Sep 6, 2024
Intelligent Investor, Market Cycles, Supply & Demand - Best of Host Matt on Investing & Economics
AZ TRT - S05 EP34 (250) 9-1-2024
What We Learned This Week:
- The Intelligent Investor Ben Graham's teaching, and seminal investing book - Ch. 8 on Mr. Market, & Ch. 20 on Margin of Safety
- Market Cycles – importance of identifying them, to know where you are at when investing to avoid Bubbles and Mania
- Supply & Demand - Economics Simplified
- Capital Allocation - What is the Opportunity of your Business Investment?
- Gamblers Fallacy - What is the Probability of the Next Die Roll?
- Game Theory - Dr. Nash’s Plan to Pickup Women
Notes:
Seg 1.
MB on Ben Graham's teaching and seminal investing book, The Intelligent Investor (c 1949), & review of the 2 main chapters - Ch. 8 on Mr. Market, and Ch. 20 on Margin of Safety
Ben Graham was an economist, professor, and investor. He is also known as the Father of Value Investing, and the author of Security Analysis, and The Intelligent Investor. He stressed fundamental analysis of securities (stocks), investor mindset, focused investing, and ‘buy and hold’. He was Warren Buffet’s professor, one time boss, friend and mentor. More: Here
Buffet – Rule #1 Never Lose Money, Rule #2 Remember Rule #1
Ch. 8 - The Investor and Market Fluctuations / aka – Mr. Market Parable
Ch. 20 - Margin of Safety as the Central Concept of Investment
Stocks are a piece of ownership of a company, not just some piece of paper. You have to be able to value the company to determine if the market is selling you the stock at a discount, or if it is over-valued. A good investment is based on the price you pay for it. A good stock can be over-priced, and a bad stock can be a good buy if the price is depressed enough. You make money when you buy (what you pay).
Mr. Market is very emotional, and changes his mind daily. Sometimes he makes you an offer on a stock that is silly, and other times he offers a stock at a deep value, at a low price. This is when you should buy. It is all about psychology, discipline and patience.
Margin of Safety is the idea to buy stocks with a defensive mindset. Buy it cheaper than the value, so if your valuation was off, you give yourself room for error. You have to do detailed fundamental analysis to determine if a stock is over or under valued. Then you hold until the stock, ride out the fluctuations until it rises to its true value.
Full Show: HERE
Seg. 2
MB on legendary investor, Howard Marks of Oaktree and his Memos, in particular, Market Cycles. The importance of understanding Cycles, and how to identify them in investing. A look at market history, and investor psychology all connected to Market Cycles.
Per Investopedia – Market Cycle
The four stages of a market cycle include the accumulation, uptrend or markup, distribution, and downtrend or markdown phases.
- Accumulation Phase: Accumulation occurs after the market has bottomed and the innovators and early adopters begin to buy, figuring the worst is over.
- Markup Phase: This occurs when the market has been stable for a while and moves higher in price.
- Distribution Phase: Sellers begin to dominate as the stock reaches its peak.
- Downtrend: Downtrend occurs when the stock price is tumbling down.
Examples – Tech Stock Bubble of 2000, Financial Crisis of 2008 (Housing Bubble), Pandemic of March 2020, Railroad Speculation mid-1800s, Great Depression 1929
Howard Marks quotes overheard in a Bubble: ‘This time it is different.’ ‘The market can’t fail.’
The market does not always go up, there is Regression to the Mean – prices will eventually go down and even out. Be leery when there is euphoria in the market (be fearful), and maybe sell. Then buy after, post crash at depressed pricing levels. Buy Low, Sell High. Even a depressed asset can be attractive at the right (low) price.
Michael Lewis book – Big Short on the Financial Crisis of 2008
Howard Marks Memos: https://www.oaktreecapital.com/insights
Books: Here (The Most Important Thing, Mastering the Market Cycle)
Bio (c/o Wikipedia) - https://en.wikipedia.org/wiki/Howard_Marks_(investor)
Howard Stanley Marks (born April 23, 1946) is an American investor and writer. He is the co-founder and co-chairman of Oaktree Capital Management, the largest investor in distressed securities worldwide. In 2020, with a net worth of $2.1 billion, Marks was ranked No. 391 on the Forbes 400 rankings of the wealthiest Americans.[2] Marks is admired in the investment community for his "memos", which detail his investment strategies and insight into the economy and are posted publicly on the Oaktree website.
He has also published 3 books on investing.[3][4] According to Warren Buffett, "When I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something, and that goes double for his book."[5] Funds led by Marks have produced long term returns net of fees of 19% per year. Investors are primarily pension funds and sovereign wealth funds.
Seg. 3 & 4
Economics 101 for Real World Business
Full Show: HERE
Supply & Demand
Supply is the amount of a specific good or service that's available in the market. Demand is the amount of the good or service that customers want to buy. Supply and demand are both influenced by the price of goods and services.
If there was only one pizza restaurant in a town and then a new pizza place opened, the demand for pizza from the first restaurant would drop. The price of gasoline often changes with the demand throughout the year. As people drive more in the summer, gasoline prices tend to rise.
In professional football, owners sell entertainment (supply) and spectators buy the opportunity to view or display the game (demand). Meanwhile, owners also buy the services of athletes who wish to play (demand) and trained athletes make themselves available for a price (supply).
Marginal Utility
What Is Marginal Utility? Marginal utility is the added satisfaction that a consumer gets from having one more unit of a good or service. The concept of marginal utility is used by economists to determine how much of an item consumers are willing to purchase.
Sports David Beckham signed $250 mil contract in 2007 w LA Galaxy
Galaxy willing to overpay to get the attention, ticket and merchandize sales
What we will pay at the margin?
There is only 1 Beckham, rare commodity, like a diamond – subjective on the value
What is the value of a bottle of water in the desert?
If only 1, then pay a lot, if there are 50 available, then pay less
Capital Allocation –
Capital Allocation is the process of distributing financial resources to different areas of a business to increase efficiency and maximize profits.
A Sunk Cost refers to money that has already been spent and which cannot be recovered. In business, the axiom that one has to “spend money to make money” is reflected in the phenomenon of the sunk cost. A sunk cost differs from future (or regular) costs that a business may face, such as decisions about inventory purchase costs or product pricing.
Sunk Costs also mean that the Money $ used on a bad investment is lost. Don’t try to ‘chase it’ to somehow recover and get even. Instead, just write it off, and move on. It is better to use the New Money $ on better investments. Where to Invest your money $ is pivital to Capital Allocation. Simply put, learn to Control Your Capital and decide wisely what Opportunity (Cost) it should go to be as efficient as possible. This is the intersection of scarcity and choice.
Opportunity Cost is the loss or gain of making a decision, the forgone benefit that would have been derived by an option not chosen. To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the others. Famous Phrase – “idle cash balances represent an opportunity cost in terms of lost interest”
Whether your time or money can be better spent on something else
Should you mow your own lawn, or hire someone and concentrate on your job to make more $
Division of Labor
We do not cut our own hair, or drill our own teeth – we go to a dental specialist, saves time & $ over long term
Concentrate on your specialties
Pencil example – one co make wood, one makes eraser, one mines the graphite, and one co assemblies – we all benefit as it would be harder and cost more if same company did it all, suppliers w/ specialty help keep costs down
In Stock Investing – Beware the Zombie Co.s in the S&P Index.
These are companies that are not profitable, or growing (may even need a Bailout). They are just treading water, and paying their interest on debt, but not their principal. In the current S&P index, it is estimated that about 20% of companies are Zombie Co’s whose main investment comes from people buying the whole Index.
Unfortunately another 30% of the Index are bad companies that are either are stagnant, or on their way to Zombie status. Maybe 10 – 15% of the Companies (Stocks) in the Index (50 – 75 Co’s) are really good to exceptional and should get your Capital.
Do you want to own the best house on the block? Or all of them?
Gamblers Fallacy each roll of the die is separate from the last, no effect
The gambler's fallacy, also known as the Monte Carlo fallacy, occurs when an individual erroneously believes that a certain random event is less likely or more likely to happen based on the outcome of a previous event or series of events.
For example, the gambler's fallacy might cause someone to believe that if a coin just landed on heads twice in a row, then it's “due” to land on tails on the next toss.
Monte Carlo Simulation – use for modeling scenarios
One simple example of a Monte Carlo Simulation is to consider calculating the probability of rolling two standard dice. There are 36 combinations of dice rolls. Based on this, you can manually compute the probability of a particular outcome.
Monte Carlo Simulation is a mathematical method for calculating the odds of multiple possible outcomes occurring in an uncertain process through repeated random sampling. This computational algorithm makes assessing risks associated with a particular process convenient, thereby enabling better decision-making.
Probabilities
Probability is simply how likely something is to happen. Whenever we're unsure about the outcome of an event, we can talk about the probabilities of certain outcomes—how likely they are. The analysis of events governed by probability is called statistics.
Sports analytics is a more recent field that uses data to measure areas like athletic performance and business health to optimize the processes and success of a sports organization as a whole. On-field data metrics help teams decide how to improve in-game strategies, nutrition plans and other methods for raising their athletes’ level of performance. Off the field, organizations can leverage data to monitor ticket sales, craft marketing campaigns and reduce operational costs.
Data lets teams and organizations track performance, make predictions and make smarter decisions on the field. Want to figure out what play is best to run on fourth down in a football game? Check the analytics. Wondering whether or not your pitcher should throw another inning? Check the analytics. Players still win games, but data allows coaches to put them in the best position to succeed.
Game Theory – science of human strategy, people behave differently in games
Dr. Nash – A Beautiful Mind
If they all go for the same girl in the bar, competition and no one gets her, but if they work together and pair off with the group of girls, they all may win
As Nash explains it, if all the men approach the blonde first, none of the men will pair off: The blonde will reject them all as a crowd, and her brunette friends will reject them all individually because none of the women will accept being second choice to her friend.
While used in several disciplines, game theory is most notably used as a tool within the study of business and economics. The "games" may involve how two competitor firms will react to price cuts by the other, whether a firm should acquire another, or how traders in a stock market may react to price changes.
Prisoners Dilemma
The prisoner's dilemma presents a situation where two parties, separated and unable to communicate, must each choose between cooperating with the other or not. The highest reward for each party occurs when both parties choose to co-operate.
Keep your mouth shut and tell the cops nothing, both walk
Cold War Example
If both combatants do nothing, everyone lives, or mutual destruction with nuclear war
War Games movie – no winner in hundreds of simulated games
Related Show:
Market Cycles, Risk, & Ben Graham’s Intelligent Investor
- Finance Lessons from BRT
BRT S04 EP29 (192) 7-23-2023
What We Learned This Week:
Mean Reversion & Market Cycles – Asset prices do not go up forever, but rather fluctuate
- Assets – Valuations have gone down, forces Investors to evaluate the worth of an Asset, Risk / Reward analysis, no more ‘free’ money
- Interest Rates – Don’t Fight The Fed, raising rates to lower value of assets
- Market Risk – can get Treasury Bills at 4 – 5%, risk-free, need good ROI to invest in stocks with 10 – 20% downside risk
- Wealthy own Assets, Business, Real Estate, Stocks are the best and most popular
- The Intelligent Investor Ben Graham's teaching, and seminal investing book - Ch. 8 on Mr. Market, & Ch. 20 on Margin of Safety
Full Show: HERE
Business Topic: HERE
Investing Topic: https://brt-show.libsyn.com/category/investing
More - BRT Best of: https://brt-show.libsyn.com/category/Best+Of
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