#3: The Six Commandments of Value Investing (Part 2)


EDITOR’S NOTE: Although it has been some time since speaking live with busy colleague Vitaliy Katsenelson CFA, I review his internet material frequently and appreciate this ME-P series contribution. I encourage all ME-P readers to do the same and consider his value investing insights carefully.

By Vitaliy Katsenelson, CFA



3. The market is there to serve you, not the other way around (Part 2)

First, we increase it by subtraction, by shrinking our universe to stocks that lie within both our IQ and EQ comfort zones.

We are very careful about stocks or industries where either our IQ or EQ is questionable. For instance, we have recognized that our IQ is low when it comes to non-revenue-generating, single-future-product biotech companies. We have zero analytical insights into this business. None.

We find that our EQ is fairly low when it comes to complex financial businesses. We don’t invest in any.

The beauty of investing is that we only need 20-30 stocks, and we get to choose which problems we want to tackle. We usually like easy problems.

In other professions, that is a luxury you don’t have. If you are an orthopedic surgeon, you are not going to tell your patient that you only operate on right knees because the last time out you had a bad experience with a left knee.

Second, we look for areas where our EQ is highest.

Over the years, we’ve discovered that our EQ is much higher with higher-quality companies. Therefore, for every company in our portfolio or on our watch list, we quantify quality. And with very rare exceptions, we own only very-high-quality companies.

We quantify quality for another reason, too. As value investors, we are innately focused on a margin of safety. We found that if you don’t quantify quality, it is very easy to lower your standards when you reach for value, especially in a very expensive market.

We went a step further: Quality, for us, is a filter. If a company doesn’t pass its quality test, it is dead to us. It may have high growth prospects, pay high dividends, and it may sell at a mouthwatering valuation. But if it failed our quality test, it is still dead to us.

By quantifying quality, we can keep the overall quality of our portfolio very high. Just as importantly, we can keep our EQ high, too.

By maximizing both our IQ and EQ for individual stocks, we maximize the Total IQ of the portfolio. Thus, when we get punched in the mouth, we are able to rationally reanalyze a stock and may decide to buy more, do nothing, or sell.

We cautiously guard our EQ and long-term horizon. We don’t let the outside world come unchecked into our daily life. For instance, we spend little time watching business TV during the day, as we find it to be toxic to our time horizon and to our investor (as opposed to trader) mentality. For the same reason, we also don’t look at our portfolio more than twice a day.

Finally, and this applies to professional investors only, you need to have clients who will allow you to maintain your EQ. Following the Six Commandments is practically impossible if your clients don’t believe in them.

Here’s a real example:

On my recent purchase of Apple stock coming off a one year top and heading down.

On January 25th, 2013 at 3:55 pm I got this email from a client, David:

David and I talked on the phone, and I tried to explain our logic. I’m not going to bore you with that, but it was along the lines of “incredible brand, high recurrence of revenues, great management, a quarter of market capitalization in cash; we tried to kill it (we lowered its margins, cut sales) and we simply couldn’t.”

I told David that the price of the stock is an opinion of value, not a final verdict – he didn’t care. He’d talked to his neighbor who was a famous technician, who said, “Apple is going down.” To which my response was, “If it declines that will be a blessing – the company is buying back stock, and we are going to buy more.”

The “technician” was right: Apple declined from $455 ($65 split-adjusted), our initial purchase price, to $395 ($56 split-adjusted). We bought more Apple as it fell. This encounter also made me realize how this negative psychology around Apple was creating an opportunity in Apple, and I wrote a two-part article describing the aforementioned incident as evidence of that.

What I did not say in that article is that we had to amicably part ways with David. I tried very hard to communicate the Six Commandments to him, but he was not willing to (re)learn. Keeping him as a client would erode my overall EQ and would have impacted other clients.

Your mental state is as important as your ability to analyze a company’s balance sheet or your ability to value the business. You may spend days sharpening your investment process, your analytical skills; but in the end, if your EQ is low nothing else will matter.

CITE: https://www.r2library.com/Resource/Title/082610254



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The Active v. Passive Investing Dichotomy

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The Controversy Continues

LINK: http://www.CertifiedMedicalPlanner.org

[By Amaury S. Cifuentes CFP® CMP®]

Physician and all investors are often overloaded with information regarding this debate, and many advisors differ in the conclusion of which strategy is best.

Stock Picking

Stock picking is typically a waist of time and few investors or advisors demonstrate the constant ability in picking winning stocks. Timing the market also becomes difficult and typically has negative effects in a portfolio. Investors will also find that they will usually have very little luck finding money mangers that can consistently out perform the market. Investors over a long period of investing time horizon would benefit from passive investing vs. active trading, with some exceptions.

Active Investors

Active investors spend time analyzing stocks or mutual funds based on a mismatch of the price relative to its value. In an efficient market, there is little or no mismatch between the current price and the true value of the investment. Also, real cost and expenses of active management are rarely calculated;  some consider the stock market a zero sum game, if the total market returns eleven percent then the investors must deduct the cost of the transaction, which would lower their return relative to the market.

Mutual Fund Performance

For example, Mark Carhart’s comprehensive study of 1,892 mutual funds title “On Persistence in Mutual Fund Performance” showed that on average mutual fund manager under performs by 1.8% to their relative index.  In addition, William Sharpe Nobel laureate article “The Arithmetic of Active Management” stated that after cost, the return of active management dollars would be less than passive dollars.

Market Timing

Timing of markets is also very difficult. Timing the market can be defined by moving your asset from risky to non risky assets before negative events happen. The Random Walk Theory basically states that there are no patterns in the stock market prices. Basically, information moves the markets and information is random, so logic would suggest that timing the markets effectively is futile. Many reports demonstrate this effect, for example, a report form Javier Estrada, a finance professor at IESE Business School in Barcelona, Spain. He studied the DJIA form 1900-2008 and concluded that if you subtracted the ten best days from the market two thirds of the cumulative gains would disappear (10/29694 or .03%), almost impossible to predict even by the most astute investors. Much more extensive research showing that market timing does not work, Wei Jiang paper “A Nonparametric Test of Market Timing” concluded that timing ability on average is negative. There are countless of studies showing that there is no evidence that timing the markets can produce superior returns.


Investing Difficulties Continue

To make thing even more difficult, investors that seek profession help cannot guarantee that the active managers they hire can consistently over long period of time outperform their benchmarks.  Obviously, it is evident that past performance is no indication of future results as advertised by all financial institution, and most active managers who outperform their bench market do not do consistently over long periods of time. John Boggle’s comprehensive study in 1992 of the Forbes Honor Roll title “Selecting Equity Mutual Funds” concluded that after commissions loads were taken into account the honor roll under performed the market between 1974 and 1990 by a difference of 193.75% cumulative.

Of Professor Burton Malkiel

Furthermore, investors over long periods of time will find that stock picking, timing the market and selecting active managers do not produce superior returns. John Stossel of ABC’s 20/20 interview Professor Burton Malkiel of Princeton University and stated in the interview that “All the information an analyst can learn about a company, from balance sheets to marketing material, is already built into the stock price, because all of the other thousands of analysts have the same information. What they don’t have is the knowledge that will move the stock, knowledge such as a news event, which is unpredictable and impossible to forecast.”


Physicians and all investors may be better off concentrating on asset allocation, picking low cost investment, deciding on tactical or strategic rebalancing and implementing models like the three factor model as pioneered by Professor Eugene Fama and Professor Kenneth French in lieu active management.


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Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™


METAVERSE: Healthcare Transformation -OR- Not?

By Bertalan Meskó, MD PhD
The Medical Futurist




If you’ve browsed the internet in the last couple of months, the term ‘metaverse’ is likely to have been thrown at you at least once. Facebook rebranded itself after the concept and other companies are adopting the metaverse with their own spin; betting heavily that it will be the next iteration of the internet where we will work and play alike.

It was time to dive into what the metaverse could mean to delivering healthcare.





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