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64 - Rebalancing Kills Compounding show art 64 - Rebalancing Kills Compounding

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

Rebalancing is an often mentioned tactic utilized in modern portfolios but seldom is it examined from first principles. If you rebalance away from the compounding asset, then you will counteract the powerful effects of compound interest.

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63 - Your Portfolio should reflect your Investing Strategy show art 63 - Your Portfolio should reflect your Investing Strategy

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

Portfolio management is a critical means by which an investor implements their investing strategy. Align your portfolio and stock selection with your chosen strategy.

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62 - Passive Asset Allocation Strategy with Value Stock Geek show art 62 - Passive Asset Allocation Strategy with Value Stock Geek

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

In this episode, we discuss how to leverage the insights of value investing when building a passive asset allocation strategy. The portfolio and principles discussed focus on investing factors that improve performance over time.

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61 - How to leverage your equity portfolio without margin show art 61 - How to leverage your equity portfolio without margin

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

Over the long-term, you will maximize your investment returns if you can somehow use other people’s money to invest. Debt leverage allows you to access other people’s money for your personal benefit. Yet, margin debt is a bad idea.

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60 - Opportunities are Rare: Go the Extra Mile show art 60 - Opportunities are Rare: Go the Extra Mile

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

In this episode, I discuss how investors can sometimes fail by not seizing available opportunities. When an investment opportunity meets your requirements you should go the extra mile if needed to make the investment.

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59 - How to manage Currency Risk (Loss of Purchasing Power Parity) show art 59 - How to manage Currency Risk (Loss of Purchasing Power Parity)

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

One potential risk of earning an acceptable return is for your investment returns to be eroded by changes in the value of foreign currency. You can limit this risk by avoiding countries with large problems that may impact the currency.

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58 - Investing Goals for 2020 show art 58 - Investing Goals for 2020

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

The key to becoming a better investor is to focus on improving your investing process. In this episode, I discuss my 2020 Investing Goals.

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57 - Technical Analysis for Value Investors with David Keller show art 57 - Technical Analysis for Value Investors with David Keller

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

Technical analysis quantifies investor behavior. Value investors can leverage charts to improve their investing process. Behavioral Finance is also critical to reducing investing mistakes.

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56 - HemaCare 100-Bagger with Dan Schum show art 56 - HemaCare 100-Bagger with Dan Schum

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

In this episode, I interview Dan Schum of NoNameStocks.com

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55 - How to manage Inflation Risk (Loss of Purchasing Power) show art 55 - How to manage Inflation Risk (Loss of Purchasing Power)

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

In today's low inflation environment, one of your best opportunities is to find and invest in companies that will thrive when high inflation returns. When the rest of the market gets hammered, your investments would be safe.

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More Episodes

Mental Models discussed in this podcast:

  • Liquidity
  • Risk
  • Insurance
  • First Principles

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You can find out more information by listening to episode 11 of this podcast.

Liquidity: Risks and Opportunities - Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode37

What is Risk?

  • Merriam Webster has a few definitions for us:
    • Possibility of Loss or Injury
    • Someone or something that creates or suggests a hazard
    • The chance of loss or the probability of loss
    • The chance that an investment (such as a stock or commodity) will lose value
  • What this should suggest to you is that there are many different types of risk. 
  • This is especially true for investing risk. Each type deserves its own discussion and it would be a mistake to believe that 
  • Two Key Elements to risk:
    1. Uncertainty,
    2. Negative Event

Liquidity Risks

  • Personal
    • Value of an Emergency Fund
    • Value of Life Insurance
  • Investment
    • Liquidity Risk - Time to receive your money back in cash
    • More liquid stocks reduce liquidity risk

Opportunities offered by Liquidity

  • Personal
    • Large sums of cash provide flexibility
      • Move across the country
      • Make investments
      • Get a good deal on a car
  • Investment
    • Liquidity Opportunity - Less liquid stocks tend to have higher returns than high liquidity stocks

When is Liquidity Important?

  • Time-Bound: On the personal side, liquidity is important when you need to spend a large sum of money. Can either be planned for or it is an emergency.
  • When you want to sell: On the investment side, liquidity is important only when you sell a stock. You don't really care about liquidity when you are purchasing a stock. The key point is that you want to be able to sell a stock at a price close to its fair value at the time you determine you need to sell. 
    • If done optimally, you can buy illiquid stocks during your buying period and when yous ell them, they will have transitioned into liquid stocks. 

Liquidity First Principle:

More liquid stocks are better than less liquid stocks because they reduce liquidity risk. 

  • "All else Equal" Considerations:
    • Unfortunately, this statement is only true when we can rely on everything else being equal. 
    • In practice, less liquid stocks tend to have higher returns. 
    • Therefore, you really have to make a tradeoff. Would you rather have low liquidity and high returns or high liquidity and low returns?
    • The reason this first principles still holds true is that there may be circumstances where high liquidity can offer high potential returns. When that occurs, it would be preferable to low liquidity options. 

Summary

Liquidity is a topic that offers both risks and opportunities. Lack of liquidity is fraught with risk, especially in your personal life. However, a lack of liquidity can offer many opportunities when it comes to investment potential. You should manage your liquidity risk across all spectrums of your life such that you can receive optimal returns with minimal risk of a total loss of principal.