[HN Gopher] Three Investing Patterns That You Should Know
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Three Investing Patterns That You Should Know
Author : gmishuris
Score : 45 points
Date : 2023-05-29 19:35 UTC (3 hours ago)
(HTM) web link (behavioralvalueinvestor.substack.com)
(TXT) w3m dump (behavioralvalueinvestor.substack.com)
| d_burfoot wrote:
| One of the most important realizations I've had recently is the
| investing motto: "You can't beat the market, but you can beat the
| tax man".
|
| Don't try to be smart about your investments from the point of
| view of share pricing, P/E ratios, EBITDA, etc, etc. The legions
| of Harvard and MIT quants working on Wall Street are going to be
| better than you at figuring out what the stock price should be.
|
| Instead, get smart about how the tax code works. Figure out the
| difference between long-term and short-term capital gains. Figure
| out how to do tax loss harvesting. Figure out what a back-door
| IRA is. Figure out how to take out a loan on your 401(k). The
| benefits from those investigations are going to be much more
| reliably beneficial than trying to be smart about pricing and
| timing the market.
| PopAlongKid wrote:
| > Figure out how to do tax loss harvesting. Figure out what a
| back-door IRA is. Figure out how to take out a loan on your
| 401(k).
|
| I'm not convinced any of those things is "smart". For example,
| if LT cap gains is your _lowest-rate_ taxable income, why would
| you want to offset it? I make sure when I have a cap loss for
| the year, I have no LT cap gains and keep it to around $3K
| (which offsets higher-tax-rate ordinary income). Loans against
| 401(k)s are rarely a good idea, you shouldn 't put in money in
| the first place if you need it before retirement. And I've
| always thought that (assuming I have any pre-tax Trad IRA
| money, which would be the case if a ever leaving a job and
| rolling over the old 401k), it's more effective to use my
| annual $6K after tax money to pay tax on a larger Roth
| conversion than to simply go though extra steps to get the $6K
| into the Roth (greater leverage).
| itake wrote:
| I moved from CA to WA for this reason. With lower salaries, I
| wonder if this was the right move.
| epolanski wrote:
| > The legions of Harvard and MIT quants working on Wall Street
| are going to be better than you at figuring out what the stock
| price should be.
|
| This is not completely true. Legions of Harvard quants most
| likely do not possess your circle of competence, whatever it
| may be.
|
| E.g. as a customer of various cloud services I am much better
| positioned than any quant at understanding cloud vendor's
| product and business, because I'm a user and customer so I can
| understand how some offerings are just better than others and I
| can safely predict winners in long term. You could likely
| predict AWS meteoric rise as a sysadmin in 2010.
|
| E.g.2 people following the semiconductor market in depth knew
| from years that Intel was on its way down since the blatant
| issue of the 10nm node appeared in 2015+ and had many years to
| act on it. As a MBP Pro user yourself you could quickly see
| that the boiling hot trackpad burning your fingers combined
| with Apple's declared intention of moving to in house socs,
| combined with the comeback of AMD in data center market
| combined with cloud vendors working on their own socs put Intel
| more and more in the corner. And what did quants do? Kept
| buying Intel because they looked at balance sheets, not
| products.
|
| Everyone has its circle of competence and can combine it with
| learning balance sheets and do their math. Point is almost no
| one does and does not go through the analysis part to value and
| price a business.
|
| Finance moreover changed. 30%+ of stocks out there are held by
| passive funds. Even investment managers which are consistently
| pressured to stay in a delta from the benchmarks.
|
| Investment opportunities are out there, what is needed is to
| practice continuous due diligence, stay in own's circle of
| competence and be patient. You can't be right consistently for
| the reasons you listed, but you only need to get it right few
| times.
| twelve40 wrote:
| > You could likely predict AWS meteoric rise as a sysadmin in
| 2010
|
| this and Intel you mentioned are pretty unique and rare
| insights, maybe like a one-off windfall, not a consistent way
| to make money. I've been in tech for decades now and I'm
| still having a hard time reliably telling who will flop and
| who won't. Only in a very few cases it's so convincing to me
| that I would be willing to bet money on it.
| epolanski wrote:
| > a consistent way to make money
|
| Who said it was?
|
| As per my last sentence my conclusion was that you only
| need to be right few times over your life time to buy a
| very good company that is mispriced for whatever reason and
| that retail investors hold often deep understandings of key
| industries that professional analysts don't.
|
| If you're willing to do due diligence (and learn to do so
| which is far from trivial) and act you can definitely see
| good long term returns on a good number of picks.
|
| Point is, stock markets only beat bonds in the long term,
| if you are in the stock market to do + some % in a short
| time it's gambling.
| 0xcafefood wrote:
| William Bernstein's books, e.g. "The Intelligent Asset
| Allocator," makes a similar point about chasing beta instead of
| alpha. Beside that, on top of minimizing tax burden, he also
| emphasizes minimizing fees that fund managers charge.
| andersentobias wrote:
| When economists say "_net present value_ of future returns", are
| they exclusively wanting to discount the inflation effects? Or is
| there anything else?
| FredPret wrote:
| This one confused me as well when I learnt about it.
|
| For valuing an investment, you have to take into account the
| inflation that will happen, as well as the opportunity cost.
|
| So if you can earn 5% on your money, but inflation is 4%, you
| can turn $100 into $101 today-dollars in one year.
| chrismcb wrote:
| But why? If you don't invest then you turn the $100 into 96
| today dollars. It seems to me that information is pretty much
| irrelevant.
| epolanski wrote:
| Well it is an important factor.
|
| Average bond yield is around 4% over a decade, that means
| that investing in a business you need to discount the
| growth it will have in it's cash flow by 4%.
|
| Imagine you conclude Coca Cola can grow it's cash flow and
| earnings per share by 6% annually, is it an appealing
| investment when you get right now almost 5 on bonds? I's
| not really, but you would probably come to a different
| conclusion if Coca Cola's price felt by 15% in some market
| conditions.
| FredPret wrote:
| That's perfectly fine too. If you aren't going to invest
| the money, that's exactly what will happen. You use TVM -
| time-value-of-money - to compare multiple options of what
| to do with some money.
|
| For an economist (and I'm not one so I don't know), they
| probably use the real growth rate of the economy in their
| calculations, because this is what the country in question
| has been shown to do with its money. The real growth rate
| takes growth and inflation into account.
| tchaffee wrote:
| Not if you spend it instead of investing it.
| dpierce9 wrote:
| Cost of capital includes an inflation term and the risk
| free rate (but neither may be right over the investment
| term).
|
| You can use NPV to evaluate different options. If NPV of
| one investment is $1 and another is negative $4 then it is
| clear what the better investment is (all other things being
| equal). Do this for all your investment options and you can
| rank where to put your money. Of course, if isn't that easy
| since two investments might have different terms, risk
| profiles, or different capital requirements.
| decompiled_dev wrote:
| It depends on your view point and the model you are making.
|
| Generally it will be your cost of capital to be used as a
| discount rate. Say if you borrow at 10%, then you need account
| for that every year you need to wait for that return.
|
| A company with access to cheap capital can use a lower discount
| rate, and come up with higher net present value based on
| distant cash flows compared to a company that needs to pay a
| lot.
|
| Net present value is a normalization measure.
| epolanski wrote:
| They discount average historical 10Y US bonds.
| 0xcafefood wrote:
| Your discount rate is generally the rate you can borrow at, so
| it differs for everyone.
|
| To see why, consider a really simple case: you can buy a
| contract to receive C cash at some time T in the future. Call X
| how much you'd pay today to enter that contract. You can borrow
| X today and agree to repay it using the payout from your
| contract. If you can borrow at a fixed, continuously compounded
| rate R, then the amount you repay is X exp(RT). So your
| breakeven (or "fair") price would have X exp(RT) = C, i.e. X =
| C exp(-RT). NB, the rate you use to discount a future value to
| know its present value to you is R, which is _your_ rate to
| borrow that much money for that length of time.
|
| There are various models that aim to recover R from other
| values, but ultimately it's determined by market activity.
| Lenders either will or will not loan you X for T time at a rate
| of R.
|
| What kinds of things might impact their willingness? Definitely
| their perception of present and future inflation rates, but
| also their ability to loan at a higher rate to someone else
| with a similar risk profile (i.e. the "rates market" as a
| whole) and also specifics of your own credit risk to them. If
| they think you might default on the loan, they'll charge you
| more for that added risk.
| rich_sasha wrote:
| Depends; economists talk about _real returns_ meaning returns
| over inflation. So discounted future _real_ returns take
| inflation into account.
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