One thing I noticed about Warren Buffet is that he prefers to buy whole businesses than just a portion of his stock. This seems to go against the common notion of owning stocks, which is to basically flip it onto someone else at a higher price.
I am bringing this up because owning a stock is the exact same thing as owning the business, yet no one really thinks that way.
Instead of framing your decision making into whether the price of the stock go up, ask yourself "would I own the company?" If there was no such thing as a market, would you still want to own the stock? Are the long term prospects of the business strong, and is the future cash flows from the business make up for the initial investment?
This is what Warren Buffet does, and he seems like he knows what he is doing.
Tuesday, July 29, 2008
Friday, July 11, 2008
Volatility isn't risk
The most absurd idea that I find in the investment community is this notion that volatility is a measure of risk. The only reason I can think of why volatility is used as a measurement to risks is because it is easy to calculate and it seems reasonable.
Volatility just measures how a stock trade, not the measure of risk. The only time volatility can be used as a measure of risk is if you need cash in a short period of time. Other than that, it is completely irrelevant how a stock trades.
The problem with thinking volatility is risks is that use base your decisions on how a stock trades rather than the underlying fundamentals. If a stock goes down in price, they assume that the market is providing them information, when it really is just have one of its mood swings.
Volatility can also provide a false sense of security. If the markets are fairly stable for a while, people can tend to think of them as less risky. Look what happened in the mortgage and housing market where investors were complacent for years. It wasnt' until economic conditions changed that the real risks were exposed by the markets.
Real risks has to do with factors that can go wrong with the underlying fundamentals of your investment. There isn't a magic number that represents it, but a collection of variables including many unquantifiable factors ranging from politics to consumer taste. It is messy and doesn't fit into any simple models, but that is the way the real world works.
Volatility just measures how a stock trade, not the measure of risk. The only time volatility can be used as a measure of risk is if you need cash in a short period of time. Other than that, it is completely irrelevant how a stock trades.
The problem with thinking volatility is risks is that use base your decisions on how a stock trades rather than the underlying fundamentals. If a stock goes down in price, they assume that the market is providing them information, when it really is just have one of its mood swings.
Volatility can also provide a false sense of security. If the markets are fairly stable for a while, people can tend to think of them as less risky. Look what happened in the mortgage and housing market where investors were complacent for years. It wasnt' until economic conditions changed that the real risks were exposed by the markets.
Real risks has to do with factors that can go wrong with the underlying fundamentals of your investment. There isn't a magic number that represents it, but a collection of variables including many unquantifiable factors ranging from politics to consumer taste. It is messy and doesn't fit into any simple models, but that is the way the real world works.
Thursday, July 10, 2008
NVDA is a falling knife
One of the few times I use technical analysis is to avoid falling knifes, and NVDA looks like one right now. In a bull market, I would expect NVDA to pop up rather soon but not right now.
However, since NVDA is priced really really low, it could still be a good time to start buying now. Although NVDA looks like a falling knife, it could really be near the bottom right now for all we know. It is near impossible to predict the absolute bottom.
I figure a good way to play these types of stocks is to start a small position now, and keep on adding to it later. This way you can hedge your costs basis no matter what the stock will do. This way you can keep emotionally sane while accumulating shares, which will make you a lot more rational in the process. Striving for perfection is the sure way to be overly emotional, which will adversely affect your performance.
Now this catching falling knife strategy only works if the fundamentals are strong for the long term. If a company has lots of debt or is losing its competitive edge, don't mess with it. Just because a stocks price looks cheap doesn't mean it is. Research the companies first, and perform the proper due dilegence.
However, since NVDA is priced really really low, it could still be a good time to start buying now. Although NVDA looks like a falling knife, it could really be near the bottom right now for all we know. It is near impossible to predict the absolute bottom.
I figure a good way to play these types of stocks is to start a small position now, and keep on adding to it later. This way you can hedge your costs basis no matter what the stock will do. This way you can keep emotionally sane while accumulating shares, which will make you a lot more rational in the process. Striving for perfection is the sure way to be overly emotional, which will adversely affect your performance.
Now this catching falling knife strategy only works if the fundamentals are strong for the long term. If a company has lots of debt or is losing its competitive edge, don't mess with it. Just because a stocks price looks cheap doesn't mean it is. Research the companies first, and perform the proper due dilegence.
Wednesday, July 9, 2008
The herd wants things to worst before they get better
This might be my first bear market that I've experienced, but it seems like everyone on CNBC agrees that that stocks will go up after the point of capitulation.
My main problem is that everyone agrees on this. If there is a clear signal to make money by timing the bottom, it will be arbitrage out of the market. If the VIX has to get at a certain level (I don't know what it is because I don't care) then people will start buying before that magical number is reached which completely ruins the signal. Thus the consensous agrees that the bear market will continue.
Another problem I have with this is that it is 100% techinical. It has no basis for the actual businesses in the economy itself and doesn't have to be the sign for the bottom.
The bottom could occur when we least expect it, and could lack the drama that everyone expects. The herd could be waiting for this signal, and completely miss the first leg of the next bull market.
I am not going to try to time the bottom, because I believe it is a futile exercise. Just buy the companies that are undervalued, and you should be doing fine in the long run whether you call the bottom or not.
My main problem is that everyone agrees on this. If there is a clear signal to make money by timing the bottom, it will be arbitrage out of the market. If the VIX has to get at a certain level (I don't know what it is because I don't care) then people will start buying before that magical number is reached which completely ruins the signal. Thus the consensous agrees that the bear market will continue.
Another problem I have with this is that it is 100% techinical. It has no basis for the actual businesses in the economy itself and doesn't have to be the sign for the bottom.
The bottom could occur when we least expect it, and could lack the drama that everyone expects. The herd could be waiting for this signal, and completely miss the first leg of the next bull market.
I am not going to try to time the bottom, because I believe it is a futile exercise. Just buy the companies that are undervalued, and you should be doing fine in the long run whether you call the bottom or not.
Monday, July 7, 2008
Thoughts on using margin
The use of margin has been really tempting, but I am very wary of actually using it.
Having a cash account, I can have comfort in the fact that I am owning share of a company. Even if the market prices my stock down 90%, I can have comfort knowing that I own the same amount of that company. As long as the fundamentals are strong, I will still be well off in the long term.
With margin, you are owning pieces of paper, instead of ownership of a business. If the market goes insane and lowers the price of your paper, they can take it away from you and you are left with nothing.
This adds another risk to your portfolio. Instead of just dealing with business risks, you face market risks too. With the recent drops of NVDA, I am reminded how serious these risks can be. The stock seemed safe to use margin on when it was trading under 20, but the market gave me a big surprise.
The only reason I would use margin is that I am young, and can really afford the risks of losing it all in the worst case scenario. It would certainly suck, but I could make my money back with a job if I really had to. As my portfolio increases in value in time, I could no longer afford these risks and capital preservation becomes much more important.
I am still wary using margin, and if I do decide to do it, I will use it very conservatively. I am aware of the risks, and they scare the hell out of me.
Having a cash account, I can have comfort in the fact that I am owning share of a company. Even if the market prices my stock down 90%, I can have comfort knowing that I own the same amount of that company. As long as the fundamentals are strong, I will still be well off in the long term.
With margin, you are owning pieces of paper, instead of ownership of a business. If the market goes insane and lowers the price of your paper, they can take it away from you and you are left with nothing.
This adds another risk to your portfolio. Instead of just dealing with business risks, you face market risks too. With the recent drops of NVDA, I am reminded how serious these risks can be. The stock seemed safe to use margin on when it was trading under 20, but the market gave me a big surprise.
The only reason I would use margin is that I am young, and can really afford the risks of losing it all in the worst case scenario. It would certainly suck, but I could make my money back with a job if I really had to. As my portfolio increases in value in time, I could no longer afford these risks and capital preservation becomes much more important.
I am still wary using margin, and if I do decide to do it, I will use it very conservatively. I am aware of the risks, and they scare the hell out of me.
I don't have to do anything
While thinking about how to play NVDA's recent drop, I had an epiphany. I don't have to do anything about it.
Just because Mr Market got grumpy and decided to offer NVDA at such a cheap price, it doesn't mean that I have to change my decision on this. I should make my judgments and decisions
independently, instead of being pressured by others in the market.
I think this obsession of feeling compelled to do something about it is just to satisfy my ego in picking the bottom. I might pick it, I might not.
The truth is that the market has presented me an opportunity, but it is my choice whether to play it or not. The worst case scenario of doing nothing would be that NVDA would go up to 18 the next couple of days, which really is like nothing has changed before. Ha! I already have money in NVDA so it wouldn't be a problem. (I guess I feel safer when the prices are really low)
If I had infinite resources, I would be backing up the truck, but currently I have to deal with opportunity costs when dealing with NVDA. I like LDK just as much, and am more impressed with its fundamentals recently. Since LDK has more short term catalysts, so I am keeping my current asset allocations the same for now.
Hopefully NVDA will stay low so I can transfer my gains into there later, but worst case, it would be like nothing has changed. I am taking some risks predicting the short term trends, but that's my choice, not Mr Markets.
Just because Mr Market got grumpy and decided to offer NVDA at such a cheap price, it doesn't mean that I have to change my decision on this. I should make my judgments and decisions
independently, instead of being pressured by others in the market.
I think this obsession of feeling compelled to do something about it is just to satisfy my ego in picking the bottom. I might pick it, I might not.
The truth is that the market has presented me an opportunity, but it is my choice whether to play it or not. The worst case scenario of doing nothing would be that NVDA would go up to 18 the next couple of days, which really is like nothing has changed before. Ha! I already have money in NVDA so it wouldn't be a problem. (I guess I feel safer when the prices are really low)
If I had infinite resources, I would be backing up the truck, but currently I have to deal with opportunity costs when dealing with NVDA. I like LDK just as much, and am more impressed with its fundamentals recently. Since LDK has more short term catalysts, so I am keeping my current asset allocations the same for now.
Hopefully NVDA will stay low so I can transfer my gains into there later, but worst case, it would be like nothing has changed. I am taking some risks predicting the short term trends, but that's my choice, not Mr Markets.
Thursday, July 3, 2008
Blood in the streets
When I saw that NVDA fell $5 premarket, I first thought there was a glitch until I started digging into the news.
NVDA had to lower their forecast due to competition from AMD and unexpected costs due to warranties and repairs from some of their chips. In this market, it created the perfect storm for a disaster with the stock.
With this short term problem, I see this as one of the best buy opportunities in the market. There is virtually no risks when it is trading this low and huge opportunities for gains. The long term growth story remains virtually the same which is what I have been focusing my valuation on.
I am going to rebalance my portfolio, increasing my weighting into NVDA because it is too good to be true at the price. The short term is definately going to suck and be extremely volatile, but the long term is still strong. I still think the stock should be trading in the 40s with its growth prospects and competitive advantage. With a margin of safety of about 70%, this is a no brainer if you can handle the pain.
This decision would be easier if LDK was up a little more, but unfortunately it is trading like a penny stock having a 30% drop on good news. If the stock was in the 40s like a week ago, I would jump into NVDA in a heartbeat. NVDA has definately less risks at these levels, but LDK has greater rewards when it is trading at 30, which is clouding my judgement on the situation.
LDK has more catalysts in the short term, making this decision even harder. I might have to sleep on it before deciding how to act. Ideally, I would like to trade 1 LDK share for 3 NVDA as arbitrary as it seems.
NVDA had to lower their forecast due to competition from AMD and unexpected costs due to warranties and repairs from some of their chips. In this market, it created the perfect storm for a disaster with the stock.
With this short term problem, I see this as one of the best buy opportunities in the market. There is virtually no risks when it is trading this low and huge opportunities for gains. The long term growth story remains virtually the same which is what I have been focusing my valuation on.
I am going to rebalance my portfolio, increasing my weighting into NVDA because it is too good to be true at the price. The short term is definately going to suck and be extremely volatile, but the long term is still strong. I still think the stock should be trading in the 40s with its growth prospects and competitive advantage. With a margin of safety of about 70%, this is a no brainer if you can handle the pain.
This decision would be easier if LDK was up a little more, but unfortunately it is trading like a penny stock having a 30% drop on good news. If the stock was in the 40s like a week ago, I would jump into NVDA in a heartbeat. NVDA has definately less risks at these levels, but LDK has greater rewards when it is trading at 30, which is clouding my judgement on the situation.
LDK has more catalysts in the short term, making this decision even harder. I might have to sleep on it before deciding how to act. Ideally, I would like to trade 1 LDK share for 3 NVDA as arbitrary as it seems.
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