The hottest Financial Theory Substack posts right now

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DCF Myth 3.1: The Margin of Safety - Tool for Action or Excuse for Inaction?

Musings on Markets • 0 implied HN points • 03 May 16
💰 Finance Investing Valuation Risk management Market Analysis Financial Theory
  1. The Margin of Safety (MOS) is a way to protect your investments by ensuring you buy assets at a price lower than their actual value. It helps investors feel safer by providing a buffer against mistakes or market fluctuations.
  2. MOS isn't a one-size-fits-all strategy. Different investments should have different levels of MOS based on how risky or certain they are. For example, a steady utility company may need less margin than a startup with uncertain prospects.
  3. Using MOS doesn't mean you can skip careful valuations. Good investing requires solid value judgments and understanding what you're buying, rather than just relying on a safety margin to make choices.

Value Investing: An Identity Crisis?

Musings on Markets • 0 implied HN points • 08 Jun 12
💰 Finance Investing Value investing Market Analysis Financial Theory Stock Trading
  1. Not everyone has the same definition of a value investor, making it broad and sometimes confusing. It's important to have a clear understanding of what being a value investor means to recognize who truly fits that role.
  2. There are different styles of value investing, like passive, contrarian, and activist. Each style requires different skills and approaches, making it essential for investors to find what suits them best.
  3. Many believe that value investors will outperform other types of investors in the long run. However, this claim should be carefully examined to see if it holds true or if it's just a popular belief.

Alternatives to the CAPM: Part 5. Risk Adjusting the cash flows

Musings on Markets • 0 implied HN points • 30 Apr 11
💰 Finance Investment Valuation Risk management Econometrics Investing Risk management Valuation Financial Theory Capital Markets
  1. You can adjust cash flows for risk in two main ways: estimating expected cash flows across scenarios and using certainty equivalent cash flows. Both methods aim to accurately reflect investment risk.
  2. Certainty equivalent cash flows account for risk by using a safer value an investor would accept instead of the expected cash flow. This helps to quantify how risk-averse someone is when valuing their investment.
  3. Risk adjusting cash flows isn't necessarily easier than adjusting discount rates. It's important to know when to apply simple methods, like focusing on safe cash flows or dividends, but also to recognize their limitations.

All assets are illiquid

Musings on Markets • 0 implied HN points • 21 Dec 10
💰 Finance Investing Markets Economic Theory Asset management Risk Assessment Market Liquidity Asset Pricing Investor behavior Financial Theory
  1. All assets are considered illiquid, meaning they can't always be sold quickly at their current price without costs involved. This changes how we understand and measure the value of assets.
  2. Illiquidity varies between different asset classes, like real estate being less liquid compared to stocks and bonds. Some stocks are also more liquid based on their size and price.
  3. Investors care about liquidity because it affects asset prices and returns. Illiquid assets tend to have lower prices and higher expected returns, especially during market crises.

Nassim Taleb and the Nobel Committee

Musings on Markets • 0 implied HN points • 19 Oct 10
💰 Finance Investment Economics Financial Theory Market Analysis Risk management
  1. Nassim Taleb criticized the Nobel Committee for awarding finance prizes to certain economists. He believes their theories contributed to financial crises.
  2. Each economist, like Merton Miller and Harry Markowitz, had ideas that challenged common practices in finance. Their theories on capital structure and risk management still hold value.
  3. Real traders often ignore financial theories. They focus more on making deals and trades rather than the academic theories that some believe caused financial failures.
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Unstable risk premiums: A new paper

Musings on Markets • 0 implied HN points • 01 Sep 10
💰 Finance Investing Risk management Market Analysis Corporate Finance Financial Theory
  1. Risk premiums are less stable and more unpredictable now. This means that how much extra return investors expect can change a lot across different markets.
  2. Different markets, like bonds and real estate, are showing more similarities in risk premiums. This lets investors make better decisions by noticing when these premiums diverge.
  3. There are many ways to estimate risk premiums, and the paper offers a guide on when to use current numbers versus historical ones. This helps finance professionals make clearer choices.