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42 - How to invest in a Health Savings Account (HSA) show art 42 - How to invest in a Health Savings Account (HSA)

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

A health savings account is the best tax-advantaged account currently available for workers in the United States. Thus, it is important to have a plan and understanding of how to invest your HSA money and maximize the benefits of this unique tax shelter.

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41 - Science of Hitting Interview: How quality limits investing mistakes, portfolio management, and Microsoft ($MSFT) show art 41 - Science of Hitting Interview: How quality limits investing mistakes, portfolio management, and Microsoft ($MSFT)

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

In this episode, I interview 'The Science of Hitting' an investor and writer for GuruFocus. Learn how quality businesses can reduce investing mistakes by limiting value traps.

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40 - When NOT to average down on an investment (Investing Rules) show art 40 - When NOT to average down on an investment (Investing Rules)

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

Investing rules help to prevent mistakes and can function as outsourced knowledge from the world’s best investors. Allowing others to make mistakes and adapting their lessons is a cheat code that can help you become a better investor faster.

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39 - Market Expectations vs Your Investing Expectations show art 39 - Market Expectations vs Your Investing Expectations

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

Investing expectations drive short-term changes in the market. However, your personal expectations of management and business performance will drive the strength of your conviction in a company. Don’t let Mr. Market dictate your investing decisions. Mr. Market’s price offers should only ever be seen as an opportunity, not a necessity to act.

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38 - Should you invest in Private Prisons? show art 38 - Should you invest in Private Prisons?

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

The private prison industry in the United States is currently hated to an extreme. Opportunity could await as CXW and GEO offer 10%+ dividend yields.

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37 - Liquidity: Risks and Opportunities show art 37 - Liquidity: Risks and Opportunities

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

Liquidity is important for the success of your personal finance journey and your investment portfolio. Learn about the risks and opportunities presented by liquidity. Access to low liquidity stocks is your greatest advantage as a DIY Investor.

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36 - What is Risk? Price Risk, Volatility, and Beta (Types of Investing Risk) show art 36 - What is Risk? Price Risk, Volatility, and Beta (Types of Investing Risk)

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

What is Risk? There are many different types of investment risk. This episode focuses on the concept of price risk otherwise known as Volatility or Beta. All risks have two key elements: Uncertainty and Negative Events. The negative event of price risk is a decline in stock price below a company’s intrinsic value.

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35 - Shorter Holding Periods are better (Investing First Principle) show art 35 - Shorter Holding Periods are better (Investing First Principle)

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

Investing First Principles are used to build the foundation for an investment and portfolio management strategy. All else equal shorter holding periods are better when you earn the same total return. Would you rather earn a 10% return in one year or ten years?

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34 - Companies with no debt are better than companies with debt (Investing First Principle) show art 34 - Companies with no debt are better than companies with debt (Investing First Principle)

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

Investing First Principles are used to build the foundation for an investment and portfolio management strategy. Today’s first principle focuses on corporate debt. You should always prefer to buy stock in companies without debt compared to companies with debt, all else equal.

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33 - Low stock prices are better than high stock prices (Investing First Principle) show art 33 - Low stock prices are better than high stock prices (Investing First Principle)

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

Investing First Principles are used to build the foundation for an investment and portfolio management strategy. Today’s first principle focuses on stock purchase prices. Buying stocks at low prices is better than buying stocks at high stock prices. The result is a higher margin of safety and a higher potential return.

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More Episodes

Mental Models discussed in this podcast:

  • Liquidity
  • Risk
  • Insurance
  • First Principles

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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.