[Guide] Intelligent Investing - Page 4

floor exercise wrote:
I have not read 95% of what you wrote but just glanced through most of it

On June 07 2009 11:09 kewlsunman wrote:


I'm not sure if you actually read the guide because I don't start with financial analysis. I believe I spend the first three parts discussing some basic financial concepts, and I specifically touch on the exact subjects that you list: the time value of money, compounding, portfolio management, the differences between debt and equity, and the various investment vehicles. I've also included a glossary to explicitly address anything that I think the novice investor might need to know which might not have been clear in the read-through.

Besides dollar cost averaging, which is an investment strategy for old people who are trying to build up their retirement account (and like I mentioned above, I just don't think my audience here is retirees), I believe I talk about everything you mentioned--except for the trading stuff, which you're right, I don't talk about. Because this isn't a guide on trading; this is a guide on investing, and there's a very important difference between the two.

On June 08 2009 01:07 SirKibbleX wrote:
I'm honestly looking for a well constructed rebuttal to my own mental argument in words I can understand after reading the guide.

I guess I just have such a strong attachment to Blizzard that I want to believe it is a good investment. I understand this is a very biased place from which to start, but all the same, I think it says a lot about the power of branding when it comes to Blizzard (and several other Vivendi properties). I suppose I argue from a much to qualitative perspective and not enough of a quantitative one. My argument centers around three points: the financial value of WoW, the very large hype surrounding Starcraft II (SC's popularity has become a rather viral meme, almost every person I know between 12 and 35 has at least heard of it, and many know of its success in SK), and the fact that the acquisition of Activision was a very large one-time cost that seems like it will pay off in the long-term. I first want to say that I don't hang out exclusively with hardcore gamers, but mostly with people in my age range, as one would expect, so there may also be some bias in my processes.

WoW is like a phenomenon. First, the fact that WoW is still the dominant MMORPG in the industry, with some people citing replacement costs of over one BILLION (with a B) dollars or more, makes it a special property. In the gaming industry especially, there is a lot of power in branding and gaining customer loyalty. That people gladly pay a respectable sum of money monthly to play a game, still surprise me but MMOs, I suppose, are subject to a powerful snowball effect. The more people play, the more exciting the game gets. WoW is a quality game that is frequently updated and well respected. All other Blizzard games are also receiving this special treatment, D2 is getting 1.13, and SC is still occasionally patched. People KNOW Blizzard stands behind its products, which gives them a reputational advantage that may be worth untold millions.

Second, Starcraft II is just around the corner. This may be one of the most anticipated releases I've heard of in a while. A lot of people have played Starcraft, or heard of its popularity, and I think SC2 is going to sell more units than a lot of people expect. Not everyone is a hardcore PC gamer or RTS player, but I think there will be a lot of casuals who will buy SC just to be a part of the initial wave of players 'breaking the game in'. Diablo III may similarly take an unexpected volume of sales, especially with the pre-1.13 buzz bringing people back onto D2.

And finally, I think the costs of acquiring Activision were warranted. Vivendi is likely going to leverage Activision's publishing arm to gain additional market share and save on costs for pushing their newest titles. The process of restructuring and Vivendi's own self-analyses will likely cure Activisions woes within a year or so, and powerful franchises like Call of Duty and Guitar Hero should ensure positive growth.

I'm just saying, I think we have a special level of understanding of the gaming market and industry above and beyond that of just the numerical data stock analysts would use. I also understand that you're trying to demonstrate how to evaluate companies with which we may not be as familiar.

I love the guide, the only thing I would like to see is a step-by-step guide for how to actually go about investing, what sites/services are suggested, and maybe a single, good example of what to look for when investing. And how you would go about acquiring stock in that company.

Sorry if I come across as stupid, I'm curious to learn more. Thanks for the guide, hope you get the key!

On June 06 2009 16:32 kewlsunman wrote:
DISCLAIMER
I've been involved in the investment industry for more than a few years now. I worked at an international investment bank for a while, doing the standard--investment analysis, deal sourcing and structuring for hedgies and other IB boys--and then moved on to the buy-side.

On June 08 2009 04:17 InsideTheBox wrote:


Just out of curiosity what division/department were you in during your stint at the IB and what kind of buy-side work are you doing now; mutual fund, hedge fund?

On June 07 2009 11:09 kewlsunman wrote:
Well, if you're interested, I don't think CAPM or APT make any sense at all. The idea that volatility substitutes as a proxy for risk is oftentimes right, but on very important occasions turn out to be false. Those very important occasions being situations like the collapse of LTCM, the collapse of Lehman Brothers and Bear Stearns, etc. I know, the entire academic establishment still disagrees. Don't worry, I've taken those classes too. They've convinced most of Wall Street but I wouldn't be surprised if even the investment banks started to shy away from volatility-based risk models in a year or two--they simply don't hold up when it's most crucial that they do.

I do mention other asset classes, by the way. Maybe not as much as you would have preferred but I think the most important points were made: no other asset class beats equities in the long run. Retirement planners suggest a variety of asset classes for older investors because lower volatility is important for them--they have to live off their investments. But for younger investors who are more interested in capital appreciation, there's almost no reason not to invest in equities.

(Also, intangible assets are one of the last of one's worries when it comes to intrinsic value. Most companies don't have a large amount of intangible assets relative to the rest of their book, you can oftentimes write-down the entire figure and not have a significant effect on your investment assessment.)

On June 06 2009 17:30 lilsusie wrote:
Wow - this is really really good guide, thanks for your efforts and can't wait to read the rest of it!

On June 08 2009 14:23 Milton Friedman wrote:


CAPM is the most fundamental theory on asset pricing there is. It makes perfect theoretical sense, but I will assume you mean it doesn't hold up empirically, which is true and inevitable from the assumptions required. APT on the other hand holds up much better empirically and is the natural extension from CAPM. Both theories make complete sense.

It's an empirical fact that volatility is correlated and that when asset prices fall they tend to fall together, even between assets that are seemingly unrelated. Volatility models capture these effects, as well as more extreme movements in price that is also observed in the data. I'm honestly not sure how much volatitility models had to do with the collapse of LTCM, Bear Stearns and Lehman. I didn't think it played any role, and the factors for their demise lie elsewhere.

I don't disagree that equity outperforms in the long run. But I can't imagine any (potential) investor on TL is going to go 100% in equity. Of course, maybe this is what you're telling people to do:

"The third contribution that Buffett made was a complete reversal of Graham’s theory of diversification. Buffett essentially said, if I’m willing to put $1 into this investment opportunity, then I should be willing to put $100, and if I’d be willing to lose $100, I should be willing to lose $1,000, etc. etc. He did not fear losing money because he had done the analysis to make sure that he wasn’t at risk. “Wide diversification is only required when investors do not understand what they’re doing.”"

Portfolio diversification is necessary because it hedges risk. Buffett says he's not at risk thanks to his analysis but any stock will always be subject to a stochastic component. Yes, you may make a profit in the long run, but not necessarily so in the short run. The implication of what you're telling people to do is invest all they have in one thing - that is, they are equally risk averse to losing $100 compared to $10,000. However, I think you'll find few people for which that is really the case. Since stocks are subject to volatility if you invest all your money in it and it turns out badly for you, you'll be living off nothing. If you invest a small percentage in one stock, the risk to you is less. This is standard intuition: investors tend to have DARA and CRRA preferences. Buffett's quote implies CARA, which is empirically implausible. A typical (and famous) hedge might be to take roughly an opposite and equal position in options on your stocks.

I'm not saying most of what you've written is incorrect, but since time (and thus length) is scarce I just feel there could've been less on who is an intelligent investor and the introduction and more on actual finance.

Portfolio diversification is necessary because it hedges risk. Buffett says he's not at risk thanks to his analysis but any stock will always be subject to a stochastic component. Yes, you may make a profit in the long run, but not necessarily so in the short run. The implication of what you're telling people to do is invest all they have in one thing - that is, they are equally risk averse to losing $100 compared to $10,000. However, I think you'll find few people for which that is really the case. Since stocks are subject to volatility if you invest all your money in it and it turns out badly for you, you'll be living off nothing. If you invest a small percentage in one stock, the risk to you is less. This is standard intuition: investors tend to have DARA and CRRA preferences. Buffett's quote implies CARA, which is empirically implausible. A typical (and famous) hedge might be to take roughly an opposite and equal position in options on your stocks.

any stock will always be subject to a stochastic component. Yes, you may make a profit in the long run, but not necessarily so in the short run.

Since stocks are subject to volatility if you invest all your money in it and it turns out badly for you, you'll be living off nothing. If you invest a small percentage in one stock, the risk to you is less.