Jul 28, 2023
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
Notes:
Seg. 1
MB on Mean Reversion & Market Cycles
Mean Reversion –
Mean Reversion, or reversion (or regression) to the mean, is a theory used in finance that suggests that asset price volatility, and historical returns eventually will revert to the long-run mean or average level of the entire dataset.
Prices do not go up forever, they tend to level out over the long term. This is why so many investors monitor the 52 week High / Low average of a stock, and how it is trailing. Many stocks will go up 5, or 10 – 20% in a year, and then go back down – whether because they are cyclical, a ‘hot buy’, scandal with the Co., or market circumstances, etc.
Market Cycles, also known as stock market cycles, is a wide term referring to trends or patterns that emerge during different markets or business environments. During a cycle, some securities or asset classes outperform others because their business models aligned with conditions for growth. Market cycles are the period between the two latest highs or lows of a common benchmark, such as the S&P 500, highlighting a fund’s performance through both an up and a down market.
Market Cycles, are common as economic phases rise, then fall. Think of this like a like a Pendulum, and pay attention to how they are moving currently. A great example is a Recession, where the market is down for 6 to 10 months, and stocks are all falling. As the economy comes out of the Recession, there are many opportunities for buys of the stocks of good companies that were down from the Recession, but now are rebounding.
Mean Reversion – companies or stocks go down over time, because completion comes after the main players in a an industry and chip away
Seg. 2
Replay Clip with Drew Niv on Risk
Guest: Drew Niv, Trader Tools & former Forex Trader
LKIN: https://www.linkedin.com/in/drew-niv-123812160/
Drew Niv had a 20 year career in trading and FX (currency) markets. He founded one of the largest Forex trading companies on Wall Street, took it public (IPO), managed hundreds of staff, and oversaw $ billions in daily trading.
Currently he runs a bank software company called Trader Tools, that specializes in FX markets. - https://www.tradertools.com/
Drew Niv is a Strategic, Technology Savvy, and Detail-Oriented Board Member and Global Business Executive with a history of award-winning performance as a visionary leader. Founded company that disrupted the FX industry, resulted in retail FX becoming a major factor of the global FX market.
Developed breakthrough technology that enabled customers to transact spot FX at 70–90% less cost than the largest exchanges and ECNs. He has forged strategic partnerships with 1,000 institutional customers, including major hedge funds, all large banks, and other brand name financial institutions, both domestically and globally.
Market is very sensitive to interest rates. The Fed establishes interest rates. Interest Rates set the tone for the entire financial industry, from business lending, to stocks, bonds, banking, insurance, investments, mortgages, etc.
Market Fundamentals are always valid, and post 0% rates, and current high inflation, become even more valid.
Pension plans and insurance company’s returns will be affected by interest rates. They are looking at minimum rates of 4 to 5%. Interest rates have been low, near 0% for a number of years.
It is tough to get Treasury bills when only at 1%. Companies were forced to chase return and take on more risk by acquiring corporate bonds and stocks. Investor mentality was not challenged at times for the last few years.
Hard to know what a good investment is at 0% interest rates. Money was cheap, so people were investing in numerous things, borrowing $, and taking chances.
We saw the rise of the Pandemic stocks in 2020 with companies like Carvana, Peloton, and different crypto assets. These all turned out to be bubbles, and wound up flopping in 2022. The crypto market has seen 90% shrinkage. Some companies go bankrupt, while others are acquired at $.10 on the dollar.
Investment philosophy 101 - you compare all investments that have risk to a risk-free investment. Treasury Bills are considered risk-free investments where with very little risk, you can get 3 to 5%.
If you are going to buy a stock by comparison, and take on more risk, you have to be paid for taking on that risk. A stock could have 10 to 20% downside risk, vs a T Bill which has almost no downside risk, the government is a good bet. The two-year treasury bill is at 4% annually.
Professional investors always look at the risk/reward ratio. Whenever you look at an investment, you have to consider the duration, the type of asset, and what you want to benchmark it against.
Example: you invest in Apple, are they a credit risk? What is the ROI? The return on an investment should be better than treasury bills, accounting for the potential downside risk of 10% (or more).
Inflation causes the economy to weaken. Housing prices decline like other assets. In 2023, inflation should go down. This assumes the Government doesn’t spend too much money, in which case inflation stays the same.
The Fed is raising rates to bring asset values down. In the current environment, 2023, savers will be rewarded. This is similar to from the 1980s to the 1990s where you could actually earn interest on saving money.
With low interest rates from 2005 to 2020, savers were punished. 2023 will be the return of the saver. Cash will be king. Valuations are collapsing, see tech stocks, crypto, and maybe housing?
Psychology of the Investor – The investor currently still remembers the highs of the last few years. As they sell off and get out of the market (expecting a recession), their viewpoint slowly changes. Typically recessions last 2 years, and this is considered short. But it takes years for investors to regain confidence and jump back into the market.
Historically market timing is tricky. In the current environment you want to reduce exposure to assets. Go to the Federal Reserve website to look at the history of housing prices. The last decade has seen an unprecedented climb in the price of housing assets - https://www.stlouisfed.org/
Mean Reversion is setting in, this happens with assets. What goes up, must come down. A retracement in valuations of assets. When you look at housing and regional markets some values are even higher, ie: the Sun Belt like Florida or the southwest.
Things that are illiquid assets, lower to the reset value, it’s different than last time. Illiquid is the state of a security or other asset that cannot quickly and easily be sold or exchanged for cash without a substantial loss in value.
Non-bank lenders will be hurt. Examples of this might be an insurance company, mortgage co., venture capital or private equity.
Full Show: HERE
Seg. 3
Replay Clip of Denver Nowicz talking Assets and why Own a Business
Co-Host: Denver Nowicz, President - Wealth For Life
https://wealthforlife.net/brt/
https://twitter.com/denvernowicz
Denver is an advisor with nearly 20 years experience working with clients in investments and insurance, designing retirement plans with a combo of both. He takes us through different strategies for clients to get the best allocations for their money over the long term. It is the Combo Strategy of both Offense and Defense, the synergy of the mix, not ‘All or Nothing’.
Businesses are usually the largest asset class of the wealthy. Options are starting your own business, buying a turnkey type business, like a franchise, or buying an established business thru acquisition.
Businesses might be physical like a traditional brick and mortar store or a digital businesses which are online businesses.
When you’re earning a high W-2 income you are punished by the tax code. If you want to make more money and grow your business you improve the systems and then invest in different types of assets.
Digital businesses are very good because they have low overhead, low expenses. Examples would be an educational course, consulting or a mastermind group.
Once you start earning over $500K to $1 mil+ , you need to be thinking very carefully about tax strategies. You want to figure out ways to redirect capital from the IRS to better assets that assist you.
Examples could be charities, or real estate. Active tax strategies, find good accountants and asset protection attorneys who can create a proactive strategy.
If you own a business that can make an extra $50,000 a year in income, that is the equivalent of owning a $1 million stock portfolio giving off 5% a year in dividends or owning a $1 million property giving 5% in rental income.
To have a good tax protection do you want to get away from W-2 income, create businesses with write offs with LLCs and expenses, and also mix in real estate.
Full Show: HERE
More - Assets Show: HERE
Wealth for Life Topic: HERE
Seg. 4
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
Investing Topic: https://brt-show.libsyn.com/category/Investing-Stocks-Bonds-Retirement
More 'Best of Investing': Here
‘Best Of’ Topic: https://brt-show.libsyn.com/category/Best+of+BRT
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