Comments for Margin of Safety

Comment on Contemporary Art Auctions Reach Records by Ray Galkowski, CFA

Ray Galkowski, CFA — Mon, 24 Aug 2015 14:39:02 +0000

QE and ZIRP flooded the markets with cash that had to go somewhere. Most of it ended up in the hands of people who have the ability to borrow and spend at low rates. Companies issued debt at low rates to buy back their stock and buy other businesses and the corporate executives who get paid mostly in stock (options, etc.) are the beneficiaries. So, a significant amount of QE and ZIRP got into the hands of people who are likely to bid up the prices of things like art. QE and ZIRP first found its way into the stock market. Those options paid for art and other luxury items.

Comment on Sam Zell Expects a Market Correction (Video) by Ray Galkowski, CFA

Ray Galkowski, CFA — Sun, 23 Aug 2015 16:44:04 +0000

Thanks W.

There are so many things to consider in the decision to sell (or buy) a position (e.g., suitability for a client, taxes, transaction costs, downside risk, how it correlates with other positions in your portfolio, whether you have liquid capital available to invest or you have to liquidate a position to invest, etc.), but your intrinsic value estimate and the MOS that the market provides helps take pure valuation and expected return off the table in most cases. You either believe you have an MOS or you don’t. If you have an MOS, after considering all the above in parentheses, the decision comes down to whether the MOS in the position you own is superior to the MOS that is available in other possible investments.

Bill Nygren, for example, has said he has no problem selling a position before it realizes full value if he has no cash available and a better opportunity comes along.

Comment on Sam Zell Expects a Market Correction (Video) by w

Thu, 20 Aug 2015 19:33:57 +0000

Hey – like the quote. I’ve thought about this one for quite a while, but I have a question about it…consider this: in the case where you require a 30% “margin of safety,” e.g., stock price < .7 * "intrinsic value", you would not buy the stock until it reached that level. At the same time, you wouldn't sell the stock until it appreciated to its intrinsic value. So the margin of safety is, essentially, a twilight zone where: not selling =/= choosing to buy.

So that's sort of my question. If the stock price is .7 (with intrinsic value=1), what do you do when it rises to .8? you wouldn't buy it at this level, but it also wouldnt make sense to sell here if you thought it was worth 1. If it did make sense to sell after appreciation to .8, then you would sell your holdings anytime stock price appreciation squeezed your margin of safety, even if the stock price was still below what you thought it was worth (intrinsic value).

I do like the quote…the corresponding analogy is basically: everyday you must sell your stock, and you have the option to buy it back (no transaction fees). Do you do it? if no, then you should sell. if yes, then you should hold. But again, how does this reconcile with the question of margin of safety? any thoughts would be appreciated. thank you!

Comment on Profoundly Unpopular: Finding Bargains Among the Unloved or Unknown by Best Pomades

Best Pomades — Fri, 14 Aug 2015 12:53:01 +0000

I think everyone is intrigued by the chance that you can get a lot of money from gambling, and that’s why it is such a problem. It’s important to understand that it’s completely by chance, no luck is involved. But great article.

Comment on Why the Singularity Makes Me a Rational Optimist by Ray Galkowski, CFA

Ray Galkowski, CFA — Wed, 15 Jul 2015 19:35:41 +0000

Henry, I hear you. It usually pays to be skeptical.

Comment on Is Your Adviser a Fiduciary? by Ray Galkowski, CFA

Ray Galkowski, CFA — Mon, 13 Apr 2015 15:40:24 +0000

In general, a big reason for the scarcity of performance data is that even when a manager has discretion over investments, s/he should be tailoring the portfolio to the client’s specific needs and ability to tolerate certain risks. So, generalized performance numbers may not tell the appropriate story. For example, an adviser whose clientele consists mostly of retirees should have different results from one who caters to millennials.

Comment on Is Your Adviser a Fiduciary? by tuliptown

tuliptown — Wed, 05 Nov 2014 22:41:36 +0000

why are there not performance numbers for CFA’s or other advisors?
Sometimes there is a “representative account” but I am always suspect when its not more than old enough to encompass the great recession.

That said, I do my own and I don’t keep strict records so I may not be able to judge a good one from a not so good one….

Comment on Truly Honored by Jason Zweig’s Selection of this Blog by Kyle

Kyle — Sun, 26 Oct 2014 16:59:31 +0000

I think he had this on his site a while ago.

Comment on Truly Honored by Jason Zweig’s Selection of this Blog by Kyle

Kyle — Sun, 26 Oct 2014 16:58:30 +0000

That is how I found your blog six months ago.

Comment on Contemporary Art Auctions Reach Records by Kyle

Kyle — Tue, 23 Sep 2014 22:33:25 +0000

Please help me understand how the art market relates to QE. Low rates on fixed income make investors want to buy expensive art? Where is the proof of that? Are you saying people are buying art at auctions to bid it up higher at another auction? Like a momentum stock that keeps going higher and higher despite a low intrinsic value, like Tulipmania?