[11 Jun 22] Newsletter: Blinded by the past, Chasing perfection, Putting probabilities in perspective & More

• The value factor generates positive returns when cheap stocks outperform expensive ones.
• That means investors are most likely to risk buying questionable companies when they’re more confident about the economy and the stock markets.
• Such an approach requires you to constantly buy stocks primarily based on the risk factor.
• It’s great to know how to improve the odds of generating returns with cheap stocks, but it hardly makes value investing easy.
• Understanding what drives value factor performance is immensely helpful, but implementing a framework around those drivers is challenging.

Read More – Improving the Odds of Value Investing

In markets, discipline beats perfection 😷

• Missing out on investment fads is a feature, not a flaw, of diversification.
• Instead of chasing short-term dopamine highs, build a portfolio around a short list of evidence-based rules.
• Exercise the discipline to follow those rules.
• Successful investors reduce fees and stick to something imperfect rather than endlessly pursue perfection.
• Next time you stumble across an investment strategy that feels like a sure thing… remember it’s likely the dopamine talking.

Read More – Why Perfectionism Ruins Portfolios

Putting probabilities in perspective 😇

• If one person plays the lottery, the odds of picking the winning numbers twice are indeed 1 in 17 trillion.
• But if one hundred million people play the lottery week after week the odds that someone will win twice are 1 in 30.
• A 100-year event doesn’t mean it happens every 100 years.
• It means there’s about a 1% chance of it occurring in any given year.
• When there are hundreds of different independent 100-year events, odds are pretty good that one of them will occur in a given year.

Read More – Once In A Lifetime

What’s your breaking point? 🛠

• Rather than risk tolerance, you should ask: what’s your loss tolerance?
• How much loss can you endure before you reach the point where emotions push you to change your mind and change your portfolio?
• That breaking point is important because it’s usually where mistakes are made like buying high and selling low.
• So how much of your net worth do you want to keep safe versus how much are you willing to lose outright?
• The goal is to find that breaking point so you can build a portfolio that minimizes regret, limits how often you change your portfolio, and keeps you invested for the long run.

Read More – Daniel Kahneman: Loss Tolerance