Value Investing
"Opportunity always exists when the public thinks it knows an unknowable future"
- In other words, be a contrarian
Go for companies that provide an essential product/service
Expand your definition of "essential" to be able to spot opportunities. For instance, given how much of western society views pollution, electric vehicles can be considered an essential product, because it solves a strong want (which can be thought of as a need) in the public.
"Given where society is now and where it is headed, what is an essential service that will continue to grow in importance as time moves on?"
Avoid investments which have unknown variables
Avoid businesses with large upfront investments that don't offer the visibility into what the returns will ultimately be.
- Avoid investing in companies whose profits depend on some macroeconomic variable, like interest rates or commodity prices
- ex. a Potash mining company who constructs a mine to be completed in 5 years has a big speculation on prices of potash 5 years from now.
- Avoid businesses with high R&D risk, like biotech, pharmaceutical, medical devices, hardware technology
Risk Free Rate
Use the S&P 500 earnings yelled divided by the 10 year treasury return to get a good proxy for the risk free rate The S&P 500 earnings yield relative to the 10 year treasury bond
- For example if The 10 year treasury rate is 1.5%, and the S&P 500 is returning 5%, then the risk-free rate is 3.5%