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77 - What is the source of your investment return? show art 77 - What is the source of your investment return?

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

Investing, as opposed to speculation or gambling, is a method of seeking returns while protecting our principal. You are not entitled to investment returns. So what is the source of your returns?

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76 - How to identify 10-bagger investments (10x in 10 years) show art 76 - How to identify 10-bagger investments (10x in 10 years)

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

In order for an investment to become a 10-bagger and earn 10x your money in 10 years it needs to have certain traits: Low price, operating leverage, turnaround situation, overlooked company, and earnings growth.

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75 - Managing multiple investment strategies in a single portfolio show art 75 - Managing multiple investment strategies in a single portfolio

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

In this episode, I describe how to incorporate multiple investing strategies into a single stock portfolio. Your portfolio can successfully leverage dividend growth investing, momentum, high-quality stocks, and deep value stocks like net-nets.

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74 - Merger Arbitrage: High returns from high certainty bets show art 74 - Merger Arbitrage: High returns from high certainty bets

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

Merger Arbitrage is an investing strategy designed to capture the value in price differences between a soon to be acquired company and the acquisition price. Investors can sometimes earn high returns at low risk using this strategy.

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73 - Economic Contagion: How COVID-19 could cause a depression show art 73 - Economic Contagion: How COVID-19 could cause a depression

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

Investors today are likely underestimating the second-order effects of the coronavirus shutdown. Layoffs and bankruptcies will have long-lasting adverse effects on the economy. COVID-19 is not simply a health crisis. If the number of layoffs and bankruptcies gets too high, the economy will likely exceed a simple recession and enter a medium-term depression.

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72 - Binary Investing Outcomes: How the Coronavirus is impacting stock portfolios show art 72 - Binary Investing Outcomes: How the Coronavirus is impacting stock portfolios

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

Investors today are likely underestimating the potential for bankruptcy of their favorite companies. Regardless of the long-term return of underlying assets, bankruptcy is possible when debt covenants are breached or a negative liquidity event occurs. 

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71 - Moral Hazard: Why government bailouts are counterproductive show art 71 - Moral Hazard: Why government bailouts are counterproductive

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

Moral hazard occurs when individuals and groups are incentivized to take greater risk than is prudent because the opportunity exists for private profits and socialized losses. Government bailouts are a key example.

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70 - Oil Majors Clearance Sale 2020 show art 70 - Oil Majors Clearance Sale 2020

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

During the coronavirus induced stock market crash of 2020, oil stocks, in particular, declined very quickly. The depth of decline created a once-in-a-century opportunity to buy the stocks of oil majors at double-digit dividend yields.

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69 - Why Study Investing? Roth vs Taxable Accounts? (Q&A) show art 69 - Why Study Investing? Roth vs Taxable Accounts? (Q&A)

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

In this episode, I answer a few questions about investing and personal finance. Why should you study value investing at all? Pros and Cons of Roth IRA vs Taxable Accounts? What to do when friends ask advice about stocks?

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68 - Strategic Cash Allocation in an Investing Portfolio show art 68 - Strategic Cash Allocation in an Investing Portfolio

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

I don't hold a strategic cash allocation in my portfolio. That is because I view cash as both an option for a better opportunity set in the future and as a drag on returns. This means that my ideal cash allocation is 0%. As soon as I identify assets that meet my target rate of return, I buy them to eliminate my cash allocation. I am not going to wait for 12% return opportunities when 10% opportunities are available today. 

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More Episodes

Mental Models discussed in this podcast:

  • Modern Portfolio Theory
  • Compound Interest
  • Rebalancing
  • Beta / Volatility

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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode64

Modern Portfolio Theory

Modified Doubling Penny Example

Three scenarios are compared: 

  1. Base Case Compounding
  2. Diversified Portfolio
  3. Diversified Portfolio with Rebalancing

It is a mistake to rebalance from an investment with high return potential into an investment with low return potential.

  • If you are going to sell an investment that is up for one that is down then you should be confident that the lower cost investment actually offers a better return.
  • Don't trade 10% return expectations in stocks for 2% return expectations in bonds.
  • Betting on future volatility to allow you to rebalance back again is gambling not investing.

Summary:

Rebalancing is an often mentioned tactic utilized in modern portfolios but seldom is it examined from first principles. The act of rebalancing can be useful to offset volatility amongst assets within similar return profiles. However, rebalancing between assets that differ in potential returns can lead to disaster. Compounding requires the ability to earn interest upon interest. If you rebalance away from the compounding asset, then you will counteract the powerful effects of compound interest.