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moneysense.ca, 8/12/08
Are you a De-Value Investor?
On a $250,000 mortgage at 6.5% interest amortized over 25 years the total interest paid will be almost $252,400 – that’s only interest!
You’ve essentially paid for two homes: one in principal and one in interest. Pre-paying one additional payment of $1600 each year would decrease your interest to $203,500. You could save nearly $49,000 in interest and have your mortgage paid off in 21 years just adding an extra payment each year. Have you ever used a mortgage calculator to see how you can meaningfully decrease your interest?
“Why would I need to diversify? I don’t need to diversify! I hold only as much stock as I can hold in one hand.”
While being over diversified can negatively impact returns, not being diversified at all can leave an investor exposed and vulnerable to unexpected events in one sector, industry, country or investment. Effective diversification is ensuring you have exposure to investments that behave differently in various market conditions and buffer your overall portfolio against extremes of volatility and risk.
“They don’t need profit…the company is going to the moon! I have to invest in this stock…just look at that chart!”
Trees never grow to the sky and the fundamentals of gravity dictate that what goes up must come down. Speculation has high rewards, but also a high potential for losses. Companies without profits are dangerous because they’re burning through more cash than they can generate and this eventually catches up to a company.
“Oh…that’s what that company does?”
Do you understand what you’re buying? Do you know what factors can influence changes within the market a company operates? Is there sustainable demand for products or services? Are their operations complex? Can you explain what they do in a single sentence? What are the risks?
“I can’t sell…there’s still potential…plus I’m only down 40%.”
Knowing when to buy is always easy; knowing when to sell can be painful and difficult to ascertain. Do you have a rule, guideline or minimum loss (percentage or dollar amount) that you can tolerate on your investments? How important is capital preservation to you? Do you have as much confidence in yourself to sell as you do to buy?
moneysense.ca, 8/12/08
I am not a de-value investor but I still have some things to do before I become a value investor. Nice article by the way
Nice article Brad.. The thing that always amazes me is how people hold mutual funds that cost them more than 0.50% per year.
Smart would be to pay off the mortgage before any investments are purchased, and smart would be to have put all money in GIC’s in 2008 before the stock crash. A lot of smart people thought that GICs did not bring back very much money… and that they could gain 10 percent in stocks. When they lost 10-15 percent this year… I laughed when all my money was in GICs and money market altimira accounts.
RS & DGI – thanks for the kind words.
L505 – I think a number of investors look back now on their investment decisions with a much better view of what their risk tolerance should have been. The troubling fact is that when the markets recover, start making new highs and the fever once again takes hold only a few will actually remember that there’s still risk out there despite the attractive returns.
The frustrating part about the markets these days is that some stocks which continue to post higher and higher profits every business quarter are still getting their share price dragged lower and lower with the overall market. Although the temptation is to add to my position in these stocks, that would un-diversify my portfolio in a huge way as I already hold more of these stocks than a typical 5% allocation in a single stock name.
The more I learn, the more I know that I don’t know anything!
Thanks to CC and Brad for this opportunity to understand more about PF.
Nice article. I just want to announce my new entry into the blogoshere. CC, Preet and others have inspired me to give it a shot. Comments, suggestions etc for a newbie like me are not only welcomed but encouraged.
[...] Canadian Capitalist asks “are you a de-value investor?” [...]
“a tour of a manufacturing plant to get a sense within the first hour or two whether an investment is something that fits my style or requirements to own.”
I happen to work in a manufacturing plant and I’m not sure what anyone is supposed to get out of touring the facility. As an investor, I’d probably be looking around going, well that was fascinating but what is it that you wanted me to see? I see machines making things and forklift ferrying material around, though I kind of figure that’s what the capital on the balance sheet of a manufacturing firm was. I see there’s actually people employed so you can justify your expenses, which I already kind of figured since stuff is leaving the plant and getting sold. It feels like saying, “I’m not a mechanic, but show me the guts of your used car anyway so that I can be completely mystified as to whether or not its a good car.”
[...] The Canadian Capitalist: Are you a De-Value Investor? [...]
GSS – Part of my investing approach is to investigate the corporate culture of a company and to evaluate management prior to investing.
I’ve toured a number of locations for prospective investments over the years and I’m not so much concerned with how many forklifts the company has or their capacity to turn out so many widgets per hour.
Frequently you’ll find me talking to the workers on the floor of the production plant or near the loading docks in order to assess what’s happening at the bottom level of the company to see if it matches the same enthusiasm as that from the top.
From a productivity viewpoint that’s very important. If management is involving all employees into the operations of the company they have a vested interest and enthusiasm to continue working efficiently. I think most investors would be surprised what I’ve learnt from such conversations in passing.
[...] Are You A De-Value Investor? A post about value investing the easy way, the hard way and the SMART way with insights into a number of personal finance tips that can save you money! [...]
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