The DIY Investing Podcast – Details, episodes & analysis

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• Delayed Gratification
• Time Horizon
• Personal Responsbility
• Compounding

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• Second-Order Effects
• Mean Reversion
• Factor Investing

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Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Show Outline

• Selling Series
  • A lot of time is spent on buying stocks. Yet, almost just as important, if not more is knowing when to sell stocks. 
  • I find this area relatively underexplored, so I want to begin a long-term series on selling stocks from the framework of a value investor. 
  • Previously talked about selling in a single episode on Ep. 106
• Today’s focus: Strategy matters
  • There is no one-size fits all approach
  • How you buy stocks will influence how you sell them
  • Your portfolio allocation strategy will matter
  • THe number of stocks you review in a year will matter
  • Whether you plan to own a cash position or not will matter.
• Excluded from this series:
  • Won’t be discussing momentum investing
  • Won’t be discussing trading or technical analysis investing (except as a marginal part of value investing when relevant)
  • Entire focus assumes that you are a value investor of some sort (whether deep value, compounder, graham value, quality, etc…)
• Deep Value:
  • Buy at 2/3rds of value and sell at “full price”
• Compounders:
  • You want to hold for a long-time. 
  • Sell when compounding ends, plateaus or you were wrong
• Net-Nets
  • Hold a year then reassess
• Waterfall Stocks: 
  • Hold so long as dividend yield is sufficient to provide target return
• Dividend Growth Investing:
  • Buy companies that pay dividends and grow them and sell them when they cut or eliminate their dividends
• Buy and Hold
  • “Never sell”
  • Works for a subset of stocks
  • Tends to overlap well with compounders and Dividend Growth investing

• Scuttlebutt
• Quality Investing
• Capital Stack
• Dark Stocks

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Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

The full show notes for this episode are available at https://www.diyinvesting.org/Episode127

• Capital Stack:
  • Clean is better. Ideally only common stock.
  • No lending to insiders or other self dealing.
  • Has management issued themselves options in the past? Were the prices reasonable? How much of the company does this represent?
  • "Overdue or delayed payment to insiders."
    • Red flag. This basically menas the company is in default putting your equity at risk. Can't even really mount a proxy fight because the management could force the company into bankruptcy.
• Filings:
  
  • Current or pink limited on filings with the SEC
  • I want to see financials. (They don't have to be audited)
  • Some sort of management commentary is nice. (Shows shareholder friendliness)
• Business Model:
  • Change
    • New products
    • New management
    • Growth of some kind
• Asset Base:
  • Ideally assts to cover the market cap (providing a margin of safety)
• Earnings Power:
  • Profitable (every year for 10 years, no more than one loss in 10 years)

Overlooked companies are often cheap. Therefore, scuttlebutt on overlooked companies needs to focus on filtering for the quality of the business. High-quality and cheap makes for a great stock. Look for abnormal signs of positive potential. 

• Liquidity
• Risk
• Insurance
• First Principles

If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. 

This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

The full show notes for this episode are available at https://www.diyinvesting.org/Episode37

• Merriam Webster has a few definitions for us:
  • Possibility of Loss or Injury
  • Someone or something that creates or suggests a hazard
  • The chance of loss or the probability of loss
  • The chance that an investment (such as a stock or commodity) will lose value
• What this should suggest to you is that there are many different types of risk. 
• This is especially true for investing risk. Each type deserves its own discussion and it would be a mistake to believe that 
• Two Key Elements to risk:
  1. Uncertainty,
  2. Negative Event

• Personal
  • Value of an Emergency Fund
  • Value of Life Insurance
• Investment
  • Liquidity Risk - Time to receive your money back in cash
  • More liquid stocks reduce liquidity risk

• Personal
  • Large sums of cash provide flexibility
    • Move across the country
    • Make investments
    • Get a good deal on a car
• Investment
  • Liquidity Opportunity - Less liquid stocks tend to have higher returns than high liquidity stocks

• Time-Bound: On the personal side, liquidity is important when you need to spend a large sum of money. Can either be planned for or it is an emergency.
• When you want to sell: On the investment side, liquidity is important only when you sell a stock. You don't really care about liquidity when you are purchasing a stock. The key point is that you want to be able to sell a stock at a price close to its fair value at the time you determine you need to sell. 
  • If done optimally, you can buy illiquid stocks during your buying period and when yous ell them, they will have transitioned into liquid stocks. 

More liquid stocks are better than less liquid stocks because they reduce liquidity risk. 

• "All else Equal" Considerations:
  • Unfortunately, this statement is only true when we can rely on everything else being equal. 
  • In practice, less liquid stocks tend to have higher returns. 
  • Therefore, you really have to make a tradeoff. Would you rather have low liquidity and high returns or high liquidity and low returns?
  • The reason this first principles still holds true is that there may be circumstances where high liquidity can offer high potential returns. When that occurs, it would be preferable to low liquidity options. 

Liquidity is a topic that offers both risks and opportunities. Lack of liquidity is fraught with risk, especially in your personal life. However, a lack of liquidity can offer many opportunities when it comes to investment potential. You should manage your liquidity risk across all spectrums of your life such that you can receive optimal returns with minimal risk of a total loss of principal.

• Velocity - Direction matters
• Relative vs Absolute measures
• Volatility / Beta
• Risk

If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. 

This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

The full show notes for this episode are available at https://www.diyinvesting.org/Episode36

• Merriam Webster has a few definitions for us:
  • Possibility of Loss or Injury
  • Someone or something that creates or suggests a hazard
  • The chance of loss or the probability of loss
  • The chance that an investment (such as a stock or commodity) will lose value
• What this should suggest to you is that there are many different types of risk. 
• This is especially true for investing risk. Each type deserves its own discussion and it would be a mistake to believe that 
• Two Key Elements to risk:
  1. Uncertainty,
  2. Negative Event

• Problems: the definition of volatility is based solely on the size of fluctuation. 
• The more volatile the stock, the riskier the stock. However, this fails to account for only negative volatility. Instead, you can calculate high volatility for a stock that goes up quickly. This would not be a risk though. High returns are the exact opposite of risk. 
• Often used as a relative measure. Relative measures are not useful to an individual investor, because all they care about is their own personal results. The focus should be on absolute results. 

• Focus is only on the downside 
• Highlights the importance of price fluctuations being short-term in nature
• Price relative to intrinsic value is what matters
• Price relative to your purchase price is important solely for the psychological harm it can cause if you lack the proper temperament for long-term investing. 
• Unavoidable - present in all investments
• Can be mitigated by only purchasing stocks below their intrinsic value. Purchasing overvalued companies will increase your price risk. 

Risk involves two key elements: Uncertainty and Negative Events. Volatility and Beta are false measures of investments and make key errors in their assumptions. They measure both upside and downside price movements as risk and they equate stock prices to stock values. You should ignore calculated measures of volatility in your investment decisions. Price risk is the key focus. Price risk is the potential for short-term downside fluctuations in stock price below the intrinsic value of the company and below your purchase price. You can mitigate price risk by only buying companies below their calculated intrinsic value. 

• Reversion to the Mean
• Moats
• First Principles

If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience. 

This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

The full show notes for this episode are available at https://www.diyinvesting.org/Episode35

• To clarify: I don’t mean compound annual return, but total return. 
• Would you rather earn a total of 10% return in one year or in ten years? 
• When phrased in this manner, the answer should be obvious. (One year)
• The shorter the holding period, the better, all else equal. 
• When you hold total return constant, you want to earn that return in the shortest period possible. 

• Long-term thinking is critical for successful investing
• Difference between CAGR and Total Return
• The methods by which you earn a high long-term CAGR might be different from how you achieve a short-term high total return
• In the end, the long-term is made up of many short-term periods
• Value vs Growth Investing perhaps?
  • I consider all investing to be value investing
  • However, traditional Benjamin Graham value investing was the result of harnessing the power of mean reversion to earn high total returns over short time frames of 3-5 years. 
    • Net-Nets strategy
    • Buying at a 30-35% discount to fair value and selling when the stock price reaches fair value after a 50% gain. (The shorter time period over which this occurs, the most profitable the investment)
  • Warren Buffett is an advocate of buy-and-hold and his returns are driven by long-term growth investments in earnings over time.
    • Focus on High Quality
    • The longer that high profitable growth of earnings per share, the higher the returns.
    • Returns are driven by moats and high ROIIC.

Shorter holding periods for the same total return result in better investments. The key question: Is the brevity of your holding period within your control. I would argue it is NOT. While reversion to the mean is powerful and can be a huge driver of high returns, you should always make investments with a long-term time horizon. As Warren Buffett would advise, don’t invest in a company if you aren’t willing to hold it for ten years. 

• Potential Energy vs Kinetic Energy
• Leverage
• All Else Equal
• First Principles

If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience. 

This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

The full show notes for this episode are available at https://www.diyinvesting.org/Episode34

• There is a concept in physics called potential energy and kinetic energy. 
• The basic explanation is that potential energy is the energy available in an object to perform work. Meanwhile, kinetic energy is a measure of the current energy an object possesses due to its motion. 
• Example: Water held in a lake behind a dam. (A lot of potential energy) This energy can be used to produce electricity if the water is allowed to flow through turbines at the bottom of the dam. Yet, once the water is released, the potential energy no longer exists. Instead, it has been converted to kinetic energy, creating motion, and electricity. You’ve used up potential future gain for the benefit of the present. 

• A company without debt is like water held in a lake behind a dam. It has a lot of potential energy. When a company has no debt, there is the possibility of adding debt in the future in order to increase earnings and therefore returns. 
• However, a company with large amounts of debt is like water already past the dam. There is no longer any potential to quickly increase earnings by taking on additional debt. Instead, you have to “PAY” cash to reduce debt if you’d like to gain additional potential energy in the future.
  • In our water example, this would be analogous to pumping the water back uphill to put it behind the dam again. 

• Companies without debt or liabilities cannot go bankrupt. 
• However, the presence of debt creates the possibility of bankruptcy. 
• When you own companies with medium or high levels of debt, you are taking on the risk of permanent wipeout of your capital due to bankruptcy. 
• While the additional return is possible due to leverage, your risk is inherently higher.

• The value of a company is the net present value of future cash flows available to be paid to you in dividends. 
• If a company has debt, any earnings in the future must first be used to make interest and principal payments on the debt, before you can receive any dividends. 
• By owning companies that use debt to earn higher returns, you are allowing debt holders to have the first claim on future cash flows. 

• Debt creates leverage - While leverage can be dangerous it can also provide benefits. It is possible that the leveraging effects of debt can allow a company to increase its returns. 
  • This is why I use the term “all else equal.” You need to compare apples to apples. 
  • If a company provides 10% returns with no debt, this is inherently better than a company that provides 10% returns while holding large amounts of debt. The debt-free company is lower risk. 
  • This investing first principle doesn’t apply if you are trying to compare a 10% returning debt-free company to a 20% returning high debt company. That’s not a fair comparison. 

Companies without debt are better investments than companies with debt, all else equal. While debt can provide the benefits of leverage, you must never forget the risks. If debt-free companies offer returns that exceed your discount rate, then you should always prefer them over debt-laden companies.

• Margin of Safety
• Price vs Value
• Time Value of Money
• All Else Equal
• First Principles

If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience. 

This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

The full show notes for this episode are available at https://www.diyinvesting.org/Episode33

1. The margin of safety is higher (What happens if you are wrong)
2. Potential Return is higher (What happens if you are right)

• Value investing, at its core, is all about purchasing assets for less than they are worth. 
• Price represents what you pay
• Value is what you receive
• Obviously, the lower the price you pay, the better the outcome. (Regardless of the value you actually receive)

• Time Value of Money - You can’t directly compare the stock prices across time. (ie. today versus the stock price one year ago.) It’s quite possible that it makes sense to pay a higher price today than it did a year ago if the value has increased. 
• Variable Business Quality - Some businesses are of higher quality than others. You can’t directly compare one company’s P/E ratio to that of another. A high-quality business might be worth 20x P/E while another business is only worth 10x P/E. It would be a mistake to assume the 10x P/E company is a better deal. 
• Variable Growth Rates - Some businesses have the capability of profitably growing their earnings, and others do not. Those with profitable and sustainable growth in the future are going to be worth more. You can’t directly compare P/E ratio’s in that circumstance. 
• Industry Differences - some industries are more attractive than others

The scope of this first principle is limited to simply understanding that your goal is to purchase the highest amount of present and future earnings possible. The way you do this is by paying a low price for those earnings.

• Zero Based Thinking
• Negative Carry
• Opportunity Cost
• Hidden Costs

If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience. 

This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

The full show notes for this episode are available at https://www.diyinvesting.org/Episode32

• Any gains by one participant must be offset with losses by other participants.
• The sum total of all value for all participants is equal to zero

• Stocks as a whole provide a positive expected value
  • Shorting stocks is the opposite. Now you have a negative expected value. 
• Further complicated by the issue of "negative carry."
  • When you purchase stock in a company the only cost of holding it, is an opportunity cost. What you could have spent the money on or what alternative investments you could have chosen. This opportunity cost is an implicit or hidden cost.
  • Shorting is different.
  • The act of shorting a stock involves two key explicit costs, both of which create negative carry.
    • Borrowing Costs
    • Dividend Payments

• Time Horizon Matters a lot:
  • You can be right and still lose money
• Everyone is working against you. CEO, Employees, debt markets, other investors, etc...
• The economy generally gets better over time. You're fighting the tide.
• Like gambling in a casino
  • "The House Always Wins."

• Stocks for the Long Run by Jeremy Siegel:
  • Buy on Amazon
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If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience. 

This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast. 

The full show notes for this episode are available at https://www.diyinvesting.org/Episode31

• Any gains by one participant must be offset with losses by other participants.
• The sum total of all value for all participants is equal to zero

• Stocks as a whole don't provide a positive expected value
• You don’t have to “take” from others in order to receive. When companies create value this is “new value.” The economy grows, everyone becomes wealthier.

• The thought is that half of the money must underperform an index, and half of the money can outperform an index. The thought, therefore, is that buying stocks is zero-sum.
• Where is the fallacy?
  • Index’s have historically had a positive expected value. If an index returns 10%, even if half of the money receives 8%, and half receives 12%, both parties are successful in growing their wealth.
  • One party doesn’t lose 10% so that the index can grow 10%. That’s not how this works.
  • Instead, stock ownership is best described as a positive sum game.

• A positive sum game is where the total value received of all participants is greater than zero.
• This means that you can be successful without worrying about the success of others.
• Frees you from the need for comparison, jealousy, or envy.
  
  • Just because someone else made money, doesn’t mean you lose money.
• Takeaway: You can ignore index funds and focus on your own personal goals
• Takeaway: You can ignore macroeconomic trends. As long as your fundamental analysis of a company is correct, the broader economic picture is irrelevant.

• Companies are full of employees who go to work each and every day trying to find a way to make your profits grow.
• While this sometimes involves taking market share from other companies, the greatest gains come from innovation, improved efficiencies, new markets, and new products.
• This raises the standard of living for all and the overall economic pie for the economy.