We should stick to low-risk investments

[specuvestor]

what is absolute return strategy?

Answer:
http://www.investopedia.com/terms/a/absolutereturn.asp

In other words, absolute return in finance jargon = return in simple english.

What then is not absolute return? That will include return measurements against a given benchmark or return volatility:
eg. Relative returns (+/- against benchmark)
eg. Risk adjusted returns (eg. statistical alpha, beta, sharpe ratio)

The term Absolute Return, like the term Value Investing, is much easier to define than to practice. Ask 10 different value investors and if you probe them deep enough, have different perspective of what is value investing. Ditto for absolute return

In practice, absolute return focus should be:
1) Fundamentals and catalysts focused... u cannot have one or another and claim to be absolute return becuase focusing on the former can lead to stuck money or value trap, while on the latter could lead to blumont

2) very averse to losses hence capital protection on downside is monitored closely

3) On the other hand tend to take profits so it underperforms markets in sustained upturns

4) Deploy cash only when the risk/reward is good

5) That means statistically speaking it should have much lower volatility

Compare that with traditional long funds, or beta strategies masquerading as absolute return strategies.

The next complexity is how do one define risk? Statistical volatility of share price, or fear of the unknown? Most people confuse the 2 after being brainwashed by Finance 101. Buffett has expressed his disdain for academic definition of risk.

Value and absolute return investors OTOH try to reduce as much unknown as possible about the security, from poring through numbers, history, management capabilities, major shareholder incentives, etc.

Imagine if u can bet a game of rolling a die and see if your number is higher than Mr Market. The advantage is that Mr Market rolls first. If he rolls 5 you can bet very little and show house if he rolls 1. The trick is of course we remove the unknown about the range of outcome on the die. To remove the range of outcome on the stock, you have to understand whether it is a 4 sided die or a 12 sided one, or if the number starts from 1 or may even have zero or negative. In this example we were ASSUMING it is a normal unbiased die. It would be disastrous if Mr Market rolls 1 and we show hand only to realise the die though 6 sided actually range from -3 to 2.

Hard work and experience is the only way to reduce the unknowns.

[gautam]

can u share ur protfolio here Gautam, I can learn from it, I am still a noob in this value investing

Hi viruskbs,

I think learning is a two way process and there is still so much for me to learn and re-learn.

Hmm, from your nickname and your posts, I would guess that you are a healthcare professional, maybe a doctor.

These might be some points to consider before investing:

1) your job needs a lot of dedication and attention. trading is out.

2) you potential earning power. from what I know, as the seniority goes up, the earnings also increase. Especially for certain specialists or sub-subspecialist, tens of K pm should be possible, in the private sector. If you are the studious sort and passing exams is not a difficult task, it might be easier to go along that path. Focus on doing your job well and the job will take care of you.

3) but for the majority of doctors, I think most end up as GP and get stuck in their clinic or in group practices, life can get boring after some time.

4) your own personal interest. I do agree that investing is interesting and it keeps me myself active.


Without going into the exact counters(because I don't like to promote my own counters, rather I prefer to share information on my selection aspects), I could share the sectors which I am in and the ones that I avoid. I am vested in the commerce, construction and financial sector. I avoid technology sector as I feel they are more volatile.

(sorry, some stuff might be mentioned in my earlier posts, but since viruskbs ask me, I decide to include it)


Personally, I would tend to look at companies in those sectors which have been in business for at least the past 10-20years ie long standing history and with characteristics of paying out more dividends over time and no skipped dividends. And I ask myself, if this business is going to be around in the next decade or so. Since I am go long term, increasing dividends are important to me as my initial investment remains the same. At purchase price, a yield of 3-5% is good enough for me, with the potential of increase along the way. I will use the dividends to buy more stocks or to enter another well-researched counter once the amount in a counter exceeds my comfort level. If the company has some assets to unlock, even better. With these measures and with a focused approach of 3-5 stocks, I think doubling of the initial sum in 3-5 years is attainable.

Remember, safety first. Always calculate your downside. For those companies which pays a sustainable 3-5% yield with yoy increase for the past 10-20years, to me, that is a major safety factor which guards against downside. Very often, those companies which possess these characteristics have real solid businesses and the likelihood of it repeating this performance in the next decade is high. And that very yield will take care of upside as well, as I use it to buy more stocks which gives me more dividends over time. So increasing dividends is a two way advantage! I don't look at roe, fcf, ebit, capex, etc. To me, the presence of a decade of raised payouts seem to shout much louder than those abbreviations.



gautam

[Temperament]

what is absolute return strategy?

Answer:
http://www.investopedia.com/terms/a/absolutereturn.asp

In other words, absolute return in finance jargon = return in simple english.

What then is not absolute return? That will include return measurements against a given benchmark or return volatility:
eg. Relative returns (+/- against benchmark)
eg. Risk adjusted returns (eg. statistical alpha, beta, sharpe ratio)

The term Absolute Return, like the term Value Investing, is much easier to define than to practice. Ask 10 different value investors and if you probe them deep enough, have different perspective of what is value investing. Ditto for absolute return

In practice, absolute return focus should be:
1) Fundamentals and catalysts focused... u cannot have one or another and claim to be absolute return becuase focusing on the former can lead to stuck money or value trap, while on the latter could lead to blumont

2) very averse to losses hence capital protection on downside is monitored closely

3) On the other hand tend to take profits so it underperforms markets in sustained upturns

4) Deploy cash only when the risk/reward is good

5) That means statistically speaking it should have much lower volatility

Compare that with traditional long funds, or beta strategies masquerading as absolute return strategies.

The next complexity is how do one define risk? Statistical volatility of share price, or fear of the unknown? Most people confuse the 2 after being brainwashed by Finance 101. Buffett has expressed his disdain for academic definition of risk.

Value and absolute return investors OTOH try to reduce as much unknown as possible about the security, from poring through numbers, history, management capabilities, major shareholder incentives, etc.

Imagine if u can bet a game of rolling a die and see if your number is higher than Mr Market. The advantage is that Mr Market rolls first. If he rolls 5 you can bet very little and show house if he rolls 1. The trick is of course we remove the unknown about the range of outcome on the die. To remove the range of outcome on the stock, you have to understand whether it is a 4 sided die or a 12 sided one, or if the number starts from 1 or may even have zero or negative. In this example we were ASSUMING it is a normal unbiased die. It would be disastrous if Mr Market rolls 1 and we show hand only to realise the die though 6 sided actually range from -3 to 2.

Hard work and experience is the only way to reduce the unknowns.

Wah! Your casino way of analogy very interesting.
The problem is there is ..." there are known knowns; there are things we know that we know.
There are known unknowns; that is to say, there are things that we now know we don't know.
But there are also unknown unknowns – there are things we do not know we don't know."

[viruskbs]

can u share ur protfolio here Gautam, I can learn from it, I am still a noob in this value investing

Hi viruskbs,

I think learning is a two way process and there is still so much for me to learn and re-learn.

Hmm, from your nickname and your posts, I would guess that you are a healthcare professional, maybe a doctor.

These might be some points to consider before investing:

1) your job needs a lot of dedication and attention. trading is out.

2) you potential earning power. from what I know, as the seniority goes up, the earnings also increase. Especially for certain specialists or sub-subspecialist, tens of K pm should be possible, in the private sector. If you are the studious sort and passing exams is not a difficult task, it might be easier to go along that path. Focus on doing your job well and the job will take care of you.

3) but for the majority of doctors, I think most end up as GP and get stuck in their clinic or in group practices, life can get boring after some time.

4) your own personal interest. I do agree that investing is interesting and it keeps me myself active.


Without going into the exact counters(because I don't like to promote my own counters, rather I prefer to share information on my selection aspects), I could share the sectors which I am in and the ones that I avoid. I am vested in the commerce, construction and financial sector. I avoid technology sector as I feel they are more volatile.

(sorry, some stuff might be mentioned in my earlier posts, but since viruskbs ask me, I decide to include it)


Personally, I would tend to look at companies in those sectors which have been in business for at least the past 10-20years ie long standing history and with characteristics of paying out more dividends over time and no skipped dividends. And I ask myself, if this business is going to be around in the next decade or so. Since I am go long term, increasing dividends are important to me as my initial investment remains the same. At purchase price, a yield of 3-5% is good enough for me, with the potential of increase along the way. I will use the dividends to buy more stocks or to enter another well-researched counter once the amount in a counter exceeds my comfort level. If the company has some assets to unlock, even better. With these measures and with a focused approach of 3-5 stocks, I think doubling of the initial sum in 3-5 years is attainable.

Remember, safety first. Always calculate your downside. For those companies which pays a sustainable 3-5% yield with yoy increase for the past 10-20years, to me, that is a major safety factor which guards against downside. Very often, those companies which possess these characteristics have real solid businesses and the likelihood of it repeating this performance in the next decade is high. And that very yield will take care of upside as well, as I use it to buy more stocks which gives me more dividends over time. So increasing dividends is a two way advantage! I don't look at roe, fcf, ebit, capex, etc. To me, the presence of a decade of raised payouts seem to shout much louder than those abbreviations.



gautam

Sensible & simple advise Gautam, But like most things in life Simple things are the most difficult to achieve.

I have had my fair share of ups & downs in last 2 years of my investing journey but most of it has been ad hoc basis & sometimes on brainwaves.
Some of my most thought out investments turned out be loss making & some of of brainwaves turned out to be winners. But yes i need to devise a better system

Thanks for your advise & best of luck with Family business & investments.

Wishing you a happy retirement very soon

[arriyana]

I think there is a general misunderstanding the definition of risk here.

While risk can mean several things, the focus on this was really on the fact that low volatility trumphs high volatility stocks because of the opportunity to reinvest in good rates and compound over long period of time.


[Edited by moderator. No soliciting allowed. You can put your link as signature, the same as others did]

[CityFarmer]

I think there is a general misunderstanding the definition of risk here.

While risk can mean several things, the focus on this was really on the fact that low volatility trumphs high volatility stocks because of the opportunity to reinvest in good rates and compound over long period of time.


[Edited by moderator. No soliciting allowed. You can put your link as signature, the same as others did]

I will add-on with a quote of Warren Buffett from his famous postscript to The Intelligent Investor:

"“The Washington Post Company in 1973 was selling for $80m in the market…now, if the stock had declined even further to a price that made the valuation $40m its beta would have been greater. And to people who think beta measures risk, the cheaper price would have made it look riskier. This is truly Alice in Wonderland.”

To Buffett the volatility was an opportunity, not a risk.

[specuvestor]

Wah! Your casino way of analogy very interesting.
The problem is there is ..." there are known knowns; there are things we know that we know.
There are known unknowns; that is to say, there are things that we now know we don't know.
But there are also unknown unknowns – there are things we do not know we don't know."

Actually my inspiration of the "die" analogy came from what I deemed is a design flaw in the Cashflow Game

Unknown unknowns is a good conceptual idea to remind us that we do not know everything, or assume we can cover every base, which some people seemed to think technology and human ingenuity can achieve.

Other than that IMHO idea of unknown unknowns are quite redundant in decision making and execution process.

I will add-on with a quote of Warren Buffett from his famous postscript to The Intelligent Investor:

"“The Washington Post Company in 1973 was selling for $80m in the market…now, if the stock had declined even further to a price that made the valuation $40m its beta would have been greater. And to people who think beta measures risk, the cheaper price would have made it look riskier. This is truly Alice in Wonderland.”

To Buffett the volatility was an opportunity, not a risk.

IMHO I think Buffett is saying price volatility has NOTHING to do with risk. The margin of safety rest with the absolute price of the company, not the price deviations. Volatility measures BOTH upside and downside deviations.

I agree and the issue is that academics needed to have a risk measure to construct their theories and models. And based on efficient and perfect market, price is the best estimator. So volatility of price became best measure of risk. Studies have shown emerging stocks delivered far higher absolute return than their models predict, so in order to be consistent with their dogma, they assume emerging stocks should have higher risk inherently, rather than adjust their dogma.

Ditto for Buffett's portfolio. By extension he must be leveraged, high risk, high beta, statistical aberration, lucky etc.

These are essentially the fundamental disagreement between value investors (and most practitioners) and academics.

[opmi]

I think there is a general misunderstanding the definition of risk here.

While risk can mean several things, the focus on this was really on the fact that low volatility trumphs high volatility stocks because of the opportunity to reinvest in good rates and compound over long period of time.


[Edited by moderator. No soliciting allowed. You can put your link as signature, the same as others did]

I will add-on with a quote of Warren Buffett from his famous postscript to The Intelligent Investor:

"“The Washington Post Company in 1973 was selling for $80m in the market…now, if the stock had declined even further to a price that made the valuation $40m its beta would have been greater. And to people who think beta measures risk, the cheaper price would have made it look riskier. This is truly Alice in Wonderland.”

To Buffett the volatility was an opportunity, not a risk.

so in these Washington-Post-type situations, would you buy because it is cheap or must have a catalyst (to prevent value trap situation)?

[Temperament]

Wah! Your casino way of analogy very interesting.
The problem is there is ..." there are known knowns; there are things we know that we know.
There are known unknowns; that is to say, there are things that we now know we don't know.
But there are also unknown unknowns – there are things we do not know we don't know."

Actually my inspiration of the "die" analogy came from what I deemed is a design flaw in the Cashflow Game

Unknown unknowns is a good conceptual idea to remind us that we do not know everything, or assume we can cover every base, which some people seemed to think technology and human ingenuity can achieve.

Other than that IMHO idea of unknown unknowns are quite redundant in decision making and execution process.

Very good thinking.
After all who can do anything with something worse than"Black Swan". If we have to take unknown unknowns into our decision, then most probably our decision is no decision(status quo).imho.

[Temperament]

I think there is a general misunderstanding the definition of risk here.

While risk can mean several things, the focus on this was really on the fact that low volatility trumphs high volatility stocks because of the opportunity to reinvest in good rates and compound over long period of time.


[Edited by moderator. No soliciting allowed. You can put your link as signature, the same as others did]

I will add-on with a quote of Warren Buffett from his famous postscript to The Intelligent Investor:

"“The Washington Post Company in 1973 was selling for $80m in the market…now, if the stock had declined even further to a price that made the valuation $40m its beta would have been greater. And to people who think beta measures risk, the cheaper price would have made it look riskier. This is truly Alice in Wonderland.”

To Buffett the volatility was an opportunity, not a risk.

so in these Washington-Post-type situations, would you buy because it is cheap or must have a catalyst (to prevent value trap situation)?

Who can be sure it's really cheap or not? And why it's cheap? Only WB knows?
OPMI like me can't be sure. So classic investment books' always advise never Pyramid Down only Pyramid Up if you want to buy.
The problem is can anyone tell when to start Pyramid up?

Actually in a way, Pyramid Down, is more suitable for traders who shorts (and buy) all the way down during a Bear market. That's why "normal" investors always like to blame the shorty traders. Ha! Ha!
But actually without them, value investors hardly can find good MOS stocks in the market.
In other words, we need all type of players in the market, if not the market has died long, long ago.
So please respect each others. We really need each others to function in the market.
Me? What type of investor? i have said i am already become a "Rojak Investor"
My apology if i bore you reading this.