[HN Gopher] Three Investing Patterns That You Should Know ___________________________________________________________________ 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. ___________________________________________________________________ (page generated 2023-05-29 23:01 UTC)