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81 - Always Ask Why: Bond Returns, Greater Fool Theory, and the 5 Why Framework

The DIY Investing Podcast

Release Date: 06/28/2020

87 - Cost of Growth Valuation and Asset / Earnings Equivalence show art 87 - Cost of Growth Valuation and Asset / Earnings Equivalence

The DIY Investing Podcast

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86 - The Tyranny of Backtesting: Why Backtests are harmful and counter-productive show art 86 - The Tyranny of Backtesting: Why Backtests are harmful and counter-productive

The DIY Investing Podcast

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Discounted Cash Flow calculations and models provide precise estimates of intrinsic value but tend to be flawed. It is much better to improve accuracy by ignoring DCF and using a simple intrinsic value calculation like the Gordon Growth Model.

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84 - Would you buy your employer's stock? show art 84 - Would you buy your employer's stock?

The DIY Investing Podcast

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83 - Key Drawbacks of the Banking Industry show art 83 - Key Drawbacks of the Banking Industry

The DIY Investing Podcast

Banking is an industry with many key drawbacks including dependence on management for risk reduction, high leverage, low returns on equity, bankruptcy risk, and lack of pricing power because money is a commodity.

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82 - Why Banking is an Attractive Industry show art 82 - Why Banking is an Attractive Industry

The DIY Investing Podcast

Banking is an industry with characteristics that are quite attractive to long-term investors. Properly evaluated, a bank can make a great investment. High retention rates, lower competition over time, and the durability of the industry are what attract me to bank investing.

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81 - Always Ask Why: Bond Returns, Greater Fool Theory, and the 5 Why Framework show art 81 - Always Ask Why: Bond Returns, Greater Fool Theory, and the 5 Why Framework

The DIY Investing Podcast

Investors should always ask why when evaluating investments. This includes understanding the underlying reasons for their investing strategy, why they earn an excess return, and the edge of their circle of competence.

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80 - Zero Interest Rates should not reduce your Discount Rate show art 80 - Zero Interest Rates should not reduce your Discount Rate

The DIY Investing Podcast

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79 - How Banks Make Money show art 79 - How Banks Make Money

The DIY Investing Podcast

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78 - Earnings Yield on Cost: A valuation rule of thumb show art 78 - Earnings Yield on Cost: A valuation rule of thumb

The DIY Investing Podcast

Stocks must eventually trade at an earnings yield on cost equal to or greater than your discount rate in order to earn your required return on capital as an investor.

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More Episodes

Mental Models discussed in this podcast:

  • Discount Rate
  • Greater Fool Theory
  • Circle of Competence
  • 5-Why Framework

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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode81

Bond Returns

In the aggregate, bond returns cannot exceed the coupon rate of the bond. Your interest rate earned sets the maximum expected rate of return on that investment. Any potential for gains above this threshold is purely speculative in nature. 

Greater Fool Theory

  • In today's bond bubble, the only way to justify purchasing bonds in a portfolio is a dependence on the greater fool theory. 
  • If you want or expect high returns from your bonds, then you hope that others are foolish enough to buy them from you before they mature. 

Circle of Competence

Your circle of competence is probably smaller than you think.

5-Why Framework

This framework is used in the industry to evaluate failures for a root cause analysis. Basically, don't stop with understanding a problem after only asking "Why?" once. You need to dig deeper. Ask "Why?" five times, to reach down to deeper levels of explanation. 

Find the root cause of a problem, not simply the surface contributing causes. 

Summary:

Investors should always ask why when evaluating investments. This includes understanding the underlying reasons for their investing strategy, why they earn an excess return, and the edge of their circle of competence.