Role of cash in a stock portfolio

I have agonized over the role of cash in stock portfolios for long. Often I felt that I should have some cash at all situations because market throws some very attractive opportunities from time to time. Other times I felt that by not remaining fully invested in the stock market I am trying to time the market which is impossible. Generally I have jumped around from one school of thought to another. Before I go into my latest thoughts on cash let me share what two popular investors practice.


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Investment checklists and dealing with contradictory information

Many of the great value investors use investment checklists while screening out investment opportunities. Using checklists for initial screening is a widely accepted and popular method.  The beauty of checklists is that they can be used for a wide range of things (not just investing). I recommend a great book on the subject written by Atul Gawande called The Checklist Manifesto.

One of the challenges equity analysts and investors face  is contradictory information on the checklists. What I mean is that, no single company will have everything positive going for it. There will always be certain factors that will be less than ideal.

Let us take a theoretical situation where we are judging a company on the basis of governance, profitability, growth, economy in which they run, competitive environment etc. The most likely case is that the company will not rate highly in these factors. A couple of the factors like economy and competition is also beyond the company’s control. What this means for any investor is that, before investing they will have to have trade-offs not only on these qualitative and quantitative factors but also when comparing with valuations.

Here are two things I recommend to work around this problem.

Have a list of deal-breakers

While screening a few things are deal breakers for me. Bad governance is definitely the number one deal breaker because I think the value of a minority share in a badly governed company is ZERO. Inability to generate returns equal to cost of capital over an entire business cycle is another one. Extremely irrational competition (e.g. price wars with no end in sight) or regulatory pressures (taxes being raised to finance growing budget deficit) can also be deal breakers. Sometimes, economic health can put the country in a no-invest zone. Russia or Argentina at present moment can be an example.

What this exercise does is clearly set situations where we are not willing to compromise.

Compare the negatives with the potential upside

For all other negatives (that are not deal-breakers) like a sudden increase in competition, an increase in raw material price reducing margins etc we have to compare them with upside derived from our fair value model. If our forecasts already account for these negatives then they are already accounted for. If the situation is binary and it is difficult to quantify the impact then we might need to resort to other qualitative judgments (compare the risk vs the upside).

In conclusion, the reason for writing this post is to add to my existing blog posts on why investing is a fairly complicated thing. It perennially involves looking at multiple factors, understanding probabilities and dealing with uncertainties. There are no perfect investments and no perfect methods for generating massive returns.


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Stock price movements – the confusions and (possible) explanations

Investing is a humbling experience. Even for the smartest of people in the world it is filled with failures of various magnitudes. This is because, as we all know there is no exact science or magic formula (Joel Greenblatt might disagree with me here) that leads to perfect results.

Let me take stock price movements as an example. Fundamental investing is done on the whole basis of identifying undervalued stocks and holding them till fair value is achieved. This simple logic isn’t as simple as it sounds. I want to discuss two different issues related to this which makes it so complicated.


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Some resources for global portfolio management

To help the contestants of the portfolio management game that starts in another 4 days time I have compiled a few resources that could be useful. This is by no definition an exhaustive list. Then again too much information could lead to information overload for the inexperienced beginner. I will personally try to use these three websites for doing the research for my trades.

Seeking Alpha

Seeking Alpha should be the go to place to understand what is happening to the global economy. See what other people (from experienced professionals to speculators) have to say about specific markets, stocks, economies, commodities etc. It can be a good source to generate investment ideas for beginners like us who have never traded in developed markets before.

Yahoo Stock Screener

One could also generate own ideas from scratch using the Yahoo Stock Screener. Just simply put your own filtering criteria to get leads. Also, if you read a bullish report on a particular industry in Seeking Alpha you could try to combine both these tools and get your investment idea.

Yahoo Finance

To do the analysis on your investment ideas which you got from Seeking Alpha or from the Stock Screener you should use Yahoo Finance (there are alternates like Google Finance, Bloomberg etc).

You can use it in a number of ways. One way would be to look at the stock fundamentals like its earnings growth, leverage, valuation multiples etc. You could also look at the technical charts as well which would look something like this. I would personally try to use a combination of the two.

Added Bonus

I will also try to write as much as possible on stock investing in this blog in the next 4 days and also as the competition continues.

Furthermore, I will probably give explanations for my trades (whether fundamental or technical) to help my readers understand why I took position. This is something I am not requiring the other participants to do.

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Why We Should Stay Away from Emerging Markets

Tahsanul Hoque, Guest post - The Asif Khan BlogTahsanul Hoque is currently working in Internal Accounts Payable in Morgan Stanley. He is a postgraduate of Ohio State University in Finance and a graduate of North South University. Even though he is a banker by profession he is also an avid investor by choice.


Most global stock investors are now well familiar with how their investments started 2014 after a phenomenal bull market of 2013. With US Fed taper in the horizon forcing a currency crisis in some emerging economies and S&P 500 going down by nearly 6% at peak, you must be wondering what you should do with your investment portfolio. You must be wondering that the good things have to come to an end at some point, right?

I have recently advised a strategy in my blog regarding why you should remain in US capital markets for now.  But what should you do if you are thinking about putting more money in emerging markets? You may think this is the good time to buy emerging stocks, since they are now very cheap. Emerging markets after all the big buzzwords on everybody’s lips. While on technical terms they are now cheaper compared to other major global stock indices, you should avoid investing in them unless you are a short term trader.

Under performance of EM even during the supposedly golden times

Let’s look at some popular Exchange Traded Funds on emerging market stocks in Wall Street and Europe and their performance over last 5 years.

 Exchange Traded Funds on emerging market stocks in Wall Street and Europe and their performance over last 5 years.
Google Finance
 Exchange Traded Funds on emerging market stocks in Wall Street and Europe and their performance over last 5 years.
Google Finance

Now you do not need a Bachelors in Finance or Economics to notice the general trend of these investment performance since 2010 (2009 was the only year where they performed well in these graphs). In most cases, the long term investor did not see any gains by investing in broad based emerging market funds. It seems to be they are in a slow bear market since middle of 2011. (Mainly due to unfavorable currency conversion issues with these investments)

Further federal reserve tapering on the cards

Remember the big picture in these graphs is that US Federal Reserve did not yet begin their tapering on full fledge. Instead the hot money from Quantitative Easing have been pouring into these investments during this timeframe. The slow tapering has just started for 2 months. Do you think the emerging market funds can manage to gain with Federal Reserve slowly withdrawing their stimulus? Think again. Your money is better invested somewhere else.

Chinese entrepreneurs diversifying outside China is a leading indicator

On the other hand, rich Chinese entrepreneurs are hastily trying to make other countries their second home. This is a subjective issue but sometimes these give some indications.

It does not take too long to notice these emerging markets have structural problems that need to be corrected by their government. So till then, it is better to avoid them.

What should we do?

Instead invest heavily more in US markets or frontier markets. Even though they also face headwinds from Fed tapering, the underlying short and medium term fundamentals are good enough to support these stocks. See these funds and their performance.

Instead invest heavily more in US markets or frontier markets. -The Asif Khan Blog
Google Finance

I still believe that over the very long run, emerging markets will be the leader in global investments. Ultimately the developed countries and their insatiable appetite for debt is not sustainable in the very long run and this will lead to major de-leveraging. However, as long as emerging economies do not increase their domestic consumption, as long as they remain export focused only with developed countries, I do not see them growing to be a major leader too soon. It will happen ultimately but not in the near future that is for sure. So for now avoid these markets. But if you are still a believer in Emerging markets for short to medium term horizon, I suggest you look at Emerging market Technology ETFs (such as CQQQ)

Disclosure: Please take your investment decision with your own knowledge and analysis. The analysis given is the author’s own independent view.

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