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Complicated Simple Problems and Risk-Taking Consequences

Top 5 of the Week of October 17

In our Top 5 this week, Jason Zweig, author of The Intelligent Investor blog, heralds the end of stock splits. Reformed Broker Joshua Brown discusses what black swan events like the financial crisis of 2008-2009 can teach us. And A Wealth of Common Sense’s Ben Carlson offers words of wisdom on the consequences of our risk-taking actions when investing.

Anthony Isola of A Teachable Moment draws the stark comparison between front and back row investors. And Morgan Housel, a partner at Collaborative Fund, examines the differences between certain ‘simple’ problems…


Stock Splits Are Dying Off

 

  • A 2:1 stock split leads to twice the number of shares, but normally also splits the per-share price in half— therefore, the per share value decreases as the share numbers increase
  • Other than 2009 and 2010 following the wake of the financial crisis, 2016 is the only other year to experience such a low number of stock splits
  • This “death” is not necessarily a bad thing; it may be an indication that the market is learning the difference between stock price and business value

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Lessons Learned from Stock Market Disasters

 

  • Tailoring your portfolio to be black swan event resistant—a portfolio built out of fear can be just as damaging
  • Don’t act impulsively following these disasters; tread carefully else “the cure can be just as bad as the sickness”
  • Investors without a bigger long term investment plan in place will be the most vulnerable during these once-in-a-lifetime occurences

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It’s Not Just About Being Right or Wrong

 

  • Investing is also about risk and measuring the consequences of your actions—to assess this always ask, “What are the consequences if I am right or wrong?”
  • In this scenario, actively doing nothing will be more beneficial to your investments than trying to time the market to your advantage
  • Transaction costs are another reason to avoid this practice, as is the psychological burden of attempting to time your trades just right

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“Front-Row Investors Run the World…”

 

  • “…while those in the rear are barely surviving.” Over half of the American population couldn’t find funds for a $500 emergency if necessary
  • A third have nothing saved towards retirement and obesity numbers have tripled since the 1970s
  • The contrasts between front-row investors (those with managed portfolios, pension funds, and financial planners) in comparison to those in the back-row (living paycheck to paycheck, surviving on payday loans, etc.) is incredibly stark

Are you in the front or back-row of investing? Share your thoughts in the comments section below

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It’s Hard to Tell the Difference Between Two Simple but Opposite Views

 

  • Tailoring your portfolio to be black swan event resistant is not the way forward—a portfolio built out of fear can be just as damaging
  • Understand the difference between a contrarian and a cynical stance; one is choosing not to go with the crowd, the other is always believing the crowd is wrong
  • Ask yourself if you’re motivated or incentivized? The first drives you for a larger cause; the second drives you only for reward—which may get you into trouble when investing

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Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form – and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.


 

Anything you would like to discuss about this week’s top 5? Do you have another favorite that isn’t mentioned here? Feel free to add it below. Let’s start a discussion in the comments section!

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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article. The Become a Better Investor Team doesn’t necessarily endorse any stocks or shares mentioned in the articles or the author of such articles linked to and summarized in Top 5 of the Week and cannot guarantee the accuracy of its information.