Dead Money?
For this week, I have taken up the role of an investing chiropractor! It is a fun thing as I try to adjust different portfolios to have a better posture.
Most of my late afternoons were spent analyzing different investment portfolios. The portfolios belong to members of my GIM community. While doing so, I managed to explore different parts of Singapore. There is a restaurant called Big Street located near Jalan Besar MRT. Perfect spot for a quiet afternoon!
Four Main Categories
A) Most investors make the mistake of over-diversifying by purchasing companies across too many industries. As a result, there was a lack of style and focus. When you have too many companies, it becomes harder to monitor as well.
You need to know what you want to be in your portfolio. Is it high-growth? Formulate a portfolio strategy with the relevant position sizings. No one becomes truly wealthy by being everywhere. A focus is key.
B) Another issue is being too concentrated into a certain country. For example, China. Since all of us are aware the trade war caused a huge decline in Chinese-listed companies, I also taught him on how to average down with confidence. The trade war is not going to stay forever. Understand this opportunity, understand the business and you can take decisive actions to help yourself. Next step is to find companies outside of China.
C) While options is a good instrument to reduce your capital outlay, I feel that short-term options are risky. You’re almost as good as gambling, wishing for the price to go up within the duration of your contract. There is absolutely nothing wrong with it but it reduces your chance to make sustain money and it is not scalable. As you grow your portfolio, you will find it challenging to devote greater capital using the same strategy (short-term options).
I sell basic puts options on companies that I intend to acquire. Occasionally, I will deploy long-calls (>1.5 years contract period).
D) Dead money.
Dead money refers to your capital in listed companies where there is no growth. The management might be complacent. They might have become the biggest player in their industry already. Their competitive advantage is declining gradually – day after day. In some ways, the business could be stagnant. The management could be contented making the same amount of revenues and profits year in and year out. To have a significant increase in share price, you will need growth in profits and cash flow. This makes a company more valuable. Once you understand what increases the share price, there are many stocks you would avoid. Your money should be growing and not dead.
(Example of a stock where your money is essentially “dead”)
Bonus sharing
In my previous post (click here), I mentioned about doing things slowly. Everyone wants to be Warren Buffett. The irony about investing is if you want to grow your money fast and sustainable, you have to go slow. Be deliberate. Go slow. Think carefully about your stock picks. Form a community, ask for some opinions. The collective intelligence is always superior to an individual’s.
In Daniel Kahneman’s Thinking, Fast and Slow, he explained we have two systems.
System 1 is intuitive, rash and quick thinking and decision making. It is the first few seconds of an impression.
System 2 is slow, analytical, critical thinking manner of making decisions.
While we believe we are in “System 2” mode, we are actually in “System 1” mode. We jump into quick conclusions because they are convenient.
That’s why I encourage people to let time work its magic. Whenever you see a stock opportunity, take your time to understand it before buying it. Ask around, gather opinions, seek for disagreements. Your decisions will become better.
I share my stock ideas with my friends and we often discuss to come up with better conclusions.
Hope you like this week’s post!
PS: Please “LIKE” my Facebook Page @ https://www.facebook.com/kelvestor. You will receive some knowledge which I do not post here.
One Response
[…] Over the years, people know me as someone honest. If I do not know what I am talking about, I will tell you upfront that either I need to find more information or this is not within my area of interest/competence. Through time and other outreach, they’ve trusted me to look through their portfolios. You need to have a portfolio strategy and do not invest your money into stocks that do not produce any value. This is what I termed in my previous article called Dead Money. […]
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