In this piece, I want to drill down deep into a ratio that I find useful in assessing potential investments: the ratio of net operating assets (NOA) to total assets (the lower, the better). It’s my favorite balance sheet ratio.
Alpha has, over the last fifty years, become the standard way to measure the active return of a portfolio: how much the portfolio outperformed the benchmark. Technically, however, it’s a point on a line, specifically the point where the line crosses the y axis.
The other night I asked my son, a high school student who knows next to nothing about economics or the stock market, “Which is more likely to grow faster, a small company or a large company?” He answered, “A small company.” Then I asked him, “Which will rise in price faster, a company whose price is cheap compared to what it earns, or a company whose price is expensive?” He answered, “The cheap one.”
Mauboussin writes, “Great investors do two things that most of us do not. They seek information or views that are different than their own and they update their beliefs when the evidence suggests they should. Neither task is easy. . . . The best investors among us recognize that the world changes constantly and that all of the views that we hold are tenuous. They actively seek varied points of view and update their beliefs as new information dictates. The consequence of updated views can be action: changing a portfolio stance or weightings within a portfolio.”
The Netflix Prize was a competition begun in 2006 to predict user ratings for films. Competitors were given ratings scrubbed of information about the users, and were challenged to find, using machine-learning methods, an algorithm based only on the raw data.
Whenever you come up with a new investment idea—whether it’s a new security to buy, a new factor to consider, or a new strategy to implement—you naturally ask yourself whether this new idea will increase your portfolio returns or cause you to lose money (and, of course, how much). Thinking probabilistically involves assessing the probabilities and coming up with a reasoned answer.
Understanding the rules of probability—how to bet—can be a valuable asset for investors. Every day I come across investors who think that regression to the…
I just finished reading Alphanomics by Charles M. C. Lee and Eric So, published by a small academic press in 2015. The subtitle is The…
Investors compare all day: stocks versus bonds, active versus passive, value versus growth, stock A versus stock B, and now versus later. Humans are quick to compare but not very good at it. Perhaps the most important comparison an investor must make, and one that distinguishes average from great investors, is between fundamentals and expectations.
Every business has a strategy, a plan for beating its competitors. It’s a good idea for an investor to assess that strategy before investing in the company. But doing so is complicated.