinds of things might impact their willingness? Definitely their perception of present and future inflation rates, but also their ability to loan at a higher rate to someone else with a similar risk profile (i.e. the "rates market" as a whole) and also specifics of your own credit risk to them. If they think you might default on the loan, they'll charge you more for that added risk.
Generally it will be your cost of capital to be used as a discount rate. Say if you borrow at 10%, then you need account for that every year you need to wait for that return.
A company with access to cheap capital can use a lower discount rate, and come up with higher net present value based on distant cash flows compared to a company that needs to pay a lot.
Net present value is a normalization measure.
Because I always discount with the rate I can borrow money at, right?
It vaguely seems like there is some opportunity cost argument to be made here...? Maybe?
For valuing an investment, you have to take into account the inflation that will happen, as well as the opportunity cost.
So if you can earn 5% on your money, but inflation is 4%, you can turn $100 into $101 today-dollars in one year.
You can use NPV to evaluate different options. If NPV of one investment is $1 and another is negative $4 then it is clear what the better investment is (all other things being equal). Do this for all your investment options and you can rank where to put your money. Of course, if isn’t that easy since two investments might have different terms, risk profiles, or different capital requirements.
For an economist (and I'm not one so I don't know), they probably use the real growth rate of the economy in their calculations, because this is what the country in question has been shown to do with its money. The real growth rate takes growth and inflation into account.
Average bond yield is around 4% over a decade, that means that investing in a business you need to discount the growth it will have in it's cash flow by 4%.
Imagine you conclude Coca Cola can grow it's cash flow and earnings per share by 6% annually, is it an appealing investment when you get right now almost 5 on bonds? I's not really, but you would probably come to a different conclusion if Coca Cola's price felt by 15% in some market conditions.
Cyclical and company-specific problems: This pattern involves a temporary issue that depresses a company's profitability. Cyclical issues are industry-wide downturns that eventually rebound. Company-specific issues require effective management to identify and resolve the issue. These problems offer opportunities to investors who can identify them early and wait for the recovery.
Turnaround situations: These represent company-specific problems that management is actively working to solve. Investing in these can be risky, as not all turnarounds are successful, but when the key operating metrics begin to improve and the turnaround shows signs of success, it can be a good opportunity to invest.
Moderate and prolonged growth: This involves companies that consistently demonstrate moderately above-average growth rates (6% to 12%) over a long duration. This steady, long-term growth is often underappreciated by the market, providing a potential opportunity for investors.