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31 - Buying Stocks is NOT a Zero-Sum Game (Investing First Principle)

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

Release Date: 06/16/2019

53 - How to buy illiquid stocks show art 53 - How to buy illiquid stocks

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

Purchasing illiquid stocks presents unique challenges. Your buying process should focus on overcoming those challenges. Use limit orders and study price changes to buy sufficient shares.

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52 - The Acquirer's Multiple with author Tobias Carlisle (Interactive Book Review) show art 52 - The Acquirer's Multiple with author Tobias Carlisle (Interactive Book Review)

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

In this episode, I interview Tobias Carlisle, author of The Acquirer's Multiple and fund manager of the ETF ZIG. Listen to an interactive review of this Deep Value Investing book.

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51 - Psychology of Selling Losers show art 51 - Psychology of Selling Losers

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

In this episode, I discuss the psychology involved in selling losing stock positions. A core aspect of behavioral finance is overcoming our weaknesses. Ignoring opportunity cost is a key investing weakness.

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50 - Tim Eriksen Interview: MicroCap Investing $BVERS $WCRS $PIOE $BWEL show art 50 - Tim Eriksen Interview: MicroCap Investing $BVERS $WCRS $PIOE $BWEL

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

In this episode, I interview Tim Eriksen and we discuss his investing strategy which involves buying microcap companies. Smaller companies offer higher returns historically. Tim Eriksen also provides insight into Beaver Land Company and its business model. We dive into additional companies including Western Capital Resources, P10 Holdings, and JG Boswell.

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49 - Value Stock Geek Interview: Cheap and Good Balance Sheet ($MU, $BDL, $DKS) show art 49 - Value Stock Geek Interview: Cheap and Good Balance Sheet ($MU, $BDL, $DKS)

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

In this episode, I interview Value Stock Geek and we discuss his investing strategy which involves buying cheap companies with good balance sheets. For ValueStockGeek value is found in a low EV/EBIT multiple. This is the Acquirer's Multiple as named by Tobias Carlisle.

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48 - David Flood Interview: Dark Stock Investing ($PLWN, $BVERS, $NTIP, $MIRI, $HMGN) show art 48 - David Flood Interview: Dark Stock Investing ($PLWN, $BVERS, $NTIP, $MIRI, $HMGN)

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

My interview with David Flood of Elementary Value focuses on investing in dark stocks. Dark stocks do not report public financial statements to the SEC. Many of these companies are deep value plays that offer attractive rates of return to investors willing to do a little bit of extra research. Scuttlebutt and fundamental analysis are key topics.

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47 - Forced Diversification and Illiquid Stocks show art 47 - Forced Diversification and Illiquid Stocks

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

Illiquid stocks offer substantial opportunity, but can also lead to an inability to purchase as many shares as you would like. This situation, along with a lack of good ideas, can lead you to rationally diversifying your portfolio more than intended. Cash has a high opportunity cost, so it is okay to build small positions in companies that are still high quality, but may not currently trade at wonderful prices. Avoid "Diworsification"

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46 - Broker Price Wars: End Game ($0 Commissions) show art 46 - Broker Price Wars: End Game ($0 Commissions)

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

The end game has begun in the brokerage price wars. We have reached the zero bound in terms of commissions now at $0 for US and Canadian exchanges. This will have a major impact on the accessibility of investing and will certainly change the recommendations I have made in the past to new investors.

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45 - Geoff Gannon Interview: Concentrated Investing in Overlooked Stocks ($NC, $KARE.AT, $NKR, $TRUX, $VLGEA) show art 45 - Geoff Gannon Interview: Concentrated Investing in Overlooked Stocks ($NC, $KARE.AT, $NKR, $TRUX, $VLGEA)

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

In this episode, I interview Geoff Gannon of Focused Compounding Capital Management. Learn about his investing process and the benefit of concentrated investing in overlooked stocks.

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44 - Investing in Bank Stocks (WFC, CFR, ALLY, DFS) show art 44 - Investing in Bank Stocks (WFC, CFR, ALLY, DFS)

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

Banks are able to operate at a 10-to-1 leverage ratio which can return a return on assets of 1.5% into a 15% return on equity.

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Books Referenced in the Podcast

  • Stocks for the Long Run by Jeremy Siegel:
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Buying Stocks is NOT a Zero-Sum Game (Investing First Principle) - Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode31

Mental Model: Zero-Sum Games

  • Any gains by one participant must be offset with losses by other participants.
  • The sum total of all value for all participants is equal to zero

Why buying Stocks is NOT a Zero-Sum Game

  • Stocks as a whole don't provide a positive expected value
  • You don’t have to “take” from others in order to receive. When companies create value this is “new value.” The economy grows, everyone becomes wealthier.

Stock Picking vs Index Funds?

  • The thought is that half of the money must underperform an index, and half of the money can outperform an index. The thought, therefore, is that buying stocks is zero-sum.
  • Where is the fallacy?
    • Index’s have historically had a positive expected value. If an index returns 10%, even if half of the money receives 8%, and half receives 12%, both parties are successful in growing their wealth.
    • One party doesn’t lose 10% so that the index can grow 10%. That’s not how this works.
    • Instead, stock ownership is best described as a positive sum game.

What is a Positive-Sum Game?

  • A positive sum game is where the total value received of all participants is greater than zero.
  • This means that you can be successful without worrying about the success of others.
  • Frees you from the need for comparison, jealousy, or envy.
    • Just because someone else made money, doesn’t mean you lose money.
  • Takeaway: You can ignore index funds and focus on your own personal goals
  • Takeaway: You can ignore macroeconomic trends. As long as your fundamental analysis of a company is correct, the broader economic picture is irrelevant.

Why is this true? - Capitalism grows the economic pie

  • Companies are full of employees who go to work each and every day trying to find a way to make your profits grow.
  • While this sometimes involves taking market share from other companies, the greatest gains come from innovation, improved efficiencies, new markets, and new products.
  • This raises the standard of living for all and the overall economic pie for the economy.