Key insights
- The post discusses value investing principles, emphasizing the importance of price relative to company fundamentals, asymmetric risk-reward profiles, and the impact of psychological biases. It highlights examples like NVDA, MU, and AMD, suggesting a focus on undervalued small-cap stocks with tangible assets and potential catalysts. The author's personal struggles with confirmation bias and timing market moves are also noted.
Hey guys,
I've always loved looking for opportunities in the market, especially in small stocks. I'm relatively risk seeking and love analyzing stocks. I've done quite alright but i'm not investing insane sums of money yet. I have a masters in strategic management and even though business majors gets memed, the concepts have proven incredibly usefull when investing and in my work and personal life and wanted to share some of them here.
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A company can be great, but the stock might be terrible. Most people know this, but this is still hard to grasp intuitively, lots of people pumping stocks only focus on the company roadmap, not the price they are paying for it currently. 2. The worst thing you can do is pay too much. This is a concept mainly from M&A literature. Synergies get overestimated and high conviction clouds judgement. Every penny above market rate destroys return, the same goes for buying companies on the stock market. 3. Not every risk is equal. A stock such as NVDA has less room to grow than a 40 mil marketcap company that's been flying under the radar backed with 35 mil of tangible assets. The efficient frontier is a great start, but looking for assymmetric risk is a great way to get an edge without taking on disproportionate risk. Assymetric risk means the stock has relatively low risk of dropping, but still has potential catalysts or reasons to grow significantly. The upside is high, the downside is protected, but remember: there is no free lunch, risk is risk.
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Confirmation bias is very real and psychology is the most difficult thing to master as a stock picker. I myself struggle heavily with buying stocks after a run and selling to early. I was on the fence buying MU this December because the financials were still insane relative to the valuation. The only reason i didn't buy was the chart. I also sold AMD on 250 locking in 110%, long term i still believed it had room to grow, but the significant and fast rip up made me feel it was time to sell. Point here is: look at the facts, not the charts. I don't regret missing the above opportunities as this saying still holds true: ' Bears make money, bulls make money and pigs get slaughtered.
The way i currently pick stocks is using 2 buckets. One is 'floor' and the other is 'growth'. The floor bucket is mostly in order to determine whether assymetric risk is protected by assets and growth is in order to determine whether or not the companies multiple is justified and/or might be compressed further. This is a very, very simplistic way to look at it, but i use it for discovery. I build a screener that routes screener metrics and weights in order to determine whether or not it's good / bad relative to peers. Based on that, i determine which companies are worth to look in further. That way i always try to invest in the best opportunity when I have cash available instead of always buying the same stocks, since timing the buying price is the single most important determinant of return.
Would love to hear you guys's thoughts and how you guys discover new stocks / determine value outside browsing reddit! The amount of metrics and possibilities for investing in the Stockmarket can be overwhelming.