Holiday edition
Nicely organized reading list
We have escaped to warmer climes. It has been a very cold winter in Toronto. We will be back in the spring. I’ve tried to pull together a collection of posts that will take readers through some of the main themes in the Nuggets of Investing Wisdom.
Things like: The world has changed, away from tangible assets and towards intangible assets; One of the greatest challenges in investing is controlling your own behavior. At the same time one of the greatest opportunities is to take advantage of other investors craziness; And, so called value stocks typically have low ratios because of limited corporate opportunities. Investing in these stocks is not true investing as described by Warren Buffett.
Check out this curated list of great posts to read.
Try picking one or two from the lists below as you have time.
Is the market down substantially?
When we left, the market looked a little shaky. The stock market might be down substantially while we are away. What to do? Is it a good time to buy or a bad time to buy? Is it a good time to sell or a bad time to sell? The answer is that it is none of those things. Buying or selling may be a sound investment decision depending on the investment quality and value of what you are buying or selling. Buying or selling based on the outlook for the stock market or the economy is market timing and will lead to poor performance. To learn more, look at this post:
Decisions, decisions and the current down market
The Age of Intangibles
The single greatest misapprehension I’ve seen by common stock investors in recent years, including many professional money managers, is to misunderstand the impact of company investment in intangibles of lasting value.
The world has changed. The biggest shift in the world of business in the last forty years has been the swing in company capital investment away from tangible assets and towards intangible assets. This has had a major impact on metrics such as earnings, price/earnings, book value of equity, ROC, ROE, CAPE and several others.
In writing this I want to make clear that valuations still matter. In fact, they are critical at a time when old rules of thumb like P/E and ROIC are breaking down. The answer involves discounted cash flow (DCF) and Warren Buffett’s owner earnings.
Here are some posts that address the issue:
Value investing in the age of the Magnificent Seven, networks, intangibles, AI and all that
The emergence of a new model of capitalism
Stock valuation in an age of intangible assets
Financial strength – the debt equity ratio has serious shortcomings
How the stock market works
I differ with Cliff Asness about Risk Adjusted Returns
The investment process
Market (In)Efficiency and beating the market
How Warren Buffett’s approach diverged from Ben Graham
How Warren Buffett was influenced by Philip Fisher
Dynamic asset allocation and the Equity Risk Premium
Investment psychology
One of the greatest challenges in investing is controlling your own behavior. At the same time one of the greatest opportunities is to take advantage of other investors craziness.
Read Investment psychology explainer for Mr. Market – introduction This will give you a better understanding of some of the terms and ideas around your behavior and the craziness of others.
Then, to dig deep into investment psychology, see:
A Daniel Kahneman core achievement applied to investing
A set of rules to develop a behavioral edge – Part 1 The problem of short-term thinking
A set of rules to develop a behavioral edge – Part 2 The attractive trap of extrapolating the most recent past into the future
A set of rules to develop a behavioral edge – Part 3 Control our animal spirits when faced with risky situations
A set of rules to develop a behavioral edge – Part 4 The herd mostly gets it wrong
A set of rules to develop a behavioral edge – Part 5 Our minds search for confirming evidence
A set of rules to develop a behavioral edge – Part 6 We generalize from limited observations
A set of rules to develop a behavioral edge – Part 7 Over-confidence and optimism bias
A set of rules to develop a behavioral edge – Part 8 Jumping to conclusions
Common stock investing basics – true investing
So called value stocks typically have low ratios because of limited corporate opportunities. Investing in these stocks is not true investing as described by Warren Buffett.
The under-performance of value stocks explained
True investing is neither growth nor value
A common misperception about stocks
When I started investing just over 50 years ago, I read that over the long-haul stocks outperform bonds. Over the years, with all the ups and downs of the stock market, I’ve never had any reason to doubt that. But, the majority of publicly traded U.S. stocks underperform Treasury bills. But that doesn’t mean you have to identify the next Magnificent Seven. The vast majority of wealth creation comes from a reasonably sized cohort of successful companies.
Tapping into the wealth created by stock market investing
Finding the right company to invest in
The tenets of companies Buffett invests in
Banks’ reported returns on tangible common equity are a con game
Making sense of free cash flow numbers
Buffett’s concept of economic goodwill vs accounting goodwill
We want great companies at bargain prices – Valuing the companies
The dangers and benefits of using Discounted Cash Flow analysis reports
The problem with analysts’ target prices
How to deal with uncertainty
Investment decision making in face of uncertainty
The stock market is closer to the Madness of Crowds than the Wisdom of Crowds
Does Wisdom of Crowds apply to earnings estimates, price targets, value estimates and stock prices?
The best performance is produced by a person and not by a committee
Buying and selling common stocks
In some ways the art of buying is easier than the art of selling. But both have to be done right.
Buying tactics for common stocks
19 Cardinal rules on selling stocks
Charts can lie through their teeth.
I would estimate that more than half of all charts we see in news, commentators and analysts’ reports about stocks and finance are fundamentally flawed and potentially seriously misleading.
Chart distortions that drive me crazy
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Readers are invited to collaborate with me to improve each and every article for the benefit of all investors. Check out the Collaboration Invite page.
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You can reach me by email at rodney@investingmotherlode.com
I’m also on Twitter @rodneylksmith
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Want to dig deeper into the principles behind successful investing? Click on the Home page for a guided tour. It will help readers get the most out of the Nuggets of Investing Wisdom blog. You might also want to take a look at the Curated List of popular posts.
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Check out the Tags Index on the right side of the Home page that goes from ‘accounting goodwill’ to ‘wisdom of crowds’. This will give readers access to a host of useful topics.
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