I can confirm that buying companies because they're "cheap" is not a good strategy. 😅
1 year ago | 34
Valuation still matters on quality companies. It took the QQQ 15 years to get back to its all time highs from 2000. Imagine if you were planning to retire in those 15 years you would be screwed because you ignored valuations?
1 year ago | 38
Absolutely valuable the thoughts you share. Thank you Joseph, much appreciated 👍
1 year ago | 2
Henrik Bessenbinder demonstrated , historically at least , that the returns of the stock market in excess of one month T bills were explained by only a handful of stocks over the long term. Perhaps the reason the index does so well is that it holds the entire hay stack , so that it’s guaranteed to hold the needle that stock pickers are trying to find.
1 year ago | 27
Studies have shown that investors underperform the stock index because they buy near the top and sell near the bottom.
1 year ago | 1
That's why quality beats value on the long term DCA. Quality = a selection of the top companies in their industry (by earnings, market share, etc), regardless of their valuation.
1 year ago | 0
Great points. I think a key difference is in the way that growth vs value companies are actually valued. They are obviously not the same and this is critical. There are "old" companies that are still considered "growth" companies. When will they be fully grown? LoL. Conversely some "value" entities don't have a whole lot of value left as far as how the world changes. Human minds want to simplify everything in to an A vs B, or T vs F assessment when it is usually far more complicated.
1 year ago | 1
It's much more complicated than just market cap and growth to join the S and P
1 year ago | 2
I think it was Lynch who said selling the winners is like cutting all the flowers in your garden, only leaving the grass remaining.
1 year ago | 0
I get my best investment advise from my dad, he told me to not invest in businesses that I don’t understand and don’t buy stock because of valuation. Focus on becoming a good partner of a business, when we focus on partnering a business then we switch our focus. We get to know the business, we usually choose to partner a business that has successful track record , good business structure and is still growing. Switching the mentality from being a stock trader to a business partner. As a partner you don’t buy in and out frequently and most of the time you don’t partner too many businesses so your portfolio is not going to be very diversified and complex, usually it’s quite concentrated with good solid companies that you are very well understand of their business nature. The diversification will not going to be in the number of stock counters, but instead diversify into real estate, gold , bond etc.
1 year ago | 0
What I learned from Darwin about investing is a great read and recommended by Pabrai. Discusses why this is the case
1 year ago | 1
In a very simplistic way, this is the foundation of technical analysis
1 year ago | 5
Joseph Carlson
One observation I have always thought is funny:
People are quick to acknowledge the S&P500 and QQQ are very difficult to beat, some say it's nearly impossible to beat.
But investors rarely point out that the index never looks at PE ratios or valuations, ever. The Index only market cap weight stocks.
How can an index, that does not factor in valuation at all, do well over such a long period of time? Isn't it essential to be focused on valuation to have a winning investment strategy?
The answer is the index gives more weight to more successful companies as they grow, meaning that an index will naturally prioritize holding compounders as the largest positions and they will never sell them based on valuation.
The index structure of prioritizing winners and holding them long-term is the winning strategy.
The error that individual investors so frequently make is doing the exact opposite of the index:
- They prioritize low-quality "cheap" companies that eventually fall off.
- Instead of selling losers, individual investors buy them up, because they're "cheaper" than the winners.
- They sell winners because they have become too expensive, selling out of winners leads to a portfolio full of losers.
- They are hyper-focused on valuation while the index, which beats out individual investors, has zero focus on valuation.
Individual investors do the exact opposite of the index, and then point to the index and say "look, nobody can beat the index! It's too difficult!!".
I'm not suggesting that all valuations should be ignored. But perhaps a greater emphasis on holding winners, selling losers, and investing with a longer-term perspective would help the average investor's return.
1 year ago | [YT] | 1,012