Finding an Investment Philosphy – imp for individual, advisor, pm

1. Ever investor needs investment philosophy. Trader becomes long term holding.. u don’t
know who is loser on poker table.
2. Market is a place to find who you are
3. Chosen a philosophy works and it works for you

An investment philosophy is a set of core beliefs that you can go back to in order to generate new
strategies when old ones do not work.

Question to ask-

1. Investment horizon
2. Risk tolerance
3. Tax status – trading cost are drag on returns

Different investment philosophy-

Asset allocation – Market timing (Sector, Countries, Bond/equity)

Asset selector- Chartists, value selectors, growth selectors

Execution based- arbitrage based strategies, information trade

Valuation-

1. Cash flows form current assets

2. Value from future growth – (new growth, new efficiency)
3. What is discount rate to apply
4. Length of high growth period

Reinvestment rate – growth rate / return of capital

Growth is not free….

High growth is easy, quality growth is rare.

You can growth and destroy value at same time

Block trate have great benefit

Return of your strategy to be checked with risk adjusted return..

Technical analysis- counter to random walk… investor are not rational and price itself is imp..

Real short term – no empirical evidence

Short term (days / weeks)- negative short term correlation.

Medium term (month / year)- positive coorelation

Momentum accompanied high trading volume…, size effect,

Long term (5 year) – negative correlation

People good at momentum are very good at identifying inflection points

Extreme momentum /bubble-

Temporal patterns- january effect, weekend effect (Monday are brutal), Friday are dicier due
derivatives

Technical analysis- stock prices move in trend.. not agree by random walk… change in trend is
caused by shift in demand and supply

1. Market overreacts – backed by empirical evidence , the contratian investors.

a. Odd lot trading, increase in ownership of retail investors
b. Mutual fund cash position –
c. Investment advisory opinion-
2. Detect shift in demand and supply
a. Breadth of market – advance /decline ratios , upmove not accompanied by breadth
b. Support and resistance lines-
c. Moving averages
d. Volume shifts
3. Momentum indicators-
a. Relative strength
b. Trendlines

Momentum with high volume is gold..

4. Follow the smart investors

a. Short sales by specialist
b. Industry buying selling
5. Elliot waves, Dow theory

Value investing- P/E ratio is too restrictive definition of value investing. Damodaran value investing is
more focused on value of assets in place and consider growth part to be inherently unreliable.
Growth is icing of cake.

Bible of value investing is Ben Graham approach

1. PE ratio less than inverse of yield of AAA corporate bond.

2. PE ratio has than 40% of average PE over the last 5 years
3. Dividend yield > two third of AAA corporate bond yield
4. Price < two third of book value
5. Price < two third of current asset value
6. D E Ratio less than 1
7. Current assets > twice current liabilitie
8. Debt < twice net current assets
 9. Historical growth in EPS > 7%
10. No more than 2 years on negative earnings out of 10 years

Low PE, Low risk, high growth and

Passive screeners- One up of wall street – price to book ratio, price to sales (king), price to earning
and dividend yield

Price to book ratio and haaave roe

Price to earning .. have accounting quality, roe and growth

EV/EBITDA – capex and tax

Revenue multiple – no strong studies, low margin

Dividend yield- no strong studies, taxes, no growth

Value investor protective armour-

1. Normalized earnings (commodity

2. Adjusted earnings
3. Owner’s earnings
4. Moat
5. Margin of safety

Screening template – screen and then use low risk, high growth, high quality growth

Contrarian investors- premise market overreact to bad news, reversion to mean, dbont and thaler
winner and loser portfolio, game of patience…

Buy bad companies reputation, betting parimutuel betting

Self confidence, patience, difficult in mutual fund

Activist value investors- lone wolves, P&G, hedge fund, nelson peltz, bill Ackman, disinvestment…

Shut down, divest or spinoff

Active growth investing alpha is better, barber and odean study top performing 6%, investor with
more concentrated

Value investing is rigit, righteous, ritualistic

Suggestion – 1. DCF , value agnostics

2. Beta is Greek from geek

3. margin of safety

4. moats

5. good management $NFLX

6. intrinsic value
Special situation investinh