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5 juli 2015

Can you handle the truth about gold investments?

Takeaways: Buy gold now.

This post was originally published at http://mikaelsyding.com/ as http://mikaelsyding.com/can-you-handle-the-truth-about-gold-investments/

Yes, buy right away. The price is at a 5 year low, after correcting by 40% from its peak in 2011, erasing about half of the run-up over the last decade. That’s a bargain – unless the trend proves broken, which there are good reasons to assume it’s not (China hoarding, production costs, negative interest rates, money printing, flight to safety coming etc.).

Buy an ETF for speculative purposes (GLD for exposure to the gold price, GDX for gold producing mines, GDXJ for smaller, more speculative and exploration oriented mines), and physical gold to hide at your BOL, as insurance against the break down of society (not my preferred choice).

Gold bottoming out? It should be.


There is gold and cocaine all around us

– so close, yet so far

Twelve percent of annual gold production reaches its final destination in minuscule amounts in electronic devices.

That gold is just as inaccessible as the cocaine in money bills. It takes a couple of thousand of dollar bills just to make one single party line. Similarly, refining the micro grams of gold found in cell phones and other electronics just isn’t worth the trouble.

Even if Colombian pesos probably have a higher cocaine content, the smallest bill (1000 pesos) still costs 40 US cents. Even at 5x the cocaine “contamination”, the cost per line would amount to 160 USD. Gold in devices has the same characteristics.

Is that a gram?


Good as gold?

Nota Bene: This is not a comprehensive overview of everything about gold. It’s bits and pieces of my perspective on gold and gold investments. Further, it’s not a recommendation to buy or sell anything. Anything.

Warning: Gold is more or less intrinsically worthless. You can’t eat it, can’t sleep in it or under it, it can’t warm you and it’s almost useless as an industrial metal. You can wear it but be prepared to lose a limb or your life over it.

Okay, so you can eat it, it just doesn’t contain any nutrition


Gold has got ONE thing going for it – it’s eternal

What’s the fuzz about? Gold is eternal and limited. In addition it’s solid, heavy and pretty. It’s malleability makes gold ideal for jewellery (and apparently, clothes and oversize dildos as in this video with Swedish pop group Army Of Lovers).

All gold was made billions of years ago in supernovae and neutron star collisions. It’s practically indestructible as well as impossible to produce artificially.

Gold utility

A fun side story is that the genius behind the group (2) went to the same business school as I did. He has also released a philosophy/psychology book at my publishing company, Hydra. Also fun is that the girl (1) in the picture (and group member) lost to me in court after refusing to pay back a loan I granted her when she wrote another (Russian cook) book at Hydra.

Why gold instead of shells, pearls, qualified work hours, MIPS, BCAA (protein), energy (1 joule, e.g., or 1 kWh), potable water, arable land, dollars or bitcoins?

Even if gold itself is worthless, using it as the base for transactions provides alasting unit of account that can’t be diluted by producing more or lost due to destruction. If you want more gold, you have to dig it from the ground and refine it, which costs about as much as gold on the market does. The cost of producing gold increases over time due to inflation and increased difficulty in extracting gold.

Pearls and shells are fragile and volatile. Dollars can be printed (even if central bankers promised to neutralize the extra dollar once the crisis is over).

Bitcoins are a bit like gold, but can be destroyed by solar flares or EMPs – and it can’t be used as jewellery or electronic circuits. Bitcoins, unlike gold, face competition from other cryptocurrencies that can be constructed by anyone that so desires. What if Bitcoin is the MySpace, Nokia or Altavista of cryptocurrencies? Where is the Facebook, Apple or Google?

Meat Wallet

-not very practical

Actually, my own favorite among the alternatives is essential amino acids, due to the undeniable intrinsic value. Their biggest problem is the needed bulk per transaction. Another problem is the volume needed to back the sum of all transactions. There can never be enough protein around for that – just the promise of delivery if needed. Perhaps water is the answer after all. Or energy. Then again, (long term) storage is an issue.


Why buy now?

The price has fallen by 40% in USD, despite mad money printing since the peak in 2011, despite intense hoarding by e.g. the Chinese central bank (albeit not yet disclosed, but probably later this year. My guess is that China has expanded the country’s official reserves by at least 5x) and despite extreme increases in asset prices such as stocks and bonds (and Swedish real estate).

China’s gold hoarding


When should you own gold?

  • during inflation
  • during or after money printing
  • during hyperinflation (caused by falling production due to speculation and malinvestment in the preceding money printing boom)
  • in turbulent times – e.g., war


Who should consider owning gold?


  • Billionaires, dynasties: one atom of gold will stay one atom of gold no matter how you hide it. Gold might be the only way for a dynasty to protect its wealth over time. It’s not about returns it’s about stability.
  • Central banks, governments: pure fiat money has never worked for long. To prevent a collapse or to restart after the death of money a base is required and the most trusted base since gold was first discovered, 7-10k years ago, is gold
  • Doomsdayers: just note it has to be physical gold, hidden from governments, armies, fellow citizens and others
  • Speculators: okay, they don’t really need gold, but they are included among buyers at this point. Contrary to dynasties, speculators don’t care about gold per se or its insurance qualities.
  • Insurance: As part of a quattro stagione portfolio, as a hedge vs. stocks or consumer prices (cf ratios gold/dow, gold/CPI, gold/oil)


Why not gold now?

Again, gold is inherently worthless.


Valuing gold

What is gold actually worth? Ballpark?

Hello! Am I invisible? Nothing!


Okay, here is a stab at gold valuation:

There is about 200 000 tonnes of mined gold in the world. At current prices that’s worth 7.2 trillion dollars or pretty close to the amount of physical money floating around. However, it’s just a tenth of a wider money definition (M3=75tn).

What if all money had to be backed or replaced by gold? Easy, gold would have to be at some 12 000 USD/oz, rather than the current approximately 1200 USD.

In contrast, what’s a dollar worth? Well, the paper isn’t worth much and neither is the 28 ug of cocaine locked in the fibres of an average dollar bill (FYI: 99% of bills in London contain cocaine). The U.S. Fed has some 8000 tonnes of physical gold in its vaults. That’s enough to back less than 10% of the physical currency in the US and around (less than) 1% of its M3. China probably has a similar amount and thus a much better coverage, albeit still negligible as backing for its currency.

However, the power of taxation should mean something… It’s just that that power and value have been diluted by existing debt, as well as promises of pensions etc. that the USD is “backed” by a huge negative net value. Hence, the Bitcoin cryptocurrency is a better bet than the USD, despite having no intrinsic value or backing whatsoever.

Of the main contenders for money, dollars and Bitcoins get disqualified pretty quickly. The only thing Bitcoins have going for them is that they are much better than dollars and other fiat money.

Energy and water sound fine on paper, but there is at least one good reason why gold has won that battle the last 10 000 years. Storage (and stability – water goes bad and energy dissipates. Just as with proteins you only have the promise of delivery left and if you die that goes away, while gold remains).

Another theoretical valuation approach

Gold currently makes up about 1% of investment portfolios. To achieve significant diversification effects that should be at least 5%, and probably rather 10%. Some advocate multiples of that – at 25% (the Quattro Stagione strategy).

Even to just get to a more conservative 5-10% average portfolio weight, either other assets have to plunge dramatically (-80-90%), or gold would have to increase in price by some 500-1000%. Once again the evidence points to 10 000 USD/oz, give or take a few thousand. Well, if it weren’t for the fact that gold is worthless, that is.

Most likely there will be a combination of falling prices for stocks and bonds and a rising price for gold, as the sellers of other assets park their wealth in the safe haven of gold. Thus, even if you want to stay long stocks, you could hedge that position by adding gold. Everybody can’t go full retard as I have (both buying gold and shorting stocks).

Chartist’s view point to 5-6000 USD/oz


My first hand experience with gold is limited but rewarding

Have I put my money where my mouth is? What is my actual experience in investing in gold, except reading about it for my entire career?

I bought a batch of gold ETFs (gold price as well as junor and senior gold mine funds) and single stocks (single senior gold mining stocks) a few years ago, after the post 2011 gold price crash, and sold them at a 25% profit after just a few months.

Then I bought again about a year and a half ago, this time just the senior gold mine ETF and a gold price ETF. The reasons behind buying at that point were:

  • The price had fallen by 40% (just as low as when I bought the first time)
  • I expected turmoil, and consequently flight to safety (to gold)
  • I expected weakening peripheral currencies, e.g. the SEK, due to weaker global trade and not least a weakening Chinese economy
  •  I expected a stronger USD (flight to safety, US investors selling foreign assets)
  • Money printing (fear of inflation, rising asset prices overall, gold/dow ratio coming back)
  • Covert central bank hoarding being disclosed (foremost China)
  • Diversification, including something benefiting from money printing
  • I wanted to be anti fragile (if there was a crash or other problems, I wanted to benefit from it)
  • Peak gold production?
  • Refill coming at the Fed?
  • Gold becoming competitive vs. negative interest rates


So far, I only got the stronger USD part right. Nevertheless I am up by 20% on the second gold trade (thanks to the USD/SEK development), and I obviously expect much more to come. My current gold exposure is about 0.5-1m USD.

Please note that buying gold is pure speculation. It doesn’t produce any return. Actually it runs up a bill just owning it.

I simply hope to offload my paper gold to a bigger fool within a few years.

Since I don’t own any physical gold directly, I have no insurance against real and lasting trouble such as war or severe capital controls. Without returns or insurance qualities, only speculation remains.


Summary: buy gold now

Apocalypse, no? I’m not much for doomsday scenarios, so I’m gonna go with paper gold, for short term (1-5 years) speculative purposes, rather than physical gold buried at my BOL as insurance for when Game Of Thrones becomes reality.

Buy the ETFs GLD (gold price 1:1) and GDX (senior/large gold mines). Make it at least 5-10% of your portfolio, or a full quarter as part of your Quattro Stagione.

Stay away from GDXJ, unless you really like to gamble with your money. I made good returns on my GDXJ the last time round, but I still don’t want them this time. The same goes for single stocks like Goldcorp (GG) and Agnico Eagle Mines (AEM). There is nothing wrong with them, and I bought them and profited from them in the previous round, but I’d rather diversify away the company specific risk. I currently own GLD and GDX.

Why? Winter is coming.

Seriously? China is hoarding gold, stocks and bonds are due for a collapse or at least a serious correction, while gold is due at least a bounce after its 40% correction since 2011. In addition, gold is the ultimate debt-free safe haven in a world of monetary madness and crazy leverage upon leverage.

Just do it

Taggar (blogg): 
3 juli 2015

Avoid market losses, and death, by understanding change

Change is good (http://mikaelsyding.com/avoid-market-losses-and-death-by-understanding-c...)

-Yes, for the Greek too

Research of all kinds shows living an ever-changing "lateral life" (http://mikaelsyding.com/achieve-peak-performance-lateral-living/) improves happiness, general health, keeps brain diseases at bay, increases longevity, not to mention makes you smarter, better at learning (higher brain plasticity potential) and more experienced and skillful with the ability to connect the dots between diverse knowledge areas.

In short, change is good.

Keep changing preemptively and purposefully. You will anyway, just not in a beneficial way without some nudging (https://en.wikipedia.org/wiki/Nudge_(book) albeit not by the state).


Break out of homeostasis

In addition, change happens all around you. And, changing willfully primes you for identifying and embracing that change - makes it easier to break out of all sorts of homeostasis, rather than be broken down by it, as Ludvig at SGM might put it.


School induced homeostasis in me at an early age

The worst thing school did to me, apart from generally waste my time, was to fool me into believing in constant truths (not least in physics).

I learned that a planet was a planet, not just by a temporary definition. I learned that the four forces were just that, always were, always will be - rather than a temporary convention to describe certain phenomena within a quite wide but still limited range. I learned time flowed forward and more or less constantly, except for in relativistic experiments.

Not least I learned time in itself was indivisible and continuous, though possibly with a lower limit of Planck time (5*10^-44s). It was never proposed that time might be something else altogether that we only approximate with something called time, and that it was just convenient in our current paradigm to treat time as, ... well the time as we know it today. It was quite preposterous really, to assume and teach that the approximately just 75-year old view of time was correct and would stay constant forever! 

It has taken me forever to relearn that everything changes, not just scientific paradigms - everything. Earth's rotation changes (the leap second), the moon's distance to earth changes, the discovery of dark matter and dark energy might in retrospect be just one small of thousands of discoveries over the coming thousand millennia and forward.

Moral and ethics change, maybe even the rules of logic (!).

You and I change - faster than you think, but we are protected by the narrative "I" that always claim everything is coherent and as it should be, and not least constant going forward. The "I" is lying. Actually, the I doesn't even know the "me", but more about that some other time (or read Nörretrander's amazing book yourself. I recommend it highly!).


TED radio hour chimes in on time, change and happiness

The other day, I was listening to the (recommended) TED Radio hour's pod cast on time (Shifting Time, 19 june 2015). As always several TED talks and aspects of change and time were discussed, but one topic regarding aging, personality change and happiness struck me particularly:

Almost all people have the experience of having grown into their real self.

We all [almost all - no spam or trolling please!] think we are finally the real me. We know we changed a lot growing up and aging, perhaps can hardly even stand for some of our earlier opinions and actions, but now finally have reached a stable self plateau.

And yet, research shows that we keep changing, morphing into somebody else over the course of 10 years, over and over again. It seems we know we could change in either direction along an infinite number of parameters (extroversion, e.g.) but since the potential changes even out, we instinctively expect status quo to reign. It's like approaching a T-crossing expecting to stay there :)


So, expect change, and manage it

-That's really all I'm saying.

That goes for companies and stocks too.


The current stock price will change, the price trend will change, sales and profits will change, valuation multiples of those fundamentals will change, competition will change, client preferences and demand will change, costs will change. All mentioned factors for the company's peers/competitors will change.

If Apple could emerge from the grave and crush Nokia, Apple too can be Appled. Facebook, which crushed MySpace to oblivion, can be Facebooked. And Tesla can..., well Tesla hasn't actually done anything yet, not at a profit anyway. Remember Kodak? Or when Dell, HP or IBM was all the rage?

My distillation of best practices in the market boils down to just two things to consider (http://mikaelsyding.com/all-the-two-rules-you-need-to-strike-it-big-in-t...):


1. How is it now?

2. What will or must change? (fundamentals, perception...)

Expecto patronum! Or, rather, happiness

If that HP reference flew right over your head, never mind. It's not important.

-You can expect time to save you, to make you happy (unless you get sick)

Research shows a trough in perceived well-being around the age of 50 (coincidentally not far from my age; 43), followed by a strong trend of improvement, leading to new all time highs just 20 years later. The risk of depression follows a similar (inverted) path.

One theory of why is that older people get happier with age because they are relieved of the burden of thinking about the future; relieved of change (despite the fact that they are facing the biggest change of them all... -on the other hand into a state of absolute stasis)

What about lateral living and homeostasis - is it good to become older and happier, or is that actually dying? I'm inclined to think the latter.

So keep changing and keep living - hopefully long enough to live forever (AI, genetics, nanotechnology, stem cells, robotics and all that. Huge changes are coming (http://mikaelsyding.com/ai-and-the-coming-technological-singularity/) sooner than you think [WaitButWhy]).

Charts of happiness (and depression risk) show a trough around my age and then ever improving numbers into old age.

I'm thus more or less at my worst now, although I've never had it better, I think.

Either I'm just born that way, thinking every year is better than the last. Or, just maybe, my instinctive focus on incremental change and growth (just one more, always be investing etc.) rather than a point target (becoming financially independent, rich, the best, buying a particular item or any such thing) is key. 


Conclusion and summary

Just take this with you, no new practices, no new habits:

Be prepared for change, never status quo

Embrace it. Manage it. Master it. Don't just sit on your favorite stock because it has done well. Analyze it; imagine things changing. Don't hold on to your job or partner for dear life or by complacency. Proactively manage for change. Expect it. Perhaps even prevent undesired change by changing something else.


Taggar (forum): 
Taggar (blogg): 
3 juli 2015

Two rules you need to strike it big in the stock market

All the two rules you need to strike it big in the stock market

Most people make fools of themselves in the stock market. Even most professionals invest like losers, constantly underperforming.

So, how can you avoid the worst newbie or pro mistakes?

All you need to do, to outperform stale index hugging mutual funds and schizofrenic panglossian/worrywart newbies is the following:

1. Check the present context intelligibly; ask yourself: “is it a fad or sustainable”

2. Imagine the future environment; the economy, profits, valuations, interest rates etc

Buy or sell accordingly.

To wait, to hold off until you see an actual opportunity, to NOT buy or to NOTsell prematurely.

If you want a little more guidance to outperforming the market, here are…:


8 easy but essential checks you must perform before buying stocks (okay, maybe its 50 check points, but easy ones…)

Newbies typically invest too emotionally; they buy on a tip, because they “like” the company’s products, because they know somebody working there or because it is trendingupward. They often buy stocks when they are relatively expensive, when the hype level is high, since that is when they hear about the company and they have a “good feeling”. Then they sell, cheaply, when the stock is trending downward, when the hype has faded and they have a bad feeling.

No matter what their time perspective is, 1 month, 1 year or 10 years, newbies tend to buy high and sell low, and then give up altogether and get out – disillusioned and fleeced like a newcomer to a poker table or poker site.

Professional portfolio managers at large institutions like mutual funds or pension funds play a completely different game. Their main objective is to keep their jobs or rathernot lose their jobs.

Their performance is measured not in terms of absolute profits or returns but relative the market (a benchmark index) and their competitors. By “hugging” the benchmark, they make almost perfectly sure they underperform the market slightly (due to their fees and paid commissions), albeit never by much. As long as they don’t make a big mistake and underperform the market or their competitors by a lot, they get to keep their clients and their jobs – even if the market and their portfolio drop by 50%.

Any rational individual would be better off just buying the market average and holding the stocks forever than purchasing mutual funds, since you would then bypass most of the costs while still making market average returns. Unfortunately you would still have to ride out the big downturns, aka Bear Markets. However, if you are willing to do a little more work to avoid the worst mistakes, you could beat both the cowardly institutional investors and the uninformed masses.


Make these 8 simple checks before rushing into an investment on the stock market


  • Is the company absolutely cheap? If not, you are speculating on a bigger fool buying it from you even more expensively in the future. That’s gambling, not investing.
    • Check valuation multiples. Assessing cheapness is material for a whole book in itself, but at least check P/E, P/B, EV/EBIT, P/FCF and P/S valuations for the coming 3 years. Anything above 10x EV/EBIT, 20x P/E and 2x P/S or 2x P/B, respectively, warrants a deeper evaluation. However, nota bene, just being cheap on these multiples, let’s say 1/3 of mentioned values, does not necessarily mean the stock warrants a buy recommendation.
  • Is it relatively cheap? If not, why and how is that sustainable? If you skipped the absolute valuation recommendation, you should check whether tha multiples are higher than several benchmarks:
    • Is it cheaper than its own historyIf not, what has changed to warrant a higher valuation now compared to before. If it is cheaper than before, is it actually cheaper or is there a reason?
    • Are other similar companies even cheaper? Check the obvious industry peers (locally and globally) before buying the first stock you come across. Avoidproximity bias. If your company is cheaper, make sure the peers really are similar.
    • Is it cheaper than the average market



  • Is the sales growth rate sustainable? Assume the market counts on recent trends to continue, but do you think that is likely? Compare the growth rate to
    • its own recent history,
    • to the average economy,
    • to its industry peers. If differs significantly, why and for how long is that sustainable? What is unique, what is the competitive advantage that could explain continued outperformance?
  • Are profit margins sustainable;
    • vs. history?
    • vs. peers?
    • vs. the economy? Remember that if one company is making super profits it will attract competitors as well as could revolt some clients.
  • Are tax rates stable and sustainable?
    • Check historical range for the company, why does it vary?
    • Compare paid tax level with actual official tax rates
    • Do they have tax deductions? How long can they keep paying lower taxes?
    • Is the official tax rate reliable? Natural resource companies, banks and other industries, or foreign companies in certain countries, often have to pay extra taxes if they make large profits, sometimes huge back taxes on many previous years. Beware if this has happened before or if the company is making super profits.



  • Are economic returns sustainable for your company (Return On Equity, Return On Capital Employed)? If higher than
    • history,
    • peers
    • or the economy, why and for how long do you expect it to continue? Why is it unique?



  • Check trends in receivables; are they getting paid on time. Compare DSOs to
    • historical range,
    • to peers,
    • to what might be reasonable (30 days, 60 days, 90 days,,, even longer?, why?). Thetrend is most important, since the market is already aware of the recent level, so
    • check if DSOs are trending higher. Higher DSOs mean clients are delaying payment which is a bad sign. The company might be invoice stuffing, overselling or having to adjust sales practices to compensate for poor demand or poor clients. DSO=Days Sales Outstanding=Receivables/Sales*Days in period.
  • Check cash flow conversion trends.
    • Free cash flow/Sales,
    • FCF/EBIT,
    • FCF/Earnings. If cash conversion is trending downward something is wrong with the business model or competition is heating up or the economy is weakening.



  • Check debts:
    • Check the debt/equity trend. If leverage is increasing, find out why.
    • Contemplate the risks involved with rolling the debts in the future, if interest rates rise or if cash flow is poor. When do the loans reset or need to be rolled?
    • Check debt covenants for highly leveraged companies, particularly in recessions.
      • A typical covenant clause states a maximum debt/equity, debt /FCF or debt/EBITDA multiple before new conditions or interest rates apply.



  • Where is the general stock market going?
    • If it’s expensive it might roll over and drag down your investments as well, unless they are very cheap or secure.
    • How did your stock fare in earlier bear markets? How much did the stock fall. How much vs the market? Why would this time be different?
  • Is the stock market trending upward or downward? The tide could lift or sink all boats. If the market is both expensive and trending downward you should have extremely good reasons to buy a particular stock. Do you? Do you really?
  • Is the stock price above or below its own moving average (20 days, 50 days, 100 days, 200 days), Has MAV worked well for that stock historically? Which MAV had worked better, mor consistently (100, 200)?
  • What price range has the stock price moved in during the last 3 months, 6 months, 12 months, 3 years, 5 years? If your investment is based on a change in trend or range, why and how would that happen?
  • Check the yield curve(s)
    • Check the 10yr-2yr = government debt yield difference. A negative yield difference (“curve”) signals recession and can be a harbinger of poor profit growth. Nowadays this signal has been distorted by central bank manipulation.
    • Check Junk bond yields vs. government yields.
      • The higher the difference, the more risk avert the market is becoming. Professional junk bond investors care about not losing the entire principal, so they make sure to be the first to panic. When they sell their holdings they push yields higher. Higher-trending junk bond yield spreads indicate increasing risk aversion.
      • Low absolute junk bond yields can signal extreme bullishness, e.g. if they are lower than average historical losses on similar debt instruments. This typically occur close to market peaks – and that’s a point where you want to avoidinvesting in stocks.



  • Check the prices of commodities
    • Check the price trends in oil, gold, soft commodities, commodity indices. What has happened when they behaved like that before? If they are really extreme it might be relevant for future growth or inflation – otherwise most often not.
  • Check the state of inflation and central bank policy
    • Is it high vs policy rates
    • Is it trending higher
    • What is the central bank likely to do the coming year – any reason to expect an unexpected hawkishness?
  • Check economic indicators
    • check coincident/lagging indicators – most economic indicators are complete bunk. However, taking what are considered coincident indicators and dividing them by the lagging indicators has given a rough estimate of future economic growth. Just remember that GDP growth and stock market returns have shown zero or even negative correlation historically.
  • Check if the market has fallen – Past performance can carry informational value
    • Buy more after negative market years (see strategies such as Quatro Stagione and Dogs of the Dow/World that will need its own post) – the market seldom falls for an entire calendar year. In any case, stocks are cheaper after a fall than after a rise. Buy after a sharp fall or after a particularly negative year for the market. Buy even more after two or three consecutive years of negative returns



  • Is the investment reasonable in a general sense? Good company, good product, not hyped, is it producing real value or is it just a fad. Do you understand the product, what’s driving demand, what the competition is?
  • Is the risk level appropriate for you? Can you afford to lose the money? How much of it? When would you be forced to sell to stop your losses. What might take the price there? Will you actually sell then or will you be locked in?
  • What do you expect to gain from the investment, when will you sell and based on what?
  • How do you picture the future environment for your investment?
    • Imagine the state of the company, its industry and the economy 1-3 years from now
    • Imagine the state of the stock market and investor preferences 1-3 years from now
    • Imagine interest rates and valuation multiples 1-3 years from now
    • Will there likely be a better time to buy in the coming 1-3 years, then wait for that. 2 years’ waiting in 2000 or 2007 would have saved you a decade of regret and worry
  • What’s the warranted absolute fundamental value and what is the likely price range under certain circumstances and time periods
    • Check the expected future return. Start point absolute valuation is EVERYTHING when it comes to expected returns
    • Check previous price and valuation ranges. Trends, fads, interest rates, relative valuation etc can and regularly do push the actual price of a typical stock to extreme highs and lows vs the fundamental value. The historical range of stock price and valuation multiples serve as a rough guidance of the likely future range.



OK, thanks for nothing“, you might say. “That’s not 8 easy steps, Those are 50 cumbersome and difficult procedures” and then you didn’t even include how to actually perform absolute valuations.

So, let’s summarize and make it even simpler…



1. Check the present context. Does this seem like a good time to invest? If not, wait.

2. Imagine the future environment or context. What will it look like when it’s time to sell? Better? Then buy today.

Just remember to check the present and imagine the future contexts in a thoughtful way, including relative and absolute valuation, earlier price ranges and likely future ranges, investor psychology and basic economic understanding about sustainability. The five most important questions you can ask yourself before investing are:

1. Why do I expect things to change?

2. Why would it be different this time?

3. Why would the currently extreme situation continue?

4. What has happened before in similar situations?

5. Does anything need to change for the investment to produce the required/expected return?

So, get to it! Or do you need anything more to get started?


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