The hottest Risk management Substack posts right now

And their main takeaways
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Top Finance Topics

The Search for Investment Serenity: The Look Back Test!

Musings on Markets • 0 implied HN points • 20 Apr 15
💰 Finance Risk management
  1. Investors should regularly review their past investments to make better decisions. This means questioning whether to buy, hold, or sell based on current valuations.
  2. 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.
  3. 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 Risk management
  1. 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.
  2. 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.
  3. 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 Risk management
  1. 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.
  2. 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.
  3. 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 Risk management
  1. 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.
  2. 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.
  3. 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 Risk management
  1. 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.
  2. 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.
  3. 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.
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Go where it is darkest: When company, country, currency and commodity risk collide!

Musings on Markets • 0 implied HN points • 20 Nov 14
💰 Finance Risk management
  1. 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.
  2. 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.
  3. 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 Risk management
  1. 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.
  2. 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.
  3. 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 Risk management
  1. 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.
  2. 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.
  3. 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 Risk management
  1. Valuing young growth companies is tough but important. It helps you understand what the business needs to succeed.
  2. 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.
  3. 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 Risk management
  1. 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.
  2. 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.
  3. 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 Risk management
  1. 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.
  2. 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.
  3. 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 Risk management
  1. 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.
  2. 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.
  3. 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 Risk management
  1. 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.
  2. 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.
  3. 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 Risk management
  1. Contrarian investing means buying stocks that other investors are selling off. This strategy bets that these stocks will bounce back after a market overreaction.
  2. 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.
  3. 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 Risk management
  1. 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.
  2. 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.
  3. 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 Risk management
  1. 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.
  2. 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.
  3. 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.

Risk free rates and value: Dealing with historically low risk free rates

Musings on Markets • 0 implied HN points • 30 Sep 11
💰 Finance Risk management
  1. Lower risk free rates mean lower discount rates, which can make assets look more valuable. However, this can be complicated for valuers who want to keep a low value for an asset.
  2. The risk free rate reflects general economic expectations, combining views on inflation and growth. When it's low, it often signals a lack of confidence in the economy's future.
  3. How you value assets today can vary widely. You can stick with current rates for a more dynamic approach or try to normalize past rates for a different perspective, but be careful not to mix inconsistent inputs.

Ruminations on Rogue Trading

Musings on Markets • 0 implied HN points • 23 Sep 11
💰 Finance Risk management
  1. Rogue trading happens when a trader breaks their company's rules, which can lead to huge financial losses or gains. It's not just about losing money; making risky trades can also be considered rogue trading.
  2. There are several reasons why people engage in rogue trading, like feeling addicted to trading or wanting to hit a big payday. Many traders take bigger risks when using money that isn't theirs, especially after experiencing losses.
  3. To prevent rogue trading, companies need to have better risk management systems and only hire cautious traders. Monitoring must be improved and there should be clear consequences for traders who take reckless risks.

Momentum versus Contrarian: Two Reads of the ERP

Musings on Markets • 0 implied HN points • 08 Aug 11
💰 Finance Risk management
  1. The equity risk premium (ERP) is important for estimating returns when valuing companies. It's useful to track how it changes, especially during market crises.
  2. A forward-looking approach to ERP, rather than a past-centric one, helps predict stock returns better. You can find tools online to calculate current ERP using market indexes.
  3. Investors react differently to changes in ERP: contrarians see it as a buying opportunity, momentum investors might follow trends, and some may choose to stay in cash until things stabilize.

A Sovereign Ratings Downgrade for the US? End of the world or bump in the road?

Musings on Markets • 0 implied HN points • 28 Jul 11
💰 Finance Risk management
  1. The U.S. government isn't likely to default soon, but people's trust in its ability to manage debt has been shaken. Once investors start worrying about default, it's hard to restore that confidence.
  2. The market is already reacting to fears of a U.S. default, with increased costs for protection against it. A formal downgrade from agencies may happen soon, but it will likely not come as a shock.
  3. If there is a downgrade, the cost of borrowing for U.S. companies and risk-free rates will likely rise. This could lead to lower stock prices, although some changes in market prices may have already factored in this risk.

Alternatives to the CAPM: Wrapping up

Musings on Markets • 0 implied HN points • 30 Apr 11
💰 Finance Risk management
  1. Ignoring risk in investments is a big mistake. You need your own way to measure and manage risk because investments have different levels of risk.
  2. Using numbers is important for valuing companies, but don't forget the stories behind them. The results in numbers should reflect the company's real situation.
  3. Keep your methods simple. A straightforward approach, like CAPM, can be useful, and it's important to question and refine your risk assessment regularly.

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

Musings on Markets • 0 implied HN points • 30 Apr 11
💰 Finance Risk management
  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.

Alternatives to the CAPM: Part 4: Market-Implied cost of equity

Musings on Markets • 0 implied HN points • 30 Apr 11
💰 Finance Risk management
  1. You can calculate the market-implied cost of equity using a simple dividend discount model, which helps you understand if a stock is fairly priced. This method allows you to figure out the expected return on a stock based on its price and future dividends.
  2. Comparing the market-implied cost of equity to a conventional one can help you decide whether to invest in a stock. If the market-implied cost is much higher than your estimate, it might mean the stock is riskier or less attractive.
  3. You can use the market-implied cost of equity for an entire sector so that you have a uniform measure for evaluating companies in that sector. This approach can make it easier to compare different companies without getting lost in individual risks.

Alternatives to the CAPM: Part 3: Connecting cost of debt to cost of equity

Musings on Markets • 0 implied HN points • 30 Apr 11
💰 Finance Risk management
  1. It's easier to figure out the cost of debt because you can see the interest rate when borrowing. This makes it a more straightforward number to use when looking at a company's finances.
  2. You can estimate the cost of equity by comparing it to the cost of debt and factoring in the volatility of both stocks and bonds. If the cost of debt is 8%, the cost of equity might be higher, like 12%, if stocks are riskier.
  3. This method works best for big companies with significant debt. However, it has limits because equity risk and bond risk are different, so care is needed in using this approach.

Alternatives to the CAPM: Part 2: Proxy Models

Musings on Markets • 0 implied HN points • 29 Apr 11
💰 Finance Risk management
  1. Proxy models move away from traditional finance theories like CAPM, focusing instead on how markets actually price investments. They try to explain returns based on observable factors rather than assumptions about investor behavior.
  2. Research by Fama and French found that factors like market capitalization and price-to-book ratios are better at explaining stock returns than the original CAPM betas. This means smaller companies and those with lower price-to-book ratios tend to have higher returns.
  3. While proxy models can improve expected return calculations, they come with risks like data mining and standard error problems. This means the results may not always be reliable or may misrepresent the true risk involved.

Alternatives to the CAPM: Part 1: Relative Risk Measures

Musings on Markets • 0 implied HN points • 28 Apr 11
💰 Finance Risk management
  1. The CAPM model has flaws and many people have shifted to using better methods for measuring risk and estimating returns. It's criticized for being too simple and for its dependence on past market prices.
  2. Multi Beta Models and Market Price based Models offer alternatives to CAPM by considering multiple factors or standard deviations instead of relying on a single market beta. These models are intended to improve return estimates but have their own complexities.
  3. Accounting information based models use a company's financial health as a measure of risk. They connect risk to fundamental business factors but can be misleading due to the way accounting numbers are reported.

Breach of Trust: Bank Valuation after the banking crisis

Musings on Markets • 0 implied HN points • 29 Mar 11
💰 Finance Risk management
  1. Investors used to trust banks because they thought regulations kept them in check. Now, that trust is gone, and we can’t just assume all banks will act responsibly anymore.
  2. The way banks determine dividends and capital requirements has changed. We should look at expected growth and regulatory needs instead of just past dividends to judge their value.
  3. Banks need to be more open about their finances and risks. This means clearer details in their financial statements so investors can make better-informed decisions.

Catastrophe and consequences for value

Musings on Markets • 0 implied HN points • 22 Mar 11
💰 Finance Risk management
  1. Natural disasters can change how we think about risk over long periods of time. We often base our expectations on past events, which might not be enough for rare but powerful situations.
  2. Experts often seem surprised by big events, even though they are supposed to know what to expect. This makes us question what we really mean by 'expertise' when big surprises keep happening.
  3. After a disaster, companies and investors face big challenges in managing risk. It's harder to prepare for unpredictable events, and these events can seriously affect the value of businesses and the market.

A tide in the affairs of men...

Musings on Markets • 0 implied HN points • 14 Mar 11
💼 Business Risk management
  1. Luck plays a big part in business success, but it's what companies do with that luck that really matters. Successful businesses build on good luck and make it a stepping stone for more success.
  2. Good risk-takers know how to take advantage of lucky moments and also minimize their losses when things go wrong. They are prepared for the ups and downs of business.
  3. Every person will experience good and bad luck in their careers. How we respond to that luck can decide if we succeed or just get by.

Luck versus skill: How can you tell?

Musings on Markets • 0 implied HN points • 12 Mar 11
💰 Finance Risk management
  1. It can be hard to tell if someone in finance is successful because of luck or skill. This confusion makes it tricky to reward them appropriately.
  2. In sports, it's easier to see skill because success is clear and happens often, while in finance, success is more subjective and can happen by chance.
  3. To find skilled investors or managers, look for those who are consistent in their success, transparent about their strategies, and humble enough to acknowledge the role of luck.

Buffett and Black-Scholes

Musings on Markets • 0 implied HN points • 01 Mar 11
💰 Finance Risk management
  1. Warren Buffett believes the Black-Scholes model gives bad values for long-term options, which is a viewpoint that some disagree with.
  2. Buffett's opinions on option valuation may not consider newer methods that adjust the Black-Scholes model for better accuracy.
  3. You can still be a successful investor without knowing how to value options, as long as you avoid investments that rely heavily on them.

Equity Risk Premiums: The 2011 Edition

Musings on Markets • 0 implied HN points • 25 Feb 11
💰 Finance Risk management
  1. The equity risk premium is how much more investors expect to earn from stocks compared to risk-free investments. It's influenced by how investors feel about the market.
  2. There are three main ways to estimate the equity risk premium: surveying people's opinions, looking at historical data, and calculating future expectations based on current stock prices.
  3. Which equity risk premium to use depends on your situation. If you’re assessing a company based on current market conditions, use today's implied premium; long-term investors can take a broader view.

The Shift to Buybacks: Implications for investors

Musings on Markets • 0 implied HN points • 01 Feb 11
💰 Finance Risk management
  1. Many companies are moving from paying dividends to doing stock buybacks. This means fewer stocks will pay dividends, but those that do may be more reliable.
  2. If you're not focused on dividends but want cash returns, consider stock buybacks as a way to profit. Just remember that buybacks can be risky and are not guaranteed.
  3. For long-term growth investors, buybacks can be a sign of maturity in a company. Look for firms that might grow in value because of buybacks, but be cautious when such announcements come.

How much cash is too much? Looking at Apple

Musings on Markets • 0 implied HN points • 19 Jan 11
💼 Business Risk management
  1. Cash balance should be compared to low-risk investments, not just operating costs. It's important to know how a company is using cash, since unnecessary risk can harm investors.
  2. Companies like Apple that effectively manage cash can be trusted to use it wisely. A good track record is key to determining how much cash is too much.
  3. Too much cash can lead to bad investment decisions, which could hurt company value. Keeping cash can be smarter than spending it poorly, especially if the company is performing well.

Herding behavior: Why, so what and what if?

Musings on Markets • 0 implied HN points • 15 Jan 11
💰 Finance Risk management
  1. Herding behavior is when people follow the crowd, which we see in many areas of life, including finance. This can lead to investors buying or selling the same stocks at the same time.
  2. This behavior can cause problems like pricing bubbles and make markets more volatile. When many people act in the same way, it can lead to big changes in stock prices.
  3. Investors can make money by either joining the herd during trends or by going against it if they have a strong understanding and confidence in their choices. But it takes skill to do it successfully.

Making money off illiquidity: Two Strategies

Musings on Markets • 0 implied HN points • 27 Dec 10
💰 Finance Risk management
  1. You can take advantage of illiquidity by buying assets when their prices are low due to a lack of buyer interest. This strategy allows you to sell them later when prices recover, potentially making a profit.
  2. Using leverage can help increase your possible returns when investing in illiquid assets, but it also raises your need for liquidity, so you must be careful and patient.
  3. Being good at predicting when markets will become more or less liquid can help you shift your investments smartly. This means keeping an eye on market trends and changes in trading volume to make better decisions.

How do you evaluate risk taking?

Musings on Markets • 0 implied HN points • 19 Nov 10
💰 Finance Risk management
  1. Risk taking should be judged not just by the outcome but also by the process and information available at the time. Good decisions can sometimes lead to bad outcomes, and bad decisions can lead to success.
  2. It's important to consider the side effects of risk taking, like how it impacts others. A decision might be profitable for one person but harmful to society as a whole.
  3. How we reward or punish risk taking now can influence future behavior. If taking risks is consistently rewarded, more people will take risks in the future.

The secret to investment success: Self Awareness?

Musings on Markets • 0 implied HN points • 11 Nov 10
💰 Finance Risk management
  1. Investment success isn't just about strategy; it's about knowing yourself. How patient are you? Do you handle stress well? These traits matter.
  2. Different investment philosophies work for different people. What might be a good strategy for one person could be a bad fit for someone else.
  3. Self-awareness can help you choose the right investment approach. Think about your personality and how you react to different situations before investing.

Nassim Taleb and the Nobel Committee

Musings on Markets • 0 implied HN points • 19 Oct 10
💰 Finance 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.

Jerome Kerviel is sentenced: Ruminations on risk and trading scandals

Musings on Markets • 0 implied HN points • 07 Oct 10
💰 Finance Risk management
  1. Younger and single people tend to take more risks than older or married individuals. This is especially true in trading where many traders fit this profile.
  2. Traders often take bigger risks when using money that isn't their own, like 'house money'. This can lead to careless decisions.
  3. When traders start losing money, they often try to recover it by making bigger bets, which can lead to even worse losses. It's important to monitor and control losses early on.