What Leads To Our Overconfidence

In a previous post, we saw how humans appear to have an overconfidence bias, and how that can play havoc on financial forecast estimations. What is not immediately clear, however, is the increasing role overconfidence plays the more knowledge one acquires. That is, as expertise rises, so does overconfidence, resulting in the fact that the people with the most knowledge are likely to be the most miscalibrated, which can result in detrimental effects.

The Little Book That Builds Wealth: Chapter 7

Morningstar's equity research director authored this book on identifying companies with competitive advantages. Dorsey separates competitive advantages into four categories, providing a framework for understanding how wide a moat a company really has. The book is full of examples of companies Dorsey believes have moats, and the reasons why their moats are likely to last - or not!

The Little Book That Builds Wealth: Chapter 6

Morningstar's equity research director authored this book on identifying companies with competitive advantages. Dorsey separates competitive advantages into four categories, providing a framework for understanding how wide a moat a company really has. The book is full of examples of companies Dorsey believes have moats, and the reasons why their moats are likely to last - or not!

Why Are You Underperforming?

Since we know value investing works (e.g. low P/B and low P/E portfolios outperform), why might you, a value investor, be underperforming? In a fascinating series of posts, Greenbackd breaks down a paper that seeks to examine why different types of value investors underperform. For example,

Oil Services: Up, Up And Away?

Isn't it crazy to avoid investing in oil stocks? After all, don't we all know that energy prices are going up in the long term? As large, developing countries continue to grow, demand for oil is sure to sky-rocket, right? Furthermore, as a non-renewable resource, the world's oil supplies reduce every single day. Unfortunately, these stories don't tell the whole tale, and the reasons for value investors to stay away from investing in commodities like energy have never been stronger.

Learning From A Random Outcome

Humans have the ability to learn from their mistakes. In so doing, they can reduce the likelihood of repeating such mistakes, which should theoretically lead to a better existence. Therefore, it should come as no surprise that investors wishing to improve their investing acumen will attempt post-mortems on their investment decisions in order to determine what went right and what went wrong. But as I attempted such a post-mortem on a risky investment that didn't pay off, a commenter made an interesting point:

The Reflexivity Of Goodwill

The question of how to treat Goodwill has confounded accountants and investors alike. Clearly, Goodwill has some value in most cases, but exactly how much it's worth is not known, and therefore how much of it should be reflected on the balance sheet is a difficult question to answer. A few years ago, a substantial change was made by the two global accounting authorities on how Goodwill is to be treated. As a result, changes in market prices can actually cause Goodwill writedowns, which can lower earnings and potentially cause further Goodwill writedowns as a result! Investors should be aware of this potential for a virtuous cycle of declining earnings and declining stock prices.