Investing 101
INVEST – On investment concept
Investing is laying out money now to get more money back in the future. - Warren Buffett (1) Invest is Improving the return with risks you can tolerate (2) Invest is Net asset growth with inflation taking into consideration (3) Invest is Value commitment, not hype nor smoke and mirrors (4) Invest is Emotion management for life (5) Invest is Safety minded with intelligent risk taking (6) Invest is Time defined commitment for higher return with lower volatility |
RESEARCH – On investment research
Risk comes from not knowing what you’re doing. - Warren Buffett (12) Research does not assure success of investment (13) Emotion of the market is the most difficult to research but critical to understand (14) Simple strategy with thorough research can achieve better returns than complex strategy (15) Evaluation of investments must be based on the same asset class comparison (16) Analyst’s reports are often good for reading but bad as timing guidance (17) Risk understanding is always more important than return expectation (18) Contrarian research could be meaningful, but be wary if it is from newsletters (19) High return of past could be a bad indicator of future, unless the research can prove the strategy is disciplined and validated |
PROTECT – On investment protection
The first rule is not to lose. The second rule is not to forget the first rule. - Warren Buffett (20) Protection by insurance is as good as who insures and who issues the product (21) Reduce long-term loss by minimizing risks, not by sitting in cash (22) Out of business possibility is a check point for any investment due diligence (23) Too-good-to-be-true product always involve something hidden and be alert (24) Eliminate surprises by owning direct instead of pooled fund if you know how to manage it (25) Cost of investment is not what you see; it is all about what is hidden (e.g., mutual funds) (26) Time is the best protection if your investment is a sound choice and grows over time |
MPT – On modern portfolio theory
Valuing a business is part art and part science. - Warren Buffett (34) Modern portfolio theory (MPT) is a scientific investment theory based on some over-simplified assumptions (35) Portfolio risks can be minimized with the mix of stocks and bonds instead of using bonds only (36) Tail risk of market statistics is where MPT fails to explain |
POST-MPT – On post-modern portfolio theory
The business schools reward complex behavior more than simple behavior, but simple behavior is more effective. - Warren Buffett (37) Post-modern portfolio theory (Post-MPT) is still lacking solid scientific foundation (38) Optimum return and risk can be achieved by expanding to more uncorrelated asset class diversification (39) Smart-beta is a good idea to put the Post-MPT into practice (40) Tactical changes of portfolio are often smoke and mirrors (41) Managing investor psychology should be the key to Post-MPT research (42) Portfolio construction complexity does not necessarily add value (43) Testing of a portfolio design must be done over multiple good and bad market cycles |
ABC – On laws of investment decision making
You ought to be able to explain why you’re making the investment you’re making. - Warren Buffett (44) Allocation of investments (selection and adjustment) is the 1st priority (45) Bracket of your income tax is 2nd priority (46) Cost of investment choices (both hidden and separate charged fees) is the 3rd priority |
TYPE – On investor types
The fact that people will be full of greed, fear, or folly is predictable. The sequence is not predictable. - Warren Buffett (47) Trial and error investor – focus on building knowledge – high competence & low commitment (anxious / careful) (48) You do it for me investor – focus on selecting advises – low competence & high commitment (confident / impetuous) (49) Passive investor – focus on allocating asset – low competence & low commitment (careful / confident) (50) Energetic investor – focus on managing emotion – high competence & high commitment (impetuous / anxious) |
FDIC – On investment insurance
You do not adequately protect yourself by being half awake when others are sleeping. - Warren Buffett (51) Face value is not guaranteed if the investment is not FDIC insured but failure of a company does not necessarily translate to any loss (52) Deposit in cash, money market fund, and CDs have different insurance (53) Insurance is only as good as the insurer and a product without insurance could be better than an insured product (54) Check your investments and advisors via SEC, FINRA, and other resources |
INSURANCE – On insurance product
A little transparency goes a long way. - Mike Barrett (55) Insurance transfers a potential larger loss to the insurance company from the insured that pays a smaller premium (56) Net return of a purchased insurance is always negative for any monetary loss (57) Saving through insurance may not be best investment choices due to additional cost involved with any insurance products (58) Understand insurance fine prints first before purchasing any insurance (59) Risk management is the key to sound insurance planning (60) Annuitization value is not the same as investment value because it also includes insurance benefit value (61) Never buying an insurance product such as a variable annuity just because of upfront bonus, which always leads to higher hidden cost in the future (62) Cash value of an insurance policy is what you will get back when you cancel the contract (63) Emotional decision when purchasing insurance could cause investors overpaying for unnecessary protection |
AVOID - On investment risk management
An investor needs to do very few things right as long as he or she avoids big mistakes. - Warren Buffett (64) Assess the maximum risk tolerance before making investment (65) Volatility is the main reason to trigger emotional risk (66) Owning right investment over longer term will reduce risk (67) Investigate and understand the causes of risks (68) Design a risk managed portfolio is much more important than timing |
CONTROL – On investor psychology
Be fearful when others are greedy. Be greedy when others are fearful. - Warren Buffett (69) Change (change own rules) (70) Ownership (wrong impression of owning based on controlling) (71) News (wrong prediction based on news media) (72) Test (selective or single evidence based on someone's limited experience) (73) Regret (if past is bad, falsely believe that future must be bad too) (74) Overconfidence (I am smarter than others, e.g., invest only in one stock or one ETF) (75) Loss (short-term volatility may not be bad for long-term) |
PRICE – On investment price changes
Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it. - Warren Buffett (76) Price is not just intrinsic value (e.g., P/E ratio and stock options); rather, it is driven by fundamental; momentum; anticipation; and fear factors (perceived value) (77) Recent prices are perceived value by buyers (e.g., asset bubble), note that risk of principal is one risk only (78) Intangible asset could be written off if it not materialized (e.g., after M&A) to affect price changes; and intrinsic value is not price (e.g., stock options) (79) Current market price and volatility can be emotionally misunderstood if there is no trade (e.g., gold and real estate); and cost is not price (e.g., real estate) (80) Estimated equity market value may not be real until it is liquidated (e.g., private equity); and it is the emotion of market participants contributes to price changes |
RATES – On interest rates
The most important thing to do if you find yourself in a hole is to stop digging. - Warren Buffett (81) Rates should always be compared based on the same quality and the same duration (82) Annuity income rate is not investment return rate (83) Term of the investment has significant impact of its rate of return (84) Evaluate fixed-income investment return by yield, not by coupon rate (85) Stability of the interest rate is by both the federal policy (short-term) and by the market (long-term) |
GROWTH – On investing for growth
A great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable problem. - Warren Buffett (86) Growth with higher volatility is not a good investment (87) Returns only cannot justify the quality of investment growth (88) Over-concentration can only be adopted if you fully understand the downside risks (89) Winning vs. losing trades, it is when to sell that counts instead of collecting (90) Tax is a secondary factor when investing to grow your asset (91) Hedge fund does not mean higher growth |
VALUE – On investing for value
Price is what you pay. Value is what you get. - Warren Buffett (92) Valuation is not only based on fundamentals, but also based on investor’s perception (93) Assess fundamental value of stocks by sales growth and earning improvement, not just by P/E ratio (94) Liquidity risk will negatively impact the value of an investment, e.g., gold coins, real estate, and currency (95) Undervalued investment may not have lower market price (96) Expense will significantly reduce investment value over long-term |
INCOME – On investing for income
It is not necessary to do extraordinary things to get extraordinary results. - Warren Buffett (97) Income investors buying bonds lose money only if bonds go bad or sell early (98) Net asset value does matter for investing in income closed end funds (99) Compounding generates more value than interest alone for long-term income investor (100) Opportunity loss in real estate can lead to bad investment or higher risks (101) Metal investing (gold or silver) does not generate income (102) Earning per share makes more sense than P/E ratio for income investors |
DIVIDEND – On dividend investing
Never depend on single income. Make investment to create a second source. - Warren Buffett (103) Dividend is not distribution – the risks of closed-end funds (104) Interest dividend and qualified dividend are taxed differently (105) Value of dividend stocks can be volatile (106) Increasing dividend is only important when earning is improving too (107) Diversification reduces the risks for dividend stock investing (108) Evaluate dividend stocks based on peer comparison (109) Never buy dividend stock just because dividend – understand preferred stocks (110) Dividend has no guarantee |