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Getting Your Head Around Second-Level Thinking

Top 5 of the Week of March 12

Writing for Real Investment Advice, Michael Lebowitz heads up our Top 5 this week with advice on what to own over the next decade. The Reformed Broker Joshua Brown helps sum up the essence of investing. And Morningstar’s Jon Hale, Ph.D., CFA, helps the conscientious investor find gun stocks in mutual and index funds.

From the CFA Institute Magazine, Nathan Jaye, CFA, teaches us how to survive financial ecosystems. And Lance Roberts, also of Real Investment Advice, helps us ride out bear market risks…


Apples or Oranges? Stocks or Bonds?

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  • Stocks and bonds define the majority of most investors’ asset allocation strategy, with many influencing factors for what percentage of each to choose
  • These factors are based on more than the price of stocks and bonds in relation to each other, whether we’re in a bull or bear market, momentum and recent performance play a big deciding part too
  • History, analytical rigor and logic all support a move in the next ten years that advocates bonds over stocks—given that valuations are mean-reverting

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Getting Your Head Around Second-Level Thinking

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  • First level-thinking: Recognizing a company that is “kicking ass”
  • Second level-thinking: Not only is it about knowing the company is kicking ass, but you go one step further to calculate the degrees by which everyone is under or overpricing the stock’s greatness
  • The best part is, there isn’t really anyway to know, it’s just a guess—hopefully, before your biases play too big a part!

How do you achieve second-level thinking? Share your comments in the section below
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Gun Stock Exposure

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  • In light of recent news, many investors are trying to find out if the portfolios they are invested in are exposed to gun manufacturing firms
  • If you are invested in small-cap stocks, you’re well diversified, but 2 out of every $3 of small-cap funds are exposed to gun stocks—index funds face similar exposure too
  • If you own actively managed funds, you may or may not be invested in the large gunmaker stocks; as giant asset managers are divided about addressing their funds in response to current events

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Is It Survival of the Fittest In the Financial Ecosystem?

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  • Andrew W. Lo hypothesizes that financial markets are ruled by the laws of biology more than by the laws of physics
  • By thinking of financial markets as an ecosystem then, we need to factor in the different species that exist inside (various fund types, banks, insurance, etc.) as well as their impact and behavior
  • The next step is to factor in the human-element when designing products, and understand that we make decisions emotionally and not rationally—only then can we survive the financial ecosystem

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Ride ‘Em Cowboy

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  • For many Americans, investing never quite delivers on its promise of wealth, this is almost always due to those investors suffering from “short-termism”
  • Even before markets reach real bear status (a decline of 20%), investors are exiting mutual funds at the 10% mark because they’re overwhelmed with fear
  • It’s only possible to ride out a bear market, which could last 3 days, 3 months, or longer, by not owning stocks—otherwise, you’re likely to fall victim to the “buy high/sell low” disorder

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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.