There is one activity that an investor can never over do — reading.
But it’s important that you read things that build your knowledge and help you make better investing decisions. Avoiding the noise is as crucial as reading the timeless stuff.
In this post, we’re sharing few good pieces that we came across this week …
In theory people should make investment decisions based on their goals and the characteristics of the investment options available to them at the time (things like valuation and expected return). But that’s not what people do. The research showed that people’s lifetime investment decisions are heavily anchored to the experiences those investors had with different investments in their own generation – especially experiences early in their adult life.
Yes, plenty of money-losing growth stocks do just fine with a P/E that is infinite, thanks to a zero in the denominator spot. But the reason investors even bother to look at this calculation is because at its core it measures success. There’s a reason that “the bottom line” is an idiom beyond just the business world, after all.
There’s also a reason that CAPE has come into fashion, since the cyclically adjusted P/E ratio used by economist Robert Shiller smooths out fluctuations because of any short-lived phenomena. Yes, the detailed analysis of Shiller P/E has its flaws and is necessarily bad at calling a top because of its long-term focus. But as a view from 10,000 feet that is insulated from the 24-hour news cycle, it is an invaluable measure of the big picture.
There are a host of other metrics that also have a purpose. Revenue growth matters, because a company can’t keep cutting costs forever. Intrinsic value matters, because customers and investors are fickle but cash is king.
None of those are perfect. And they each are frequently “wrong” as sell signals.
But are you really going to invest without caring about profitability? Or growth? Or the underlying value of a company behind the smoke and mirrors?
There are enough resources to go around to deal with the risky issues and produce much more equal opportunity plus improved productivity that will grow the pie. My big worry is that the sides will be intransigent in their positions so that capitalism will either a) be abandoned or b) not be reformed because those on the right will fight for keeping it as it is and those on the left will fight against it. So to me, the biggest questions are a) whether populists of the right or populists of the left will gain control and/or have conflicts that will adversely affect the operations of government, the economy, and international relations or b) whether sensible and skilled people from all sides can work together to reform the system so it works well for the majority of people.
What is your relationship with money? Some people think that money is evil, some despise the lifestyle of the rich and others focus on not spending money, rather than making more. So here is my first tip: You need to love making money! Not at all costs of course, but at least you should not have any problems with the concept.
So please examine your own relationship with money and adjust where necessary. The way we think and feel is largely driven sub-consciously and it might not be so easy to change it, but it is entirely possible.
If you’ve read something interesting, feel free to share it with us.