Also in this playlist...
This transcript is automatically generated
And we are gonna switch gears now and talk about -- eight mistakes we mentioned it off the top of the show.
They're both pro and individual investors frequently make and where.
Please rejoined always nice to be joined by fellow cartel but -- -- -- joining me here on the set here's a founder president of alpha theory.
I've joining us from Charlotte today in person.
-- talk to listen -- you basically get you help portfolio managers manage their research -- positioned sizing its right.
Let's talk about -- eight mistakes I think we have a graphic maybe that shows him but we'll we'll start with first things first put much upside and downside that -- professionals everyone has to think about every investment decision to calculate an expected return that's right.
So the the concept is simple it's it's basically you're buying stock for twenty dollars you clearly expect that's worth something more than twenty dollars.
How much more it's -- has a bearing on how much but finished at that asset and -- that you should be thinking about.
How much you make vs how much you could potentially lose right and -- -- -- have a twenty dollar stock you believe is worth forty.
Let's say -- downside is.
You know that's a lot different -- an outside of five dollars -- downside at fifteen dollars and so what we simply ask is that for every investment you calculated -- turn.
How much -- make for -- how much could lose.
And the probability of those things occurring now we have we have and our website that it -- enough -- com slash calculator an example of how our.
I was gonna -- -- gonna ask for that because.
Basically you know a year even formally trained a lot of individual investors don't think they know product or company and they just you know this may be difficult for them to come up with a target -- -- -- -- good idea right right.
That's do -- do a little math homework alongside -- that.
A best ideas -- and it would -- In this seems very self evident since at all on this oh this is fairly straight -- your best ideas should be your largest position if you really like something you should put the most money into.
And not only just -- it because thinking about it and saying that you like it is one thing actually calculating how much he can make vs how much -- the -- What's the best expected return it is -- best idea my largest position.
Is my sixth best idea in my six large positions -- sixteenth best idea my -- part of this.
Arguably you know it's a very difficult thing to ascertain what if you you know this -- be -- core Tenet of everything -- talk about today.
If you calculated expect returns very easy sort of line that things up.
What's my best expect to return is -- my largest position.
But yet you say that 90% of fund managers don't have their.
Five best ideas fashion as -- largest position that's right so this is clearly something that the pros are making a mistake on individuals should should take to heart when their.
Creating their own 401K are there IRA or.
-- -- simple concept that page 35% expect returns better than 25% expect return to better than 15% expect to return.
If he had the Brian James and his and you team he claims much ticket and he you'd asked him issued more than maybe some of the other guys on the -- but.
Position are reliant on this also guessing you're from the sixteenth best idea should you even have sixteen ideas in there if if this is not your full time job and maybe even if it is yet -- mean what you find is what you start calculating expect returns -- How much can -- make.
-- how much tonight please.
You quickly start to realize this very tough to find good positive expect to return ideas and at the end -- the day.
As investors who had aluminum limited that time we can devote to ideas I call this the concept of mental capital you can only -- commitment to capital names your portfolio.
You you have to home that and I'm positive expect return names.
And limit the exposure you have to very small positions would have which have very little impact on your portfolio.
-- can cost you a lot of mental capital now and certainly sixteen positions for even for prose can be tough -- some of these guys have.
It -- -- scores of the -- hunt got positions.
Yet that's exactly right so you know if you if years deluding yourself by having hundreds of positions in your portfolio.
-- -- -- your mental capital but you also dilute.
1% position has a very little impact in your portfolio that may take -- a large portion of human.
And mail to take up some of -- that here task capital as regular -- yeah that's an Iowa you -- -- could be to plant to the best idea exactly if you if you Bedford.
Exactly so if you're.
Missing some of the due diligence should be performed on that 1% position.
And you've missed something clearly would cost you not only mental.
All right well let's go into the good stock paradox here yes so and it goes along with the idea of calculating they expect returns you know that twenty dollar -- and -- before -- we said maybe it's worth forty.
What happens as that stock goes from twenty to forty that's it actually -- -- wanted to do you know it's -- it's currently represents 3% of our portfolio.
As that stop it from twenty to forty it turns into at roughly 6% position.
But what's happened to our expected returns as -- going from twenty to forty.
I expect returns on the -- right so as these stocks don't wanna do -- expect return went down while we increased our exposure that -- And it is that -- happier than the funding popular example would be Apple Stock has done tremendously well for people over at 23 year short timeframe.
You have to reevaluate.
And and -- exactly -- -- you know as things change you know the prospect for apple may have improved over time so my upside may have been you know.
600 before now it's 800 you know things do change fundamentally changing -- to change your price target as.
And you expect returned as things progress but eventually gonna get to a point where there's not as much upside and there's a lot of -- of expect return has decayed.
But you've taken on so much with what that there.
And apple would say right now that it you know there's there's a long ways down -- even just to the 200 day moving average with itself but it -- an uptrend but.
Don't wanna get to parlor they also makes it outsize position in your portfolio as well which is something you need to reevaluate.
Actually that's exactly right now.
-- I mean I think that you sort of brought up an interesting point is that you know that downside the concept of downside it's critically important and that's why we ask for every investor.
For every name in the -- calculate.
How much do I think -- -- make vs how much do I think I could lose.
That is the core Tenet calculating -- -- -- use that expect return to make every decision and you make less emotional decisions and better this.
Yeah deduct funds on with me the last time my -- sitting aside about -- strategies and that's whole other topic that.
Individual investors need to have -- a financial advisor and strong correlating what he's doing.
And let let's move to dealing with losers here yes so I mean is this the it's sort of the opposite of what -- -- -- -- -- -- -- -- -- When things go up it's very easy to ignore them.
When things go down it's very difficult -- -- You know I mean pain of -- is about two and a half times greater than the feeling that -- -- gives you -- similar now.
And and you know.
Good and act and the the good about it is that loss is really have a disproportionately impacting your portfolios that are -- and nagging at a dollar today.
It goes up 50% tomorrow.
That makes the dollar -- it goes down 50% next day.
-- dollars turned and 75 cents although it went up 50% and down to try to think of the -- -- vicinity that I.
Go up a lot more to make back the -- exactly as coherent companhia vehicle portfolios compact vehicle so.
Downside you really want to protect against downside right portfolio that's what's so important not only got much of the debate but also how much you can lose.
So I think that sort of when you're evaluating -- You know there's a strong tendency.
Focus on them but it's important to reevaluate.
Has have fundamentals change -- fundamentals haven't changed it may be an opportunity.
All right what could be an opportunity of Cameron I think so much for joining us here -- generate the full -- report.
On the eight done mistakes that both professional and individual investors make on the website -- theory dot com thanks again for is joining us here I saw this had pleasure to have a -- tar heel and how.
Filter by section