Contains the notes on the Investment Planning study book material for the CFP Board Exam. Topics range from investment characteristics and risks, valuation basics, portfolio theory, and behavioral finance.
How Bernard Baruch Evaluated Businesses
One of the more difficult aspects of investing is knowing when to walk away from an investment. Selling, as they say, is the hardest part.
Not only because of the numerous biases investors face after an investment is made, but the impact of change — the kind that destroys companies — is difficult to recognize in the moment.
Selling is tough enough if investors are saddled with over-optimism, groupthink, confirmation bias, endowment effect, status quo bias, and the always difficult sunk-cost fallacy, to name a few. If you’re confident the company is fine, surround yourself with people that think the same, only look for affirming evidence to the fact and ignore the rest, overvalue the investment simply because you own it, and let all the time, money, and emotion you’ve “invested” in a single stock infect your decisions, then selling will be a grueling experience.
To complicate things further, the value of companies change all the time. Not always at the same rate as its stock price. It gets especially confusing when the company’s value and stock price move in opposite directions. To sum it up, selling is hard! Continue Reading…
Insurance Study Guide
Contains the notes on the Insurance study book material for the CFP Board Exam. Topics include life, disability, health, auto, P&L, annuities, and Social Security.
The Notes
Bernard Baruch’s Investing Rules
Bernard Baruch once said that Wall Street provided an extended course on investor behavior. It taught him that human nature was the driving force behind markets and investing mistakes.
Baruch was born in 1870 and began his career as a broker. He quickly learned that every investment carries some risk. It’s always a gamble.
What we can try to do perhaps is to come to a better understanding of how to reduce the element of risk in whatever we undertake. Or put another way…our problem is how to remain properly venturesome and experimental without making fools of ourselves.
He must have figured it out because, by the turn of the century, he had his own brokerage firm, a seat on the NYSE, a few million to his name, and a reputation as a savvy financier.
His fortune continued to grow during the 1920s bull market. But as luck would have it, he sidestepped the crash. Continue Reading…
Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick
Buy the Book: Big Mistakes shows even the best investors make costly mistakes. It tells the stories about how some of the most famous, and infamous, investors failed miserably and the lessons we can learn from their biggest mistakes.
The Notes
This Time is Different
Investors sometimes pay a high price for lofty expectations. A good example of this can be found in the number of companies trading at over 15x sales.
Since 2000, an average of 181 companies traded at over 15x sales in any given week (with a minimum $100 million market cap and not trading OTC).
Today that number hit 600. The last time we saw numbers remotely close to this was 2000 when it peaked at over 400 companies. Continue Reading…