Top 5 of the Week of September 18
The team at Sumzero Headlines head up our Top 5 this week by making us aware of the stockpicker’s most dangerous trap. The Intelligent Investor Jason Zweig weighs in on how we should be using financial advisors. And Lawrence Hamtil, writer of Fortune Financial’s blog, explains the merit of lasting economic moats.
Managing Director of Factor Research, Nicolas Rabener compares combination vs. double-sorting portfolio construction. And the author of Silver Value Partners blog, Gary Mishuris explains what the best investors do for success…
The Peril of the Stockpicker’s Trap: Confirmation Bias
- Emotions and investing are not supposed to mix, but if we carry out our research with due diligence and take emotional bias out, we should be fine, right?
- Except that once you conquer the urge to invest by gut instinct as a rookie trader, you graduate to a whole new set of behavioral issues
- Your emotions may no longer weigh in, but you must now deal with your cognitive biases—of which confirmation bias (the ability to favor information which affirms our beliefs) is the most dangerous
Have you fallen victim to the stockpicker’s trap? Share your comments in the section below
Your Financial Responsibility
- A financial advisor’s (FA) responsibility is to provide investment advice that best serves their clients’ interests, not their own; this is their fiduciary duty
- But not all of them will tell you when they act outside of these interests, and until regulations are truly controlled to best implement this ethical criteria, it is up to you to conduct your own research
- Undertake your own due diligence on the FA of your choosing by asking the right questions, and, hopefully, getting the right answers
Economic Moats: Your Company’s Best Line of Defense
- An idea made popular by Warren Buffett; economic moats are often undervalued as mere competitive advantage—in fact, they help ensure a company’s profitability
- The key to moat investing lies not just in creating and benefiting from one but in increasing its sustainability when it is under threat from new tech
- Sectors that could merit from a lasting moat include railroads, tobacco, and airports—not to create out-sized returns for the industries but to reduce the odds of disappointing their investors
Combination or Double-Sorting Portfolio Construction?
- Should factor investors use a combination of factors (e.g. 50% to Value/50% to Momentum) or use ‘double-sorting’ (e.g. rating stocks on Value and Momentum to invest in ones with the highest combined score)?
- For Value and Quality portfolios (cheap stocks with Quality characteristics), double-sorting works better than for Value stocks that rate high with Momentum factors
- The combination portfolio creates a higher risk-return ratio next to double-sorting for both stock mixes, but provides lower returns
Above the Rest
- Stay calm: An innate characteristic perhaps, it is not in everyone’s nature to remain rational during the worst situations
- Study many investing approaches: Being able to understand many investing disciplines is a skill worth learning
- Concentrate on strategy, not results: By focusing your efforts on “process over outcome” you will continually improve your strategy for long-term results
- Mitigate your own behavior: Know that you are your own worst enemy and act accordingly
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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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.