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Member
quote: Originally posted by Halebop
In my opinion the risk free rate of return is far too low for any company. By its nature, equity investing is not risk free and requires higher long term returns.
Hold on, I'm confused, weren't you the guy that told me there is no relationship between risk and return. While I agree with your statements that people require higher long term return, the basis for them requiring this is surely that there is (or at very least they think there should be) a payback in return for greater risk. Maybe I've misunderstood your position?
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quote: Originally posted by stevieb
Hold on, I'm confused
Yes you are...
quote: Originally posted by stevieb
Maybe I've misunderstood your position?
...Yes you have...
quote: Originally posted by stevieb
...weren't you the guy that told me there is no relationship between risk and return. While I agree with your statements that people require higher long term return, the basis for them requiring this is surely that there is (or at very least they think there should be) a payback in return for greater risk. Maybe I've misunderstood your position?
When valuing a company, if I use a higher discount rate, I achieve a lower valuation. If I achieve a lower valuation and then apply a 50% margin of error on top - I am only buying companies for much less than their intrinsic value. Being valued much less than intrinsic has nothing to do with risk. The qualitative factors verify risk, not the quantitative. A discount rate has nothing to do with risk. It's purely subjective. I don't actually see treasuries / government stock as being "risk free" yet they are offered referred to as such (or at least as the nearest proxy). But I do see excess risk in valuing a risky asset class at a "risk free" rate of return.
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Member
quote: Originally posted by Halebop
quote: Originally posted by stevieb
Hold on, I'm confused
Yes you are...
quote: Originally posted by stevieb
Maybe I've misunderstood your position?
...Yes you have...
quote: Originally posted by stevieb
...weren't you the guy that told me there is no relationship between risk and return. While I agree with your statements that people require higher long term return, the basis for them requiring this is surely that there is (or at very least they think there should be) a payback in return for greater risk. Maybe I've misunderstood your position?
When valuing a company, if I use a higher discount rate, I achieve a lower valuation. If I achieve a lower valuation and then apply a 50% margin of error on top - I am only buying companies for much less than their intrinsic value. Being valued much less than intrinsic has nothing to do with risk. The qualitative factors verify risk, not the quantitative. A discount rate has nothing to do with risk. It's purely subjective. I don't actually see treasuries / government stock as being "risk free" yet they are offered referred to as such (or at least as the nearest proxy). But I do see excess risk in valuing a risky asset class at a "risk free" rate of return.
It wasn't the discussion of valuation I was confused about, my points is why bother assessing risk at all (valuation I can understand) if you don't see any relationship between risk and return. For someone who does not believe there is any relationship you mention the word risk and how you would assess a hell of a lot in your posts.
If you don't believe in the relationship I don't understand why you bother.
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quote: Originally posted by stevieb
It wasn't the discussion of valuation I was confused about, my points is why bother assessing risk at all (valuation I can understand) if you don't see any relationship between risk and return. For someone who does not believe there is any relationship you mention the word risk and how you would assess a hell of a lot in your posts.
If you don't believe in the relationship I don't understand why you bother.
I was talking about the divorce between valuation and risk and risk and return. The divorce comes through (or at least is exploited by) the process of qualitative risk management, not the other way round.
Risk and return do not correlate. If they correlated then the most speculative investments [u]on average</u> would make the biggest profits. But bar a few extraneous results in the distribution curve which everyone likes to focus on, big risks tend to result in big losses.
If I manage my risk in terms of the quality of the investment and buy only when the shares are trading at a substantial discount to a subjective valuation criteria, then I reduce the risk of loss but maintain the typical upside of share investing. Again, risk and reward do not correlate. The qualitative criteria ensure I give more obvious duds a miss and focus on the good stuff and the valuation criteria ensure I buy cheaply more often. My returns are exaggerated by avoiding too many big losses yet I have taken the "same" equity risk as all share investors. The magic of less losers by avoiding risks is that my winners don't even need to outperform by much to make me look good. The qualitative measures also ensure the winners have a degree of consistency, which becomes more important if you hold through those inevitable down years.
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quote: Originally posted by beacon
Thanks Halebop.
You're Welcome! (Not sure I'm appreciated on all fronts [])
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Member
quote: Originally posted by Halebop
Risk and return do not correlate. If they correlated then the most speculative investments [u]on average</u> would make the biggest profits.
Aha, but correlation does not have to be a positive correlation. Negative correlation is still a correlation.
quote:
big risks tend to result in big losses.
That's a correlation.
quote:
From http://economics.about.com/cs/econom...orrelation.htm
Definition of Correlation”
Glossary
from Econterms
Definition: Two random variables are positively correlated if high values of one are likely to be associated with high values of the other. They are negatively correlated if high values of one are likely to be associated with low values of the other.
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Member
quote: Originally posted by Phaedrus
Mr Market, You say you would prefer to hold stocks forever. So would I! We both know that this is not a good idea though. The bluest blue-chip does not keep going up for ever. I have a lot of sympathy and understanding for your approach. In fact, I used a very similar system for over 10 years when I first started out. I was happy enough with the "buy" side, but gradually became increasingly dissatisfied with the fact that I was giving a lot of my profits back to the market by holding stocks too long. The crash of '87 was the last straw. I lost an awful lot of money and it took me over 2 years to recover. The lesson that I had to be a lot more active in order to protect my capital and profits was rammed home. Never, ever again, would I pursue a "buy and hold" type of system.
I'm sorry you got burned in '87 Phaedrus. Even though it didn't work for you doesn't mean it's not a valid investing strategy. As I said before one should look at selling if one perceives extreme overvaluing by the markets. For whatever reason you did not see the overvaluation in '87. Did you know that Warren Buffet once liquidated his entire portfolio (I think it was in the 60's) because he was uncomfortable with the extrememly high market valuations. The market crashed soon after.
In any case, you have now found a system that works for you, and you are right to take advantage of it.
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quote: Originally posted by stevieb
Aha, but correlation does not have to be a positive correlation. Negative correlation is still a correlation.
Great thought but I referred to correlation, which is neither positive nor negative - just trendable. If you can show me the correlation, positive or negative, you would probably earn a Nobel prize in economics! Get to it, the prize and sharemarket profits are worth more than any argument of semantics with me!
While its a commonly "accepted" concept that risk and reward go hand in hand, there is no data or model that backs that up. Risk and reward are a product of market conditions and nothing else. My apparent genius today can be disproved tomorrow with catastrophic loss. Even something as low yielding and superficially low risk as a bank deposit can end in tears if the banks face systemic loss.
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Member
quote: Originally posted by Mr_Market
quote: Originally posted by Phaedrus
Mr Market, You say you would prefer to hold stocks forever. So would I! We both know that this is not a good idea though. The bluest blue-chip does not keep going up for ever. I have a lot of sympathy and understanding for your approach. In fact, I used a very similar system for over 10 years when I first started out. I was happy enough with the "buy" side, but gradually became increasingly dissatisfied with the fact that I was giving a lot of my profits back to the market by holding stocks too long. The crash of '87 was the last straw. I lost an awful lot of money and it took me over 2 years to recover. The lesson that I had to be a lot more active in order to protect my capital and profits was rammed home. Never, ever again, would I pursue a "buy and hold" type of system.
I'm sorry you got burned in '87 Phaedrus. Even though it didn't work for you doesn't mean it's not a valid investing strategy. As I said before one should look at selling if one perceives extreme overvaluing by the markets. For whatever reason you did not see the overvaluation in '87. Did you know that Warren Buffet once liquidated his entire portfolio (I think it was in the 60's) because he was uncomfortable with the extrememly high market valuations. The market crashed soon after.
In any case, you have now found a system that works for you, and you are right to take advantage of it.
Phaedrus, I too sympathise with your '87 losses as I also dropped a bundle of cash in that debacle. Remember portfolio gems like Equiticorp, Chase, Ariadne, Judge, Rainbow, Renouf? However, that experience prompted me to be even more rigorous in my value investment criteria. I want to be convinced that a company has a leading (or niche) position in an attractive market, has an able management and is able to sustain some sort of competitive advantage over an extended period.
However, I (or Mr Market I am sure) am not suggesting anyone should buy stocks and then go and stick our heads in the sand and ignore what is happening in the market. Every company has missteps, loses its competitive advantage or of course the market as a whole drives prices to irrational levels. In all these occasions we should be strong enough to make a decision to sell a share (even if we have held it for a long time) to protect our capital.
However, I think Mr Market's point stands...buy low enough to withstand the occasional downswings in a long term upwards trend. You raise the example of HBY, which I actually still hold - it clearly has been affected by a feeling that it has overexposed itself to retail at the same time as retail is perceived to be in a general down-cycle. However, I have not lost faith in management and since I bought this stock at $2.08 in 2001 at the current share price that is effectively still a 17% p.a. compound growth rate in my capital since I bought (excluding divis). I still believe that company can generate superior growth in the future which is why I continue to hold...until I am proven wrong.
Your example of Coca Cola is also a relevant one. However, even in this example if you had bought 10 years ago at $15 you would still have made a compound return approaching 12% p.a. based on a share price of $45 today. Everything depends on the time period during which you hold. Now that he is so big Warren Buffet doesn't have the luxury (as most of us do) of being able to get into and out of stocks in a short time horizon. His approach with Coca Cola will probably be more likely to try and influence the strategic direction of the management through his large holding rather th
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