EREers who invest actively, what tools do you use in your analysis?

[ertyu]

Part of this is obviously book knowledge. Reading a macro textbook, reading and understanding Investments, etc. Let's call this the economics book pillar of investment proficiency.

What other pillars are there, and what are you doing about them? What tools are you using? How are the answers of those two questions informed by your investment strategy? Do you, for example, use a particular quantitative tool or programming language? Do you use data, and if so, which kind / where from, and for what purposes? Did you read any investment books other than textbooks which helped? Are you consciously doing anything about keeping a certain psychological mindset when it comes to your trades?

I am sure there are other questions I have not considered, so please chime in with anything you think is relevant

[jacob]

You have to know your edge, that is, what you can do that few others (only a small percentage) do. A typical edge would be domain knowledge, like e.g. knowing a lot about graphics cards. The tools go along with that. If GPUs are your thing, you're already reading magazines, discussing hardware on forums, ... knowing which are trending. One active investor I know is an anthropologist who looks for cultural trends; what people wear, eat, etc.

However, just because a company is doing well doesn't mean it's a good investment if it's obvious to everybody else that it's doing well. In that case, it's already priced high. Your edge therefore needs to be checked against a filter of "what do I know that it's most likely correct but which other people have not figured out yet". It takes time (weeks, months, even years) for information to transform itself into general knowledge or market behavior. This requires getting into other people's heads, so a psychological understanding of why people invest is also required. Fortunately lots of people will tell you exactly why they think what they think on investment forums. The next filter is "have I figured out something that other people will either never figure out or never agree to". Even if it passes the other filters, this is to be avoided because it will never come around. It's a trap. The mindset is one of continuous doubt of both the self and the others (rest of market). What if I'm wrong? What if they're wrong? Key idea is to be slightly less wrong that they are, because as a small investor, I can't ignite movements.

My edge is mostly macro. I read a lot of US related news (I mostly stick to US companies, the world is simply too big for me---also know your weaknesses) of the geopolitical variety. Apparently not something most people do. I get my feeds from https://www.memeorandum.com/ which means I see both filter bubbles and their respective sizes. Market news is mostly from https://www.marketwatch.com/ The idea being to figure out what the economy is like in 5-10 years compared to now. The closest description of my general strategy is given in https://www.amazon.com/Mastering-Market ... 328479250/ Once I have an idea of trends or more precisely the diff(old,new) I know which sectors will do better and which will do worse --- and from the news, I know whether other people know this too. I use a stock screening tool from my [full service] broker looking for companies that would thrive in such a situation. [A metaphor would be knowing that global temperatures are rising and planting more heat resistant tree saplings knowing that they will thrive better than what people are currently planting and that this will become obvious to people eventually even if it isn't now(*). The best kind of ignorance is the kind that will eventually be forced by reality.] After screening candidates I read analyst reports, I like CFRA and TheStreet, interpreting them based on having read http://earlyretirementextreme.com/start ... sting.html ... which makes it possible to come up with a final selection. I don't do any analysis myself; I expect the 24yo CFAs who write these reports to be able to read, add and subtract.

(*) This type of investors tend to read widely and a lot to get ideas for understanding complex behavior and so continuously spout out metaphors.

Add: What I do is essentially synthesis which is the opposite of analysis. Analysis is a dime a dozen. Synthesis is more complex. It doesn't take more time as much as it takes more/wider knowledge to do. It's also practically impossible to capture quantitatively which means that there's no competition from statistical approaches.

[Dream of Freedom]

So, that is a broad question. I'll keep short-term trading and options out of it for now and focus on long-term investing.

There are 5000+ stocks out there and I can't analyze them all. Also, SEC filings are time-consuming. So, I want to generate leads to stocks that might fit what I want, quickly weed out what I obviously don't like, and if it all checks out only then do proper research.

There are all sorts of ways to generate a lead for an investment. My go-to's are stock screeners (finviz.com) and simply seeing something and googling the relevant stocks (ie There sure are a lot of cyber attacks these days "hey Google").

Weeding out is complicated, but not really time intensive. I take a glance at the 5-year and 1-year charts (TDAmeritrade). I don't want any nastiness on the 5-year, but the 1-year I think of as context for price. I then go to CFRA (available free from TDAmeritrade) just like @jacob. Then I look at corporate governance. I don't want it to be controlled by one person or entity, have some weird management agreement, or have a board made up entirely of industry insiders. Also if top executives recently left why? Fired or "Spending time with family" (even though they got the job by working 16 hour days, not by being there) aren't actually good signs.

If that passes, it's on to proper research. A more thorough chart analysis is first. Next is conference calls ( I go for the hungrybull app, it skips the registering and keeps the old calls around longer). Then to SEC filings.

That's not necessarily comprehensive, but I hope it helps.

[classical_Liberal]

I tend to value invest.

#1 Macro economic environment for the the industry/country/world, per @jacob. This requires a broad skill-set and understanding.

#2 If you are going to invest in something based on the first, the most important metric is free cashflow to market cap. You can get that info anywhere. Then look at where that cashflow is coming from (ie examine everything). Will this cashflow continue, or increase? P/B analysis is also helpful. Read all earnings call transcripts for the last year. Any recent analyst reports you can get your hands on. They may see something you didn't think about.

#3 How will this investment fortify MY PERSONAL PORTFOLIO? Is this over-weighting my portfolio in anyway? Is it filling a gap? A great looking value can still kill if you are overweight into the same macro economic risks. Look to balance those risks.

#4 Smart covered calls can help to increase returns. Particularly in this macro environment because any gain is a gain and the income is nice.

[WFJ]

Not to be too snarky, but this reminds me of a question I often posed to people: "Who is more valuable for advice; a friend who is correct 90% of the time or a friend who is wrong 100% of the time?" The answer is ask the friend who is wrong 100% of the time and do the opposite. Along these lines, there are several members of the finance community who are completely incompetent and are extremely enthusiastic at sharing their opinions. The CEO and CIO of CalSTRS and CalPRS (Chris Ailman is always wrong), Yellen, Brainard, Helton, Cook, Cuban, Scaramucci, Novogratz, Wood, Cramer are always good to do the opposite and you will be rewarded over varying time periods. One could also just let Buffet, Icahn, Druckenmiller do all the work and just follow what they disclose as their holdings. Or just buy VOO low cost index and do something else with your time.

If you choose to develop your own data-based strategy, be aware that Bloomberg has developed a field and trading platform where one can evaluate all variables (30,000+) against all indexes, for all securities, for any time period, any rebalance strategy/frequency for all performance measures that is accomplished with a Bloomberg terminal and a few hours on the phone setting up the system. Several firms run mindless strategies that just find the most profitable strategy over some time window and follow the strategy until it no longer works. This can be done for $25,000 and a marginal programmer in a few hours.

https://www.bloomberg.com/professional/ ... e-analyst/
https://www.bloomberg.com/professional/ ... d-process/

[Dream of Freedom]

@WFJ

Thank you for participating.

[Dream of Freedom]

How about you @ertyu, since we're all sharing?

[Dave]

I have been doing active value investing for the last five and a half years. In trying to think how to respond, I’ve struggled because there are so many radically different approaches that it’s hard to generalize for what to study and what tools to use.

For example, I largely agree with @jacob’s post, but we have quite different approaches. His starting point is (and I might be simplifying a bit) the market mostly efficiently prices in business-specific underlying fundamentals, and his alpha is he tries to identify broad-based trends underlying the assumptions in analyst models where the market is wrong and he can take a position to generate economic profit when the market shifts its view via increasing share price.

I am more bottoms-up. Many value investors do not think they/most people can accurately predict macroeconomic forces nearly well enough to be useful. I have seen compelling evidence supporting this – I really don’t think many people who listen to a few hours of podcasts a week or read a few blogs by famous investors or economists have a value-added perspective. I don’t want to say someone who is a broad thinker who reads widely like @jacob can’t do this, but in my view way too many people think they have some incremental insight above everyone else on macro issues when they really don't.

So I stick to analyzing fundamentals, and find that while the CFAs writing reports may get things right a lot, there are a huge number of securities out there with very minimal or no coverage at all. Small, illiquid, unloved securities. For these securities, there is no one earning six figures writing sell-side reports. This creates opportunity for mispricing, to both the up and downside. To the enterprising analyst, this is opportunity.

To value these securities, it always comes down to cash flow. An asset is worth the present value of future cash flows discounted back to today. To figure that out, I have to be able to reasonably estimate the range of expected value from said cash flows, and for the vast majority of securities I cannot do this. For the few I can, I also have to be honest whether those cash flows will be actually available to shareholders, or is it a value trap where cash piles up/gets squandered/invested poorly. For those few where I have high confidence and where the shares trade way below value, I invest heavy and wait for price to converge with value.

I’ve read tons of investing books but as I said in the beginning, it’s hard to prescribe what would be valuable without knowing what style of investing/trading you’re going for. Regarding pillars, for value investing it’s wise to have a reasonable grasp of microeconomics, macroeconomics, accounting, finance, market history, game theory, and behavioral psychology as a starting point.

For tools, I’m pretty bare bones. I don’t read sellside reports. I follow a number of value investing blogs and value investors whose letters are public, and use these as a starting point for research ideas. I also follow ideas that follow naturally from the prior – to understand company X investment guru bought I need to research their supplier B, and then go from there. I read SEC filings and do not like a lot of services that collect data. They are a nice starting point, but when I compare them to SEC filings there is very often a lot of mischaracterizations (note, I see this sometimes in sellside reports too, while yes they can do basic arithmetic I have seen many cases where they do not grasp the economic reality of situations leading to incorrect views).

Personal psychology is huge in investing, and in addition to studying it is worth tracking and reflecting on your own idiosyncrasies as you go. I highly recommend an investing/trading journal so you can review and reflect.

Finally, an absolutely massive factor in one’s success is staying in what Buffett calls one’s circle of competence. No matter what approach you do, being honest about what you know, and its limits, keeps you out of trouble and increases the odds of generating economic profit. Trying to reach is asking for trouble. For example, my macro views are not nearly informed enough like @jacob to generate value, so while he’s right that analysis is more commonplace than synthesis, if I can limit myself to the small fraction of situations that are misanalysed, there is plenty of profit to be made. You only have to be right/less wrong about the things you invest in, and don't need to have an opinion on very much to do well.

[ertyu]

How about you @ertyu, since we're all sharing?

I haven't started yet. So far, my psychology is such that I see my 200k as insecure and scarce and so every drawdown generates extreme anxiety. I bought an iShares T-Bill index and I woke up in the middle of the night worrying sort of levels. My fear of drawdown has caused me to miss gains. Even in successful trades, anxiety will cause me to want to exit exit exit because any gain is in danger and could turn down any minute and no one ever went broke taking gains etcetera. This has led me to believe I need to educate myself.

My strengths are my strong academic background in economics, my spontaneous interest in listening to macro podcasts, and my international perspective, having lived and worked in many different countries. I am also a fairly balanced big picture/quantitative thinker in the sense that I'm not a genius at either but I am also not the guy that's strong in math and science to the exclusion of all "bla-bla" subjects. Instead, I always did well in math, stats, and econ, but I am equally strong in the traditional "libtard" subjects. I feel drawn to options strategies with defined drawdown based on macro plays rather than individual stock names. My psychology being what it is, I would probably benefit from assuming the money lost the moment I enter the trade and making my peace with that.

Another weakness: lack of trust in my own opinions and analysis, and lacking intuitive sense of the relative movement of macro variables against each other - which would probably be rectified by education and consistent attention to the market.

I have understood that I need to learn to manage my money and that I have been avoiding it due to my extreme anxiety around the subject. Now beginning work on that. Interestingly, my anxiety likely means I can use myself as "the friend that is 100% wrong." For instance, I had extreme anxiety when the dollar and the euro reached parity and a strong fear-based urge to buy dollars (posted on investments and trade log to document haha). The dollar has not broken parity and has indeed slightly bounced back since then. My fear-based reaction perfectly timed the bottom.

[frommi]

I created an automated trading system on portfolio123.com where the subscription costs me 35$ per month. Its based on the old learnings from Ben Graham/Buffett. Pretty hard to do this manually which i tried to do in the beginning. System works since its creation 100 years ago and still spits out >30% annual returns for small sums of money (<1 million USD). (backtested 2000->2017 and trading it since 5 years live.)
Problem is that its scary to buy these stocks because most of them are failed businesses. My edge is simply that i know that the system works and i overcome the behavourable problems by automation.

[jacob]

His starting point is (and I might be simplifying a bit) the market mostly efficiently prices in business-specific underlying fundamentals, and his alpha is he tries to identify broad-based trends underlying the assumptions in analyst models where the market is wrong and he can take a position to generate economic profit when the market shifts its view via increasing share price.

Corrrectamundo! I'd add one nuance: Instead of writing "market" above, write "stock analysts" or widely followed gurus. The institutional market and many retail investors follow the public exclamations of analysts, e.g. when Goldman changes their recommendation from Hold to Buy, the price jumps. Of course there's Cramer, but his recommendations don't really result in a steady lift (Sorry Cramer).

Thus, the strategy is identify the trends in assumptions (how do analysts think) and then wait for them to figure it out for themselves---it's really not all that different from moderating a forum I'm just looking at what people disagree on while trying to understand where they're coming from and more importantly who eventually will have to come around before reality^H^H^H^H^Ha new consensus forces their hand. Once that happens, the price moves.

It is a good day [for me] when there's news that Berkshire or some other guru has put in a bid for one of my positions. Bad news when they put in a sell on something I still own. The former happens more often than the latter.

[Smashter]

It's really interesting to read about all the different strategies. It'd be even more if people posted their performance numbers over the last several years

[classical_Liberal]

An asset is worth the present value of future cash flows discounted back to today. To figure that out, I have to be able to reasonably estimate the range of expected value from said cash flows, and for the vast majority of securities I cannot do this. For the few I can, I also have to be honest whether those cash flows will be actually available to shareholders, or is it a value trap where cash piles up/gets squandered/invested poorly. For those few where I have high confidence and where the shares trade way below value, I invest heavy and wait for price to converge with value.

Yes!

Still, one cannot discount the shorter term value of momentum and "personal values" investing.

I missed all the profits taken from bitcoin and Tesla, but i still wouldn't put any capital into those shit-holes. i missed trends. However i was 50% cash and 10 % oil by Jan of 2022, because that was obvious to me. Invest to your strengths.

[WFJ]

It's really interesting to read about all the different strategies. It'd be even more if people posted their performance numbers over the last several years

Schwab has a "Portfolio Performance" tool. Below are the results of a "Don't fight the Fed" strategy. This is the price only return and not value weighted (last three years were much better than first three years). Over long time periods, it is almost impossible to beat the market without taking higher levels of risk. I can probably count 5x more mistakes I've made investing than "great calls" and below are the results. Luckily for me, most of the outperformance has been in the last three years where the balances were much higher than the beginning of the time period in 2009.



01/01/2019-07/15/2022 Risk(%) Return(%)
Combined Account Portfolio 15.79 16.76
Aggressive 17.67 10.5
Moderately Aggressive 15 9.38
Moderate 11.58 7.51


07/17/2019-07/15/2022 Risk(%) Return(%)
Combined Account Portfolio 15.74 13.06
Aggressive 17.83 6.63
Moderately Aggressive6 15.16 5.87
Moderate 11.73 4.49

01/01/2009-07/15/2022 Risk(%) Return(%)
Combined Account Portfolio 13.15 10.03
Aggressive 14.9 10.63
Moderately Aggressive 12.52 9.63
Moderate 9.47 8.04

[frommi]

Over long time periods, it is almost impossible to beat the market without taking higher levels of risk.

Can you elaborate what you think that higher levels of risk are?
My portfolio has a beta < 1 and goes down less when the markets falls, but it is much more concentrated then for example the S&P500. Is this now a higher level of risk or not?

[ertyu]

Can you elaborate what you think that higher levels of risk are?
My portfolio has a beta < 1 and goes down less when the markets falls, but it is much more concentrated then for example the S&P500. Is this now a higher level of risk or not?

beta = market risk. according to your definition, your portfolio has less than market risk - for now. But let's say the market rotates out of the sector (s) you're concentrated in - then your portfolio might end up having higher than market risk and have a greater beta than someone fully diversified. E.g. if one is concentrated in a sector that was doing well - say tech - and the market rotates out of that sector, you will now have higher beta than someone fully diversified. On the other hand, if you are concentrated in stocks with low beta such as mcdonalds etc, you're giving up return because those stocks also don't go up as much during the up swing of the cycle. So, over the long run, it evens out

[frommi]

So in the end nobody knows what the risk anybody takes is because you cant say it in advance?
Stock goes down i took a risk, stock goes up i didnt? :

[ertyu]

So in the end nobody knows what the risk anybody takes is because you cant say it in advance?
Stock goes down i took a risk, stock goes up i didnt? :

i probably need the more knowledgeable people here to confirm, but to my understanding, stocks that go up more than the market on an upswing tend to also go down more than the market on the downswing

[jacob]

My portfolio has a beta < 1 and goes down less when the markets falls, but it is much more concentrated then for example the S&P500. Is this now a higher level of risk or not?

Here's the standard textbook explanation:

There are different kinds of risks. Your portfolio has less market risk (beta<1) but more concentration risk (because less diversification). There are many other types e.g. business risk, currency risk, merger risk, sector risk, interest rate risk. There are also several different ways of measuring risk, e.g. price volatility, Treynor, Sharpe, Sortino, ...

(This makes the idiomatic "risk-reward" conjecture rather idiosyncratic. What risk? What reward?)

Using the standard deviation around the average of the closing price is widespread because it's easy to calculate and freely available + it comes with assumptions that makes the math a lot simpler. (All the tools of frequentist statistics become available.) In the vernacular, risk is possibility of something bad happening. Generally people do not see improvements as risk. However, using a one-sided negative-only probability measure is A LOT harder (hello computers!) than the L2 norms that the canonical pencil and paper theory is built on. Also, it can be argued that as far as the price is concerned, increases are a risk too for some market participants. The institution is the long-short man in the middle and makes his money between the buyer and the seller on the price rips. High volatility increases the risk of being caught out.

You'll note that these risks can be roughly divided into financial-risk and economic-risk, that is, if the risk primarily affects the price w/o affecting the business or vice versa. Of course, these risks are not independent as much as they are lenses. For example, in theory the implied volatility of options should equal the volatility of the underlying. In practice it never does resulting in the smile, the skew, ... Similarly, Graham's strategy was to eliminate business risk by companies below their liquidation value. Conversely, a highly illiquid stock that almost never trades will exhibit a constant price most of the time. It will therefore have close to zero volatility and someone using volatility as a risk gauge would naively conclude it is risk free.

[frommi]

Wow, nice summary . Since all the risk that is measurable is backward looking (price,beta) and all the risk that really matters is forward looking (business fundamentals deterioration) risk is still a pretty fishy word at least to me.