Strategy

Tom Konrad, CFA In Green Energy Investing for Beginners, Part I, gave information to guide the choice of green investment vehicles (mutual funds, ETFs, or stocks.) This article is intended to help investors decide how much of their money to put into those vehicles. An informed decision of how much to invest in green energy is at least as important as how you make the investment.  The choice between green Exhange Traded Funds (ETFs) and green Mutual funds rests on a difference of about one percent per year, caused by differences in fees.  Yet in the first three quarters...

Stocks may be expensive now, and the temptation is to buy before they get even more expensive.  Why patience makes the brokerage account golden. Tom Konrad, Ph.D., CFA On Friday, I started a series on stocks I'd like to buy when they are cheaper.  The first was on clean or efficient transport stocks which will benefit from both Climate Change regulation and high oil prices due to Peak Oil. Before I continue on with my Clean Energy Shopping List series, I think it's worth talking about the underlying strategy, since it can be counter-intuitive, and I expect that many...

Last week, I looked at how a small investor could gain an advantage in the market by understanding the other players.  The most important other players are institutional investors such as hedge funds, pension funds, mutual funds, and investment banks who have considerably more resources and valuation skills than the individual investor, and so trying to take them on directly to beat them at their own is likely to be an expensive exercise in futility. Two Exploitable Weaknesses On the other hand, I argued that institutional investors have certain handicaps and biases which do allow small investors to enter...

Tom Konrad, CFA In stock portfolios, deciding how many stocks to own involves weighing a trade off.   A smaller portfolio can be built (and sold) with fewer commissions, and also requires less time to research.  On the other hand, a portfolio with fewer stocks will gain fewer benefits of diversification, and likely be both more volatile and harder to sell in a crisis.  These trade offs are also affected by the size of the portfolio, and the market capitalization and liquidity of the companies in the portfolio. Diversification is widely accepted as a nearly costless way to reduce...

Tom Konrad, Ph.D., CFA Often, knowing more about a company is less useful than knowing just a few of the right things.  Knowing the right questions to ask can help investors wade through a sea of mostly irrelevant information. Take a moment to answer the following poll: Suppose you want to know if fictional solar Company MySolar will outperform other solar stocks. Which fact would be most useful in your decision?(poll) The key to this question was the stated goal of "outperforming other solar stocks."  An investor who is only hoping to achieve returns equal...

When I first came across ProShares' UltraShort ETFs, I thought they were a brilliant idea.  They seem to promise a multitude of advantages for investors: The ability to hedge market or sector exposure without having to go short.  (Going short requires a margin account, and US law prohibits the use of margin in most retirement accounts.) They should have a better risk profile than shorting.  With an UltraShort, you can't lose more than your initial investment.  With true shorting, the potential losses are unlimited.  As the underlying index rises, each percentage gain creates a smaller dollar fall, while...

John Petersen In "An Elephant Hunter Explains Market Dynamics" I discussed the two basic types of public companies; earnings-driven companies that are “bought” in top-tier weighing machine markets and event-driven companies that are “sold” in lower-tier voting machine markets. Today I'll get a bit more granular and show how "sold" companies usually fall into one of two discrete sub-classes that have a major impact on their stock market valuations. As a starting point, I'll ignore the China-based companies that are listed in the US because their quirky metrics would only confuse the analysis. Then I'll break...

Tom Konrad, CFA My target sector allocation for Green Energy Sectors: How much to put in Solar, Wind, Geothermal, Biomass, Biofuels, Energy Efficiency, Alternative Transport, and enabling technologies such as Smart Grid and Transmission. In Part I of this series on green energy investing (see also Part II and Part III), I suggested readers "structure your portfolio to reflect the technologies which are actually going to make a difference."  This is not the same as investing in a market portfolio, because the market tends to overemphasize the most exciting or familiar (as opposed to the most useful) technologies.  This...

Tom Konrad, CFA If you don't know what could go wrong in 2010, it could still hurt your portfolio. In Nassim Taleb's Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, he describes an exercise at one of his early jobs.  In order to become aware of risks they otherwise might have overlooked, they were to assume that they would lose all the money under their management in the coming year, and they work backwards to figure out how that might have happened. This struck me as an excellent idea, which investors...

If you're going to have someone else manage your money, consider their incentives carefully. I just finished reading Micheal Lewis's excellent book The Big Short: Inside the Doomsday Machine on the Wall Street's role in the subprime mortgage meltdown and the few investors who saw it coming. I began with a low opinion of the effectiveness of the vast majority fund managers and advisors who manage other people's money for a living, but the the highly-paid gross negligence and/or incompetence of the people running the CDO operations of the big Wall Street banks in the years leading...

Because I'm currently studying for the second (of three) CFA® exam, I'm going to take a break from my usual article analyzing some aspect of alternative energy.  This week and next, I'll take a step back and try to answer an existential question: How can I possibly hope to beat the market, when "the market" consists of professional money managers with resources far exceeding my own?  Every active investor should ask themselves this question: the answer will either make you a better investor, or save you a lot of time and money if you are humble enough to realize...