Top 5 of the Week of May 14
Heading up our Top 5 this week, the Investment Masters Class blog discusses Warren Buffett’s “edge.” The Market Fox, Daniel Grioli, offers the consideration up that not all heuristics are a bad idea. And Gary Mishuris, CFA, of the Enterprising Investor blog looks at what is optimal for portfolio concentration.
From O’Shaughnessy Asset Management, Travis Fairchild examines the problem with more and more U.S. companies reporting a negative book value. And Nicolas Rabener from Factor Research helps us improve the tax efficiency of the Value factor…
What’s Your Investing Edge?
- The difference between an average investor and a successful one is their “edge” or advantage
- In investing, this edge can be structural, intellectual or psychological—it can even be the length of your investment horizon or simply, your reputation
- When it comes to investors like Warren Buffet, the list of edges he has is comprehensive and very long, but most importantly, they’re available to all investors to emulate
So, what’s your investing edge? Share your comments in the section below
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- Making quick decisions can get us into a lot of trouble if we don’t consider all the relevant information because our heuristics—mental shortcuts—are biased
- But if it’s possible to make decisions rapidly without making lots of mistakes then heuristics may be worthwhile—adding more information may reduce bias but can add complexity to the decision
- When making decisions, it’s worth considering when to go with heuristics due to the bias-variance trade-off and when to use a more complex model
There’s No Such Thing as a Free Lunch in Investing
- For some, diversification is the only investing giveaway available, but it all depends on the type of investing
- In certain types of fundamental value investing, there are increased costs in the form of lower returns and time spent vs. quality when it comes to underwriting existing investments
- Diversification only becomes advantageous where likely investments will incur comparable returns or if undervaluation is broad, otherwise increased concentration is better to avoid the above costs
A Distorted Perspective
- Often used in valuation, the price-to-book ratio is becoming problematic as more U.S. companies are logging negative book value
- This is causing distortions in the way companies are measured and viewed which is having a ripple effect on active value strategies
- The answer to this is to modify reported book values according to their underlying biases and minimize some of these distortions
Too Much Turnover
- Some factor investing strategies are more affected by tax than others, which can be a strong motivator to limit portfolio turnover
- The Value factor’s tax efficiency especially can be refined by minimizing exposure to dividend-yielding stocks
- This is dependent entirely on the market though as many countries have different capital gains taxes and special taxes like stamp duty to take into account
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.
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