The hottest Risk management Substack posts right now

And their main takeaways

Amazon and Apple at a Trillion $: A Follow-up on Uncertainty and Catalysts!

Musings on Markets • 0 implied HN points • 21 Sep 18

Uncertainty is a big part of valuing companies. Instead of ignoring it, we can use tools like scenario analysis and simulations to make better predictions.
When valuing companies like Apple and Amazon, using more than just single numbers helps us understand how different factors can change the outcome.
Look for events or news (like earnings reports or management changes) that can change a company's stock price. These can be key moments for making investment decisions.

Deja Vu In Turkey: Currency Crisis and Corporate Insanity!

Musings on Markets • 0 implied HN points • 15 Aug 18

💰 Finance Currency Market Trends Economic Policy Risk management

Turkey is facing a severe currency crisis, primarily due to a drop in the value of the Lira. This situation is made worse by poor business practices and lack of proper regulatory oversight.
Many Turkish companies are mismatching their debts, meaning they borrow in foreign currencies while generating cash flows in the Lira. This creates a big risk for them, especially as the Lira declines.
To prevent future crises, changes are needed. This includes the government not bailing out companies with mismatched debts and banks needing to be more careful about the risks they take when lending money.

January 2018 Data Update 6: A Cost of Capital Primer

Musings on Markets • 0 implied HN points • 26 Jan 18

💰 Finance Investments Corporate Finance Valuation Risk management Capital Structure

The cost of capital is a critical concept in finance, representing the return an investor requires from a business investment. It's best understood as an opportunity cost, not just the cost of borrowing money.
It's important to use appropriate rates for different risks when making investment decisions, as applying a single cost of capital to varying investments can lead to poor choices.
Estimating the cost of capital involves understanding both equity and debt and considering market values. Having a clear method can help make better financial decisions.

January 2018 Data Update 4: The Currency Conundrum

Musings on Markets • 0 implied HN points • 24 Jan 18

💰 Finance Risk management Investment Analysis Currency Markets Economic Theory Sovereign debt

Many people wrongly assume that government bonds always have no risk, especially when they are in local currency. But countries can default on these bonds, making their interest rates not risk-free.
There is no single global risk-free rate; it varies with inflation across different countries. Mixing risk-free rates from different currencies can distort financial analyses.
Choosing the currency for valuation doesn’t change a company's inherent value, since risks and cash flows should align with the currency used.

January 2018 Data Update 1: Numbers don't lie, or do they?

Musings on Markets • 0 implied HN points • 05 Jan 18

💰 Finance Market Data Investment Analysis Corporate Finance Risk management Financial Metrics

Collecting and analyzing data from a large number of companies helps in gaining a better perspective for making investment decisions. It allows for comparison against industry and geographic averages.
It's important to question common investing rules of thumb and understand whether they still hold true in today’s market. Examining actual data can reveal if these rules are outdated.
Trends and changes in corporate finance can significantly impact investors and the economy. It’s useful to track how companies evolve over time and how that affects various financial metrics.

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A Tale of Two Markets: Politics and Investing!

Musings on Markets • 0 implied HN points • 06 Jun 17

💰 Finance Market Analysis Investment Strategies Risk management Economic Indicators Behavioral Finance

There is a big divide among investors about the current market. Some think a crash is coming while others believe a new bull market is starting.
People are showing different feelings about risk. For some, the market seems stable, but others see a lot of uncertainty in economic policies.
Consumer confidence is up, but spending hasn't followed. Both consumers and businesses feel good about the future, but they aren't investing as much as expected.

January 2017 Data Update 3: Cracking the Currency Code

Musings on Markets • 0 implied HN points • 20 Jan 17

💰 Finance Valuation Currency Investment Risk management Capital Markets Economic Indicators

Understanding currency is really important for evaluating companies. You can't just ignore how different currencies affect cash flows and the value of assets.
You should be able to value a company in any currency without changing its actual worth. The key is to keep your estimates consistent across cash flows and risk rates.
When estimating future exchange rates, a simple approach is to consider how inflation rates differ between currencies. It helps you make better valuations without overcomplicating things.

January 2017 Data Update 2: The Resilience of US Equities!

Musings on Markets • 0 implied HN points • 13 Jan 17

💰 Finance Investing Equities Market Analysis Economic Trends Risk management

US stocks showed resilience in 2016 despite initial fears of a market bubble due to economic concerns. Investors were surprised by the market's recovery after significant drops early in the year.
The expected return on stocks for 2017 is estimated at around 8.14%, which is higher than the historical average. However, there are concerns about companies paying out more cash than they're earning, which isn't sustainable in the long term.
Interest rates are likely to rise in 2017 due to economic growth and inflation. This could impact stock prices if earnings don't keep pace, but there's also a chance that rising earnings will support the market.

Active Investing: Seeking the Elusive Edge!

Musings on Markets • 0 implied HN points • 28 Dec 16

💰 Finance Investing Market Analysis Risk management Portfolio strategy Economic Trends

Active investing is struggling because most active investors don't perform better than passive options. This is mainly due to high fees and transaction costs that eat into returns.
Many active investors lack a clear investment philosophy, causing them to jump between strategies instead of sticking to one approach. This inconsistency leads to poor performance.
To succeed in active investing, it's important to have a strong investment philosophy and find a unique edge that sets you apart from others in the market.

Myth 5.2: As g-> r...To Infinity and Beyond!

Musings on Markets • 0 implied HN points • 30 Nov 16

💰 Finance Valuation Investment Economics Market Trends Risk management

When using the perpetual growth model in valuations, the growth rate should never exceed the overall economy's growth rate. This keeps your calculations realistic.
It's best to use the risk-free rate as a cap for growth because it takes inflation into account and provides a solid basis for your numbers.
Valuing companies with overly optimistic growth rates can lead to big mistakes. Keeping growth rates in check helps maintain value accuracy.

The Trump Effect on Markets: A Financial (not a Political) Analysis!

Musings on Markets • 0 implied HN points • 11 Nov 16

💰 Finance Market Analysis Investment Strategies Economic Policy Risk management Financial trends

Market reactions to big political events can be surprising and unpredictable. After the election, there were initial drops but then the markets bounced back, showing that how investors react can change quickly.
Expert predictions are not always reliable. In this case, many experts predicted doom, but the market's actual response showed that the public often trusts their instincts over expert advice.
Stories can influence outcomes more than statistics. The narratives around Brexit and the Trump election resonated with many voters, suggesting that emotional connections can sometimes matter more than hard data.

Myth 4.5: DCFs break down with near-zero risk free rates!

Musings on Markets • 0 implied HN points • 04 Nov 16

💰 Finance Valuation Interest Rates Investment strategy Risk management Market Analysis

Lower risk-free rates can increase the value of future cash flows in discounted cash flow (DCF) models. This means that when interest rates go down, it can make companies look more valuable.
It's important to adjust growth rates and risk premiums alongside changes in risk-free rates. If you change one factor without looking at the others, your valuation might be way off.
Using historical data for risk premiums while ignoring current rates can lead to misvaluations. As rates change, you need to rethink the risks associated with investments.

Myth 4.4: The D(discount) rate is a receptacle for your hopes and fears

Musings on Markets • 0 implied HN points • 04 Nov 16

💼 Business Valuation Finance Investing Risk management Decision-making

The discount rate in cash flow valuation shouldn't be used to reflect personal hopes or fears. It's meant to account for business risks, not management quality or competitive advantages.
Risks like nationalization or distress risks are better handled with decision trees or other tools instead of altering the discount rate. This helps provide a clearer picture of an asset's value.
Using a margin of safety or doing more homework won't eliminate risk in valuations. It's important to recognize that some risks are inherent and cannot be fully mitigated.

Myth 4.2: It's all about D in the DCF

Musings on Markets • 0 implied HN points • 04 Nov 16

💰 Finance Valuation Investment Risk management Market Analysis Behavioral Finance

Many people focus too much on discount rates when valuing investments, often ignoring cash flows and growth rates, which are just as important.
Getting the discount rate wrong can lead to big mistakes in valuation, but the range of costs of capital is often quite similar across different companies.
Instead of stressing over discount rates, we should prioritize accurately estimating future cash flows and growth, especially for younger companies.

Deutsche Bank: A Greek Tragedy at a German Institution?

Musings on Markets • 0 implied HN points • 06 Oct 16

💰 Finance Banking Investment Regulations Market Analysis Risk management

Deutsche Bank has experienced a significant drop in its stock price and market value, which has raised concerns among investors regarding its stability and future prospects.
The bank's recent troubles are attributed to a mix of bad investment decisions and regulatory challenges, especially after facing a large fine from the US Department of Justice.
Despite the current perception of risk, some investors see an opportunity as the stock may be undervalued, but it's important to recognize the risks associated with such investments.

May you live in "exciting" times! An Updated Picture of Country Risk

Musings on Markets • 0 implied HN points • 22 Jul 16

💰 Finance Investing Market Analysis Economic Indicators Risk management

Investing in different countries has varying levels of risk. Factors like political stability, legal systems, and violence affect how risky a country is.
There's a difference between market measures and non-market measures when assessing risk. Market measures can change quickly, while non-market measures can be slower and less clear.
Understanding country risk is important for businesses operating globally. The risk isn't just based on where a company is located, but also on where it does its business.

DCF Myth 3.2: If you don't look, its not there!

Musings on Markets • 0 implied HN points • 23 May 16

💰 Finance Valuation Investing Risk management Statistical Analysis

Using simulations for financial valuations helps capture uncertainty. Instead of just using one guess for numbers, you can use a range to see different possible outcomes.
Probability distributions are important in understanding risks and making better financial decisions. They can show how likely different outcomes are, which is essential for planning.
Modern tools like Excel add-ons make simulations easier to run. You can use programs that help visualize the potential values of an investment based on various inputs.

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

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.
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.
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.

DCF Myth 3: You cannot do a valuation, when there is too much uncertainty!

Musings on Markets • 0 implied HN points • 02 May 16

💰 Finance Valuation Investment Market Trends Risk management Behavioral Finance

You can still do valuations even when there's a lot of uncertainty. It's actually common to face unknowns in investing.
Uncertainty can lead to bad decision-making like inaction or relying too much on others' opinions. Being aware of how uncertainty affects you is key.
Having a clear story or narrative about a company helps during uncertain times. It can guide your decisions and make valuations feel more grounded.

January 2016 Data Update 4: The Costs of Capital

Musings on Markets • 0 implied HN points • 14 Jan 16

💰 Finance Corporate Finance Valuation Investment Analysis Risk management Economic Indicators

The cost of capital is crucial for businesses as it helps determine where to invest. Companies need to know the minimum returns needed to justify their investments.
It plays a key role in deciding the mix of debt and equity a company should use. Understanding this mix can optimize financial performance.
Different sectors have varying costs of capital due to risk factors. It's important to use a cost of capital that reflects the specific risks of investments being considered.

January 2016 Data Update 3: Country Risk and Pricing

Musings on Markets • 0 implied HN points • 09 Jan 16

💰 Finance Risk management International Markets Valuation Methods Investment Strategies

Country risk matters for business, and it's based on where a company operates, not just where it is based. Companies can face risks from markets they rely on for revenue.
Different countries have different levels of investment risk, affecting equity risk premiums. Understanding these risks helps investors make better decisions.
Stocks from various countries are priced differently, often reflecting local market conditions. It's important to consider these multiples when investing internationally.

Another Market Crisis? My Survival Manual/Journal!

Musings on Markets • 0 implied HN points • 26 Aug 15

💰 Finance Market Analysis Investment Strategies Risk management Economic Trends Portfolio Management

Market crises cause a sharp increase in the price of risk, which leads to a drop in the value of risky assets. It's important to keep an eye on this price of risk to understand market movements.
During a crisis, liquidity becomes very important. Investors prefer liquid assets more than ever, and companies with strong cash positions generally fare better.
It's easy to panic during market downturns, but it's crucial to stick to a personal investment strategy. Taking a step back and avoiding constant checking of the market can help manage anxiety.

Valuing Country Risk: Pictures of Global Risk - Part II

Musings on Markets • 0 implied HN points • 29 Jul 15

💰 Finance Investment Risk management Valuation Economic Analysis Market Trends

Investors need to adjust cash flows based on country risk, which means recognizing how risks in different countries can affect expected earnings and cash flows.
An alternative way to deal with country risk is by increasing the required return on investments to reflect the higher risk, which also lowers the asset's value.
It's important to avoid double counting risks when making adjustments and to ensure that any changes made for country risk are clear and understandable to others.

No Light at the end of the Tunnel: Investing in Bad Businesses

Musings on Markets • 0 implied HN points • 25 May 15

💼 Business Investment Corporate strategy Market Analysis Financial Performance Risk management

Businesses can be considered 'bad' if most companies in the industry regularly lose money. It's not enough for just a few companies to struggle; the whole sector needs to be underperforming.
Companies might stick around in bad businesses because they hope things will improve or because it's hard to sell their assets at a good price. Sometimes, they also face pressure from other parties, like unions or governments.
Investors might still invest in these bad businesses if the price is right. However, they need to be careful as putting money into struggling companies can turn out to be risky and often leads to more losses.

The Search for Investment Serenity: The Look Back Test!

Musings on Markets • 0 implied HN points • 20 Apr 15

💰 Finance Investing Valuation Behavioral Finance Market Analysis Risk management

Investors should regularly review their past investments to make better decisions. This means questioning whether to buy, hold, or sell based on current valuations.
It's important to be open about mistakes and avoid emotional decision-making in investing. Being transparent can help you learn and improve your strategy.
Having a balanced approach to investing is key. Too much faith can lead to ignoring potential issues, while too little can cause you to abandon good investments too soon.

Illiquidity and Bubbles in Private Share Markets: Testing Mark Cuban's thesis!

Musings on Markets • 0 implied HN points • 20 Mar 15

💰 Finance Market Analysis Investing Venture Capital Economic Trends Risk management

Not all rising tech stock prices mean there's a bubble. Current tech companies are more solid compared to the bubble of the 1990s because their market values match their actual revenues and profits.
Private markets are not as liquid as public ones, but that doesn't mean they're always less stable. Some private markets have improved in terms of liquidity, and both types can struggle when investors lose interest.
Bubbles can happen in both public and private markets, but the impact of a bubble burst may be less severe in private markets if the investors involved are wealthy. They are more likely to absorb the losses without causing wider financial harm.

DCF Myth 1: If you have a D(discount rate) and a CF (cash flow), you have a DCF!

Musings on Markets • 0 implied HN points • 23 Feb 15

💰 Finance Valuation Analysis Investment Cash Flow Risk management

You can't calculate a DCF just with a discount rate and cash flow. It needs to be done carefully, considering many factors for accurate results.
It's important that everything in a DCF is consistent, like using the same currency and type of cash flows. If things don’t line up, the result won't make sense.
A good DCF should tell a convincing story about the business’s future, matching numbers with real expectations and market conditions.

How low can you go? Doing the Petrobras Limbo!

Musings on Markets • 0 implied HN points • 11 Feb 15

💰 Finance Investing Market Trends Risk management Corporate Governance Valuation

Petrobras had a major rise and fall in its market value, going from a top global oil company to losing over $200 billion due to poor management and political interference.
The company's governance structure allowed the Brazilian government to maintain control while still raising funds from shareholders, leading to decisions that favored political gains over profitability.
Investors should be cautious when companies are heavily influenced by government interests, as this can result in value destruction rather than shareholder benefits.

Putting the D in the DCF: The Cost of Capital

Musings on Markets • 0 implied HN points • 19 Jan 15

💰 Finance Investment Corporate Finance Valuation Risk management Financial Analysis

The cost of capital is really important in finance and there are three main ways to understand it: as a cost of raising money, as an opportunity cost, and as a discount rate for valuing businesses.
When figuring out a company's cost of capital, you need to look at the risk of the business, the debt it has, and how much investors expect to earn. It’s a detailed process but crucial for making good financial decisions.
It's easy to get caught up in small details about the cost of capital, but what's more important is to focus on the actual cash flows of the business. Getting those numbers right can make a bigger impact.

Go where it is darkest: When company, country, currency and commodity risk collide!

Musings on Markets • 0 implied HN points • 20 Nov 14

💰 Finance Investing Valuation Market Analysis Risk management Corporate Governance

Investing in companies with uncertain futures can lead to bigger rewards. While it may seem safer to choose stable companies, those come with less potential for finding great deals.
Understanding various risks, like country, currency, and corporate governance, is crucial when valuing companies. These factors can greatly impact a company's success and its stock price.
Higher commodity prices usually benefit mining and oil companies, but these markets are unpredictable. A thorough understanding of these cycles is necessary for wise investing.

Value in the eye of the storm: Why you should welcome uncertainty!

Musings on Markets • 0 implied HN points • 19 Nov 13

💰 Finance Investment Valuation Market Analysis Risk management Economic Theory

Valuing companies during uncertain times can actually give you an edge over others. When everyone else is scared, you can find opportunities others might miss.
If you wait for all the uncertainties to clear up before making your investment decisions, you might lose out. Act when things are messy, as your insights are most valuable then.
If many investors are saying something can't be valued, that's when you should jump in and try. There might be hidden potential in areas others overlook.

Twitter IPO: Why a good trade be a bad investment (or vice versa)?

Musings on Markets • 0 implied HN points • 10 Oct 13

💰 Finance Investing Trading Market Analysis Valuation Risk management

There’s a big difference between price and value. Price is what people are willing to pay, while value is what the actual worth of the asset is supposed to be.
Traders focus on price movements and market trends to make quick profits. Investors look for long-term value and often ignore short-term price changes.
Both trading and investing are important in markets. Traders create opportunities for investors by moving prices, while investors help stabilize the market.

Many a slip between the cup & the lip: From forward value to value per share today

Musings on Markets • 0 implied HN points • 11 Sep 13

💰 Finance Investing Valuation Market Analysis Risk management Corporate Finance

Valuing young growth companies is tough but important. It helps you understand what the business needs to succeed.
Per share values can be tricky with young companies because the number of shares can change a lot. Always be cautious when looking at these numbers.
Using future earnings to estimate a company's value can be misleading. It often doesn't show the risks like potential failures or dilution from new shares.

Equity Risk Premiums (ERP) and Stocks: Bullish or Bearish Indicator

Musings on Markets • 0 implied HN points • 19 May 13

💰 Finance Investing Markets Risk management Financial Analysis Economic Indicators

The equity risk premium (ERP) is the extra return investors want for taking risks by investing in stocks instead of safe investments like government bonds. Right now, the ERP is high, which some believe indicates good stock returns in the future.
There are different ways to measure the ERP, including looking at historical returns, surveying investors, or calculating based on stock prices and future cash flows. Each method can give varying results about how investors view risks and returns.
Low interest rates on government bonds have been a big reason for the high ERP lately. If interest rates rise, we might see the ERP drop, which could lead to changes in stock prices and the overall market.

The Golden Rule? Thoughts on gold as an investment

Musings on Markets • 0 implied HN points • 20 Apr 13

💰 Finance Investing Economics Market Analysis Commodities Risk management

Gold doesn't generate cash flow on its own, making it hard to determine its true value. Many investors, including famous ones like Warren Buffett, prefer assets where they can estimate a value.
Gold prices often rise with inflation and during times of crisis. People tend to buy gold when they worry about their financial safety, which shows its role as a protective asset.
Using gold as insurance in your portfolio can be wise, especially during uncertain times. Even if it's priced high, it can help protect against major financial disasters.

Storms and Stocks: Dealing with Disruptive Shocks

Musings on Markets • 0 implied HN points • 16 Nov 12

💰 Finance Investment Strategies Risk management Market Trends Economic Events Crisis response

When you see repeated problems, like storms or market issues, it’s likely they will keep happening. This means we should change how we invest and manage risks.
Relying too much on past events can lead to bad choices. Just because something worked before doesn’t mean it will work again in a similar situation.
After disruptions, there’s often a lack of clear information, causing people to believe rumors. It’s important to have systems that can adapt and provide real guidance during crises.

Equity Risk Premiums: Globalization and Country risk

Musings on Markets • 0 implied HN points • 02 Jul 12

💰 Finance Investing Risk management Market Analysis Global Economy Valuation

The equity risk premium shows what investors expect to earn from stocks over a risk-free rate. It is influenced by macroeconomic concerns and varies across different countries.
Country risk matters when estimating equity risk premiums. Riskier countries, like Venezuela or Greece, should have higher premiums compared to safer ones like Switzerland or Canada.
Estimating equity risk premiums for different markets can be tricky. Approaches like using country default spreads or market volatility can help, but it's important to consider specific economic conditions and investor behavior.

Contrarian Value Investing - Going against the flow....

Musings on Markets • 0 implied HN points • 18 Jun 12

💰 Finance Investing Market Trends Stock Analysis Behavioral Finance Risk management

Contrarian investing means buying stocks that other investors are selling off. This strategy bets that these stocks will bounce back after a market overreaction.
It’s important to do your homework and consider why a stock price dropped. Some drops are temporary and can lead to big gains if the company is still strong.
Watch out for risks and costs, especially with low-priced stocks. Timing your investments and understanding market reactions can make a big difference in returns.

Equity Risk Premiums: The 2012 Edition

Musings on Markets • 0 implied HN points • 23 Mar 12

💰 Finance Investment Risk management Market Analysis Valuation Economic Indicators

The equity risk premium is the extra return investors expect from stocks compared to safer investments. It shows how investors feel about risk and potential returns.
Different methods exist to measure the equity risk premium, including surveys, historical data, and implied premiums. Each method can give different results, but future predictions are key.
When valuing stocks or deciding on investment allocations, using the current implied equity risk premium is generally best. This keeps valuations grounded in today's market situation.

Facebook: Playing the "IPO pop" game?

Musings on Markets • 0 implied HN points • 23 Feb 12

💰 Finance Investing IPOs Stock Market Valuation Risk management

Getting shares at the IPO price is tricky. Even if you bid, you might not get all the shares you want, which can lead to investing too much in overpriced stocks.
Just because a stock usually pops on offering day doesn't mean it will this time. Bigger IPOs like Facebook might not have the same initial price jump as smaller ones.
Timing your exit is crucial. Many IPOs don't perform well long-term, so it's often better to sell quickly after the offering if you want to make a profit.