Would you buy the whole company for $1? $100? $1MM? $1B? Why priceĀ matters.

For lack of a better word, 2020 has been very interesting for financial markets. Volatility hit all-time highs, some fortunes were wiped out, and hundreds of opportunities to make new fortunes arose.

Iā€™ve had a lot of conversations with my friends discussing where we should invest our savings. With investing being more an art than a science, there is never a right answer. People have different interests, varying risk tolerances and different amounts of time theyā€™re willing to devote to market research. A 10-page in-depth review of a special case small cap may be appropriate for one person, while blindly investing in the S&P 500 may be the best approach for others. My personal opinion is that the best way to invest is such that you can sleep well at night without worrying about your portfolio. Unless youā€™re a trader, this also means being able to go days or weeks without the need to check your portfolio.

Some of the key factors to investing is understanding oneā€™s own values, expectations, risk tolerance and time horizon. Even though everything is going to go up in 30 years, we might need access to that capital sooner and can only stomach large drawdowns for so long.

After studying different investment approaches from various books and podcasts, I personally like to diversify across investing methodologies in addition to different companies, industries, countries, etcā€¦ I categorize my investments like so:

  • Undervalued Companies: A company that can be bought at a good price using fundamental analysis, and should probably be sold when the price reverts back to the mean.
  • Great Businesses: A company with a healthy balance sheet, executes efficiently or continues to either meet or exceed expectations. Though it may not necessarily look cheap, itā€™s difficult to say if a better buying opportunity may ever arise in the future.
  • Dividend Aristocrats: A well-established business with a long track record of paying a good dependable dividend. When bought at the right price, it could be a good alternative to cash but donā€™t expect a large principal appreciation.
  • Momentum: A company or asset that is likely to experience large price movements in the near future using technical analysis. This is often triggered by some sort of catalyst and magnified by narrative and human behaviour.
  • Speculation: A high-risk high-reward investment that could either go all the way down to $0 or provide returns of the same magnitude as venture. These investments are mainly driven by narrative as opposed to any sort of quantitative analysis. Itā€™s important to note that there are no hard delineations, and most investments usually span more than one of these buckets. As someone who is interested in both fundamental and technical analysis, I often find myself in discussions that conflate narrative and valuation. As Grant Williams (@ttmygh) discussed with Ben Hunt (@EpsilonTheory) on his podcast, one does not replace the other.